The Ohio workers’ compensation successor-in-interest rules frequently catch even the most seasoned corporate M&A attorney off guard. Most M&A attorneys reasonably expect that a straight asset purchase will not result in the assumption of any workers’ compensation liability in Ohio. As it relates to companies that pay premiums directly into the Ohio state workers’ compensation fund, that expectation more often than not will turn out to be wrong. In short, Ohio’s courts have long held that the workers’ compensation statute authorizes the BWC to find successorship whenever "any employer transfers a business in whole or in part or otherwise reorganizes the business."

Frequently deferring to BWC determinations that successorship justifies a transfer of the seller’s experience to the purchaser, the courts simply have defined a successor in interest as a "transferee of a business in whole or in part." This broad definition generally has resulted in the asset purchaser being held to have succeeded to the experience rating of the selling company even when the asset purchase agreement expressly states that the purchaser assumes none of the liabilities of the selling company. (Indeed, it has even resulted in a finding of successorship when a company retained another company’s employees as it took over a lease of that company.)

When the selling company’s workers’ compensation experience in Ohio is negative, the purchaser often is very surprised when they are left holding the bag and responsible for continuing to pay premiums attributable to some very bad claims. As a result, any company that is purchasing the assets of (or is otherwise taking over the business of) a company that is experience rated for workers’ compensation in Ohio would be wise to evaluate whether the selling company is merit or penalty-rated and, if the latter, to either take that into consideration in arriving at a purchase price or to create a mechanism to recoup payments made for the workers’ compensation claims it inherits.

With these successor principles as a backdrop, we now consider the Ohio Supreme Court’s decision yesterday in State ex rel. Valley Roofing LLC v. Ohio Bureau of Workers’ Compensation, which upholds a tiny, but significant, gap in the BWC’s broad authority to find successorship. In that case, Valley Roofing purchased the assets of Tech Valley Contracting, Inc. from PNC Bank after the bank had foreclosed on Tech. When Valley Roofing applied for workers’ compensation coverage, the BWC transferred Tech’s experience rating to Valley Roofing. Valley Roofing objected on the ground that it was not a successor to Tech; instead, it had acquired Tech’s assets from an intermediary bank. The Ohio Supreme Court, relying on its prior decision in State ex rel. Crosset v. Conrad, found that Valley was not a successor to Tech because Tech did not transfer its business to Valley Roofing, but instead transferred its assets to the bank, which foreclosed on them and then the bank transferred those assets to Valley Roofing. Valley Roofing undoubtedly saved a substantial amount of money as a result of the structure of this transaction.

In this economic climate and perhaps more so as the economy hopefully enters a recovery, we suspect that there may be businesses that are looking to purchase the assets of other more struggling businesses. In structuring these deals, many purchasers do not consider the workers’ compensation history of the selling company. But shrewd purchasers can structure the deal in order to avoid a nasty surprise once the transaction has closed and it is time to obtain workers’ compensation coverage for the new entity.