Cross-border transactions involve a number of issues from a human resources perspective that can have both a social and economic impact on the transaction. It is therefore critical for HR to be involved from the very beginning of a transaction. Some issues arise from both the buyer and seller sides; others are a focus for only the buyer or the seller.

At the time a transaction is first discussed, it will be necessary to determine which employees will be affected—especially in a divestiture. For example, the company will need to determine whether there should be a restriction on internal transfers— a “ring fence”—on all employees , only on certain business units, or only in certain countries. From a seller’s perspective, the business being sold may require key executives and/or a trained workforce to transfer with the business in order to obtain full value in the purchase price; from a buyer’s perspective, only if these key individuals continue with the business may the buyer be willing to purchase the business at the negotiated price. In addition to determining whether and when such a ring fence should be established, it may also be necessary to consult with legal counsel, work councils and other labor representatives to determine whether it is permissible to restrict employees’ transfer rights in each jurisdiction involved or will it be problematic— as it is in much of the European Community for example. Finally, it may be necessary to institute a retention bonus arrangement to keep employees through the closing of the transaction and, in certain cases, for a continuing period.

When negotiating a multi-jurisdictional transaction, it is important to determine when is the earliest possible closing date in each country (based on legal and other transition issues) in order for the seller to prepare for the transfer or termination of the affected employees and for the buyer to have payroll, pension and other benefits in place immediately after the closing. In some transactions it may also be necessary for the buyer to create a local entity employer, which may require governmental approvals resulting in unforeseen delays. Other negotiation issues include: whether transition services will be needed; will employees lose benefits because of the transaction; how will pension plan obligations be transitioned; who will pay severance and other liabilities; will the buyer assume unfunded deferred compensation arrangements; and who will be responsible for liabilities to retirees and former employees of the business?

Often overlooked, especially by U.S. buyers, is the country-by-country implementation of the EU Acquired Rights Directive (“ARD”), which applies in asset transactions and, in general, substitutes the buyer as the employer and continues existing compensation and benefit arrangements. However, the ARD does not require pension liabilities to be automatically transferred. But note that some EU countries do require the assumption of pension liabilities. For example, in Germany a buyer is required by statute to assume pension past-service liabilities attributable to employees who transfer to the buyer. However, there is no parallel required transfer of assets – which then must be bargained for.

In an asset transaction, both buyers and sellers should focus on notice and consent requirements relating to the transfer of employees. The United States is the only country with “employment at will” providing U.S. employers great flexibility in determining their workforce. In many countries, either by statute or by contract, employers may be unable to reduce the workforce unilaterally without negotiating with a works council, a trade organization, the governmental labor administrator or agency, or the employee. In countries such as Taiwan and many South American countries, there are statutory and contractual severance payments required to be paid to transferring employees. In China and Japan, the employee’s consent to transfer is required. Thus, tri-party agreements should be considered between the buyer, the seller and the employee to provide for employee agreement to the transfer, what compensation and benefits will be provided by the buyer, and whether severance, if any, will be paid or waived.

HR issues in cross-border transactions will arise in each country where there are employees of the target business. Because of differing social, cultural and legal climates, headquarters HR will need to consult early with local HR regarding whether the terms and conditions of employment will be the same, substantially similar in the aggregate, or will change after closing. One of HR’s key responsibilities is communicating with employees and their representatives before, during and after the transaction regarding the effect of the transaction on their employment, compensation and benefits. Being involved early in the planning of a cross-border transaction will ultimately save costs and make a more effective transition.