Human capital issues generally do not “drive the bus” in M&A transactions. Many corporate lawyers use standard diligence check lists and formula representations and warranties covering employment law issues. Is that enough? Our experience is that early involvement of labor and employment counsel can be a “value add” because careful workforce issue planning and targeted diligence may contribute to maximizing value in the acquisition. In addition, when such counsel’s experience is plugged in early, it may also help to ward off subsequent headaches. Set forth below are some planning items to take into account as a deal is reviewed.
1. What is the status of key employees?
- Are there non-competes, no poaching of employees and confidentiality agreements in place? Are they transferrable?
- How will succession planning concerns be met — is the “bench” secured?
These are more than check list questions. Careful review of employment contracts following from study of a target’s organizational structure and the proposed post closing business plan can insure that the business purposes of an acquisition will be met.
- Does the target have a culture of employment agreements for executives? How does that fit with the acquirer’s culture? Does any of that need to be changed as part of the transaction or post-closing?
Suppose the target has a culture of employment contracts while the acquirer does not. Cultural issues, together with the legal questions of how to get employees into a new set of terms and conditions of employment, flow from this.
- Change in control provisions — in addition to costs relating to “good reason to leave” concerns, are there “tails” (i.e. aspects that kick-in based on post closing developments such as no change in responsibility for a year)?
This is one, but not the only, example of obligations or costs that an acquirer could encounter if it does not keep them in mind post closing. Careful diligence and follow up will help to avoid potential pitfalls.
2. Has the target made use of independent contractors, consultants, or outsourced resources?
- For non-employees, is a duty of loyalty, confidentiality, and/or trade secret/invention assignment already defined by contract? To whom are obligations owed? Are such agreements transferrable?
Our experience has been that in asset transactions, especially, such “non-material” matters may not receive full attention. Yet, in many businesses, key intellectual property and business plan knowledge is housed outside the traditional employee complement. Recognizing and drafting for these issues may be critical.
- Classification issues under benefit plans: do the target’s plans properly exclude contingent workers?
Although many large businesses have knowledge of “Microsoft” benefits issues, form benefit contracts such as bank sponsored 401(k) programs frequently fail to exclude independent contractors; these documents are often insufficiently reviewed at the diligence stage. Bad or incomplete exclusion language in a target’s plans can prove costly, as recent case law shows.
3. Are there any wage and hour misclassification issues within the target’s workforce?
- Managers and assistant managers, sales reps, computer help desk, loan originators, supervisors without supervisees, “independent contractors” and a number of other categories have drawn significant lawsuits in the last few years.
Wage and hour litigation is at an all time high, yet most standard diligence check lists do not call for sampling the appropriateness of worker classifications or pay practices at the target. Depending on the size of the target, this is an area where a representation that the company is in compliance with law may not be worth the paper it is printed on. Diligence in this area may be of significant importance.
4. Is there a pattern to employee complaints at the target?
- Management issues, potential union organizing and class actions can all be behind such patterns.
- Access, even on a no-names basis, to hot line complaints should be strongly considered, especially in light of the TARP era whistleblower provisions.
Labor and employment lawyers look to patterning because it speaks to employee morale, and the likelihood of future claims. Any ownership change tends to be unsettling for employees. Acquisition followed by cost cutting is potentially destabilizing to morale and may give rise to otherwise unanticipated post-closing claims. Therefore, drilling down on what is behind a pattern of complaints may prove to be the proverbial ounce of prevention. Indeed, this sort of review is likely to be far more protective of an acquirer than a representation that there are no pending material claims.
5. Are there “structuring” opportunities?
- WARN responsibility can effectively be negotiated by determining when a lay-off will occur, pre-closing.
- Union contracts can be set aside or modified in asset purchase situations.
In the union environment, many mergers and acquisitions practitioners are aware that an acquisition may provide opportunities to change labor commitments. It is important to understand the window of opportunity and how to take advantage of it, especially in the face of shifting National Labor Relations Board decisions and, with a new administration, changing agency personnel. Typically it is critical to develop and implement a plan prior to closing. Where the target is a distressed company, this may be even more important and potentially goes to valuation. Knowledge of how existing collective bargaining agreements may impact managerial flexibility or impose hidden costs through, for example, potential pension plan underfunding liabilities is a vital initial component of diligence review which may drive such planning.
Even in the non-union target environment, workforce planning at the diligence phase can protect the acquirer against exposure in connection with subsequent personnel transactions. In addition to the WARN concern, for example, an acquirer may, under the right conditions, be able to protect itself against some later claims if the decisions it makes about target employees are based on rankings or evaluations performed by the target’s people.
6. Have benefit plans been operated in accord with governing documents?
- There is typically a representation to this effect but in large plans that may not be much protection.
401(k) plans which have Company stock investment options, any plan with bundling of services from single providers and non itemized fees, and plans where there have been recent changes to plan design should all be potential warning signals for heightened diligence. There have been significant class actions filed in all those areas recently.