A key component to a successful acquisition is often retention of the target organization’s essential employees. Although this component has always been important, in recent years potential buyers and sellers have spent much more time negotiating a plan with respect to employee related issues that works for both sides. During these negotiations, the parties often discuss and document a variety of employee related matters in the definitive agreement in an effort to streamline the process and avoid confusion. The following examines some material employment related issues that may arise during an M&A transaction. Properly considering and addressing these issues can help ensure not only continued financial success post-closing, but also fair treatment of the employees on whom the institution relies.
Buyers or sellers often inventory existing employee agreements early in the acquisition process. Common existing employee agreement provisions often provide for change in control payments or other payments that must be paid to an employee at the time of sale. Naturally, a buyer and seller may want to evaluate these additional closing expenses and document responsibility for paying them. Additionally, the buyer may step into the shoes of the seller with respect to existing employment agreements, so the buyer should determine what additional obligations it will have under existing agreements with respect to the employees. Under certain circumstances, the employees may be willing to negotiate different terms with the buyer to be effective post-closing.
During diligence, a potential buyer frequently identifies certain key employees that it will want to retain post-closing. Sellers will also benefit from retaining key employees at least until closing to help prepare for the sale and keep the organization operating as usual. Additionally, a buyer may decide to take certain measures designed to prevent employees from competing with the acquired institution post-closing. Therefore, the buyer and seller may want to consider entering retention or “pay to stay” agreements with certain key employees that provide a payment to an employee in exchange for staying onboard for a period of time. As described above, employee retention often benefits both the buyer and seller, so the parties may decide to split the costs of retention payments (although this is a point to be negotiated). The parties may also agree on which employees buyer can approach early in the process to attempt to enter post-closing type agreements (e.g., noncompetes) and whether such agreements will be required as a closing condition on the sale. If a buyer and seller agree that such post-closing arrangements will be required, it is often better to negotiate with the employee prior to signing the definitive agreement with respect to the sale of the organization so that the employee cannot hold up the sale by rejecting the proposal.
CREDIT FOR PRIOR SERVICE
Employees often accumulate paid time off and other credit under benefit plans based on the length of their service. Sellers might consider asking the buyer to credit its employees for service with seller under buyer’s benefits. A buyer would be wise to clarify that such credit will apply only to employees actually retained by buyer post-closing and that buyer will have no obligation to hire anyone. The parties may also want to discuss whether accrued paid time off will be paid out by seller at closing, so that buyer can start fresh under its employment policies.
Most buyers want an opportunity to interview and evaluate all of seller’s employees prior to closing on the transaction. By conducting diligence on employees prior to closing, the buyer will be in a position to eliminate redundant or unqualified employees immediately upon taking control of the institution. This process is often difficult but sometimes essential to the overall economics of the transaction. Therefore, the parties to a transaction may want to consider responsibility for terminating identified employees, whether to pay severance payments, and whether to request litigation releases.
One might think that if the buyer wants to terminate an individual’s employment, the buyer should have to terminate the employee post-closing. However, buyers can, and frequently do, negotiate for the seller to terminate certain identified employees immediately prior to closing. Doing so can relieve buyer from the unpleasant task at a minimum, and might mitigate the buyer’s potential liability associated with the termination. Additionally, paying severance (and determining which party is responsible for such severance payments) is a common point of negotiation between the parties. Finally, if severance will be offered, the parties should consider whether to request litigation releases whereby the terminated employees agree not to bring certain legal actions against the buyer or seller in exchange for the severance payment. Often state laws place restrictions on such litigation releases and require that the employee have time to review and rescind such releases. Therefore, if litigation releases will be requested from the terminated employees, the parties need to consider the legal and timing requirements well in advance of closing.
Parties to a transaction should be prepared to consider and negotiate a growing number of increasingly complicated employee related issues involved in the M&A process.