When we hear the words "share purchase" we normally breathe a sigh of relief – TUPE will not apply. It is true that in the context of a purchase of shares, the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") does not ordinarily apply. However, where post-acquisition or as a result of an acquisition a business is effectively "hived-up" so that the employees are employed by another group company (for example, the parent company of the purchasing entity or another company in the group structure) then this can trigger a TUPE transfer.
The recent Employment Appeal Tribunal decision of Jackson Lloyd Ltd and Mears Group plc v Smith and others UKEAT/0127/13 is a reminder that we should not automatically assume that, just because we are dealing with a share purchase, TUPE does not apply.
Share purchase vs. Asset purchase
On a share sale, it is the ownership of the entity operating the business, rather than the ownership of the business itself, which changes. Assets continue to be owned by the target company, contracts continue in the name of that company and, crucially, there is no change of employer for the target’s employees.
On an asset sale, however, individual assets and contracts, including employment contracts, transfer into the name of the buyer. From completion, therefore, the target’s employees will have a new employer – the buyer. The law has evolved to protect employees in this situation and TUPE applies to ensure that the target’s obligations and liabilities in respect of the employment contracts are transferred to the buyer, thus protecting the transferring employees.
The share purchase
In the Jackson Lloyd Ltd and Mears Group plc case, Mears Ltd, (a wholly owned subsidiary of Mears Group plc), purchased the entire issued share capital of Jackson Lloyd Ltd. The parties considered that TUPE did not apply and therefore did not inform and consult the employees of the business.
The EAT upheld the Tribunal’s finding that, while the share transfer between Jackson Lloyd and Mears Ltd had been a genuine transaction, Mears Group plc's actions after the share sale were sufficient to trigger a business transfer under TUPE. This meant that the employees ought to have been informed and consulted about the TUPE transfer.
What triggered the TUPE transfer?
The ET and EAT found that the following factors triggered the TUPE transfer:
- the existing Jackson Lloyd board members resigned and were replaced by Mears Group nominees;
- the employees were told that as Mears Group had purchased Jackson Lloyd there would be an integration programme which would result in them moving over to Mears Group;
- the integration exercise went ahead and was overseen by Mears Group employees and an integration consultant. The integration included changing policies, procedures, work methods and control to Mears Group, while retaining the Jackson Lloyd branding and uniform for staff;
- the changes were enforced by Mears Group employees rather than, for example, the Jackson Lloyd HR team, and they were not made in accordance with the existing Jackson Lloyd mechanisms for making such changes.
Why should we care?
A TUPE transfer means that:
- the affected employees automatically transfer to the new employing entity on the same terms and conditions of employment – any changes to terms and conditions by reason of the transfer will be void unless they are for an "economic, technical or organisational reason" (ETO reason) i.e. redundancy;
- the affected employees are protected from being dismissed – any dismissal will be automatically unfair if the sole or principal reason for the change is the transfer itself and is not for an ETO reason (although even with the ETO defence it can still potentially be unfair if a proper process has not been followed);
- the new employer will inherit all rights, liabilities and obligations connected to the affected employees; and
- the transferor will have obligations under TUPE to inform and, if any "measures" are proposed which affect its employees' employment, consult with representatives about the transfer. The risk is that the liability for such claims passes to the new employer by operation of TUPE.
The case also highlights that if there is no TUPE consultation (which will undoubtedly be the case if it is not recognised that TUPE applies) then individual employees may be able to bring claims directly for failure to inform and consult without relying on there being representatives in place. Jackson Lloyd had in the past worked with employee representatives who had been elected for various collective procedures but by the time of the TUPE transfer the representatives’ terms of appointment had all expired. The EAT held that these former representatives were not proper representatives for the purposes of TUPE consultation. As a result, there were no representatives to pursue TUPE claims and so all of the employees affected by the transfer could bring an individual claim for the failure to inform and consult with them about the TUPE transfer, which can result in an award of up to 13 weeks' gross pay per affected employee.
What to take away
- Do not just assume that because there is a share sale TUPE will not apply. Careful consideration should be given to the circumstances and the purchaser's intention post-completion.
- Careful consideration should be given to communications made to employees and, where relevant, public communications (for example under the Alternative Investment Fund Managers Directive (AIFMD)). However, a Tribunal will look behind any communications to what is happening or has happened in practice.