Explore the implications of the WARN Act in the M&A context through a case study on the buyer’s accountability for unpaid compensation to former employees in the acquisition of a trucking business. Gain insights into the legal proceedings, court rulings, and key factors that shape buyer liabilities.
M&A Stories
September 27, 2018
Introduction:
In a pivotal case involving the acquisition of a trucking business, a buyer found itself accountable for unpaid compensation to former employees, shedding light on the implications of the WARN Act.
Background:
In 2008, an Arkansas-based seller entered an asset purchase agreement with an Indianapolis buyer for $24.1 million. The deal encompassed the acquisition of assets and assumption of liabilities, excluding cash, receivables, real estate, and certain goodwill.
Employee Transition:
Of the 658 employees, the buyer hired 201 based on its standards, while the remainder faced termination by the seller. Subsequently, a class-action complaint under the WARN Act was filed against the buyer by terminated employees seeking compensation for the lack of a 60-day notice.
Legal Proceedings:
The central question was whether the buyer, having acquired the assets with the intent to run the business as a going concern, was responsible for the seller’s failure to provide the required notice.
Court Ruling:
The trial court held the buyer liable, emphasizing the intent to run the business as a going concern. The buyer appealed, arguing that the transaction was merely a sale of assets, not a business as a going concern.
Court of Appeals Decision:
The Court of Appeals rejected the buyer’s argument, emphasizing the substance over form. Despite the asset purchase agreement’s wording, the court deemed the transaction as more than a sale of assets, pointing to the buyer’s acquisition of essential business elements.
Key Factors:
The court highlighted the buyer’s purchase of the seller’s name, customer lists, agreements, and its intent to merge operations. Noncompetition agreements further reinforced the buyer’s acquisition of the business, not just assets.
Implications and Lessons:
This case underscores the importance of buyer due diligence in understanding the WARN Act’s applicability. Employers with at least 100 employees fall under federal jurisdiction, and some states, like California, apply similar laws to companies with 75 employees.
Conclusion:
The Day v. Celadon Trucking Services, Inc. case serves as a cautionary tale for buyers in acquisitions, emphasizing the need for clarity in deals to avoid potential liabilities under the WARN Act.
Case Reference:
Day v. Celadon Trucking Services, Inc., No. 15-1711, United States Court of Appeals, Eighth Circuit (Filed: July 5, 2016).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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