The Employment Law Review: Employment Issues in Cross-Border M&A Transactions
Cross-border merger and acquisition transactions give rise to a myriad of employment-related issues that, if not properly managed, can cause headaches for lawyers, human resources professionals and others involved in the deal. In the extreme, these issues can even delay or prevent a deal from progressing. This chapter provides an overview of employment-related issues that should be considered whenever a corporate deal involving a global workforce is contemplated.
Particularly for US practitioners, the employment issues that can arise in merger and acquisition deals are often unfamiliar, and lawyers and human resources professionals may be called on both to spot these issues and to assist their business counterparts in understanding these unfamiliar concepts and their potential impact on the deal. Most notably, as is clear from the various country-specific chapters in this book, the concept of 'at-will' employment largely does not exist outside the United States. This means that the various parties to a deal will encounter a workforce that enjoys certain rights and benefits by virtue of the existing employment relationships. This can have implications in terms of the costs and liabilities associated with the transaction as well as with respect to matters such as transaction structure and timing.
II Deal structure
When approaching any transaction, before delving into the employment issues, it is important first to understand the structure of the deal, including whether it involves the transfer of stock or assets as well as what entities are sellers, purchasers and targets and where those entities are located. Although these decisions are typically driven by tax and similar considerations, the structure chosen can have major implications for the employment issues that arise.
Notably, in stock or cash deals, including tender offers, 'going private' transactions and acquisitions of subsidiaries or business units through sales of equity, the employment issues are often less complicated than in other types of transactions. Although it is still important to conduct thorough due diligence to understand what assets and liabilities are being acquired, transactions that involve a mere change of ownership but that do not change the identity of the employer do not raise many of the thorny employment issues discussed below, particularly with regard to the transfer of employees, because existing employment contracts simply continue under the new ownership. In most jurisdictions, however, the new owner will not be able to change the terms and conditions of employment.
In asset deals, on the other hand, more difficult issues can arise, particularly with regard to the transfer of employees to the acquirer and business presence requirements for employment of transferring employees. These issues are discussed in more detail in Section IV.
III Due diligence
Employment lawyers and, in some cases, human resources professionals advising the buyer in a transaction will often be called on to conduct employment-related due diligence, usually with a goal of identifying potential liabilities or other issues that will affect the valuation of the deal. When conducting such diligence, the following types of documents should be among those requested and reviewed:
- a census of all employees worldwide (anonymised where necessary), including part-time and contract employees, preferably including date of hire, complete compensation and job category;
- all agreements and information concerning employee benefits, perquisites and retirement plans. Information regarding the value of plans and how plans are funded is critical because in many countries a plan is considered legally funded with mere book reserves as opposed to cash. Unfunded or underfunded pension liabilities discovered during due diligence can be an employment-related deal killer because of the potentially high costs involved;
- information regarding change-in-control, golden parachute and other M&A-related clauses in any employment contract or other agreement;
- any agreements (such as from a target's previous business acquisitions) that affect or limit employment flexibility (e.g., agreements limiting reductions in force);
- the text of all employment agreements, whether individual, collective or with works councils, including contracts designated as 'non-compete', 'confidentiality', 'indemnification' or 'expatriate' agreements;
- pay information, including data on salary administration (to, among other things, establish that withholdings are proper and that the target complies with any legally mandated payroll requirements, such as payroll frequency and form of payment) and incentive or bonus plans;
- information on stock options or employee ownership programmes (the transfer or replication of which can be particularly complicated);
- information regarding any pending employment-related lawsuits, disciplinary proceedings, potential claims, government investigations and unpaid judgments;
- information on any lay-offs or other reductions in force conducted in the past several years; and
- any social plans or severance plans from previous reductions in force.
Those conducting due diligence also should be aware that in certain jurisdictions, such as EU Member States, Hong Kong and Canada, the release of employees' personal data to the buyer could give rise to liability for privacy law violations. For example, the European Union's General Data Protection Regulation (GDPR) – enacted in May 2018 – has significantly increased individuals' rights with regard to their personal data, the level of protection companies handling personal information must afford and the penalties for non-compliance. Multinational employers have also felt the ramifications of the GDPR, as the Regulation applies to any entity that processes the data of EU citizens. Accordingly, those representing the buyer should be aware of any potential transfers of personal information between the buyer and the target, and how these transfers may implicate privacy laws in that jurisdiction.
It is also very important to conduct anti-corruption due diligence. In recent years, enforcement of anti-corruption laws has received growing attention globally. For example, prosecutions under the Foreign Corrupt Practices Act in the United States have significantly increased. Anti-corruption laws have also been enacted in France, Mexico, Colombia and Brazil in the past few years. Failure to identify a target's non-compliance with anti-corruption laws can expose the buyer to successor liability and severe penalties, including but not limited to fines, profit disgorgement and even individual criminal liability. Owing to the severity of the potential consequences, it is imperative that the buyer conduct thorough due diligence on the target's compliance with applicable anti-corruption laws and regulations.
IV Employee transfers and business transfer laws
A key issue in any merger or acquisition transaction is whether and how the employees of the affected business will transfer to the new owner.
As indicated above, typically, in stock transactions, this is a fairly straightforward process – the acquirer merely steps into the shoes of the seller. Employment contracts remain in place and the employment of the target employees is continuous, so the terms and conditions of employment remain unchanged. However, it is necessary to consider the implications of separation of the target companies from the selling parent, particularly if benefit plans such as retirement savings, health and welfare plans or stock plans were maintained at the parent level. It is also important to consider whether post-close transition plans include modifying terms and conditions of employment. Many US-based employers are surprised to learn that, outside the United States, they often will not be able to make changes to existing employment terms without employee consent.
Asset transactions, however, present a more technically complicated situation and different countries have very different mechanisms for employee transfers in these transactions.
Some jurisdictions have business transfer laws that operate automatically to transfer employees of a sold business from the seller to the buyer (or at least to allow the automatic transfer of employees from seller to buyer). These laws exist throughout the European Union, for example, pursuant to the EU Directive on Transfers of Undertakings, and in certain non-European jurisdictions throughout Asia and the Americas, including Brazil, Colombia, Singapore and South Korea. Where these types of laws are present, a fact-specific inquiry is required to determine whether the proposed transaction amounts to a 'business transfer' under the law. Although the standards vary between jurisdictions, in general, a business transfer will be deemed to have occurred when an independent business unit is transferred and the activities of that unit continue with the buyer. It is also necessary to assess which employees will transfer. Typically, this inquiry is straightforward with regard to employees who work exclusively for the transferred business, but can be more complicated with regard to employees who support both transferred and non-transferred businesses, particularly employees in shared services roles. Different jurisdictions have different standards for addressing whether these employees transfer automatically or would need to consent to transfer. Finally, in certain countries, such as South Korea and Germany, employees transfer automatically but have the right to object to the transfer.
In contrast, in other jurisdictions, including Australia, Bahrain, China, Hong Kong, Indonesia, Japan and the United Arab Emirates, employees do not transfer automatically. Instead, the buyer and seller determine which employees they wish to have transferred in the deal and those employees must consent to the transfer (often by agreeing to a mutual termination of their employment with the seller and accepting new employment with the buyer). However, even this seemingly simple approach can raise complex issues. If the transferring employees are important to the business, for example, the acquiring company must consider, usually in consultation with the seller, what sort of package should be offered to induce those employees to consent to transfer to the buyer. Usually this involves, at a minimum, replication of all existing terms and conditions of employment and recognition of years of service for all purposes (including benefits eligibility, vacation entitlement and severance payout). In some jurisdictions, such as Hong Kong, this arrangement ensures continuity of employment for statutory protection purposes. Retention bonuses or other sweeteners are also frequently considered in these situations. It is also necessary to consider what will happen to employees who refuse to transfer to the buyer. For example, will the seller be able to redeploy them in other areas of its business? If not, will it be possible to make them redundant and, if so, at what cost? Will the buyer share in those costs? In some countries, severance is not owed if an employee refuses to transfer to a buyer offering identical terms and conditions of employment and recognition of years of service, so this also should be considered. The buyer should consider the fact that in some jurisdictions, such as Australia, applicable collective agreements may, by operation of law, transfer to and become binding on the buyer and the transferring employees.
Finally, in some jurisdictions, such as The Bahamas, employees may not transfer by operation of law, at least under certain circumstances, but an employer can agree to assign or transfer employees to a new employer without the employees' consent. Typically, these transfers would require the terms and conditions of employment and recognition of years of service to be maintained, though these rules may vary to some degree by jurisdiction.
V Representation and consultation
Many corporate transactions give rise to information or consultation rights for employees, a concept that can be particularly unfamiliar to US practitioners, especially those with non-unionised workforces, and that can be unpalatable to the businesspeople involved in the deal because of confidentiality and other concerns.
It is especially common in the European Union for companies to have works councils that serve as employee representatives and have the right to receive information and to be consulted on issues and decisions that can affect employees. The exact scope of the consultation obligation depends on the law of the jurisdiction, but these types of rights and obligations often exist with respect to transactions that will either affect employees directly (such as asset deals where some, but not all, employees will transfer, or deals that will result in redundancies or changes to the terms and conditions of employment) or that will affect the company in a way that might ultimately affect employees (such as where the employing company will make a large outlay of capital as a purchasing entity). Accordingly, although consultation obligations are more common in asset deals, they can arise in all types of transactions, so it is necessary to consider each transaction, and each country, individually to ensure compliance with these obligations.
It is also important to consider whether any pre-closing restructuring will occur that could give rise to separate information and consultation obligations. In stock transactions, for example, it is common for a number of asset transfers and other mini transactions to take place before the ultimate stock transfer to prepare the company for the transfer (e.g., creation of new subsidiaries for acquisition and movement of employees and other assets into or out of target companies). Pre-closing restructuring transactions can give rise to information and consultation rights, even if the ultimate stock transfer does not.
Although most laws are somewhat vague with regard to the exact timing of consultation, it is clear that consultation is required to occur at a time when it would be 'meaningful', which is generally understood to be before the signing of a binding purchase agreement. This can be problematic both because of concerns regarding confidentiality and because the deal is often in flux right up to the time of signing, making provision of accurate information to employees or their representatives difficult. It is important, therefore, to understand the potential implications of non-compliance, or late compliance, with consultation obligations, so that risks can be assessed properly. In some countries, such as the United Kingdom, the penalty for non-compliance with consultation obligations will be merely financial. In others, works councils have the ability to delay, or even kill, a deal unless and until the employer complies with its information and consultation obligations. In the Netherlands, for example, a works council can go to court to obtain an injunction preventing a deal from moving forward until the employer complies with its consultation obligations.
Although the concept of works councils is fairly specific to the European Union, consultation obligations can also arise in other jurisdictions, particularly with regard to unionised workforces. It is relatively common for collective bargaining agreements to require at least notice, and sometimes consultation or negotiation, regarding transactions that transfer ownership or involve the transfer of employees.
VI Restructuring and harmonisation of employment benefits
An acquiring company may plan to engage in workforce restructuring or to modify the terms and conditions of employment for transferring employees following a transaction, either to address financial instability or to harmonise terms and conditions with those of the acquiring company's existing workforce. In the United States, under the doctrine of at-will employment, there are generally few restrictions on these actions other than in specialised contexts (such as when a workforce is unionised or an employee has contractual rights to certain benefits or a certain period of employment). Elsewhere, restructuring and modifying terms and conditions of employment is often much more difficult.
For example, with regard to restructuring, termination of employment will require a minimum of just cause or a fair process. Although economic reasons can frequently be used to justify terminations of employment agreements, in some countries, such as France and Japan, the economic situation must be serious before they are legally justified. Moreover, even where terminations are possible, notice and severance are usually required, so these costs should be considered when assessing the financial value of a transaction. In many countries, works councils or other employee representatives have the right to be consulted about planned terminations of employment agreements, and many countries require an employer to agree with those representatives on a social plan aimed at preventing or lessening the consequences of terminations, which, again, can add further costs. Government notification or approval requirements should also be considered. If mass redundancies are planned, there are often additional requirements with respect to both consultation with employee representatives and notification to and authorisation from the labour authorities.
Similarly, modifying terms and conditions of employment, either for economic reasons or to harmonise with existing employees, can be difficult. In most non-US jurisdictions, an employer cannot make detrimental modifications unilaterally, and employees who are subject to detrimental modifications may be able either to claim constructive dismissal (thereby entitling them to payments due on termination of employment) or to bring claims for unpaid wages or benefits. In some jurisdictions, employers may be able to modify terms and conditions for economic reasons if they meet the requirements for redundancy terminations, but similar advance notice may be required. In most jurisdictions, employees can consent to the modification of their terms and conditions, but this is not universal. Brazil, for example, adheres to a principle of no waiver of labour rights, meaning that an employer cannot, under any circumstances, modify employment terms to an employee's detriment, even with his or her consent.
VII Business presence issues
Another issue that can arise in certain deal structures is whether the purchasing entity can legally employ acquired employees in a given jurisdiction. This issue arises, in particular, in asset sales that involve the sale of one or more but not all business units of the selling entity in a particular jurisdiction when the acquiring company does not have existing operations in that jurisdiction before the transaction. In such cases, the employees will transfer to, and become directly employed by, the acquiring entity. Often, the acquirer will be a foreign entity, such as the global parent or a special subsidiary incorporated to acquire the assets that are the subject of the transaction, resulting in the transferred employees being employed directly by a foreign entity.
In some countries, including the United Kingdom, direct employment by a foreign entity is possible, but the foreign entity must register with tax and social security authorities, a process that, in some cases, can be particularly onerous. Italy and Spain are examples of jurisdictions in which establishing a branch or subsidiary may be a more straightforward approach, either for tax reasons (Italy) or because the registration process for foreign employers can be particularly onerous (Spain). In other countries, a foreign entity is not permitted to hire employees directly, and a local business presence must be established to hire the transferred employees. To engage employees in China, for example, a foreign company must establish either a wholly foreign-owned enterprise or a joint venture. To hire employees directly in India, a foreign company must establish a branch office (which is not tax-efficient), a liaison office (which may not be useful because there are restrictions on the activities that a liaison office can undertake), a project office, a joint venture or a subsidiary. Similarly, in Brazil and Colombia, although it is technically legally permissible for a foreign employer to hire employees directly, practically speaking it is necessary for a foreign company to establish either a branch or a subsidiary to make the required enrolments to pay taxes and other social charges (although note that in Brazil, this is usually accomplished through a subsidiary because a presidential decree is required to open a branch of a foreign company).
It is important to be cognisant of the business presence issue, because of the implications it can have for deal pacing and structure, and the potential liabilities for the acquiring entity if this issue is not addressed.
In some jurisdictions, including India, it can take two to three months to establish a local branch or subsidiary that can legally employ the transferred employees and enter into a business or asset transfer agreement (as the case may be). In such cases, it may be necessary in the contracts outside that jurisdiction either to have a sufficiently long period between signing and closing to establish a local business presence or to carve out of the deal the employees, and possibly other assets, of the implicated jurisdiction and to have a later closing with respect to that particular jurisdiction once the business presence can be established. In such situations, acquiring companies will sometimes resort to engaging third-party service providers or obtaining services through a transition services agreement with the seller (to the extent permissible) to manage this waiting period. Buyers should beware, however, that some countries prohibit employee leasing, which can be an issue with respect to transition services agreements. Even in countries in which only registration is required, the acquiring entity may need to be prepared to move quickly to comply with the registration requirements.
The employment of individuals in a jurisdiction without registration or a formal business presence, where that is required, can lead to fines and penalties (sometimes criminal) both for the unregistered employment itself and for the consequent non-payment of taxes and social charge contributions.
The employment issues that can arise in cross-border M&A transactions are numerous and complex. These issues can be further complicated by the tight timelines and constantly evolving deal structures that now characterise many M&A transactions. Successful management of the employment issues requires careful tracking of the many moving pieces and constant communication with the deal team to keep track of deal structure and other business decisions. Employment practitioners working on cross-border transactions should always consult with jurisdiction and subject matter experts as necessary to ensure compliance with the various and complex requirements.
1 Erika C Collins is a partner at Faegre Drinker. The author would like to thank the following attorneys from across the world for their thoughts and contributions on this chapter: Lorena Arámbula of Dentons Cardenas & Cardenas; Raffaella Betti Berutto of Gianni, Origoni, Grippo, Cappelli & Partners; Juan Bonilla Blasco of Cuatrecasas Gonçalves Pereira; Vivek K Chandy of J Sagar Associates; Isa Soter of Veirano Advogados; Melissa Anne Teo and Elizabeth Wong of Allen & Gledhill; Setsuko Ueno of Ueno Law Office; and Anthony Wood of Herbert Smith Freehills. Ryan H Hutzler, associate at Faegre Drinker, also contributed to the chapter.