Learn about a recent legal case involving severance benefits for employees of a publicly traded chipmaker during an M&A deal. Understand the court’s ruling and its implications for employee benefits in similar situations.
M&A Stories
April 20, 2019
Introduction:
Selling a company often comes with challenges, especially the risk of rumors leaking that it’s up for sale. These rumors can unsettle customers, suppliers, and most importantly, the company’s employees who fear losing their jobs. In such cases, companies sometimes promise severance benefits to employees who may be affected by the sale. These benefits typically include a portion of the employee’s annual salary and continued health insurance coverage for several months after job loss.
The Case:
This particular case involved a publicly traded chipmaker headquartered in Silicon Valley with around 1,800 employees in the United States. In 2015, news spread that the company was on the market. To address employee concerns, the company introduced a severance plan for its U.S. workforce in July, offering 25% to 50% of their annual base salary, coverage of health insurance premiums for three to six months, and potentially a prorated bonus. The severance plan would be activated if the company finalized a definitive acquisition agreement for its sale by November 1, 2015. In the event of a sale, any employee terminated without cause within 18 months of the acquisition agreement’s execution date would be eligible for severance benefits.
The company did enter into an acquisition agreement (merger agreement) on September 19, 2015, but this deal did not close because another company made a higher offer. However, on January 19, 2016, the company struck a new merger agreement with the successful buyer, and this agreement was finalized on April 4, 2016.
Shortly after the deal closed, eight employees were terminated without cause. All of this occurred within the 18-month period following the company’s initial agreement with the unsuccessful suitor and well before the 18-month deadline (likely by March 19, 2017).
The Twist:
The new buyer refused to provide severance benefits because their merger agreement was not signed by the November 1, 2015, deadline specified in the severance plan.
The Lawsuit:
The terminated employees took legal action, suing the company in a California federal district court under the federal employee benefits law known as ERISA. The former employees argued that, based on the facts and the severance plan’s terms, they were entitled to severance benefits as a matter of law.
The Outcome:
The court sided with the former employees, ruling that they should indeed receive their severance benefits. The court emphasized that the purpose of the severance plan was to alleviate employee concerns about potential job loss due to the company’s sale. The buyer’s interpretation, which would have limited benefits to only the September 19, 2015, merger agreement with the unsuccessful suitor, was deemed insufficient. This interpretation would have excluded benefits if the company sold to the original suitor under different terms or if the company accepted a better offer from another suitor after the November 1, 2015, deadline.
Case Reference:
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
By John McCauley: I help businesses minimize risk when buying or selling a company.
Email: jmccauley@mk-law.com
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