Essential factors to consider before the ink dries on sales agreements
2023 continues to bring increased economic uncertainty. In the world of M&A, this means that companies must proactively address post-integration employment issues well in advance to maximize deal value. In this article in our Crossroads – ICR Insights series, we explore key employment issues to consider in post-acquisition integrations. By managing these issues up front, Israeli companies engaged in mergers and acquisitions can ensure a more seamless integration process and avoid costly surprises.
Assessing the applicability of employee transfer laws
When planning for post-acquisition integrations, companies must assess how employees will transfer. Generally, the country-level transaction structure determines employee transfers, meaning that companies must look beyond the US/parent company transaction – as that can often have little impact at the local level. For a share or stock sale, employees remain employed by the same entity, but for a merger or asset sale, employees must transfer to the employing entity going forward. How that transfer occurs will depend on the applicability of employee transfer laws, which can vary across different jurisdictions.
TUPE (Transfer of Undertakings, Protection of Employment) style laws are prominent in the European Union and stem from the EU Acquired Rights Directive (ARD). These laws aim to protect employees’ rights during business transfers or changes in ownership and, if triggered, often mean employees automatically transfer on their existing terms and conditions (including with leave and seniority entitlements).
Whether these laws are triggered needs to be assessed at a country level, as the factors considered (but which primarily focus on whether there is a “business transfer”) vary from country to country such that the same set of circumstances can result in differing outcomes.
Outside of the EU, a minority of jurisdictions have similar automatic transfer rules (eg, Singapore and Quebec). In many countries in Asia and Latin America, employee transfers may occur through consensual transfers or termination and rehiring processes. This can impact the bottom line, depending on who is on the hook for statutory severance payments due to termination. Understanding the specific laws and regulations about employee transfers in each jurisdiction is critical to ensure compliance and a smooth transition.
Addressing employee representatives, works councils, and union requirements
Those who do not deal frequently with global collective bodies and unions are often surprised at the consultation requirements, and even co-determination rights (ie, where collective body approval is required), involved in M&A and integrations. For example, a local asset transfer in a post-integration process can trigger consultation requirements with local works councils that, if ignored, can lead to criminal and/or financial penalties. These processes may take many months and, in some countries (eg, Germany), may hold up employee transfers until concluded. Depending on the jurisdiction and circumstances, the works council may be able to obtain a preliminary injunction to prevent the deal from proceeding until co-determination rights are adhered to.
Understanding legal restrictions on terminations pre-or post-integration
Employers must be aware of legal limitations on terminations due to redundancies when navigating post-acquisition integrations. Outside the US, most jurisdictions have specific laws and regulations governing the termination of employment contracts, which generally require a showing of reasonable cause, a fair process (which may include notice and consultation), and payment of statutory severance to affected employees. It is crucial to be aware of these requirements, because failure to comply may lead to employee reinstatement orders or significant compensation awards. In addition, where ARD transfer rules are enlivened, terminations “due to” the business transfer may be legally prohibited.
Companies need to address these limitations to effectively plan for and manage integration and redundancy costs while ensuring compliance. For more information on global terminations see our previous ICR Insights article here.
Addressing legacy equity and transitioning to unified equity program
With the growing popularity of equity incentive programs offered by companies at various stages of growth, it is common for acquiring companies to inherit legacy equity programs or awards following an acquisition. In this context, such companies may find it beneficial to proactively address challenges to ensure ongoing regulatory compliance of existing equity awards under legacy plans, such as undertaking required filings with government authorities, maintaining tax-qualified status, and complying with foreign exchange control regulations.
Equally, acquiring companies are encouraged to consider the implications of transitioning employees of the acquired corporation into their existing global equity program during post-acquisition integration, which may involve additional compliance steps or requirements, including those related to securities, exchange control, labor and employment, data privacy, and tax.
Mitigating immigration complications
Global post-acquisition integrations often involve immigration considerations that require careful attention to ensure a seamless transition for your international workforce. For example, in an asset sale, if employees of the seller are being hired by or transferred to the purchaser, and some of those employees are on sponsored visas, the purchaser is urged to make sure the employing entity has the necessary permits to be able to sponsor those employees. As such, the immigration status of all employees should be assessed during due diligence so that the company has sufficient time to plan and comply with immigration requirements.
Anticipating restrictions on harmonizing employee terms and conditions
Harmonizing employee terms and conditions and benefits offered across different jurisdictions is usually a business-crucial aspect of post-acquisition integrations but can be difficult to achieve in practice. Local employment laws and collective agreements may impose restrictions on changing or aligning terms such as working hours, salaries, benefits, and leave entitlements. For example, ARD rules may require that employees generally retain their current employment terms, with a few exceptions such as pensions and stock options.
While it is permissible in some countries to vary these terms with employee consent, there is risk in many others that even variations with consent could be rendered invalid by a court. By carefully assessing the legal landscape in each jurisdiction and conducting thorough due diligence to ascertain existing employee entitlements, employers can develop strategies to navigate these challenges while respecting the rights and expectations of their employees. The latter is critical to ensuring the process is as minimally disruptive to the workforce, employee wellbeing, and productivity as possible (although some disruption will ultimately be unavoidable).
Successful navigation of global employment considerations in post-acquisition integrations requires careful attention and strategic planning to ensure that costly and time-consuming issues are not discovered at the eleventh hour. Experienced guidance and meticulous planning lay the groundwork for a smooth transition and the achievement of business objectives.
WELCOME TO CROSSROADS – ICR INSIGHTS
Crossroads – ICR Insights is our series of short-read articles designed to assist organizations considering an international corporate reorganization (ICR). Each country-specific, solutions-based brief will answer a key consideration during a global transaction such as carveouts, spinoffs, acquisitions and dispositions, pre- and post-acquisition integration, or legal entity rationalization. Visit Crossroads – ICR Insights to view the entire collection or sign up to be notified of new postings. Have an idea of a topic or interested in discussing further? Email ICRCrossroads@dlapiper.com.