Learn about the legal complexities of purchasing a distressed business in bankruptcy, specifically focusing on shedding union liabilities. Explore the case of Mission Coal Company and understand the key takeaways from this challenging M&A scenario.
M&A Stories
March 12, 2019
Introduction:
Purchasing a distressed business comes with inherent risks, especially when it involves shouldering a company’s liabilities, even for asset buyers. This situation is governed by federal and state laws, including bankruptcy regulations. Currently, the coal industry serves as a prime example of such distressed businesses, with five coal companies seeking bankruptcy protection in recent years.
Coal companies often carry substantial union obligations, including pension and healthcare commitments to current and retired employees. For some of these companies, the only viable option for selling their assets to a new buyer hinges on ensuring that union liabilities do not transfer with the sale.
The Deal:
In this particular case, the seller was a severely distressed operator of three coal mines. Factors such as disruptions in rail and port operations, adverse mining conditions, and substantial capital requirements for maintaining and upgrading coal mines led to a liquidity crisis. Consequently, the seller was unable to meet its financial obligations without resorting to Chapter 11 bankruptcy protection.
The Lawsuit:
Subsequently, the seller filed for Chapter 11 bankruptcy protection in an Alabama bankruptcy court. At the time of filing, the seller had an existing collective bargaining agreement with the union, covering retirement and healthcare benefits for both current and retired employees.
Despite actively seeking potential buyers, the seller faced significant resistance due to the union liabilities associated with the deal. Without the sale, the seller would have been required to pay an average of approximately $10.3 million annually for its union obligations. Furthermore, the seller’s pension plan was critically underfunded, with a deficit of approximately $1.2 billion.
As a result, the seller petitioned the court to authorize the sale of the business without the burden of union liabilities. The court approved this request, emphasizing that without the sale, the mines would cease operations, leaving union employees unemployed.
Key Takeaway:
Acquiring a distressed business through bankruptcy while shedding union liabilities is far from guaranteed. Bankruptcy laws permit this only when the court deems it the sole feasible method of selling the business as a going concern while safeguarding the jobs of the seller’s union employees.
The presiding judge outlined the exhaustive efforts undertaken by both the seller and the union in a comprehensive document. This process aimed to preserve pension and healthcare benefits for union employees and retirees.
Case Reference:
In Re Mission Coal Company, Case No. 18-04177-TOM11 (Jointly Administered), United States Bankruptcy Court, N.D. Alabama, Southern Division, (March 1, 2019).
By John McCauley: I help businesses minimize risk when buying or selling a company.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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