Buying a Unionized Shop: The Successor Rights Surprise

The situation

Layla and Nadia had spent a decade building a precision-parts manufacturing company outside Cobourg through a holding company they co-owned. Layla still ran a dental practice as her primary occupation; Nadia worked as an investment advisor. Neither had started out intending to run a factory. The manufacturing business had begun as a side investment in a struggling small operation, and under Nadia's financial discipline and Layla's willingness to reinvest her own income into it, it had grown into a genuine competitor in the regional precision parts market: non-union, roughly 60 employees, and profitable enough that the two of them were now looking to expand by acquisition rather than by the slower, harder work of winning new contracts one customer at a time.

The opportunity came from Dov, who owned a similarly sized machine shop across town that supplied parts to some of the same industrial customers Layla and Nadia's company already served. Dov, in his early sixties, wanted to retire and had no family member ready to take over. His shop had roughly 45 employees represented by a union, with a collective agreement in place governing wages, seniority, shift scheduling and shop-floor grievance procedures that had built up over more than a decade of bargaining. Layla and Nadia's advisors structured the deal as a proposed asset purchase agreement, valuing the business at roughly $6,500,000, on the assumption that buying specific assets rather than the shares of Dov's corporation would let them acquire the equipment, inventory, real property and customer contracts they wanted while leaving the existing union relationship behind and folding the combined workforce into their own non-union operating structure.

The legal problem

That assumption was wrong, and it is one of the most common misunderstandings in business acquisitions involving a unionized workforce. Under Ontario's Labour Relations Act, 1995, when a business or part of a business is sold, leased, transferred or otherwise disposed of, the person who acquires it is bound by any collective agreement in force and by the union's existing certification, provided the business carried on afterward is substantially the same business that was sold. This rule, known as successor rights, applies whether the transaction is styled as a share purchase or an asset purchase. The legal form of the deal does not control the labour law outcome; what matters is whether the workforce, equipment, customer relationships and operations continue on in recognizable form under the new owner. A buyer cannot use an asset purchase agreement as a tool to strip away a union simply by describing the transaction as a sale of assets rather than a sale of shares.

Our review of the target shop and the proposed deal structure found that almost everything about it pointed toward continuity: the same building, the same production lines, the same customer contracts, and an intention to keep most of the existing workforce in place because their trained skills were part of what made the acquisition valuable in the first place. That combination meant Layla and Nadia's holding company was very likely to be found a successor employer bound by Dov's existing collective agreement and by the union's certification, regardless of how the purchase agreement described the assets being transferred. Their original deal team, focused on equipment valuations and customer contract assignability, had not flagged this, and the purchase price had been set as though the union relationship would simply end at closing along with Dov's ownership. We also had to explain that even the employees Layla and Nadia hoped to let go as part of streamlining the combined operation would carry seniority and severance protections forward under the existing agreement, another cost that had not been priced into the original offer.

What we did

1. Reviewed the collective agreement and certification in detail. We obtained and read the current agreement between Dov's corporation and the union, including wage grids, seniority provisions and any pending grievances, to understand what obligations would actually transfer with the business.
2. Explained the successor rights exposure clearly before any further negotiation. Layla and Nadia needed to understand, in plain terms, that structuring the deal as an asset purchase would not achieve their original goal of a non-union operation, and that treating the union relationship as an afterthought risked a labour board complaint after closing.
3. Reopened the purchase price discussion. Because the buyer would now be carrying the collective agreement's wage and seniority terms forward rather than resetting labour costs to match their existing non-union shop, we advised renegotiating the price to reflect that ongoing cost difference rather than proceeding at the original figure.
4. Negotiated a closing holdback tied to pre-closing labour liabilities. A portion of the purchase price was held back in escrow for a defined period after closing to cover any grievances, unpaid wage claims or other labour-related liabilities that existed before the sale but surfaced afterward.
5. Built a transition communication plan with the union. Rather than letting employees learn about the change of ownership informally, we advised notifying the union and the workforce promptly after the agreement was signed, consistent with the buyer's obligations as the incoming employer, to avoid unnecessary friction during the handover.
6. Revised the representations and warranties in the purchase agreement. The agreement was amended so Dov's corporation confirmed the status of the collective agreement, any outstanding grievances, and compliance with Ontario employment standards obligations, giving Layla and Nadia contractual recourse if anything had been misrepresented.

The outcome

The deal still closed, but not on the terms Layla and Nadia had originally expected. The purchase price was reduced from roughly $6,500,000 to about $6,150,000, a decrease of roughly $350,000 reflecting the higher ongoing labour costs the buyer would now be carrying under the existing collective agreement rather than reverting to non-union wage levels. A further $250,000 of the adjusted price was held back in escrow for twelve months to cover any grievances or claims tied to the period before closing, rather than becoming Layla and Nadia's problem to absorb without recourse.

Layla and Nadia's holding company became the successor employer, bound by the collective agreement and the union's certification exactly as the Labour Relations Act, 1995 anticipated. That was the loss: the non-union expansion they had originally pictured was not available on this deal, and their initial pricing model had to be rebuilt around a cost structure they had not planned for. The two of them had genuinely believed, going in, that the shape of the purchase agreement controlled the labour outcome, and learning otherwise partway through the process was a hard adjustment to a deal they had already committed emotional and financial energy toward closing.

But it was a contained loss rather than an open-ended one. Because the exposure was identified before closing rather than discovered afterward, Layla and Nadia were able to negotiate compensation for it, put a financial backstop in place for pre-closing liabilities, and manage the transition with the union directly rather than being caught in a labour board complaint after the fact. Their combined operation went ahead as two integrated production lines under one ownership, with the formerly unionized shop continuing to operate under its existing agreement while the two businesses were gradually harmonized on pay bands and scheduling as the collective agreement came up for renewal. Had the original asset purchase agreement closed as first drafted, at the original price and without the holdback, the same successor rights obligations would still have applied by operation of law — Layla and Nadia would simply have absorbed the added labour costs and any pre-closing liabilities with no price adjustment and no contractual recourse against Dov to show for it.

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