Challenge: International mergers and acquisitions implicate a number of employment issues that, if not resolved up front, can prove expensive and bedeviling in post-merger integration.
There are many employment issues to address in any international deal that involves seller workforces across a number of countries. Among the most vital are:
- Transfer status. Whether the deal is structured as an asset or a stock purchase, understand what will happen to the seller's employees upon closing. Plan for any reductions-in-force. See our Global HR Hot Topic for May and June 2010.
- Due diligence. Conduct targeted due diligence into employment issues in each affected jurisdiction using an international employment due diligence checklist. See our Global HR Hot Topic for August and September 2010.
- 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, 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. Clarify issues in the deal documents. Consider using indemnities or setting aside 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. Factor employment issues into entity structuring.
Tip: Along with managing the range of issues that accompany any international M&A deal, use a targeted approach to address cross-border employment issues.
- 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. See EU Transfer of Undertakings Directive 2001/23/EC at art. 4(1). 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, often a challenge after a merger or acquisition. Where continuity be important, 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. 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 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, labor-management councils, in company unions, 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. See EU Transfer of Undertakings Directive 2001/23/EC at art. 6(1). 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. 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 prefer to substitute their own individual form employment contracts naming the buyer as employer, sometimes making permissible (non-material) tweaks to employment terms/conditions or aligning 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. Employees will be hungry for information. 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.
- Press releases. Buyer and seller press releases and public communications about a deal implicate labor laws. 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 ensuring success.