When contemplating acquiring the assets of a company in Canada, the purchaser will engage in extensive due diligence to ensure it is making a sound investment. These searches almost always include inquiries with the Workers’ Compensation Board (WCB) in the relevant province.
A poor result, with outstanding claims and high premiums, might send the transaction sideways. However, a recent decision of the Appeals Commission for Alberta Workers’ Compensation suggests that a purchaser may avoid the consequences of a mediocre WCB record altogether and wipe the slate clean.
Initial assessment
A public company without operations in Alberta, Newco, purchased the assets and undertaking of a business, Oldco, as part of a broader national transaction. Oldco operated in Edmonton and Calgary and had a poor WCB record. Following the purchase, Newco changed Oldco’s name to reflect the new ownership and management. There was no overlap in the directors or officers of Newco and Oldco. Newco named new individuals to key human resources and safety positions at Oldco, and rolled out new health and safety procedures in Alberta.
According to WCB policy, when a new company purchases the assets and undertaking of an existing WCB client, the WCB will conduct a risk assessment to decide whether to combine the records of the two entities. If it determines that, despite a change in ownership, the insured risk remains the same, the accounts will be combined. Here, that is what the WCB decided. In its assessment, the purchase of Oldco by Newco did not change the risk profile. This resulted in higher WCB premium costs for Newco.
Newco sought a review of this decision to the WCB’s Dispute Resolution and Decision Review Body (DRDRB). The DRDRB upheld the initial decision, and Newco appealed to the Appeals’ Commission.
Appeal decision
WCB policy directs that several criteria be considered when conducting a risk assessment. These criteria include a consideration of ownership, affiliation and control, business continuity, continuity management personnel, changes in financial and operational control, continuity of health and safety programs and disability management, intercompany transactions, and transfer of workers between businesses. The process is discretionary in nature.
The Appeals Commission determined that there was a substantial improvement in the risk profile of the business. As such, it was not reasonable for the WCB to combine Oldco’s unfavorable experience record with that of Newco.
In making this decision, the Appeals Commission considered several factors:
(a) Oldco was an “orphan division,” with no interaction with its national parent and no benefit of a corporate structure focused on occupational health and safety;
(b) Oldco operated at a loss without the assistance of continued investment by its parent;
(c) Unlike Oldco, Newco was a division of an international organization with the necessary resources, capacity, and intention to operate with the high standards expected of an international organization;
(d) Schedules and plans prepared by Newco prior to the sale demonstrated the premium it placed on safety within its operations;
(e) Newco implemented an overhaul of Oldco’s organizational structure, putting new executives in place who are in charge of workplace safety, and made several capital investments to enhance the safety of Oldco’s premises; and
(f) Newco dropped Oldco’s operating name and rebranded it with the purchaser’s international name, putting the reputation of the purchaser in jeopardy should Newco fail to address the shortcomings of Oldco.
As a result, it was not appropriate to combine the experience records of Newco and Oldco.
Takeaway
This decision highlights the risks associated with acquiring the assets of another company in Canada and the possibility of being saddled with the other company’s poor management and operational decisions. However, if a company is willing to invest resources in improving operational safety and in reinforcing a culture of workplace safety, those past failings may become irrelevant.
