Employment issues on corporate transactions
With corporate activity starting to increase, we thought it would be useful to consider some of the key employment aspects that can arise on a corporate transaction.
How do staff transfer to the buyer?
On a share sale, staff will generally be employed by a target company and the employment contracts will simply remain with the acquired target company following closing; in practice, nothing really changes from the staff’s point of view. It is important, therefore, that parties check that employees are properly employed by the target company (and not, as is sometimes the case, another non-target group company for legacy reasons).
Where a business is being acquired by way of an asset sale, employees will usually automatically transfer to a buyer entity under what’s commonly referred to as “TUPE”. In practice, employees ‘attach’ themselves to the business and automatically move with it on their same terms and conditions of employment and maintaining their continuous service. There are also restrictions on the buyer preventing it from trying to amend their terms and conditions of employment and terminating their employment.
Where TUPE applies, it is important that both the buyer and seller comply with their respective duties under the TUPE regulations, which, amongst other things, requires them to carry out an information and consultation process with affected staff. This can involve consulting with trade union representatives (if applicable) or electing a body of employee representatives and can take around one month.
Identifying key employees
Identifying the key employees will be vital.
The seller will want to ensure that it has identified a key team who can assist with the sale and stay with the business so as to be attractive to a buyer (given their knowledge and connections). The buyer will want to ensure that it acquires a key team who are engaged and ‘locked-in’.
It is common for the key team to have retention arrangements in place to incentivise them to stay with the business and work for a minimum transition period. The buyer might also want to further incentivise them by agreeing a management incentive plan, such as shares or options in the target company.
In addition, a buyer will want to know the terms on which the key employees are employed under. It is important, for example, that key employees are subject to:
- Sufficient termination provisions and notice periods.
- Robust confidentiality and intellectual property provisions.
- Post-termination restrictions (e.g. Non-compete and non-poach provisions).
It is also important to understand what their commercial terms are (such as salary and agreed bonuses).
Where key employees do not have appropriate employment contracts in place, it is common for the parties to agree that new contracts are signed at closing.
Departing senior employees
It is often the case that senior employees and directors leave the business as part of a corporate transaction. In those circumstances, having them sign standard waiver and release agreements (under which they release any employment claims (such as for unfair dismissal)) is a good idea.
General employment issues
Through the due diligence process, it is important for the buyer to understand the general employment position to identify any claims and potential liability. This will include understanding:
- The general terms on which employees and consultants are employed or engaged.
- Any special arrangements, such as enhanced redundancy pay rights and contractual bonuses
- Whether there are any recognised trade unions and, if so, what the relationship between the unions and the target business are like.
- Whether there are live HR issues or live or threatened employment claims.
- Whether the target company has utilised any government schemes during the COVID-19 pandemic (such as the furlough scheme) and, if so, the way it has used them.
It is important that these risks and liabilities are mitigated (to the extent commercially possible) through warranties and indemnities in the transaction documents.
It can often be the case, especially in the context of a “carve-out” deal, that the target business receives services from a central seller support function. This can typically include HR support, IT support and finance. The buyer will likely want the target business to continue to receive such support for a period after closing to allow it to make its own arrangements. Thought will need to be given as to how this support shall be staffed. It might be the case that support staff who are solely dedicated to the target business will transfer to the buyer at closing and such staff will therefore need to be seconded back to the seller to provide the transitional support.
Where a business has employees based in other jurisdictions, it is important to take local advice. For example, in the US and in many Asian countries, there is no equivalent to the TUPE rules; therefore, if the transaction is structured as an asset sale, those employees will need to accept new employment contracts with the buyer and consideration will need to be given as to how any severance payments that are triggered as a result of the technical dismissal and rehiring are dealt with.
In addition, some countries (especially in Europe) have far stricter information and consultation requirements, including on share acquisitions. In France, for example, a business’ works council must be consulted about any proposed acquisition and given a one- to three- month period in which to pass its opinion: this often needs to happen before any transaction document is signed.
This note reflects our opinion and views as of 9 November 2020 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.
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