1. Is it a share purchase or an asset purchase?

On a share purchase, the default position is that the identity of the target company remains the same before and after the sale; it is simply ownership of the target that changes. This means the employing entity remains the same and employees stay where they are.

On an asset purchase, employees may become employed by the buyer. In the UK this takes place under the Transfer of Undertakings (Protection of Employment Regulations) 2006 (TUPE), which is derived from the EU Acquired Rights Directive (‘ARD’). Countries in Europe have their own national legislation implementing the ARD, similar to but not always the same as TUPE. Some countries outside Europe (Chile, Argentina, Brazil and Singapore, to name a few) have their own rules about automatic transfer of employment/succession of employer.

TUPE provides that where there is a transfer of assets amounting to “an economic entity which retains its identity”, any of the transferor’s employees who are assigned to that economic entity will transfer with it. This would include a business sold as a going concern (including after a share purchase). Employees transfer on their existing terms and conditions, meaning rights and liabilities also transfer to the buyer. This has important ramifications for process and documentation.

TUPE is modified where a business is bought out of formal liquidation or administration, allowing a buyer greater flexibility.

In jurisdictions which do not recognise a principle of automatic transfer, such as the United States, Hong Kong and India, there is typically a dismissal and reengagement process (known colloquially as “fire and rehire”) whereby the seller terminates the employment of the individual, and they are offered fresh terms of employment with the buyer.

2. What due diligence do we need?

A robust due diligence process can help a buyer to expose any key areas of potential employment law liability within the target company/business. An up-to-date and thorough due diligence questionnaire is crucial for this.

Key areas of focus include:

• Terms and conditions: Are service agreements and employment contracts fit for purpose? Clauses regarding notice period, post-employment restrictions, intellectual property and confidentiality are particularly important. Check for change of control clauses which could result in sizeable payments. Do any policies/handbooks include contractual terms?

• Incentive schemes and benefits: Are there any bonus schemes, equity award schemes or benefits - and can they be easily changed if needed?

• Enhanced payment rights or state contribution requirements: For example, are employees contractually entitled to enhanced redundancy payment, whether expressly or impliedly through custom and practice? Must the employer make any particular contributions to statutory payments on dismissal, such as in Spain when dismissing employees aged 50+?

• Claims/disputes: Are there any existing or likely employment claims against the company? Dismissals deserve particular attention, particularly in jurisdictions where protections cover a broad range of people – such as employee representatives or even non-elected candidates in social elections in Belgium.

• Employment status and tax: Is there a risk that individuals labelled as self-employed are employees – leading to potential employment rights and tax claims? Are agency workers supplied and/or employer of record arrangements used? This sort of “employee leasing” is more heavily regulated in some countries than others. There is relative flexibility in the UK. But in Spain and Italy for example, the supplier of the labour must be registered, and in Belgium the permissible grounds for using this arrangement are very limited. The end user (i.e. target) can end up incurring liabilities for breach of the rules.

• Collective agreements: Is there a union or works council? (see later)

• Pensions: Is the company compliant with any pensions auto-enrolment requirements? These exist in the UK and are coming into force across some other jurisdictions (for example Ireland and India). Other countries such as Sweden, Spain, Greece and Chile do not have these requirements, so different considerations may be more important there, such as compliance with the terms of any voluntary scheme. Are there any defined benefit schemes in place? in the UK, rights relating to early retirement or redundancy under an occupational scheme may transfer under TUPE.

• COVID-19: Is the company compliant with the latest health and safety requirements, such as to carry out risk assessments? Has any claim under the Government’s Job Retention Scheme in the UK been lawfully made? Restrictions were imposed in several countries against employers dismissing employees where a furlough grant was received, such as in Spain, Italy and Germany, so due diligence needs to join up the dots between dismissals and any grant.

3. Which employees do we want to acquire and how do we get there?

If you are a buyer, you should identify early on who the critical/key individuals are in your purchase. You need to confirm that they are employed by the company in question and not by an entity outside of scope for purchase. If the important people are not in the correct entity, a buyer should get the seller to move them to the right place – with both parties bearing in mind that this is likely to trigger TUPE/ARD across European jurisdictions (even where the ultimate acquisition is a share purchase).

In an asset purchase, there is an additional question of whether employees are permanently “assigned” to the target business. This test should be met easily where an employee devotes the whole of their time to the business, but falls into question where they work in other areas too.

Employees have the right to object to the transfer in the UK, which brings their employment to an end on the transfer, without notice or compensation being due. Some countries use different terminology for the idea of employees choosing not to transfer, and may see it as a dismissal attracting compensation. In Sweden for example, an objecting employee’s employment does not end on the transfer, but rather remains with the transferor (which would then need to dismiss in the normal way). In Germany, employment will terminate as at the transfer, with notice payment but no additional severance payment. A buyer can make it a condition for completion that particular employees, or a specified percentage of employees, must transfer. Any dismissal costs can be dealt with under the transaction document.

Self-employed individuals and agency workers are not usually covered by TUPE/ARD and their contracts do not transfer to the buyer. If they play an important part in a target business, a buyer may wish to enter into new contracts to take effect post-completion. In a share purchase, no change of contracting party is needed, but a buyer should review whether the terms of engagement provide sufficient protection to the company against employment status and tax claims.

In jurisdictions without TUPE/ARD or any form of automatic transfer of employment – such as the United States, the UAE, China – a dismissal and reengagement process is needed. A buyer will need to understand from the seller which employees work in the business it is acquiring. Sellers may need to pay a statutory severance (and may seek to negotiate that the buyer covers this cost). Generally, the employment arrangements are documented in a revised employment agreement and/or a tri-partite transfer agreement.

4. What should be included in the purchase agreement?

Buyers should give careful thought to warranties to ensure that they capture all relevant areas of employment law, and will trigger any further “flushing out” of important information later in the seller’s disclosure letter. A buyer should have certainty which employees are being acquired, what terms they are employed under and what sums they are entitled to (including any promises made).

A general warranty of compliance with employment law is always needed. A buyer may also wish to include specific warranties confirming that holiday pay has been calculated correctly (given complexities in case law) and national minimum wage has been paid. in the UK, a warranty should be sought confirming compliance with IR35 tax legislation, including that the seller has provided any status determination statement required.

Indemnities are particularly valuable where specific risk has been identified, such as employment litigation – especially discrimination and whistleblowing claims which attract uncapped tribunal awards in the UK.

An asset purchase agreement involving a target in the UK or Europe should contain provisions dealing with which employees will transfer under TUPE/ARD, any TUPE/ARD liabilities and apportionments and potentially how the parties will work together during the required information and consultation process. Indemnities might ordinarily address failure of the seller to provide employee liability information; any unintended transferring employees; and failure to inform and consult (on both sides). Under TUPE, a failure to inform and consult can attract punitive damages of up to 90 days’ gross pay per employee; and liability is joint and several between the transferor company and the buyer, meaning a buyer could face potentially extensive liability. It is not legally possible to get employees to waive these rights.

Even where TUPE/ARD does not apply, it is not uncommon to see a seller require commitments from a buyer under the purchase agreement that the buyer will honour existing employee terms and conditions. Liability typically is apportioned on a pre-completion (seller) and post-completion (buyer) basis.

5. What process do we need to follow with employees?

In a share purchase in the UK, while there is generally no legal requirement to inform employees that ownership of their employer will be changing hands, companies usually prefer to communicate positive messaging on their own terms. Where the seller recognises a trade union, there may be an agreement to inform the union or even seek their agreement, before committing to the sale. In some countries, workers’ representatives may have the right to receive the same information that the seller provides to shareholders (such as in Spain).

In an asset purchase which triggers a transfer under TUPE/ARD, there is a prescriptive information and consultation process to be carried out before completion with employee representatives of any affected employees. This may involve an election of representatives, or it may be with trade union representatives.

In the UK, that process must take place “in good time” before the TUPE transfer. Some countries are more prescriptive. For example, in Ireland information must be given at least 30 days prior to the transfer, and 25 days before the transfer in Italy. In Spain, while there is no set timeframe, any buyer plan to change terms and conditions should properly result in consultation at least 15 days prior to the transfer for substantial changes, or 30 days for any change in the workplace.

Information to be given to representatives includes: when and why a transfer is taking place; the legal, economic and social implications of the transfer; any measures that the target or the buyer proposes in connection with the transfer (or if none, a statement to that effect); and information related to agency workers (easily overlooked).

Where there are proposed measures, the employer must consult with representatives with a view to reaching agreement with them. “Measures” has been interpreted broadly as any “action, step or arrangement” taken in connection with the transfer and could include dismissals, changes to terms and conditions, reporting line changes, changes to benefit providers, and changes to pay day. Consultation must be genuine, though agreement need not be reached.

In the UK, it is possible to consult after sign and before completion, but this may not be permitted abroad. For example, in Belgium, information and consultation must take place before a final decision is made and before any public announcement.

Where TUPE/ARD or similar obligations do not apply, the process is most likely to be one of dismiss and re-hire. The buyer is free to offer fresh terms but may be subject to any restrictions imposed under the purchase agreement as to whether it needs to honour existing terms.

6. Can we integrate the acquired business into our own?

If you are a buyer, you will most likely turn your attention to integrating the new business into your existing activities following completion.

A buyer should be aware that even in a share purchase, certain acts post-completion in the UK and EU can trigger an intra-group transfer of the acquired employees. These could include: a parent company taking over the day-to-day running of the business; employees reporting directly to employees of the parent company; and more obviously, the acquired employees signing an employment contract with the parent company.

Where a buyer acquires a business and splits its activities post-completion amongst companies in its group, that may trigger additional TUPE/ARD transfers. In practice, it is often advisable for a buyer to present such post-completion plans as a “measure” during the first transfer process from the seller to the buyer.

7. Can we change employee terms and conditions?

As a general rule, contractual changes can be implemented by obtaining employee consent. However, this may be different after a transfer of employees.

Where employees have been transferred following an asset purchase, TUPE in the UK states that their terms and conditions cannot be changed if the sole or principal reason for the change is the transfer. The only exception, rarely applicable, is where there is an economic, technical or organisational (ETO) reason entailing changes in the workforce. In practice in the UK, employees may agree to the changes - but the changes still risk being technically void and so unenforceable.

In Italy, employees retain the right to object to the transfer and resign, should their conditions of work be substantially changed in the three months following the transfer. A buyer could try to package the changes as being unconnected to the transfer – such as by linking them to a promotion or discretionary bonus payment, linking them to some other reorganisation, or even waiting a couple of years to make them.

Some countries take a more relaxed approach here, and changes are permitted following completion with employee consent, even without an ETO reason - such as in Sweden and Italy. Or, an ETO reason is needed, but no employee consent is required – such as Spain. In Belgium, generally employees keep their current terms after the transfer and the employer gradually seeks harmonisation and tries to negotiate a collective bargaining agreement.

It may be desirable to hold an off the record discussion, particularly with more senior individuals, where changes to terms and conditions are sought (or dismissal is required). In the UK, to ensure an employee has waived their statutory rights (including those under TUPE), they need to sign a settlement agreement meeting certain requirements - including that the employee has obtained independent legal advice.

In countries which do not recognise TUPE/ARD or other forms of automatic transfer, fresh terms can generally be offered by the buyer in any dismissal and re-hire process. However, there may nevertheless be restrictions. In Brazil for example, new conditions are only valid if they are not detrimental to employees – even if employees consented to them. And in India, “blue collar” workers have the right to the same or better T&Cs, continuity of service and right to receive severance compensation, otherwise they are assumed to be dismissed with retrenchment benefits.

8. Can we dismiss employees we have acquired?

Ordinarily, as a general rule in the UK and across most European countries, an employer is entitled to dismiss employees provided that it has a fair reason and follows a fair process. In an asset purchase, that becomes more difficult where TUPE/ARD applies. TUPE/ARD protects employees from dismissal where the reason is the transfer and where there is no ETO reason entailing changes in the workforce.

Redundancy may be a legitimate reason for these purposes, although a buyer should remember that any process still needs to be fair in the usual way. This could mean pooling its existing employees with newly acquired ones when selecting roles for redundancy – a potentially unattractive proposition.

In jurisdictions where TUPE/ARD does not apply, typically employers can more easily dismiss after the acquisition. They may need to follow their ordinary rules for dismissal (e.g. redundancy consultation); or they may have more flexibility to terminate without cause, such as in the United States.

9. Do we need a transitional services agreement?

Sometimes following the purchase of a business, a buyer requires the seller company to provide services and know-how to it for a limited duration for operational continuity. This can be done under a transitional services agreement (TSA). The parties should be mindful that commencing and ending the provision of services may trigger transfers under TUPE/ARD, depending on how the acquisition and TSA are structured. The parties should also be careful to ensure the arrangement is properly constructed as a supply of services, rather than a supply of labour, as the latter – known as “employee leasing” in certain countries – can be heavily regulated (and possibly unlawful), depending on jurisdiction.

10. How should employers factor in differing collective consultation obligations between countries?

Employers should be aware that collective consultation obligations vary significantly between jurisdictions. At one end of the spectrum, jurisdictions such as Hong Kong do not require any collective consultation with employees in the context of M&A. At the other end of the spectrum, many mainland European jurisdictions require extensive consultation. Other countries sit somewhere along the spectrum. For example, collective consultation is not generally required in the UK in the context of share sales, but is required in the context of business sales when measures affecting employees are proposed.

A thorough assessment of different collective consultation obligations in each jurisdiction should therefore be undertaken as early as possible when planning a transaction. Even preparatory steps might trigger collective consultation obligations, such as with a European Works Council, and that consultation in some countries may take significantly longer than business managers are used to in their own jurisdiction. Central coordination is also key. Employees can easily communicate on a cross-border basis, and so management must ensure consistent messaging to all its employees’ representatives.

Finally, businesses must remember that employees are often affected in profoundly different ways by projects. A works council in a country that is likely to see increased investment in their location is likely to be supportive of a project. A markedly different reaction can be predicted from a works council in a country that is likely to lose future investment. Whilst consistent messaging is key, it is equally as important to ensure that appropriate but nonetheless different support and investment into proper consultation is put in place on a country-by-country basis.

Contributors:

David Hopper (Lewis Silkin, UK)

Catherine Hayes (Lewis Silkin, Ireland)

Catherine Leung (Lewis Silkin, Hong Kong)

Burkard Göpfert and Susanna Stöckert (Kliemt, Germany)

Javier Alonso de Amiño Rodriiguez (Sagardoy, Spain)

Silvia Figueiredo Araujo (Veirano Advogados, Brazil)

Inger Verhelst (Claeys & Engels, Belgium)

Ornella Patané (Toffoletto, Italy)

Gagan Verma (Kochhar & Co, India)

Marcela Salazar (Munita & Olavarría)