Has the Court of Appeal, in the case of Richard Millam v The Print Factory (London) 1991 Limited, overruled the accepted wisdom that the sale of shares in a company does not trigger TUPE? The short answer is no. A share sale does not - of itself - trigger TUPE.
This was a case that turned on its somewhat unusual facts and on a surprising first instance decision from an Employment Tribunal. But, we have been given a reminder to consider carefully the background to any apparently “simple” share sale. In some contexts, this could, in fact, be disguising an associated TUPE transfer. In this article we consider the facts of the Millam case, the principles which can be drawn from the Court of Appeal’s findings and some specific risk areas for businesses and their investors.
Mr Millam was employed by Fencourt Printers Limited (Fencourt) as a lithograph printer. In 1999, Fencourt was sold to McCorquodale by way of a share sale agreement. Mr Millam was told that the identity of his employer was not changing as a result of this sale. So far, so good. Rather confusingly, he was also told that his employment had been continued “under the TUPE regulations”. At the time of the sale, Mr Millam and his fellow employees were also told that it was McCorquodale's intention to fully incorporate the business of Fencourt into its own.
Following the share sale, Fencourt and McCorquodale remained separately registered with their own VAT registrations and accounts. On a documentary level at least, these were two separate businesses being run by two separate companies. In reality however, there was a good deal of control being exercised by McCorquodale over Fencourt:
- McCorquodale had taken over the payment of wages to Fencourt’s employees and management of the Fencourt pension scheme.
- McCorquodale had also subsumed the Fencourt sales function and, partly to make Fencourt appear more attractive to potential purchasers, some of its non-sales activity.
- McCorquodale made key decisions in relation to workload, it attempted to bring about contractual changes and it ultimately made the decision to put the subsidiary into administration.
Nothing particularly out of the ordinary for companies in the same group.
In 2005 both companies went into administration and Mr Millam brought various claims in the Employment Tribunal. The Tribunal, and then the EAT and the Court of Appeal were tasked with deciding whether Mr Millam’s employment had transferred from Fencourt to McCorquodale.
The Tribunal accepted the received wisdom of the EAT’s judgment in Brookes v Borough Care Services, that a change in the legal control of the original corporate employer (such as in a share sale) does not of itself amount to a TUPE transfer.
Nevertheless, the key question remains (as ever): has, as a matter of fact, the business in which the employee is employed been transferred from one company to another?
With that question in mind, the Tribunal considered on the facts of this case that, although the share sale agreement gave the superficial impression that no TUPE transfer had occurred, in reality a transfer of a business had occurred and therefore TUPE applied. The Court of Appeal (overturning the decision of the EAT) agreed with the Tribunal and held that Mr Millam’s employment had transferred to McCorquodale. Its key findings were:
- Put simply, regardless of the share sale, there had been a transfer of the business functions from the subsidiary to the parent, triggering TUPE. Fencourt’s activities were actually being carried out by McCorquodale.
- The mere fact of control, which is of course intrinsic to the parent/subsidiary relationship, would not be sufficient to establish the transfer of a business from subsidiary to parent. In this case, the Tribunal had identified a number of further factors, which, in combination, established that control of the business (in the sense of how its day-to-day activities were run) had passed from Fencourt to McCorquodale.
- It is worth noting here that the Employment Tribunal did not use the standard list of criteria set out by the European Court of Justice in Spijkers v Gebroeders Benedik Abbatoir. For example, the Tribunal did not consider whether assets or employees had transferred, or whether the services were similar before and afterwards. If it had, it might well have come to a different conclusion as to whether a transfer had in fact occurred, rather than by focusing - unusually - simply on the issue of control.
Does this change anything?
In this case the Court of Appeal did not, as it may appear to have done on first blush, apply TUPE to a share sale. The court simply considered the facts and found that a business, in addition to the shares, had, in fact, been transferred. The Tribunal was persuaded that the parent company’s handling of a significant element of the management of the subsidiary set its actions apart from those of a “normal” shareholder.
Do we care?
Where the primary transaction is a share sale, there is a risk that there may be a TUPE transfer which goes unnoticed, particularly in the context of a gradual hiving up of activities from subsidiary to parent in which the tipping point (triggering the transfer of the business) may not be apparent.
However, this liability is going to be more than theoretical in certain situations.
- At an early stage in any share transaction, consider whether yours is indeed a “pure” share sale or whether it could be tainted by a lack of clear separation between parent and subsidiary going forward. If so, you should try and cover off the risks of an accidental TUPE transfer in your post-transaction planning.
- Is there an incentive for the employees to claim that they have become part of the parent’s workforce? Such an incentive is most likely to arise where the subsidiary goes into liquidation but may also be found where benefits, such as bonus and pension schemes, operated by the parent are more attractive than the equivalent subsidiary offering.
- Even when a company has been sold via a share sale, where employees or their representatives are resistant to a purchaser, it is feasible that the representatives could bring a claim for failure to inform and consult, claiming that TUPE applied because of the harmonisation of group functions. It would be a useful legal weapon in an industrial relations issue.
- Any proposed onward sale of the subsidiary could also be a catalyst for discovery of the issue. Lack of clarity or disputes as to who employs the employees working in the business will not be conducive to a clean and simple sale process. However, careful drafting of indemnities ought to cover off such liabilities.
- Investors in a parent company who exercise a large degree of control (for example those in private equity arena) will be concerned to discover that they are not necessarily insulated from the employment liabilities of the operating business.
- Withdrawal of a participating employer from a multi-employer final salary pension scheme may trigger a substantial debt on that employer in certain circumstances. A TUPE transfer will result in such a withdrawal as the relevant members will no longer be employed by that participating employer.