Challenge:

Due diligence in international mergers and acquisitions too often overlooks many employment law issues lurking in overseas human resources operations.

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.

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.

Pointer:

In an international deal, conduct targeted international employment due diligence using a thorough checklist.

  • 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. “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 similar 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 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 the 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 date 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. 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.