Selling your company can be very stressful for employees and contractors not picked up by the buyer. Especially those that have depended upon cash flow from you company for a long time.
This creates a risk you may be sued by employees or contractors left out in the cold.
This case is about a Pennsylvania based Gold’s Gym. The company operated as a corporation.
In 2014 the company sold its assets. The club had two personal trainers that had been with the club for 10 years as independent contractors under similar written agreements. Neither of these personal trainers were hired by the buyer after the closing.
The two personal trainers made claims against the company amounting to $414k for breach of their contracts. They claimed that the company had promised in the contracts to assign their personal trainer contracts to the buyer.
The claims ended up in a Pennsylvania bankruptcy court. The applicable provision of the contracts were identical and said that the term of their contracts were as long as the company “remains in business, and shall be assigned by” the company “to any new owner or operator in the event of a sale, transfer or other change of control in the ownership or operation of” the company.
The trainers argued that the company had to assign their contracts to the buyer. The court disagreed saying that the company only had an obligation to assign the contracts to the buyer if there had been a stock sale, and the sale in this case was an asset sale.
This case is referred to In Re Mechanicsburg Fitness, Inc., Bankruptcy No. 1:16-bk-01897-HWV, United States Bankruptcy Court, M.D. Pennsylvania, (May 10, 2019)
The contract language in dispute was badly drafted. I think courts could have gone either way in this case.
But one thing was clear. These personal trainers lost their living after 10 years of work at this club. Not surprising that they were motivated to salvage something from the sale.
In 20/20 hindsight, the company should have reviewed these contracts to see if the seller had any risk of post-closing liability to these trainers as a result of the termination of their contracts. A review would have led the seller to conclude that the contract language could lead to problems if these trainers were not being picked up by the buyer.
One possible solution to this problem would be for the company to try to work something out with the trainers before the closing and avoid post-closing problems.
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Telephone: 714 273-6291
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