Planning Ahead Ensures A Successful Deal

Thursday, February 16, 2012 - 13:01

The Editor interviews Scott Faust and Howard Robbins, Partners and Co-heads of the Strategic Corporate Planning Group at Proskauer.

Editor: Tell us about your professional backgrounds.

Faust: I’ve been practicing labor law in Boston since 1985; however, my practice takes me across the U.S., from Massachusetts to the Midwest to the state of Washington, representing management in a broad array of industries, from heavy manufacturing, steel, aluminum and chemicals to healthcare and even to the Museum of Fine Arts here in Boston. I’ve done a great deal of work in connection with corporate transactions, especially in dealing with distressed companies. In distress situations, I’ve been labor counsel to debtors, unsecured creditors committees, secured creditor groups, individual creditors and asset purchasers in labor-intensive industries.

Robbins: I’ve been a labor and employment lawyer in New York since 1994.  About 75 percent of my practice is traditional labor law, and the rest is employment litigation and counseling. My practice is more New York-centered, in part because New York represents one of the most labor-heavy states in the union.  I co-chair with Scott the Strategic Corporate Planning group, which enables buyers and sellers to obtain insights about the labor picture in any contemplated acquisition.

Editor: What is the role of the Strategic Corporate Planning Group in corporate deals?

Robbins: To summarize, we try to provide strategic advice to maximize the value and minimize the risks in labor and employment issues, which are often a key element of corporate transactions. When potential buyers are considering a purchase that they consider will bring efficiency and synergy to their own businesses, changes to the labor and employment landscape are often involved. We try to help clients understand whether those things are possible and, if so, what it will take to get there.

Faust: Ideally we start with assisting with the strategic planning, particularly in an acquisition context. We provide guidance as to whether and how our client’s business objectives may be achieved. Particular tasks include the due diligence process and participation in negotiation of reps and warranties, as well as input into issues that can materially affect the pricing of the deal, particularly if there are unions that need to be reckoned with. At times there is the need for the outright negotiation of modifications to labor agreements in advance of the deal or in conjunction with the deal.

Editor: Which industries do you commonly advise in the deal-making process?

Robbins: Among them are real estate, hospitality, healthcare, manufacturing of all kinds, transportation, the financial sector and also the sports sector – a broad range of industries.

Faust: Our clients can be strategic buyers or sellers.  With increasing frequency over the last five to ten years, they've also included financial investors. Many financial players are looking at distressed situations – buying up the debt of a company or making a play for the company outright – in labor-intensive industries. They recognize that significant value can be locked up in some of the labor and benefit issues and hopefully unlocked by restructuring labor agreements and benefit programs for both active employees and retired employees.

Editor: What types of labor issues arise within the context of a deal involving unionized employees?

Robbins: When there are labor unions involved, it makes for a more complicated landscape. It may be desirable, for example, to make changes to healthcare, which generally cannot be done without giving a union the opportunity to bargain. Labor contracts may include limitations on the right to outsource, and there may be successors and assigns clauses that limit the ability to sell the business assets free of the unions.  Will the unions representing the seller’s employees represent the buyer’s employees after the sale?  What are the benefits issues, such as underfunding of multi-employer benefit plans? There may be more intangible issues, such as evaluating the labor-management relationship. What kind of relationship between the employees and management would the buyer be stepping into?

Faust: Successorship can carry with it a trail of secondary consequences that can materially affect the value of a deal because a union that has a strong, aggressive successorship right in its existing contract can wield a great deal of leverage over picking the winner among competing bidders. Important questions include the union’s reaction to the transaction itself. Are they in favor of the sale? Do they see a sale as a way to save the business? How do they react to the particular buyer? Unions will very often react to a strategic buyer one way and to a financial buyer in another, particularly if the financial buyer has a reputation as a corporate raider. Even if a union doesn’t have the successorship language to block or impair a sale, buying into a hostile union situation can be a dicey proposition, affecting the value of the deal. Our mission is to understand at the outset what the business objective is, what sort of impediments might need to be cleared in order to achieve that objective, understand who the union is and how they think. These insights will help us to help our client value the deal and overcome any objections and will help us to advise our client as to the limitations on what they’re going to be able to do. Sometimes the client may well decide the deal is not worth doing; it’s better for them to do that sooner rather than later.

Editor: How do you deal with a company that is being acquired that has a union shop when the acquirer is non-union?

Robbins: There is sometimes a phobia on the part of non-union acquirers who feel that acquiring a unionized company is like bringing somebody with a communicable disease into your house. But that is something that can certainly be managed in keeping the acquired company as a separately run entity.  There is what is known as the "accretion" issue, where in mixing employee populations, you’ve invited the sick person to dinner, complicating the picture that the union represents. Employers often get the unions they deserve, and the best defense to unionization is to treat your non-union employees well.

Editor: Tell us about occasions where one company with a union acquires another with a rival union?

Faust: It really depends on the situation. Very often each union will continue to represent the unit that they represented originally. If you are combining those units, there are rules under the National Labor Relations Act that can lead to the dominance and overtaking of a subordinate unit by another.  If there is contention surrounding it, it might find its way to the National Labor Relations Board, and in my practice this has not been a significant issue. Typically, if an acquired facility is represented by a different union, we just deal with that union at that facility. Many businesses have multiple unions.

Editor: What types of issues arise when the employees are not unionized?

Robbins: Many of the issues are the same. A new owner needs to manage employee expectations and to make sure that liabilities that you want to leave behind definitely are left behind. In a recent transaction in which I represented the buyer, there was an issue of accrued paid time off, based on the seller’s leading the employees to believe that they had a bank of such time. We made sure that that liability didn’t end up with us. But the seller was sued in a state court class action by its former employees. 

Editor: What other issues can arise when two companies with two separate workforces merge?

Faust: Another big issue can arise when the acquiring company seeks to achieve synergies by elimination of redundant functions and unwittingly walks into WARN (the Worker Adjustment and Retraining Notification Act) obligations if they are closing facilities or laying off mass numbers of employees. The apportionment of WARN liability as a negotiating point between buyers and sellers of distressed industries is often a significant issue. A related issue involves accretion risk where union and non-union facilities are being integrated. An unwitting buyer believing that it can achieve cost efficiencies through the integration of operations can find itself with a much broader unionized workforce if it is not careful.

Editor: At what time in the deal cycle is it best for the strategic planning team to get involved in the process?

Robbins: The short answer is as soon as a crystallized view is developed of what the value in a deal will be and if there is a component that involves labor and employment issues. If we get involved early, there may be collective bargaining agreements that can be renegotiated with changes valuable to the transaction before they get renewed by the seller in the ordinary course.  It’s good to get us involved early and to plan ahead. I often say to clients that they need to play chess six moves at a time, not one move at a time.

Faust: The big issue with timing is leverage. From the buyer’s perspective, timing is leverage, both with respect to negotiating with the seller over the terms of the deal, price, representations, warranties, indemnifications, liabilities that will be assumed, liabilities that will be left behind but also leverage with the union if you need to restructure labor agreements. The sooner we are involved, the better we are able to assess the likelihood that our client will achieve what he wants to achieve in negotiations with the union.

Editor: What are some questions that your clients should ask as they are vetting a company for merger or acquisition?

Faust: Start with the due diligence checklist: if there are unions, ask to review the contracts, understand the state of labor relations, see the benefit plans, see the actuarial reports; review multi-employer plans; ask to see the employment agreements, particularly those of key employees; and obtain a full understanding of the pending or threatened litigation confronting the target. In a unionized setting, it is important to understand the state of labor relations, the grievance and arbitration history, negotiation history and any strike history. Other areas to explore are the union’s likely reaction to the deal, the union’s likely reaction to the buyer, whether there are competing bidders for the business, how the union is likely to react to each of the competing bidders, and whether the union will try to play bidders off against one another. Understanding those elements as early as possible will help to inform both your acquisition strategy and the business plan in relation to the deal to obtain financing or to structure your deal. One of the benefits that we bring collectively within Proskauer is that we have extensive experience with virtually every major industrial union in the country; we understand how they may perceive a particular transaction; and we are experienced in dealing with those unions. There is also an element of credibility that we can bring as advisers to any union situation.  Failure to account for labor, employment or benefit issues in a given transaction can have significant consequences on how well you valued the deal, on your chances of success in closing the deal and ultimately your chances of success in executing the strategy that led you to pursue the deal in the first place.

 

Please email the interviewees at sfaust@proskauer.com or hrobbins@proskauer.com with questions about this interview.