Dive into the complexities of M&A asset deals with our latest blog post, ‘Buyer Beware: Unforeseen Pension Liabilities.’ Explore the cautionary tale of a private equity group navigating the legal pitfalls of acquiring a Maui hotel and assets with unionized employees. Learn the crucial lessons in due diligence to avoid costly surprises. M&A Stories, Legal Insights, Pension Liabilities, Due Diligence Tips.
M&A Stories
July 3, 2018
In a cautionary tale for potential buyers, a recent federal court decision emphasizes the importance of thorough due diligence when acquiring assets, particularly those with unionized employees. The case, Heavenly Hana LLC v. Hotel Union & Hotel Industry Of Hawaii Pension Plan, serves as a stark reminder that overlooking pension liabilities can have costly consequences.
The buyer in question, a private equity group, entered into a purchase and sale agreement on December 31, 2009, to acquire a Maui hotel and related assets for $14.5 million. The seller, bound by a collective bargaining agreement with unionized workers, was responsible for funding pensions through a multiemployer pension plan. Notably, the seller withdrew from the union pension plan on the closing date, leaving behind unfunded vested pension benefits.
Three years post-closure, the union pension plan sent a demand letter to the buyer, seeking $758,000 to cover the seller’s unfunded pension plan liability. The ensuing legal battle hinged on whether the buyer, acting reasonably, should have been aware of the potential liability.
The court ruled against the buyer, stating that actual notice is not a prerequisite for liability. Crucial factors influencing this decision included the buyer’s prior experience with multiemployer pension plans, a history of inquiring about potential liabilities in past transactions, knowledge of the seller’s unionized workforce, and awareness of previous contributions to a multiemployer pension plan.
The court highlighted missed opportunities in the buyer’s due diligence process. A reasonable purchaser, it argued, should have delved deeper by reviewing publicly available pension plan documents, directly contacting the pension plan for information, and requesting estimates of the seller’s unfunded pension plan liability.
The case underscores the need for meticulous investigation before acquiring assets, especially when dealing with unionized labor and pension obligations. The buyer’s failure to uncover crucial information ultimately led to significant financial repercussions.
In summary, this cautionary tale serves as a valuable lesson for entrepreneurs, business owners, CFOs, and other stakeholders involved in M&A transactions. Thorough due diligence is not just a formality but a crucial step in avoiding unforeseen liabilities and ensuring the success of the deal.
Case Reference:
This case is referred to as Heavenly Hana LLC v. Hotel Union & Hotel Industry Of Hawaii Pension Plan, No. 16-15481, United States Court of Appeals, Ninth Circuit (June 1, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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