How to navigate potential cross-border M&A legal landmines

The perils of unwittingly stepping into a works council, union or other employee-representative legal landmine during M&A are numerous. In M&A transactions, works councils or unions should be considered part of the overall audience identification and stakeholder analysis. Their impact on deal timing, structure and even viability cannot be overstated.

With a 25-fold increase in cross-border deals since 1985, addressing works council/unions early in due diligence is critical. Understanding the legal considerations of these representative bodies, which vary by geography and sector, is critical. This important topic was the focus of a recent Metro New York HR M&A roundtable hosted by WTW, comprising multinational Fortune 500 clients representing diverse industries and facilitated by senior executives at the global law firm Freshfields Bruckhaus Deringer, experts in complex M&A, litigation, governance and regulatory work.

Here are some of the key takeaways from our roundtable:

What are works councils? What rights do they have?

Unions make general labor and collective bargaining agreements on a national or industry level worldwide, whereas works councils and local unions represent employees at the company level, especially (but not only) in Europe. The power and application of works councils and labor unions varies by country.

When contemplating significant change, it is important that you are cognizant of the workforce representation body and the process for working with them.

In terms of M&A, works councils and unions typically have the right to:

Ignorance can be costly

Understanding what information/consultation obligations might apply at the outset of the transaction and assessing whether they need to be built into the transaction structure and/or timetable are essential.

Not factoring in works councils is costly, time-consuming, detrimental to the deal’s “optics,” and will hinder the progression of a deal and even cause its demise. Tackling works council rights quickly and proactively is crucial to avoid unwanted delays or sanctions including:

• Penalties/fines, some of which can be of criminal nature (in France, for example)
• Strikes or employee walkouts that can impact the deal or delay the close
• Tense social climate
• Closing delay
• Damages (In Belgium, for example, companies may be required to pay remunerative damages to employees.)

Real-world works council/union complexities

It’s difficult for even the most experienced M&A professional to keep up with all the nuances, differences and complexities inherent to works councils. We asked our roundtable participants which jurisdictions they’ve encountered difficulties in an M&A context due to employee representatives. Austria, France, Germany, Japan and Mexico were among the countries at the top of the list. Speakers and participants also mentioned specific challenges they’ve experienced including:

• In Germany and Switzerland, pension liabilities must be transferred to the seller when divesting.
• In the Netherlands, the consultation process is typically reflected in the form of a closing condition (introduced by the seller).
• In France, works councils cannot stop a deal but they can delay it if they can argue that they have not received all the relevant information regarding the sale (including the transactional documentation and the buyer's business plan).
• In the U.K., it is about electing the employee representatives; sometimes the pension trustee also weighs in.
• In other jurisdictions, the amount of time it takes to consult and get the required approvals may end up being much more than what was anticipated at the beginning.

How to address works councils head-on

At the outset, make sure you know the answers to the following questions.

• Is there a European Works Council (EWC) or National Works Council (NWC) that will have to be informed or met with? Even without an EWC or NWC, legal considerations and regulations must be addressed in that sector or geography.
• What is the articulation between the NWC and EWC? How does one impact the other?
• What are the rights of the works councils and what will be your approach to working with them?
• The overlap between EWCs, NWCs and trade unions can be complex due to the different penalties and legal obligations; should you consult an external expert for detailed advice?

6 works councils in M&A best practices

It‘s critical to know what information/consultation (I&C) obligations might apply at the outset of a transaction and to assess whether these need to be built into the transaction structure and timetable. Here are six best practices:

Effective interaction with works councils and unions requires close collaboration and coordination among M&A advisors, employment counsel, HR business partners and other key stakeholders. It is a team effort. Leveraging the tips and insights above will help you anticipate and mitigate challenges and streamline the process for you and the organizations you represent.

A special thank you to Elodie Favre-Thellmann and Nicole Foster of Freshfields Bruckhaus Deringer for their partnership on this article.