Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How a WARN Act Clause Torpedoed a $2 Billion Deal
Transcript
- Lucas: So there's a specific federal law from 1988 that barely anyone thinks about during M&A due diligence — until it kills a deal worth over two billion dollars. Luna: The WARN Act. Lucas: Exactly. Worker Adjustment and Retraining Notification Act. Requires employers with 100 or more workers to give 60 calendar days' notice before a plant closing or mass layoff. Sounds procedural, right? But in M&A, it's a landmine. Luna: I've heard of it mostly in bankruptcy contexts. How does it actually blow up a going-concern acquisition? Lucas: Great question. Let me walk through a real near-deal from last year. Private equity firm — let's call them Apex Equity — signed a definitive agreement to buy Midwest Precision Parts for $2.1 billion. Midwest had 4,200 employees across seven plants. One of those plants was being wound down even before the sale closed. Luna: So a planned closure during the gap period between signing and closing. Lucas: Right. The target's management had already decided to shutter a non-core facility in Ohio, laying off 340 workers. They didn't give the 60-day notice because they assumed the deal would close first, and then the new owner would handle it. That assumption created the problem. Luna: Because under the WARN Act, if the employer doesn't give notice, each affected employee gets up to 60 days of back pay and benefits. And if the facility closes before the deal closes, the target company is still the employer. Lucas: Exactly. So the buyer's attorneys flagged it during final due diligence. They said: 'You, the seller, are about to violate WARN. If that happens before we close, we inherit a contingent liability that could be seven million dollars or more.' According to my sources, the seller's response was: 'We'll indemnify you for any WARN claims post-closing.' And the buyer walked away. Luna: Wait — they walked over an indemnity clause? That seems like standard negotiating. Sellers give indemnities all the time. Lucas: Normally, yes. But here's the nuance. The buyer's investment thesis depended on certain post-close cost synergies. One of those synergies involved restructuring that same Ohio plant. If they accepted the indemnity, they'd essentially be self-insuring a risk that was already material — and they couldn't get warn specific deal insurance at a reasonable premium. The return just didn't pencil. Luna: So the cost of the tail risk — the potential class action — ate into the IRR. Lucas: Correct. The buyer modeled it: worst-case WARN class action, including legal fees, could hit $7 million. Indemnity insurance would cost another $400,000 in premium plus a retention. The deal's projected internal rate of return was already thin at 14 percent. After that, it dropped below the firm's hurdle. So they terminated. Luna: And the seller was left with a half-done plant closure, a broken deal, and presumably a WARN class action anyway. Lucas: Exactly. Which brings us to a broader structural point about M&A today. More and more target companies have ongoing restructuring activity — especially in manufacturing — and that activity often triggers WARN obligations that the seller hasn't fulfilled. Buyers are getting much sharper about this. Luna: Speaking of getting sharper — you know, if this kind of analysis has helped you think about your own work, maybe it's worth the price of a coffee. Today's episode, and everything on Fexingo, stays ad-free because listeners chip in when it's useful. If today moved your thinking forward even a little, there's a link — buy me a coffee dot com slash fexingo. And honestly, even a single coffee helps keep the lights on. Lucas: Yeah, we don't run ads, so listener support is what keeps this show independent. Appreciate anyone who throws in. Back to the WARN Act — what I find interesting is how this is reshaping pre-signing due diligence. Luna: What are buyers doing differently? Lucas: Two things. First, they're requiring sellers to certify WARN compliance in a separate representation, not just buried in the general compliance reps. Second, they're auditing the target's actual notice history — looking at whether any plant-level communications could be construed as constructive notice. Luna: Constructive notice — meaning even informal chatter about potential closure could trigger the 60-day clock? Lucas: There's case law on that. In some circuits, if management tells shift supervisors that a plant 'might close,' and those supervisors pass it to workers, a court could find that the 60-day notice period started informally. That's a nightmare for due diligence. Luna: So the buyer's attorneys are now interviewing middle managers? Lucas: Increasingly, yes. And they're also checking state-level mini warn laws. California, New York, Illinois, New Jersey — those states have their own versions with different thresholds. California's applies to employers with 75 workers. New York's is 50. And the penalties can be worse. Luna: So a multi-state target could be facing multiple overlapping WARN liabilities. Lucas: Right. And here's where it gets really technical. Under federal WARN, liability is capped at 60 days of back pay and benefits. But some state laws allow for civil penalties, attorneys' fees, and even punitive damages in certain circumstances. So a buyer who assumes only federal exposure could be unpleasantly surprised. Luna: What about the seller's perspective? If I'm selling a business that's planning layoffs, what's the smart move? Lucas: The smart move is to issue the WARN notice early — before signing, ideally before even entering exclusive negotiations. Because once you've issued notice, the 60-day clock runs, and by closing, the liability period has expired. That makes the deal much cleaner. Luna: But that also signals to the workforce that layoffs are coming, which could hurt morale and productivity during the sale process. Lucas: It's a trade-off. Some sellers try to thread the needle by using 'layoff aversion' strategies — offering transfers or severance packages that might satisfy WARN's requirements without a formal notice. But that's risky because WARN doesn't have a clear exception for 'we tried to avoid it.' Luna: So the safest path is actually the most transparent one. Lucas: In my opinion, yes. And I think the market is moving that way. We're seeing more purchase agreements include a specific WARN covenant that requires the seller to give notice before closing if any layoff is planned — and if they don't, the buyer gets a walk right, not just an indemnity. Luna: That's a stronger remedy. A walk right gives the buyer the option to terminate post-signing if the seller fails to comply. Lucas: Exactly. And that changes the negotiation dynamic. The seller can't just say 'we'll indemnify you' and move on. They have to actually fix the exposure. Because if they don't, the buyer can walk — and in a competitive auction, that's a huge risk for the seller. Luna: So the WARN Act is quietly becoming a deal-breaker in middle-market manufacturing M&A. Lucas: I think it already is. And I expect we'll see more litigation around it — either from employees suing after a botched closure, or from buyers suing sellers for failing to disclose WARN exposure. The law hasn't changed, but the deal community is catching up to its implications. Luna: That's a good note to end on. Thanks, Lucas. Lucas: Thanks, Luna. And for anyone negotiating a deal right now — check your target's plant closure plans before you sign.