Court battles dense asset purchase agreement language to resolve dispute over severance payments made to former seller employees

Seller is one of the world’s leading manufacturers of over-the-counter pharmaceutical products, with headquarters in Allegan, Michigan. Buyer’s parent company (a subsidiary of a Dutch multinational company) manufactures vitamin and nutritional/dietary supplements and is based in Freehold, New Jersey.

Seller and Buyer entered into an asset purchase agreement for the sale of Seller’s vitamins, minerals, and supplements business (the Business) to Buyer. The sale closed on August 5, 2016.

On or after the closing date of the sale, Buyer terminated several employees of the Business. Pursuant to the asset purchase agreement, Seller made severance payments to those employees. The payments to each employee amounted to twelve weeks of salary, plus one week of salary for each year the employee worked for Seller.

Seller requested reimbursement from Buyer claiming the right to do so under the asset purchase agreement. Buyer refused claiming that it had no obligation under the asset purchase agreement to reimburse Seller for the severance payments.

Seller sued Buyer in U.S. District Court in Delaware, asking the court for approximately $1.2 million in damages.

The court said that the language of the asset purchase agreement dealing with this issue is “dense, wordy, and opaque”. Just skim the following language from the asset purchase agreement to get a feel of what the court was talking about; but try not to get a headache:

“Section 8.1 Designated Employees; Excluded Employees; Transitional Employees. At or before the Closing, Seller shall (a) terminate the employment of all Business Employees, except those Business Employees identified on Schedule 8.1(a) (collectively, the “Excluded Employees”) and those Business Employees identified on Schedule 8.1(b) (collectively, the “Transitional Employees”), (such Business Employees terminated in connection with this Section 8.1, collectively, the “Designated Employees”), and (b) pay all amounts due to the Designated Employees by way of salaries, bonuses, incentives, commissions or, with respect to any Designated Employee that is a Terminated Business Employee, sick leave, paid time off, vacation days or holidays or, subject to Section 8.4, any severance or termination payments that accrued prior to the Closing Date or become payable as a result of the transactions contemplated by this Agreement and/or the Ancillary Agreements. For so long as a Designated Employee is employed by Buyer or any of its Affiliates, the Seller Entities shall not enforce against such Designated Employee any confidentiality, non-compete or non-solicit obligations, or otherwise assert with respect to such Designated Employee or Buyer or any of its Affiliates claims, in each case, that would prohibit or place conditions on such Designated Employee’s acceptance of an offer of employment by Buyer or any of its Affiliates, such Designated Employee’s employment by Buyer or any of its Affiliates in the Business, or any actions related to the Business taken by such Designated Employee as an employee of the Buyer or any of its Affiliates. For the removal of doubt, the Seller Entities shall not be required to terminate the employment of any Excluded Employee or Transitional Employee, and all such Excluded Employees and Transitional Employees shall remain employed by the Seller Entities or any of its Affiliates. Buyer will hire enough Designated Employees so Seller Entities have no obligations or Liabilities under the WARN Act or similar Law. Notwithstanding the foregoing, for those Business Employees identified on Schedule 8.1(c), Buyer shall notify Seller within ten (10) Business Days of the date hereof whether such Business Employees shall be Excluded Employees or Designated Employees.

“Section 8.2 Continuation of Base Compensation. At the Closing, Buyer or one of its Affiliates shall offer employment at will at the same base compensation in effect immediately prior to the Closing Date to all Designated Employees on the terms set forth in this Article 8. Each Designated Employee who accepts Buyer’s offer of employment pursuant to this Section shall be referred to herein as a “Transferred Business Employee.” For each Transferred Business Employee, Buyer shall maintain for a period of at least 12 months following the Closing Date (or until any earlier termination of employment) the same base compensation in effect for such Transferred Business Employee immediately prior to the Closing. As of and after Closing, Buyer will provide to each Transferred Business Employee full credit for purposes of eligibility to participate, level of severance and other benefits and vesting (but not for purposes of benefit accrual or any purpose under any retiree welfare plan) under any employee benefit plan, policy or arrangement of Buyer or any of its Affiliates for such Transferred Business Employee’s service prior to the Closing with any Seller Entity, to the same extent such service is recognized by such Seller Entity immediately prior to Closing, except as such credit would result in a duplication of benefits. For the avoidance of doubt, Buyer or its Affiliate shall not be obligated to employ any Transferred Business Employee for any particular period of time.

* * * * *

“Section 8.4 Severance.

(a) In the event that a Business Employee does not, for any reason, continue employment with Buyer or its Affiliates at or immediately after the Closing (the “Terminated Business Employees”), which results in any obligation, contingent or otherwise, of Seller or any of its Affiliates to pay any severance or other benefits (including such benefits required under applicable Laws) to any Terminated Business Employees or any additional Liability incurred by Seller and its Affiliates in connection therewith, Seller shall remain solely responsible for the payment and performance of all such severance and other benefits and Liabilities; provided, however, that Buyer shall, and shall cause its Affiliates to, reimburse Seller and its Affiliates (including the other Seller Entities) an amount equal to the severance that would have been due to such Terminated Business Employees under the terms set forth on Schedule 8.4 as if such Terminated Business Employees were employed by Buyer and involuntarily terminated without cause by Buyer, taking into account and combining such Terminated Business Employees’ service with Seller and its Affiliates prior to the Closing. Notwithstanding the foregoing, neither Buyer nor any of its Affiliates shall be obligated to reimburse Seller for any severance paid to any Terminated Business Employee who receives an employment offer from Buyer or any of its Affiliates for a Comparable Position, as such term is defined in Perrigo Company’s U.S. Severance Policy amended and restated effective November 12, 2015; provided that Perrigo Company PLC will not claim that a Terminated Business Employee is entitled to severance because Buyer or any of its Affiliates did not offer the Terminated Business Employee equity incentive compensation so long as there is not a material diminution in the aggregate amount of such Terminated Business Employee’s total annual compensation (base salary plus total target incentive compensation) in relation to the aggregate amount of such Terminated Business Employee’s total annual compensation in effect immediately prior to the Closing Date.

(b) In the event Buyer does not offer a Transferred Business Employee a Comparable Position (as defined in the Perrigo Severance Plan) which results in any obligation, contingent or otherwise, of Seller or any of its Affiliates to pay any severance or other benefits to such Transferred Business Employee under the Perrigo Severance Plan, Seller shall remain solely responsible for the payment and performance of all such severance and other benefits and Liabilities; provided, however, Buyer shall, and shall cause its Affiliates to, reimburse Seller and its Affiliates (including the other Seller Entities) an amount equal to the severance that would have been due to such Transferred Business Employee under the terms set forth on Schedule 8.4 if such Transferred Business Employee’s employment was terminated involuntarily without cause by Buyer, taking into account and combining such Transferred Business Employee’s service with Seller and its Affiliates prior to the Closing.

(c) With respect to each Transferred Business Employee whose employment is terminated involuntarily without cause during the period commencing on the Effective Time and ending 12 months after the Closing Date (the “Severance Period”), Buyer shall provide such Transferred Business Employee with severance benefits in accordance with the terms set forth on Schedule 8.4, taking into account and combining such Transferred Business Employee’s service with Seller and its Affiliates prior to the Closing and with Buyer and its Affiliates on and after the Closing.

* * * * *

“Section 8.7 Transitional Employees. Effective as of the Closing Date, Seller shall continue to employ the Transitional Employees until the earlier of (a) such time as Buyer or any of its Affiliates shall specify or (b) nine (9) months in the case of Bill Austin or 180 days from the Closing Date in the case of all other Transitional Employees (the “Transitional Employee Termination Date”); provided, however, Seller is not required to continue to employ Transitional Employees who terminate their employment voluntarily or are terminated by Seller for cause. Buyer or any of its Affiliates shall notify Seller of such date in writing at least fifteen (15) days prior to the Transitional Employee Termination Date. For the avoidance of doubt, Buyer or any of its Affiliates may specify a different Transitional Employee Termination Date for each Transitional Employee. From the Closing until the Transitional Employee Termination Date, Buyer shall reimburse Seller for the reasonable costs to employ each Transitional Employee (including, without limitation, base compensation, the costs for such employee’s participation in the Benefit Plans set forth on Schedule 4.16 and all related employer taxes (such costs, collectively, the “Reimbursable Expenses”). From the Closing until the applicable Transitional Employee Termination Date, Seller (1) shall not increase the base compensation or incentive opportunity of any Transitional Employee, and shall not grant any new equity incentive awards to any Transitional Employee, and (2) shall not make any changes to the Benefit Plans covering such Transitional Employees that do not also apply to other similarly situated employees of Seller. Upon the occurrence of the Transitional Employee Termination Date, unless Seller elects to continue the employment of any Transitional Employee, Buyer shall reimburse Seller an amount equal to the severance that would have been due to such Transitional Employee under the terms set forth on Schedule 8.4 if such Transitional Employee’s employment was terminated involuntarily without cause by Buyer, taking into account and combining such Transitional Employee’s service with Seller and its Affiliates prior to the Transitional Employee Termination Date.”

The court concluded from this very difficult language that Buyer had an obligation to reimburse Seller for the severance payments.

This case is referred to as Perrigo Company v. International Vitamin Corporation, No. 1:17-CV-1778., United States District Court, D. Delaware (September 7, 2018).

Comment. It is best to use as simple and concise language as possible in contracts. However, it is difficult to do so with complicated subject matter. However, one wonders if in this case the language could have been simplified. If so, it is possible that this dispute would not have ended up in court.

By John McCauley: I help people start, grow, buy and sell their businesses.

Email: jmccauley@mk-law.com

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Posted in hiring seller's employees, overly complicated language in contract

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