When purchasing a commercial facility or plant, our clients’ primary concerns relate primarily to planning, title, environmental and/or health and safety issues. However, the possibility that employees may also transfer to the buyer should also be a primary concern, if the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 (TUPE) apply.
What is TUPE?
TUPE provides that when a business (or part of a business) is bought, the employees who attach to that business (or part of that business) transfer with the business. Importantly, the business must “retain its identity”, for TUPE to apply.
When a business is being bought as a going concern, with premises, stock, goodwill etc, TUPE will generally apply. However, where a plant or facility is being acquired, an analysis must be carried out to try to determine whether this amounts to a transfer of a business, thereby triggering TUPE. Often, the sale of a premises, or facility, will amount to an asset sale only (ie not a business), which will not trigger TUPE. However, there may be factors which point towards the transaction actually constituting the sale of a business, which brings TUPE into play.
- Is the buyer buying a premises only, or does the purchase include any additional assets associated with a business?
- Is it buying plant/machinery?
- Will the buyer resume the same commercial activity as the seller?
- Is there likely to be a continuation of a customer base?
- Is it taking on any of the seller’s employees?
Each situation must be considered on its facts. Also, importantly, the fact that trading has ceased at the time of the sale, or even for some months after, does not prevent a transfer occurring.
What if TUPE applies?
If TUPE applies, then all employees who are assigned to the business being sold automatically transfer by law with their accrued years of service and existing terms and conditions of employment. All rights and obligations relating to their employment contracts are taken on by the buyer. This even includes any collective bargaining agreements in place, and trade union recognition. This can be a significant change for a buyer who has never previously recognised, or engaged with, trade unions.
Both the seller and buyer have obligations to inform and consult with employee representatives where reasonably practicable, not later than 30 days before the transfer is carried out (and at least in good time before the transfer is carried out). In reality, unless the buyer’s employees will be affected by the transfer, no obligations arise in respect of its existing staff. However, because it steps into the shoes of the seller, the buyer has a vested interest in ensuring that the process is done properly.
The obligation to consult only applies where there are ‘measures’ envisaged in relation to the employees, which effectively means if there will be material changes arising from the transfer. The buyer has an interest in assisting the seller in this consultation process.
Dismissals as a result of a transfer are prohibited, save for economic, technical or organisational reasons.
There can be significant employment costs associated with acquiring a business. For example, employees may have considerable length of service, which directly impacts the costs of redundancies. Also, the buyer must replicate existing salaries and bonus structures in place, and/or severance terms. Employees may have lucrative pension entitlements, and while pension benefits do not generally transfer under TUPE, this carve-out does not necessarily apply where the pensions benefit is a contractual entitlement, whether express or implied. This can give rise to significant costs to the buyer who may have to continue to honour the employees’ remuneration entitlements, post-transfer.
Furthermore, because the buyer becomes the employer (steps into the shoes of the seller) any employee claims (including personal injury claims) will likely be made against the buyer.
This is why due diligence is crucial. By undertaking a process of information gathering, review and reporting, the buyer obtains more detailed knowledge about the business it is buying.
Due diligence has four main purposes:
- To identify any risks or liabilities associated with the business
- To enable the buyer to establish an informed and accurate valuation of the business it is buying
- To gather valuable information to enable the buyer run the business post-transfer, and
- To enable the buyer decide whether it wishes to proceed with the acquisition at all
Warranties and indemnities
Having carried out a rigorous due diligence exercise, a buyer should then be aware of some of the risks and liabilities in the seller’s business. A buyer can guard against these risks by getting warranties and indemnities from the seller.
Warranties are statements by a seller about the state of affairs of its business at a particular time. If a warranty is untrue, a buyer can sue the seller for damages. However, a buyer must be able to prove it has suffered a loss and also that the seller did not disclose the existence of that liability to the seller. Warranties do not protect a buyer where the buyer is actually aware of a particular liability.
Indemnities are undertakings from a seller to reimburse a buyer on a euro-for-euro basis in respect of a specifically identified liability. An indemnity protects a buyer even if it is aware of a liability. An indemnity offers more robust protection to a buyer and so requests for indemnities will be resisted by a seller.
When purchasing a commercial facility, or premises, explore the possibility that this may be a business sale and not an (more straightforward) asset sale. This requires a dedicated preliminary examination of the specific circumstances. If it may, or is likely to constitute, a business sale, the buyer is well advised to initiate a different, and more extensive, due diligence process to include seeking all relevant employee data. Then, depending on the outcome of such exercise, and particularly given the considerable costs and potential employee related liabilities involved, the buyer should seek appropriate warranties and indemnities.