How to navigate cross-border acquisitions from an HR perspective

Understanding the structure of the deal

From an employment perspective there can be significant differences where a transaction is structured as a share sale versus an asset sale.

Asset sales

On a business sale, the assets of the business are being acquired rather than the employing company itself. This means that employees working in the target business need to be ‘transferred’ from the seller to the buyer on completion of the deal.

In European jurisdictions this generally happens automatically by operation of national legislation implementing the EU Acquired Rights Directive as amended. Subject to certain rights to object, assigned employees will generally transfer on existing terms and conditions of employment and with continuity of service. The European automatic transfer principle is commonly referred to as ‘TUPE’, which is an abbreviation of the UK’s particular implementing legislation, the Transfer of Undertakings (Protection of Employment) Regulations 2006. 

Other jurisdictions, like Australia, Hong Kong and India, do not provide for automatic transfer. When employees move across to a buyer this involves a buyer making an offer of employment to the target employees and, if they accept, the employees resign from their employment with the seller (or the seller dismisses them) with effect from completion. Theoretically this gives the buyer greater flexibility to pick and choose who they want to take. But the flip side is that there is less certainty from the employees’ perspective. 

Share sales

By way of comparison, share sales tend to be straightforward. Employees remain employed by the entity being acquired and the buyer takes on that entity with all associated employment obligations and liabilities. It isn’t necessary to put the employees on new contracts (unless as part of a harmonisation exercise – see below). Consultation requirements are generally less onerous than for an asset sale. 

Share sales involving automatic transfers

However, TUPE (or its equivalent) cannot simply be ignored on a share sale. Transactions are often structured in stages, involving pre- or post-closing reorganisations, hive downs or the disposal of particular assets. Any of these steps, although potentially secondary to the main acquisition, could involve the transfer of some or all of the employees pursuant to applicable automatic transfer legislation. These transfers should be examined on a case by case basis. A diagram can be a useful tool for this purpose.

In France, the transfer of employee representatives must be authorised in advance by the labour inspector. This process may take several weeks to complete. 

In the UK, so called ‘gold plating’ of EU transfer legislation adds another layer of complexity. Here TUPE transfers are not limited to transfers of undertakings (ie the traditional sale of assets scenario) but can also encompass what is known as a ‘service provision change’. Subject to meeting certain requirements, this means that TUPE can theoretically apply to pre- or post-closing outsourcings/in-sourcings, intra-group employee transfers or shared service arrangements. In France, however, in the event of a ‘service provision change’, TUPE would generally not apply unless it constitutes a more general transfer of activity that continues afterwards on similar conditions, and is operated through the transfer of material assets.

Following the UK’s vote in June this year to leave the European Union, there has been speculation as to whether the UK Government will look to repeal or amend parts of TUPE, including the rules about changes to service provision. However, major changes seem unlikely because businesses are used to how these rules work, and the current requirements are reflected in contract drafting and market practice.

Due diligence

Understanding the make-up of the workforce

As a prospective buyer, one of the first steps in HR due diligence is to work out how the target business is staffed and what the employees actually do. Workers can be engaged in very different ways, particularly where the business has grown inorganically through acquisitions, undergone reorganisations or relies on third party labour arrangements. Regardless of the structure of the transaction or countries involved, getting a handle on these arrangements is important. Some questions to consider include:

• Which company actually employs the employees servicing the target business? If the employees are employed by an entity outside the target group, will they need to be moved or transferred into the target before the acquisition? Is that possible under local law?
• Are any functions (eg IT, HR, marketing, accounting) carried out at a group level rather than by the target? Do you have a plan in place for transitioning those functions after the deal closes or will you need to put in place transitional service arrangements?
• Does the target rely on outsourced labour or dispatch worker arrangements? If so:
  • do the service contracts need to be assigned or novated to the buyer or does the buyer have its own providers?
  • which of the contracting parties bears the costs of terminating the employment of any surplus employees on a change of control?
  • have the outsourced arrangements been carried out in compliance with local law? Indonesia, for example, has a very strict regime relating to outsourcing.     Breaching these rules means workers are automatically deemed to be employees of the target business.
• Are any of the employees sponsored to work in the relevant jurisdiction? If so, which entity sponsors them and will the buyer need to apply for new visas as part of the transaction?

Identifying risk areas

• The scope of due diligence will vary from transaction to transaction. In broad terms, the key areas of focus will be:

• key executive terms of employment (particularly provisions dealing with termination and protection of proprietary interests)
• general terms and conditions of employment and staff policies
• benefit and incentive arrangements
• pension liabilities
• on-going or pending employment litigation; and
• collective bargaining arrangements and trade union issues. 

A buyer should look out for any contractual or statutory change of control entitlements that may be triggered as a result of a transaction. Key executive employment contracts often contain contractual entitlements providing for bonus payments, increased notice periods or accelerated vesting of benefits. Statutory entitlements are less common but can have a significant impact on a deal. 

For example, in Indonesia, even in the absence of termination of employment by the employer, employees can elect to walk away from a business on a change of ownership and receive a generous statutory severance payment. 

In Australia, a buyer should seek confirmation that appropriate superannuation contributions have been made by the target company to a complying fund, and look out for participation in defined benefit funds. 

Similarly, in the UK, if the target company participates or has participated as an employer in an underfunded defined benefit scheme, arrangements will need to be made to deal with the target company’s share of the deficit before it is sold. The buyer will also want as much comfort as possible from the seller that the UK Pensions Regulator will not be able to exercise its moral hazard powers against the target company in the future. 

When dealing with an asset sale in the UK, a buyer should consider the risk of any potential liability for enhanced pension scheme benefits of transferring employees arising on redundancy or on an agreed early retirement age for certain employees. The buyer may want to consider, for example, a purchase price adjustment to take account of the potential risks involved.

Where employees participate in a seller employee share scheme, it may be difficult for a private buyer to replicate that employee benefit. The consequences of the transaction and the ongoing value of the benefit (including whether it is contractual or discretionary) need to be carefully assessed. Often the rules of an employee share plan provide for vesting if the employing entity is sold outside the group. Where vesting is a taxable event and there are withholding obligations in respect of the tax due and/or social security contributions, it is important to establish where those obligations fall. If the legal position does not coincide with the commercial intention, an indemnity or other contractual provision may be required.

Buyers and sellers should take care when handling employee data as part of any due diligence exercise. Personal data of the target business’s employees will usually attract protection under local data privacy laws. There will often be restrictions on the ability to send this personal data outside the home jurisdiction.

Employee consultation

Employee consultation varies across jurisdictions and doesn’t always lend itself to adopting a uniform approach. It may be necessary to allow for differing closing timetables across jurisdictions to take account of the time needed to consult in each country involved. 

The stages at which consultation is required also differ. For example, in France, consultation with Works Councils about the sale of a business needs to take place before any definite decision has been made on the sale. 

Statutory consultation processes may be required for both the sale of the business itself and for any proposed restructuring or redundancies.

While some countries, like Hong Kong, do not provide for mandatory statutory consultation processes on asset or share sales, in Australia there are legislative obligations to consult. These arise when an employer has decided to dismiss 15 or more employees under certain circumstances (which may include asset or share sales). Although Japan also does not provide for mandatory statutory consultation processes on asset or share sales, Ministerial guidelines recommend consultation processes on asset sales. 

Even where there are no statutory consultation obligations, the consultation obligations under any applicable collective agreements or instruments in each jurisdiction should be checked (such as modern awards in Australia). 

Retention and incentivisation

A buyer will typically want to ensure that managerial employees remain engaged and motivated in the run up to completion and beyond. A key feature of most deals is to put in place incentivisation arrangements for any key executives, linked as appropriate to financial targets or retention conditions. This can take the form of cash-based retention bonuses, share options or other awards.

More generally, a buyer should carefully review key executive terms and conditions to ensure that they contain appropriate protections for the target/buyer business going forward, for example, in relation to restrictive covenants and termination provisions. If they don’t, then as part of the transaction process (and often as a condition to closing), these individuals may need to be placed on new contracts of employment, to the extent this is permitted under local law.

Transaction documentation

The parties to a transaction will seek to protect their respective positions on employment matters by allocating costs and liabilities under the relevant purchase agreement. For a buyer, protection will typically come in the form of employment warranties, effectively ensuring that the seller has disclosed all relevant information and provided accurate copies of key documents such as employment contracts, handbooks and benefit/incentive plans. Pay close attention to the time limits and caps that apply to warranties as these will dictate the extent of any remedies available in the event of any inaccuracies discovered after completion.

A purchase agreement will also usually contain indemnities whereby particular risks are ring-fenced and liability is allocated to either the buyer or seller. While it isn’t possible to contract out of TUPE (assuming it applies), ‘wrong pocket’ clauses are often included in an asset purchase agreement. Under these clauses the seller picks up the costs associated with anyone who inadvertently transfers and the buyer remains responsible for anyone who did not transfer by operation of law but whom the parties intended to transfer.

Harmonising terms and conditions/ restructuring

Acquiring a workforce is often just a first step towards an equally challenging process of workforce integration. Assuming that the target business acquired will not operate independently from the rest of the buyer’s business, a buyer will often look to achieve synergies and reduce duplication with its existing business.

From a European perspective, there are restrictions on what the buyer can actually do following automatic transfer of employees. For example, in the UK, changes to terms and conditions in connection with a TUPE transfer will be void unless they are made for economic, technical or organisational reasons. Similarly, there are rules providing for unfair dismissal protection where employees are dismissed in connection with the transfer. In France, if an employee is dismissed to avoid a transfer that would be compulsory under TUPE regulations (and it is not part of a plan to avoid closing down the business), the dismissal has no effect and the employee can either be transferred to the buyer or claim damages in court.

In Indonesia, if employees have accepted an offer of employment with a buyer as part of a business sale, they have a right to enjoy the same terms and conditions as they had with the seller. In Hong Kong, if ownership of a business changes, severance pay may not be payable if the terms of employment with the new employer are on an overall basis no less favourable. There are similar requirements in Australia in an asset sale, with the added requirement that the buyer recognises the employee’s service with the target company.

Even where changes to terms and conditions or redundancies are possible, local consultation requirements will need to be followed and governmental approvals or notifications may need to be made as appropriate.

Further resources

The Ashurst Global Guide to Public M&A also provides guidance on global M&A issues.

Authors: Andrew Valerio, Counsel; Marie-Claire Foley, Partner; Elizabeth Bayliss, Senior Expertise Lawyer; Nataline Fleury, Avocat à la Cour; Sarah-Jane Gemmell, Expertise Counsel; Ming-Yee Ma, Senior Associate; Jennie Mansfield, Partner; Mansu Pak, Senior Associate; Debby Sulaiman, Partner; Evan Tsang, Associate