Explore the legal implications of a case where a buyer’s purchase price may triple post-closing due to an undisclosed underfunded union pension plan liability. Learn from the Members of the Board Of Administration of the Toledo Area Industries UAW Retirement Income Plan v. Obz, Inc. case and the importance of thorough due diligence in M&A transactions.
M&A Stories
January 9, 2019
Introduction:
In 2014, a wire-forming company was sold for $250,000, with the buyer unaware of the seller’s $644,000 pension liability. This blog explores the legal consequences and lessons learned from the case of Members of the Board Of Administration of the Toledo Area Industries UAW Retirement Income Plan v. Obz, Inc.
Background:
The seller, faced with an underfunded union pension plan, had withdrawn from the plan in 2013, leading to a significant liability under ERISA (Employee Retirement Income Security Act). The buyer purchased the seller’s assets, including machinery, customer list, and goodwill.
Legal Implications:
The court ruled that the buyer, despite not knowing about the pension liability, should have been aware of it based on due diligence. The key question is whether there is substantial continuity between the seller’s and buyer’s operations, involving factors like the workforce, management, equipment, and servicing customers.
Continuity Analysis:
The court couldn’t definitively determine if the buyer continued the seller’s business without interruption. While the buyer hired the seller’s employees and used their equipment, significant changes were made, including equipment upgrades and shifts in job duties.
Goodwill and Customer List:
The buyer paid a substantial amount for the seller’s goodwill and customer list, despite initially claiming that no goodwill existed. This creates a complex legal situation.
Lesson Learned:
The case highlights the importance of expert assistance when dealing with sellers having union pension plan liabilities. In this instance, a more thorough due diligence process could have revealed a hidden liability, potentially increasing the purchase price from $250,000 to nearly $900,000.
Case Reference:
Members of the Board Of Administration of the Toledo Area Industries UAW Retirement Income Plan v. Obz, Inc., Administration Case No. 3:15CV756, United States District Court, N.D. Ohio, Western Division, (December 26, 2018). https://scholar.google.com/scholar_case?case=11249101925830503209&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
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