In the right situations, the United States Bankruptcy Code provides powerful tools for acquiring distressed companies and realizing economic value, including synergies from vertically integrating suppliers or customers, or purchasing competitors’ assets at a discount.
Section 363(f) of the Bankruptcy Code allows a debtor to sell assets “free and clear” of any interest in such assets if one of five conditions are met. Section 365(a) of the Bankruptcy Code allows a debtor, subject to court approval, to assume or reject any executory contract or unexpired lease. Section 1113 of the Bankruptcy Code allows and provides a framework for a debtor to reject collective bargaining agreements (CBAs).
While using these tools can improve the economics of an acquisition (for example by shedding an onerous CBA) and seem attractive, buyers should pay careful attention to potential pitfalls when devising and implementing their strategies.
The United States District Court for the District of Delaware recently held that a sale “free and clear” under section 363 could not insulate a buyer from certain obligations under the National Labor Relations Act of 1935 (NLRA) to bargain with a union even where the CBA had been rejected under section 365(a) — see United Steel, Paper and Forestry, Rubber, Manufacturing, Energy Allied Industrial and Service Workers International Union AFL-CIO, CLC v. Braeburn Alloy Steel LLC (In re CCX Inc.), 22-1563 (D. Del. Sept. 19, 2023).
The bankruptcy court’s order in that case approved the debtor’s sale of substantially all of its assets to the buyer “free and clear of all liens, claims, rights, encumbrances, and other interests. ...” The buyer declined to assume the CBA that covered substantially all the hourly production and maintenance employees of the facility that the buyer acquired. The buyer hired essentially all these employees under new terms and conditions of employment and refused to negotiate with the union after the union demanded bargaining. The union then filed an unfair labor practice charge with the National Labor Relations Board (NLRB) taking the position that it was a “perfectly clear” successor and that the buyer was therefore obligated to bargain with the union regarding new terms and conditions of employment. The NLRB issued a complaint and the buyer responded by seeking an injunction from the bankruptcy court to enjoin the union from pursuing any legal claim that the buyer had an obligation to recognize or bargain with the union.
After concluding that the CBA was an interest in property that a debtor could sell “free and clear” under section 363(f) and that section 1113 provides for the rejection of CBAs, the bankruptcy court issued an injunction that barred the union from taking any action with respect to any allegation that the buyer was bound to the CBA. The union appealed.
The district court reversed the bankruptcy court, holding that a “free and clear” purchase under section 363 does not eliminate a buyer’s obligation to comply with federal labor law (even if the CBA was not assumed). The district court held that the bargaining obligation of the buyer under federal labor law exists independently of the CBA. The NLRB’s successorship doctrine provides that a new employer is a “successor” under federal labor law and must recognize and bargain with the predecessor’s union if it employs a majority of the predecessor’s employees unless it does not have “substantial continuity in the employing enterprise.” Because the buyer hired nearly all the debtor’s union-represented employees and conducted the same operations, it was a “successor” under federal labor law and bound to negotiate with the union that represented the employees of the debtor.
Using the powerful tools of the Bankruptcy Code requires carefully crafted and precise strategy. For instance, the NLRB is precluded from filing charges of unfair labor practices against the debtor for violating the provisions of the NLRA after a bankruptcy court approves the rejection of a CBA. However, a bankruptcy court order approving the sale of the debtor’s assets “free and clear” cannot shield the purchaser from successor liability under federal labor law arising out of the buyer’s post-sale conduct. Considerations for strategies in this context include:
- Buyer could employ less than a majority of the debtor’s prior workers.
- Buyer could change operations in a way to eliminate “substantial continuity.”
- Debtor could use negotiating leverage that bankruptcy provides to renegotiate the collective bargaining agreement with the union prior to the sale.
- Debtor could reject and replace the union contract prior to the sale.
The preceding considerations are very fact and situation specific and may be successful in the right circumstances, but tailoring the right strategy for the circumstances is imperative. Consulting with the experienced advisors at Warner can help if you’re interested in exploring how to use the tools of the Bankruptcy Code to enhance your M&A strategy.
For needs or questions involving M&A matters, including distressed acquisitions inside or outside of bankruptcy court, please contact Linda Paullin-Hebden, Nick Binder or a member of Warner’s Mergers and Acquisitions Practice Group. For questions regarding bankruptcy, restructuring or insolvency, please contact Rozanne Giunta, Gordon Toering, Susan Cook or a member of Warner’s Bankruptcy, Restructuring and Insolvency Practice Group.
