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Why are there employee clauses in a sale and purchase agreement?
In this final blog of our series on employee-related aspects of sale and purchase agreements (SPAs), we look at how the type of M&A deal can impact employee treatment.
The main two types of M&A transactions are:
- Asset deal: The employees are transferred from a seller’s legal entity to a buyer’s legal entity. A new employment contract may be needed.
- Share (or stock) deal: The buyer purchases the entire legal entity from the seller and the employees are transferred along with the legal entity. Typically, a new employment contract is not needed.
Corporate development teams typically set the type of deal based on factors such as:
- The seller’s legal entity structure
- The type of buyer (corporate, private equity, joint venture, etc.)
- Local legal requirements, tax implications, headcount, etc.
The initial plan can also change during the negotiation process.
For example, in a multi-country transaction, it is common to have a mix of asset and share deals across the countries, and the type of deal can change during the deal life cycle as new information becomes available and final agreements are reached.
A seller may decide to restructure the business to be sold into separate legal entities before closing, allowing the seller to transfer those entities to the buyer using share deals. In this case, there can be asset transactions prior to closing (to move employees into stand-alone legal entities) followed by a share deal (transferring those entities to the buyer) at closing. Special care should be taken to ensure all the proper people, assets and systems are transferred.
HR needs to ensure it has a thorough understanding of these steps and the implications on affected employees before and after closing and that the details are set out in the SPA.
Some key employee-related topics to consider
Asset deal employee issues
- Some countries may require new employment offers and employment contracts, while others will have “automatic transfer” requirements apply.
- The target’s employees can join the buyer’s existing compensation and benefit programs.
- However, the terms of the deal or “automatic transfer” legal requirements can mean that acquired employees’ old programs need to continue, or at least that a comparable compensation and benefit package is provided for some period.
- If the seller’s compensation and benefit programs are not part of the transaction, automatic transfer requirements may create a need to establish programs mirroring employees’ old ones, adding considerable complexity to the transition.
- Alternatively, an assessment may be needed to establish the value of the buyer’s compensation and benefit package versus the seller’s, with compensation measures determined if the buyer’s value is lower. This can be complicated to assess across multiple countries and job levels. HR plays a significant role in ensuring all these requirements are met.
- We explore the issue of “comparability” in more detail in this article.
Share deal employee issues
- As employees in a share deal do not change the legal entity that employs them, they typically remain subject to the same compensation and benefit package as before the deal under their existing employment contract. However, always be sure to check for any possible unique country situations.
- The seller may include a clause in the SPA that the buyer cannot change these benefits for a certain period after closing.
- A significant issue can arise if the legal entity being sold participates in broader benefit programs (e.g., pension fund or insurance policies) covering other entities of the seller’s group.
- In this case, the buyer may need to create carved-out mirror programs for the transferring employees or extend the acquiring company’s plans.
- This can give rise to practical issues, for example: Is the new plan set up before or after closing? Can similar programs even be set up for a smaller group of transferring employees? Will plan costs or terms and conditions be significantly different?
- Not all share deals are alike, just because the shares of a company are moving does not mean that the plans, programs and systems are. The team needs to ensure they understand what is and is not transferring in the transaction.
Use of transition services agreements
In cases where the speed of the deal means that closing will happen before the buyer can perform all business functions of the acquired entity, transition services agreements (TSAs) are often established where the seller continues to perform certain business functions on behalf of the transferring business for a limited period, at a cost to the buyer. This helps to ensure the deal can proceed in a timely fashion without waiting for every business process to be separated.
TSAs can be used across different business areas, and HR is no exception. HR TSAs may cover areas like payroll, benefit plan administration, accounting of benefit plan costs, and so on.
The development of a TSA by the seller should begin when a decision is made to possibly sell a business. The seller should establish a small team, representing each functional area to develop a pro-forma TSA based on the understanding of how the business currently operates.
It is then important to determine what services will be provided under the TSA, for how long and at what cost — so there is no ambiguity later. There also needs to be a mechanism for extending the TSA if needed, as things rarely pan out as planned in many cases.
Conclusion
As we stated in the beginning of this series, employees are a crucial element in most corporate transactions. Employers on both sides of a deal take steps to protect transferring employees, manage employee-related risks arising from the transaction and ensure the transaction value for their respective organizations. Understanding the purpose and best practices in employee-related terms provides for a better foundation to execute on the requirements in the sale and purchase agreement.
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