Ten years ago, a leading London corporate lawyer declared to the New York Times (Mar 26, 2000), in “merging two regular companies...you just do it and sort out the people issues afterwards.”1 If that was true then, it no longer is. These days, in any merger or acquisition between two employers—especially in the cross-border context—human resources and employment law compliance have become increasingly vital. “People issues” will never lie at the heart of the international M&A process, but they can be persistent and bedeviling over the course of a cross-border transaction, from due diligence and acquisition-agreement drafting through closing and post-merger integration.2
This is a toolkit for US human resources professionals and legal counsel responsible for “people issues” in international M&A transactions. We address a multinational buyer or seller as it accounts for the seller’s outside-US employees who, at closing, will transfer over to the buyer. We divide these issues into three stages: (1) M&A employee transfers outside the US (vested rights, acquired rights, de facto firings);3 (2) international M&A employment due diligence checklist;4 and (3) checklist of HR issues in international M&A transactions.5
Part 1: M&A Employee Transfers Outside the US: Vested Rights, Acquired Rights and de Facto Firings
In most multi-jurisdictional deals, a single threshold employment-law question permeates all others: What happens, after closing, to the seller’s employees? In cross-border transactions where the seller employs staff in more than one country, the answer to this question may differ for each jurisdiction, particularly when the transaction is an asset purchase.
Parties to a deal sometimes negotiate for the seller to lay off (“make redundant”) some or all employees before closing, although in the European Union the fact of a transaction “shall not in itself constitute grounds for dismissal.”6 Any such pre-closing lay-off (“collective redundancy”) needs to comply with each affected jurisdiction’s reduction-in-force and notice/redundancy/termination/severance laws, including local labor laws that require information/consultation/bargaining with employee representatives. But lay-off laws are not unique to the M&A context. A pre-closing reduction-in-force is largely the same as any other lay off, although some unsatisfied severance liabilities can reach a buyer after closing.
The biggest employment-law problem that looms over M&A deals is the fate of those employees who remain on the seller’s payroll at the moment of closing. This problem gets complex outside the US because other jurisdictions tend to protect transferring staff more paternalistically than does the US under employment-at-will. To draw this contrast we begin by looking at how US law does— and does not—protect American employees affected by a deal. Then we look at workforces based abroad.
US context. In addressing the fate of a seller’s US employees at the closing of an M&A transaction, the key distinction is whether the deal structure is a purchase of stock (shares) or assets.
- Stock (shares) deal and US employee transfers. A stock sale (such as a merger) does not change employee status at closing. Peering through the lens of employment law, a stock transaction is invisible: The buyer, at closing, becomes the employer entity; that entity itself stays the same. The employer/employee relationships, liabilities, and collective bargaining arrangements stay the same, at least where employees do not have change-in-control clauses written into employment/compensation agreements. In the words of the old rock song, “meet the new boss, same as the old boss.”7
Yet a stock (shares) buyer enjoys an unusual flexibility as to its newly-acquired American employees because of the unique US doctrine of employment-at-will. A buyer that has recently acquired the stock of some other business remains free to lay off all its newly acquired US employees without paying any severance charges (assuming that: none of the US staff enjoys contractual, quasi-contractual or union contract rights not to be fired; the lay-offs are not for an illegal discriminatory/retaliatory reason; neither a severance plan nor the stock purchase agreement restricts lay-offs; and any mass reduction complies with applicable notice mandates).
Going beyond lay-offs, US employment-at-will leaves non-unionized employers—and hence stock buyers—unshackled by vested rights obligations to maintain work conditions after closing.8 A stock buyer is generally free to reduce existing terms/conditions of newly-acquired non-union US employees, to demote them, to discontinue their benefits, to reduce their pay, to change their job titles, and otherwise to restructure (subject to any contractual or quasi-contractual restrictions and subject to pension continuity rules under US ERISA law).9
- Asset-purchase deal and US employee transfers. The analysis differs markedly as to American employees in an asset purchase transaction. While US labor union law can impose doctrines of “alter ego” and “successorship” on the 7% of the US non-government workforce represented by labor unions, in the asset-purchase context the other 93% of the American workforce gets no statutory job protections. This means an asset buyer need not offer the seller’s US employees any jobs at all, and therefore remains free to offer tougher jobs with lower pay at a new and distant workplace. Indeed, the asset buyer that decides to offer jobs to US staff is free to offer whatever terms/conditions it wants—even if materially lower than what the seller had provided—unless it contractually commits otherwise. And an asset buyer is free to start American employment fresh, with no years-of-service credit (service credit tends to be legally insignificant under US employment statutes, anyway). In short, US employment law outside the union context imposes no concept of “acquired rights.”10
Outside-US context. Outside the US, though, the legal analysis as to M&A-context employee transfers differs radically. Even so, in analyzing these transfers outside the US we start with the very same structural distinction: stock (shares) versus asset purchase transactions:
- Stock (shares) deal and outside-US employee transfers. In a stock transaction the buyer becomes the employer entity, and so existing employer/employee relationships, contracts, and liabilities stay the same—although jurisdictions such as France and Romania impose obligations of “information/consultation” with worker representatives before a seller can commit to or close a stock sale. Outside of US employment-at-will, from the moment of closing a stock buyer runs into the legal hurdle called vested rights. Outside-US jurisdictions impose a regime of “indefinite employment” or (as it is known in the Philippines) “security of tenure.” Indefinite employment regulates, restricts or prohibits no-cause employment terminations by granting fired employees some cause of action for a dismissal without notice, without good cause, or without following mandated procedures. This “vested rights” principle follows a stock deal through closing; stock buyers outside the US cannot lay off employees after closing unless they comply with legal restrictions, pay legally-imposed costs, and heed local notice/termination/severance and lay off laws.
The tentacles of this vested rights rule reach far beyond restrictions on lay-offs. An implicit corollary of any functional doctrine limiting no-cause terminations is that the restrictions on firing also act as restrictions on constructive discharge.11 Otherwise, an indefinite employment regime’s prohibition against unfair dismissals would become meaningless—an employer could freely “fire” workers, without cause, by demoting them, cutting their pay, and assigning intolerable tasks until they walked out in protest. Therefore, vested rights rules outside the US severely restrict the power of an employer stock buyer unilaterally to reduce material employment terms/conditions of surviving employees. This means that outside the US a stock buyer, after closing, faces obstacles restructuring, transferring workers to new office locations, realigning job titles, and discontinuing bonuses, benefits, and equity plans (absent employee consent, which often requires substantial concessions).12
Asset-purchase deal and outside-US employee transfers. The vested rights doctrine does not reach a buyer of assets because an asset buyer is a distinct legal entity—a new and separate employer. This fact alone sometimes tempts buyers to structure acquisitions as asset purchases, so as to maximize flexibility in human resources operations by sidestepping vested rights. This strategy is particularly common stateside, where many business sales get structured as asset purchases. But this strategy is much less viable abroad. Outside the US, jurisdictions tend to close the implicit loophole here in one of two ways, by imposing either an acquired rights rule or a de facto firing doctrine:
- Acquired rights jurisdictions. Any buyer of a business that could skirt vested rights obligations simply by structuring an acquisition as an asset purchase would threaten the public policy that underlies the vested rights doctrine: safeguarding employee security in existing jobs as currently structured.13 Because the asset purchase scenario threatens employees’ vested rights, many countries’ laws close this loophole by legislating in a concept called acquired rights. Acquired rights laws are statutory mandates that force an acquirer of the assets of a business (in Europe called an “undertaking”) to assume the transferor’s existing workplace vested rights obligations. Indeed, acquired rights laws reach not only asset sales but also outsourcings and other business transfers short of a stock sale.
In an acquired rights jurisdiction, the vested and acquired rights concepts add up to a strict but fairly simple rule: Regardless of whether parties structure their deal as a stock (shares) or asset purchase, the buyer steps into the seller’s shoes as employer and assumes a legal obligation to perpetuate existing employment terms/conditions/seniority (unless employees consent otherwise, which they have little incentive to do unless granted concessions).
There is another side to this coin. The quid pro quo of any coherent acquired rights mandate is that where affected employees transfer with terms/conditions/seniority intact, the transferor gets to walk away from its workforce without being deemed to have laid anyone off, and therefore free of severance pay/notice/“collective redundancy” obligations. This helps both parties, because no severance pay means the seller cannot pass termination costs onto the buyer in the form of a higher sale price.
How acquired rights laws work, as to their particulars, differs from jurisdiction to jurisdiction. Some examples:
- EU. Each EU member state imposes an acquired rights law under which an asset seller’s employees automatically transfer to an acquirer with terms/conditions/seniority intact, and these laws require information/consultation with employee representatives over the asset sale.14 (Colloquially if inaccurately, these local European laws are sometimes referred to by the British acronym “TUPE.”) These laws adopt (“transpose”) the amended European Union “acquired rights” or “transfer of undertakings” directive.15 The EU directive lets European states except pension plans, and so in some EU jurisdictions pension rights are not acquired rights.16 Member state laws implementing the directive are particularly robust and well-enforced; Germany, for example, allows employees to refuse the transfer.
- Singapore. Under the Singapore Employment Act section 18A, only low-level employees (staff other than managers, executives, and those in confidential positions) transfer by operation of law to an asset buyer with terms/conditions/seniority intact. A Singapore seller must notify these non-exempt employees and any union of the transfer before closing. Employment contracts automatically transfer, unless employees agree to new terms.17
- South Africa. South Africa’s Labour Relations Act section 197 is an acquired rights law that works more or less like laws under the EU directive.
- South Korea. South Korea imposes acquired rights restrictions on many asset transfers. Transferring employees must get reasonable notice and must consent. Parties may execute an “employment transfer agreement” (ETA) confirming the consent; ETAs are necessary if the buyer will change terms or conditions of employment.18
- De facto firing jurisdictions. Vested rights jurisdictions generally protect employee vested rights, even in the event of an asset sale. But not every vested rights jurisdiction imposes acquired rights laws. Many countries use a different way to protect employee rights in an asset sale, a model we might call the “de facto firing doctrine.” De facto firing jurisdictions presume that a seller’s employees continue on as seller employees even after an asset sale, until they have been lawfully terminated and paid out notice and severance pay. That is, employees whose jobs are linked to transferring assets either keep working for the seller notwithstanding the sale or else get fired and paid out accordingly—even, in many cases, where the asset buyer agrees to hire them at closing. An asset seller with no appetite for retaining affected employees after an asset sale must do a layoff, funding severance pay, notice, and all other obligations of a mass firing. These costs fall on the seller in the first instance, but because an asset sale is what triggers them, a smart seller factors severance expenses into the sales price, and so the asset buyer ultimately, if indirectly, pays.
Not surprisingly, there is another side to this coin. The quid pro quo of the de facto firing doctrine is the opposite of the quid pro quo of the acquired rights doctrine: In a de facto firing jurisdiction, an asset buyer need not recognize acquired rights. An ex-employee of the seller, having been fully “cashed out,” enjoys no right to a job with the buyer. Any buyer that does hire a seller’s ex-employee is free to offer reduced terms/conditions and zero retroactive seniority.
But in many deals the asset buyer wants a “turn-key” operation complete with an experienced workforce. In other deals the asset seller insists that the buyer take responsibility for its existing staff, to minimize human resources problems and costs. Even where the buyer in a de facto firing jurisdiction agrees to hire seller employees at closing under identical terms/conditions/seniority, that commitment does not necessarily relieve the seller of its severance pay obligations. In the eyes of the law in a de facto firing jurisdiction, an asset buyer willing to hire a seller’s workforce looks little different from some unconnected business hiring these same fired employees off the street. Indeed, a seller that chooses to sell only its assets, not its employment agreements, cannot expect the law to credit a buyer’s post-closing job offers against seller pre-closing severance obligations.
That said, in an asset deal where the buyer is willing to hire, both parties have a keen financial incentive: saving severance money. Any transferring employee who receives both a full severance package from the seller and a new job from the buyer on retroactive terms/conditions/seniority would be “double dipping.”
Often parties can avoid this “double dipping” if the employees cooperate. A buyer can warrant that it will offer jobs on same terms/conditions/seniority in exchange for each employee’s agreement to resign from the seller or otherwise to waive severance pay. In essence the parties offer each employee a choice between either a full severance package or a comparable job with the buyer—not both. Local law in some jurisdictions facilitates these voluntary employment transfers through “employer substitutions” or other mechanisms.
Examples of de facto firing jurisdictions include:
- Latin America. In Argentina, Mexico and most of Latin America, employees whom an asset seller fires enjoy a right to full notice and severance pay unless they consent to some other arrangement or unless in a jurisdiction like Mexico the parties structure an “employer substitution.” In some Latin American jurisdictions a buyer and seller can be held jointly liable for severance payments. However, in Brazil a sale of the assets of an entire line of business can in effect trigger a sort of acquired rights rule.19
- China. An asset seller in China that fires staff associated with transferring assets is subject to notice and severance pay obligations. China’s lay-off (“massive workforce reduction”) law kicks in where a seller fires at least 20 employees or 10% of its workforce. Employees who agree to a transfer can resign or execute a mutual termination agreement plus a new employment agreement with the buyer, which can be structured as a three-party contract. Chinese employees will not likely agree to such a transfer unless the buyer perpetuates terms/conditions/seniority.20
- India. Indian law distinguishes unskilled manual-laborer “workmen” earning up to US$34 per month from non-workmen (usually managers, administrators, and supervisors). Where an asset seller does not intend to retain workman associated with transferring assets, the buyer can decide whether to hire them on same terms/conditions/seniority. Where the buyer refuses to hire workmen on replicated terms, the seller owes notice and severance pay. Indian law is similar as to non-workmen, except that a non-workman can transfer without severance pay even if the buyer will not replicate terms/conditions/seniority, unless the employment agreement requires otherwise.21
- Japan. An employer (and hence a seller) in Japan cannot unilaterally lay off staff without cause, even where the employer is willing to give notice and tender severance pay. Japanese employees affected by an asset sale (a jigyoujouto) enjoy a right to keep working for the seller after closing, even if the buyer and seller contractually provide for an employment transfer and even if continued employment proves impossible because no seller business remains. If buyer, seller and employees all agree, the buyer can assume the seller’s employment contracts, or the seller and employees can agree on separation terms or negotiated retirement agreements. Where employees have consented to a cash-out, the buyer is free to hire on new terms/conditions without respecting seniority.22
Part 2: International M&A Employment Due Diligence Checklist
After understanding what will happen to a seller’s employees upon closing, the first “people issue” to tackle in any international M&A transaction is human resources due diligence.23 Every prudent buyer of a business undergoes a due diligence process to learn what it is, and is not, buying—and whether the purchase is worth the price.
Thorough due diligence requires researching a range of business and legal issues including, for example, seller’s compliance with antitrust laws, accounting principles, environmental regulations, and tax requirements. One part of thorough due diligence is the “people issues” of labor/employment and employee benefits. Due diligence into employment and benefits outside the US is vital, because as we have seen, a buyer operating away from employment-at-will can in effect inherit the seller’s human resources status quo, whether by vested rights in a stock purchase, acquired rights in an asset purchase, or some contractual commitment. Therefore, a prospective buyer should study the seller’s employment operations and get familiar with the to-be-acquired worldwide workforce.24
A due diligence checklist helps a prospective buyer figure out what data to scrutinize and helps a prospective seller anticipate what data prospective buyers will expect to see. Doing due diligence into employment/human resources is tricky because employment is inherently local, with local issues indigenous to each affected country. (For example: Hong Kong imposes special social security/pension compliance requirements; Mexico imposes strict profit-sharing mandates; Brazil imposes an employer-financed unemployment regime; Saudi Arabia imposes unique workforce gender-segregation rules; and South Africa imposes special diversity obligations.) Here, though, our global due diligence checklist focuses on those human resources issues that arise across various jurisdictions. And so this checklist is merely an outline that needs fleshing out for each local jurisdiction where a seller in a particular deal employs staff.
- Data laws in due diligence. Many jurisdictions, including all those of the European Union, impose broad data privacy/protection laws that can have unexpected consequences in the due diligence context.25 “Electronic data rooms” exacerbate exposure when they offer up to bidders personal information about identifiable seller employees. Liability for breach can transfer to a buyer at closing. Compliance may require “anonymizing,” entering into “onward transfer agreements,” entering into cross-border “model contractual clauses” agreements, or other such steps. Jurisdictions including Argentina, Hong Kong, Japan, Korea and United Kingdom offer guidance specific to the M&A due diligence context.
- Materiality threshold. Few prospective buyers will care about immaterial aspects of the seller’s human resources operations. Check whether international HR due diligence in the particular deal is subject to some “materiality threshold,” and then focus due diligence on what exceeds that threshold.
- Claims, liabilities and exposure. Are there any pending, threatened, or potential employment-related claims, lawsuits, disciplinary proceedings, workplace audits/investigations, criminal proceedings, or unpaid employee judgments? What is the exposure for non-compliance with labor/employment, payroll, safety, and HR data privacy laws (including data agency filing requirements)? What are the seller’s cash reserves?
- Corporate/employer issues. Identify the seller’s local affiliated corporate entities in each country that employ staff. Learn the relationships among seller’s business/operating entities and any “services companies” that employ people.
- Census and organization chart. Get a census of seller employees (and directors) worldwide, including part-time and contracted-out employees. Include both employees who service the target entity and target-entity employees “seconded” to service other organizations. Ideally this census should include dates of hire, compensation, and job category. Separately, get an organization chart and verify that only the employees who actually work for the target unit, regardless of title or designation, will transfer as part of the deal. Identify any “shared services” employees who work for both the target unit and non-acquired units. Identify seller’s contingent staff, such as independent contractors, consultants, agents, secondees, sales representatives, and employees who work from home or remotely.
- Expatriates and immigrants. Collect information on the seller’s expatriate and immigrant populations and programs. Who are the overseas secondees and other posted expatriates? Which corporate entity employs each expatriate? Identify “stealth expatriates” not in the expatriate program but working outside their home countries. Check the visa status of non-local-citizen employees worldwide. How might the deal affect these visas? In a stock (shares) deal, be sure to check expatriate-triggered “permanent establishment” issues: Which expatriates are doing business in countries where the seller is unregistered and not paying taxes?
- Code of conduct. Check compliance with the seller’s internal ethics code of conduct including any commitment to an industry code, any workforce corporate social responsibility program, and any so-called “framework” (union neutrality) agreement.26 Do the seller’s HR practices comply? Will they align with the buyer’s practices? Check seller practices regarding government procurement, payment procedures to government officials, compliance with anti-bribery laws and audit/accounting rules.
- Supply chain and human rights. Get any supplier code of conduct, and get compliance information like social/human rights audits. Collect data on labor practices in the supply chain, particularly as to components/product sourced from the third world. Consider exposure to workplace-context human rights claims under the US Alien Tort Claims Act.
- HR polices and terms/conditions. Identify and check compliance with seller’s employment policies, written and unwritten. Look at employee handbooks, written work rules, and health/safety guidelines. Does the seller comply with leally-mandated terms/conditions of employment? What special terms/conditions (beyond legal minimums) does the seller extend to employees? The buyer may have to replicate terms after closing.
- Compensation and benefits. Using a separate compensation/benefits checklist, check the seller’s compensation philosophy, compensation/benefits “schemes” or plans, severance plans, retirement plans, bonus plans, and perquisites (like meals, housing, country clubs, and company cars). Check individual pension promises, special agreements, grandfather clauses, death/disability benefits, cafeteria plans, service awards, profit-sharing, savings plans, employee loans, and unusual expense reimbursements. Check compliance with local laws that mandate extra payments and benefits. Get an accounting of any transferring plans and study funding: Unfunded, underfunded, and “book reserve” plans can raise huge problems.
- Equity and loans. Look at seller stock options, employee ownership programs, officer/director stock ownership, and employee ownership in affiliates and entities doing business with the seller. Also check into loans and guarantees to employees.
- Employee insurance coverage. Look at the employment-related insurance the seller provides, like employee life/health/accident insurance, hazardous duty/kidnap insurance, payments to state-mandated insurance funds (such as workers’ compensation insurance), expatriate coverage, and “key man” policies naming the employer as beneficiary.
- Performance management. Study the seller’s performance management system. Focusing on key employees, collect data on job evaluations, performance appraisals, and problem employees.
- Labor organization relationships. What labor organizations represent workers? Collect organizational data regarding in-house or company-sponsored labor organizations such as works councils, any “European Works Council,”27 company unions, health/safety committees, staff consultation committees, and ombudsmen. Collect meeting minutes and records memorializing labor disturbances and days lost to strikes.
- Collective agreements. Look at applicable collective agreements and “social plans” with employee groups. Get expired agreements with terms that still apply. Do any industry (“sectoral”) collective agreements bind the seller as a non-signatory? Does the seller participate in any multi-employer bargaining associations? Go beyond trade unions and check agreements with works councils, worker committees, and ombudsmen.
- Individual employment agreements. Look at individual employment contracts with employees including agreements designated as statement of particulars, non-compete, confidentiality agreement, indemnification agreement, inventions agreement, and expatriate arrangement—or at least check these for key executives and look at form/template agreements for rank-and-file employees. Be sure to look at contracts with contingent workers (service providers like independent contractors, consultants, agents).
- Employee consents. Check individual employee consent forms. (In jurisdictions like the UK and Korea, employees may have consented in writing to work overtime. European employees may have consented to processing sensitive personal data. Employees may have acknowledged a code of conduct or work rules in writing.)
- Change in control. Check change-in-control, golden parachute, and other transfer-related clauses in employment-related and agency agreements, including M&A-ratification provisions in any labor union contracts.
- External agreements. Do any external agreements (with third parties) limit HR flexibility? (For example, are there acquisition agreements from earlier deals that limit reductions in force? Has the seller signed onto any customer codes of conduct imposed on customers’ suppliers? Is the seller a government contractor that has taken on public-procurement obligations affecting HR?) Separately, look at outsourcing agreements with HR service providers like payroll providers, “temp” agencies, benefits providers, and whistleblower hotline providers.
- Payroll. Check the seller’s payroll processing compliance as to deductions, withholdings, reporting, compliance with mandatory payments to unions, and remittances to agencies including tax, social, unemployment, and housing funds. How is payroll issued? Are there any extra deductions (such as for charitable contributions or employee loan repayments)? Does the seller properly pay mandated benefits like premium-pay vacation, profit sharing, and thirteenth-month pay?
- Wage/hour compliance. Verify compliance with wage/hour laws, cap-on-hours laws, overtime payments, payments during business travel, and exempt-status designations.
- Duty of care. Get information on duty of care/safety/evacuation and other protocols such as for hazardous-duty work and occupational health/safety law compliance, including for expatriates.
- Discrimination/harassment. Verify compliance with local discrimination/diversity/harassment laws including laws on pay equity, affirmative action, mandatory training, and “bullying.” Verify compliance with the seller’s own discrimination/harassment policies: Many international discrimination/harassment policies go well beyond local laws.
- HRIS. Look into the seller’s employee data-processing and human resources information systems [HRIS]. Investigate transferability of HRIS and how HRIS complies with data protection laws.28 Has the seller made all required notices/communications to employees about HR data processing?
- Powers of attorney. Find out what powers of attorney employees, officers, and directors hold. (These are particularly critical in Latin America, where there can be different levels of powers, some of which include the power to dispose of company assets.)
- Management oversight. What controls does the seller’s headquarters use to monitor local management’s compliance with laws and corporate policies?
Part 3: Checklist of HR Issues in International M&A Transactions
Having addressed both what happens to a multinational seller’s employees upon closing an international M&A deal29 and what topics to check in conducting employment due diligence in the international M&A context,30 there remains a list of other “people issues” to address in any international deal.31 Among the most vital are:
- Post-merger integration strategy. Many threshold issues vital to deal structure inevitably turn on the buyer’s anticipated level of post-closing workforce integration. Before structuring an international merger or acquisition, the buyer should articulate the extent to which it intends to integrate acquired employment operations after closing. Where will the buyer fall on the spectrum between managing the new operation as a stand-alone versus fully integrating acquired workforces into existing operations? Will there be an integration transition period after closing?
- Purchase agreement drafting. Employment issues factor into a number of the provisions in any thorough international M&A agreement, because employment liabilities often transfer at closing. Even where a buyer does not intend to employ the seller’s workforce, a purchase agreement’s representations, warranties, covenants and schedules should address employment issues across the seller’s worldwide operations. Of course, the details (what the purchase agreement says about employment) differ from deal to deal. Parties to an M&A transaction usually agree in principle that pre-closing employee-related liabilities lie with the seller while post-closing liabilities lie with the buyer. But local laws in many jurisdictions can hold both parties liable for employment claims that accrue in the months before, or after, a deal. In practice there are further complications: What if the buyer, after signing the agreement but before closing, grants pay raises or takes other steps that raise the buyer’s post-closing employment costs? What if the buyer fails to match employment terms/conditions and triggers imputed firings by the seller? Clarify these issues in the deal documents. Consider using indemnities or setting aside a basket of funds to cover post-closing claims between the parties.
- Employer entity. The buyer in an asset deal may need to set up new corporate entities in certain countries to employ people locally after closing. Forming a new local corporate entity implicates issues of corporate and tax law—and also employment law.32 Factor employment issues into entity structuring.
- Buyer rules. Before committing to an international M&A deal, a buyer should factor in its own global code of conduct, its own human resources policies, and its own prior commitments to any industry or customer codes and any “framework” (union neutrality) agreements. Do any seller practices run afoul of these? Will the buyer be able to impose these commitments on new workforces after closing?
- Restructurings/lay-offs. In some jurisdictions a transaction itself is not legal grounds for dismissal.33 Even so, some buyers may insist that the seller do a pre-closing lay-off. In other deals a buyer will plan lay-offs or a “restructuring” for after closing. If there will be lay-offs or a restructuring after closing, account for complexities that arise during the deal itself, such as regarding content of employee disclosures, compliance with severance provisions in existing employment contracts, and information/consultation with employee representatives.
- Retention. The flip side of the lay-off coin is retention, which is often a challenge after a merger or acquisition. Where workforce or leadership continuity will be important, well before closing the buyer should consider strategies (like proactive communications, incentives, and “stay bonuses”) for retaining desired employees.
- Information/consultation. Trade unions, works councils, committees, ombudsmen, and other employee representatives are far more common outside the US than stateside. Before committing to sell a business, in many countries a seller bears a mandatory-subject-of-bargaining duty of “information/consultation” and sometimes “participation,” involving worker representatives in the ultimate decision. Liability for violating these consultation duties can pass, at closing, to the buyer—and injunctions holding up the deal are a threat—so neither seller nor buyer should take this issue lightly. Compliance is especially tough while a deal still needs to stay under wraps and where this bargaining obligation arises at overseas affiliates far from headquarters. In France and Germany a works council that has not been properly informed/consulted can win an interim injunction holding up a deal. In some jurisdictions, particularly in Europe, a buyer might have separate information/consultation obligations to its own existing workforce.
- Representative bodies. Under US law, employer-dominated labor organizations are flatly illegal. But outside the US many employee representative bodies (for example, works councils in Europe, labor-management councils in Korea, company unions in Latin America, health/safety committees, staff consultation committees, ombudsmen) owe their very existence to the sponsor employer. A buyer of either stock or assets may need to arrange to transfer, and then host, these bodies upon closing.34 Where a seller spins off less than all of its workforce, employees may transfer without free-standing representative bodies, and the buyer may then have to launch new ones upon closing. In some deals a buyer may have a strategic reason to invite in a union at closing.
- Individual employment contracts. When employees transfer over to a buyer by contract or by operation of law, the buyer often assumes an obligation to maintain existing terms/conditions/seniority. And the buyer often inherits the existing individual employment contracts, as written. As a housekeeping matter, though, buyers may want to substitute their own individual form employment contracts naming the buyer as employer, sometimes making permissible (non-material) tweaks to employment terms/conditions to align HR offerings with the buyer’s existing programs. Employees who sign new employment contracts should unambiguously revoke their prior agreements with the seller.
- Offerings, benefits, payroll, HRIS. A buyer must be ready to issue payroll upon closing in each country, making government withholdings and contributions and providing payroll-linked benefits that replicate seller benefits. This requires filings and taxpayer identification numbers. Some benefit plans automatically transfer to a buyer (such as in a stock transaction), but others do not. Any buyer that must maintain seller’s terms/conditions in various countries may have to scramble to implement programs and structures that replicate seller offerings. Replicating equity plans can be a particular problem where the buyer is not publicly traded. Separately, how will acquired employees “migrate” onto the buyer’s human resources information system [HRIS]?
- Transition services. Some asset purchase deals establish a post-closing transition period during which the seller agrees to provide certain HR services or to employ certain employees who do not transfer by operation of law. Where applicable, work out a thorough HR transition services agreement.
- Expatriates and visas. Seller’s expatriates pose a challenge in a deal where the buyer must employ them, must reconcile (or replicate) their packages, and must ensure that the transfer does not nullify visas/work permits. Separately, a buyer that will send its own expatriates into new overseas operations after closing should apply early for visas/work permits.
- Employee communications. A buyer and seller should coordinate their employee communications about the deal. Comply with language laws. Heed employment laws that require notice to employees and information/consultation/bargaining with employee representatives. A seller may have to tell employees, before closing, about the buyer’s post-closing plans. Employees will be hungry for information.
- Press releases. Buyer and seller press releases and public communications about a deal implicate labor laws. Labor representatives in certain countries may have a right to information about a deal before any press release can issue. Never announce as a fait acompli any transaction that remains subject to labor consultations in some country.
- HR integration. Work out a coherent post-merger HR integration strategy. Following through on HR issues after a merger or acquisition is vital to business success.
Contrary to an assertion of a London corporate lawyer, parties to an international deal can never afford to “just do it and sort out the people issues afterwards.” A stock (shares) transaction, merger, or asset purchase that affects employees across a number of countries confers significant rights on employees outside the US. Precisely what these rights are, though, differs by country and can depend on transaction structure.
Address the fate of overseas employee populations.35 Handle employee due diligence proactively.36 And account for all the other employment issues, in every affected country.37
This article was published in a slightly different form in International HR Journal (West) and NYSBA Labor and Employment Law Journal