One of the biggest challenges for a selling a company is the rumors getting out that it is for sale. That rumor can make the company’s customers and suppliers very nervous. And just as importantly, it can make the company’s employees scared of losing their jobs.
Sometimes, the company will tell the employees that it is selling. But to calm fears of losing jobs, the company often promises severance benefits for employees who lose their jobs as a result of the sale. The benefits can involve a percentage of the employee’s annual base pay, plus payment of health insurance premiums for several months after a job loss.
This deal involved a publicly traded Silicon Valley based chipmaker with about 1,800 U.S. employees.
In 2015, word got out that the company was for sale. In July, the company announced a severance plan for its U.S. employees. It consisted of 25% to 50% of their annual base salary, paid health insurance premiums for three to six months, and potentially a prorated bonus. The severance plan became effective if the company entered into a definitive acquisition agreement for the sale of the company by November 1, 2015. Then, if there was a sale, an employee terminated without cause within 18 months of the execution date of the acquisition agreement would be entitled to severance benefits.
The company entered into an acquisition agreement, a merger agreement, on September 19, 2015 with a suitor. That deal did not close because another company offered a higher price. The company and that successful buyer signed a new merger agreement on January 19, 2016 that closed on April 4, 2016.
Shortly after the closing, 8 company employees were terminated without case; all within the 18 months of the company’s entry into the September 19, 2015 merger agreement with the unsuccessful suitor; and well before the expiration of the 18 month period (probably March 19, 2017).
The new buyer refused to pay the severance benefits because its merger agreement was not signed by the November 1, 2015 severance plan deadline.
The terminated employees sued the company in a California federal district court under the federal employee benefits law called ERISA. The former employees filed a motion for summary judgment, arguing that based upon the given facts and the severance plan, that they were entitled to their severance benefits as a matter of law.
The court agreed that the case was clear cut and ruled that the former employees should get their severance benefits.
This case is referred to Berman v. Microchip Technology Incorporated, Case No. 17-cv-01864-HSG, United States District Court, N.D. California, (March 22, 2019) https://scholar.google.com/scholar_case?case=3496069145728558692&q=%22merger+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
The court said that the purpose of the severance plan was to ease the minds of employees concerned about losing their jobs because of the sale of the company. The court said that the buyer’s interpretation of the severance plan would not do that.
Under the buyer’s take of the severance plan, employees would be entitled to benefits only if the September 19, 2015 merger agreement with the unsuccessful suitor was the same one that resulted in the actual sale of the company. But that would mean that employees would not receive severance benefits if, for example, the company sold to the original suitor, but upon terms and conditions of a renegotiated merger agreement signed after the November 1, 2015 deadline. Nor would employees receive severance benefits if (as actually happened) the company received and accepted a better offer from another suitor after the November 1, 2015 deadline.
By John McCauley: I help businesses minimize risk when buying or selling a company.
Telephone: 714 273-6291
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