| Employment law aspects of acquiring a business or company |
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| David O’Donnell and Kevin Langford remind buyers and sellers of key employment law issues to be aware of when entering an acquisition. |
The buyer and seller need to be fully aware of the legal issues pertaining to the workforce. If the buyer and seller fail to manage this part of the process, it may come back to haunt either or both of them and in certain circumstances may prevent the deal from closing.
As the principle of caveat emptor (buyer beware) applies to all mergers, acquisitions and take-overs, the buyer needs to investigate the employment situation of each employee. The buyer should carry out a full personnel audit at an early stage in the negotiations. In practice, this involves the buyer’s solicitor sending a detailed questionnaire to the seller’s solicitor and reviewing the responses together with the documentation furnished.
Depending on the size of the work force and the value of the deal, the diligence exercise might also cover other employee related matters such as industrial relations, health and safety, pensions and employee claims. This process should reduce or eliminate any surprises which might otherwise greet the buyer after it has completed the purchase.
If serious employee related issues are unearthed during the diligence process, the buyer can seek to renegotiate on price or even walk away from the deal. In some cases the buyer may have to enter into discussions and/or negotiations with senior management and representatives of the workforce prior to closing, to ensure (insofar as this is possible) any concerns which the workforce may have relating to the future operation of the business are allayed.
Warranties
As well as the diligence process, warranties can be used to flush out information on employee related matters. The seller will be asked to warrant that a perfect state of affairs exists in relation to employees. The seller will need to disclose any imperfections to the buyer in a disclosure letter. Failure to disclose such imperfections may give rise to a warranty claim by the buyer, if the buyer has suffered loss as a result of the breach.
Warranty claims are typically limited in that the claims must be brought within a certain time limit (usually 2 years) and the amount which can be recovered for all claims is capped (usually at the purchase price).
Transfer of Undertakings Regulations
On the sale of a business, the buyer and seller must both have regard to the provisions of Council Directive 77/187/EEC (the Acquired Rights Directive) as implemented into Irish law by the European Communities’ (Safeguarding of Employees Rights on Transfer of Undertakings) Regulations, 1980 (S.I 306 of 1980). This legislation applies to the sale of a business or undertaking or part thereof. It will be deemed to apply if the business retains its identity following the transfer and if there is a change in the employer. It does not apply to the sale of shares in a company.
The combined effect of the Directive and the Regulations is that the employees of a business are entitled to transfer with the business to the new employer. The employees must transfer with their existing terms and conditions intact as well as the benefit of accrued length of service and also any collective agreement that is relevant to the employment. As a matter of law, the buyer assumes the historical liabilities of the seller for employee matters.
The prudent buyer will seek to be indemnified against all pre-completion employee liabilities which have transferred to the buyer by virtue of the Regulations and the Directive. The seller will seek a similar indemnity from the buyer for post completion employee liabilities.
Dismissals as a result of a transfer are prohibited, unless such dismissals are made for ‘economic, technical or organisational reasons entailing changes in the workforce’ (the ETO reasons). A dismissed employee could bring a claim for unfair dismissal provided he or she is covered by the scope of the Unfair Dismissals Acts, 1977 to 1993.
There are also obligations for both the buyer and the seller with regard to notifying their respective employees of the proposed sale of the business. Principally, these include a requirement to inform the employees and their representatives of the reasons for the sale and the legal economic and social implications for them. If there are any measures envisaged as a result of the sale, consultation with the employees is necessary. This must take place in good time prior to the sale. ‘In good time’ is not statutorily defined. Very often the buyer and seller express a reluctance to impart any information concerning the sale to the employees in advance of closing as this may jeopardise the sale.
There are fines under the Regulations for failure to comply with the information and consultation requirements and furthermore, it is conceivable that employees can seek injunctive relief to prevent a transfer taking effect pending compliance by both parties with the legislation.
European Works Councils
If the buyer is an EU based company, the acquisition may trigger the application of European works councils legislation. This was implemented in Ireland by the Transnational Information and Consultation of Employees Act 1996.
If the seller’s employees are already represented on a European employees’ forum or works council, then there may be a requirement to consult with that body in relation to the sale of the business.
Redundancies
Following the transfer of a business, the buyer will frequently end up with too many staff as a result of having two sets of employees and may seek to rationalise. Prior to the transfer of a business, the seller may wish to rationalise its workforce to make the business more saleable. In the case of a transfer of a business (as opposed to a share sale), any dismissals have to be legally justifiable within the context of the ETO reasons outlined above. Also, any such dismissals will normally be grounded in redundancy and therefore the provisions of the Redundancy Payments Acts need to be complied with in full. Any existing redundancy selection procedures must be observed having regard to an employee’s rights to fair procedures.
If collective redundancies are envisaged, under the Protection of Employment Act, 1977 there is a duty to consult employee representatives, e.g. trade union officials and to furnish them with certain information. An employer is also obliged to notify the Minister for Enterprise, Trade & Employment of collective redundancies at least 30 days before the first dismissal takes effect. Failure to do so may result in a fine.
Pensions
The seller of a business (as opposed to a share sale) is not obliged to provide pension benefits into the future comparable with those enjoyed by the employees prior to the sale. However, the purchaser is obliged to ensure that the funding of pension benefits that have accrued to employees of the business is adequate. The purchaser will therefore have to satisfy itself fully as to the level of funding in the pension scheme and if deemed necessary, to secure an appropriate indemnity from the vendor regarding pension matters.
Mergers Notification
Where a sale of a business or company is required to be notified to the Minister for Enterprise Trade & Employment under the Mergers Acts 1978-1996, the notification usually gives details of the likely effect of the proposed merger or take-over on the common good in respect of a list of scheduled criteria which includes:
• level of employment
• employees
• rationalisation of operators in the interest of greater efficiency.
If the Minister refers the notification to the Competition Authority, the Authority is required to give its views on the likely effect of the proposed merger or take-over on the common good in respect of the above criteria.
Accordingly when the notification is being completed, the buyer is to some extent forced to reveal details of its plans for the workforce. If in a notification, there is information or a statement made which is false or misleading, then the notification is not valid. Any letter of clearance obtained as a result of such notification is consequentially invalid and title to business or company does not pass to the buyer.
David O’Donnell is a partner in the Corporate Department and Kevin Langford is a senior associate in the Human Resources and Employment Law Department, at Mason Hayes & Curran, Solicitors. |
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| Article appeared in the November 2000 issue.
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