Caveat emptor applies to M&A

Julius Melnitzer | Oct 1, 2012 10:11 AM ET | Last Updated: Oct 1, 2012 11:16 AM ET
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Peter J. Thompson/National Post Customers leave a Zellers store in Toronto. What Target has discovered since buying the leases on 220 Zellers stores is that where entry to Canada involves the transfer of any significant asset from a similar unionized Canadian business, Canadian labour laws can make it quite difficult for U.S. retailers and others to shed collective bargaining obligations.

When Target Corp. decided to come to Canada, it eschewed a greenfield approach involving the construction of new stores partly to avoid the daunting maze of land use regulation in Canada.
So regulatory hearings and public demonstrations were likely not part of the package that Target expected when it instead spent $1.825-billion to buy 220 Zellers leaseholds in 2011. After all, as Target’s lawyers recently told the B.C. Labour Relations Board, the U.S. retailing giant is doing everything it can to avoid being identified with Zellers’ stores or image to the point where it doesn’t even have any interest in Zellers’ customer lists.
But what Target has discovered is that where entry to Canada involves the transfer of any significant asset from a similar unionized Canadian business, Canadian labour laws can make it quite difficult for U.S. retailers and others to shed collective bargaining obligations binding the transferor.
Indeed, Target is now embroiled in a successorship hearing that has already taken up five days before the B.C. Labour Relations Board and is set to continue in October with the presentation of expert evidence.
That evidence will doubtlessly focus on whether Target’s real goal in purchasing the lease relating to the former Zeller’s store at Burnaby’s Brentwood Mall was to get control of the location that was the subject of the lease.
“When dealing with retail businesses, it can be argued that the location is so crucial as to be the main or a primary asset of the business,” says Paul Cavalluzzo, a union-side labour partner at Cavalluzzo Hayes Shilton McIntyre & Cornish LLP in Toronto.
“And if what is really being transferred is a main asset of the business, the Labour Board may well conclude that there has been a sale of the business within the meaning of the labour legislation.”
If there has been such a sale of the business, most jurisdictions in Canada mandate that the deemed buyer of the business must assume any collective bargaining agreement that bound the seller.
The upshot is that the five unionized Zellers locations, including four in Ontario, that Target is poised to open under its own brand, are proving to be a thorn in the side of the U.S. giant’s Canadian plans — especially since the United Food and Commercial Workers Union, which represents unionized Zellers employees, has announced it will also seek successorship declarations from the Ontario Labour Relations Board.
Whether the UFCW will succeed in either Ontario or B.C., however, is unclear.
“Deciding if the transfer of the lease amounted to the transfer of a business involves a very complicated analysis,” Mr. Cavalluzzo says.
Target has consistently maintained that it did not buy Zellers’ business, pointing out that there was no transfer of merchandise, systems, employees, logos or goodwill;  that Target will be spending at least $10-million on remodelling each site; and that Target has a customer base that is younger and more free-spending than Zellers’ patrons.
“The more parts of a business flow through, the more likely there is to be a sale of business,” says Mary Beth Currie, a management-side labour and employment partner in Bennett Jones LLP’s Toronto office. “The converse is equally true.”
Ms. Currie says a comparison between the merchandise mix and customer base of Target and Zellers may be critical to determining whether a sale of a business has occurred.
“For example, Target and Neiman Marcus recently announced a Christmas campaign during which both stores will sell co-branded collections from designers like Oscar de la Renta,” she says.
“What you’d want to think about is whether Neiman Marcus or Oscar de la Renta would ever have collaborated with Zellers.”
Further complicating the matter is the possibility that the Ontario and B.C. labour boards may reach different results for each of the five unionized premises.
“Among other things, whether a store is a destination store or whether it is more of a local community-based business could well affect the outcome,” Ms. Currie says.

http://business.financialpost.com/2012/10/01/cavaet-emptor-applies-to-ma/