Employment Considerations in Business Takeovers

Corporate Acquisitions: Employment Insights - Episode 2

Following on from the last episode,​​​​​​​ Katie Harris and Natalie Wood, will guide you through employment issues that come into play with corporate acquisitions. By the end of our conversation, you'll grasp the critical differences between share and asset purchases—imagine a box of biscuits, where buying shares means taking the whole box, liabilities and all, while asset purchases let you pick just the biscuits you want. 

They'll deep dive into the world of employment due diligence within mergers and acquisitions, where the age-old 'caveat emptor' adage truly comes to life. You'll come away with a clear understanding of the comprehensive nature of due diligence in share sales, versus the targeted scope in asset sales. They also demystify the implications of the Transfer of Undertakings (Protection of Employment) Regulations—TUPE for short—and its role in safeguarding employee transfers. 

This episode is a must-listen for anyone keen on mastering the art of navigating employment intricacies in corporate acquisitions. 

Episode Links

• Visit our website
• Contact us
• Our Employment services
• Our HR training

Chapters

• 0:04 Corporate Acquisitions and Employment Issues
• 11:02 Employment Due Diligence in M&A

Transcript

 Katie Harris: 0:04

Hi, I'm Katie Harris. I'm a senior associate in Boys Turner's employment team. This employment podcast series is going to be looking at the different elements of corporate support work that we do as employment lawyers. In our last episode, we were joined by Chris Dobson, who's a partner in our corporate team. Chris looked at the different types of corporate acquisition and what a typical acquisition process looks like. In this episode, we're going to take a closer look at the employment aspects relating to these different types of acquisition and how the employment issues differ between them. I've been speaking with Natalie Wood. Who is an associate solicitor in our employment team an works very closely with me on these acquisitions. To start, Natalie reminded us of the different types of acquisitions that Chris spoke about in the last episode.

Natalie Wood: 0:48

So, starting with a share purchase, simply put, that's where a buyer or buyer's take over the ownership of a company by acquiring its shares from the company's existing shareholders. In this type of transaction a buyer takes over everything, so the good, the bad and the ugly, so all assets, obligations and liabilities of the company that they're acquiring. So one way to think about it is that the company is a box of biscuits and inside that box there are different biscuits. Some are nice, others not so much. In a share sale, the buyer buys the box including all the biscuits inside it, whether they like them or not.

Katie Harris: 1:27

I love that analogy, Natalie. That makes it so clear. What about an asset purchase?

Natalie Wood: 1:34

An asset purchase, conversely, is where the assets of the company are acquired. So, rather than the company itself, such assets could include equipment, inventory, real estate contracts. So in these types of transactions, purchases can elect what assets they wish to purchase and which that they don't want to purchase. So assets that are not bought or sold under the terms of a transaction just simply remain with the seller Right.

Katie Harris: 2:01

So thinking back to our box of biscuits, analogy which I think is fab in an asset sale, the buyer doesn't buy the box. Instead, they select which biscuits out of the box they want to buy and then they just leave the others and the box behind.

Natalie Wood: 2:17

Exactly so, fairly different models of acquisitions, and you could see why the position of a business or a company may inform a buyer's decision as to whether they want to buy the company's shares or whether it just wants to buy a particular asset or biscuit, or biscuits from the business instead. So from an employment perspective, I think obviously there are some differences between the two types of transactions In your view. What do you think these are?

Katie Harris: 2:45

So I think the box of biscuits analogy is really helpful, actually. So the key difference is that under a share sale, as you've just beautifully described, the buyer is acquiring the entire company, so including all of the employees sitting within that company. But that also means that it's acquiring all the rights, liabilities and obligations associated with those employees, and this is the important bit not just the employees that are currently in the business, but potentially all former employees and future employees. It's literally, as you say, buying everything relating to those employees, worts and all. But with an asset purchase, the position's quite different, and the main reason for that is because of a piece of legislation which I think we briefly touched on it in the previous podcast, but this piece of legislation is called the Transfer of Undertakings, protection of Employment Regulations 2006, affectionately known as TUPE, and in most cases in most not always, but in most asset purchases TUPE will apply, and this is quite a big difference between the two.

Natalie Wood: 3:56

And so what would it mean if TUPE were to apply?

Katie Harris: 3:59

So TUPE is really complicated.

Katie Harris: 4:01

Now, I think it's fair to say that it's not everyone's favourite piece of legislation. But essentially TUPE does does when it does apply which, as I said, will be in most asset purchases its whole purpose is to protect the employment of any employees who are employed within the business or that part of the business that's being acquired by the buyer. And the primary way that it does this is by applying what we call an automatic transfer principle. And essentially what this does is that it automatically transfers the employment of any of those employees engaged in that business to the buyer, and that happens whether the buyer wants it. So the buyer might not want a whole bunch of employees, but you know, TUPES applies, the buyer will be getting them, and equally, it doesn't matter if the employees don't want it. It happens automatically and by operation of law. And of course, it's not just the employees that will transfer to the buyer. It will also be the majority not all, but the majority of the rights, liabilities and obligations associated with them. In contrast to a share sale, however and again this is an important difference the buyer is only going to be inheriting those rights, liabilities, obligations relating to the employees that are transferring, so say, for unlimited circumstances, the buyer won't inherit any rights or liabilities relating to former employees or indeed any employees who are remaining with the business. So often if it's just part of a business that's being acquired, you know the other part of the business will stay where it is and all the employees working in that part of the business will stay put, and you know so. It's just a small group of employees that are transferring to the buyer, so it will only be the rights and liabilities obligations associated with those employees, not all employees, which is what we have in a share sale Got you, got you.

Katie Harris: 6:02

The other thing that's really difficult about TUPE and I think where we find most of the problems arising is the restrictions that it imposes on what can and can't be done with those employees. So TUPE does this in two ways. The first thing it does is that any dismissals or termination or employment where the reason for those dismissals is because of or related to the transfer will be automatically unfair, and secondly, any changes to contractual terms again that are being made because of or for a reason related to the transfer will be void. So it makes it really really difficult for either the seller or the buyer to terminate employment or change contractual terms TUPE is involved. Now there is an exception to this, and that's where you know the buyer or the seller whoever it is that wants to make the dismissals or the changes can show that they have an economic, technical or organizational reason, otherwise known as an ETO reason, for either making those dismissals or those changes.

Katie Harris: 7:08

But that can often be quite difficult to do Now. We're going to go on and talk TUPE in more detail, including ETO reasons, in a later podcast, so I won't go into that now. But the bottom line TUPE can make things quite tricky on an asset purchase.

Natalie Wood: 7:25

So what inform and consult obligations are there TUPE then?

Katie Harris: 7:30

Yeah.

Katie Harris: 7:30

So this is another complication of the TUPE that can also make things a bit trickier for buyers or both parties actually on an asset sale.

Katie Harris: 7:43

So TUPE applies, it also imposes an obligation to in every case provide information, so a set of statutory information to employee representatives or recognised trade unions providing a certain amount of details about the transfer.

Katie Harris: 8:02

But in many cases it will also impose a duty to consult with those employee representatives or recognised trade union. And the obligation to consult will arise where either the seller or the buyer envisages taking any measures in relation to any of the employees who are affected by the transfer. Measures in this context is quite wide, so it can even mean just small administrative changes, for instance change to payroll date. So this obligation to inform and consult is something that has to be taken into account, particularly when we're looking at the timings of the transaction, and often I think, as Chris may have touched on in our last podcast, timings can be quite important and often there's a pressure to complete an acquisition by a certain deadline. So it's really important to identify early on why TUPE applies here and do we have to consult and if so, how long is this realistically going to take so that can be built in.

Natalie Wood: 9:01

So quite a lot for a buyer to think about. So under a share sale then, which sounds simpler from a very generic overview perspective? Yeah, Is it right to say that nothing changes for employees?

Katie Harris: 9:18

More or less. Yeah, I think that's yeah. Obviously, with an asset sale, as we just touched on, there is a complete change for the employees because the identity of their employer is changing and there will be a lot of other changes associated with that, whereas in a share sale, obviously, if we imagine that the employees are some of the biscuits, they're sitting within the same box. That box isn't changing, their employer isn't changing, so it really should probably. You know, the day after the acquisition, the employees aren't really going to notice any difference at all. Nothing will change as business as usual. I mean the only slight caveat around that is often on a share sale, the new buyers come in and they might want to take the business in a slightly different direction or they might have a slightly different strategy. So over time they may want to implement changes which can affect employees.

Katie Harris: 10:08

And you know a bit of a warning point here, just because we're dealing with a share sale, you know some people think, oh, that's great, TUPE doesn't apply. But then you know they forget to remember that often you'll have a share sale and, depending on the plans for the business, particularly if the buyer wants to later integrate the target company into their existing business, a TUPE transfer might potentially arise further down the line. So, you know, just because a share sale is much more straightforward on the face of it and business as usual, still important to bear in mind that there could potentially be changes that are affecting the employees that may also have, you know, important legal aspects to consider. So, Natalie, we talked a lot about the sort of different impact from an employment perspective. You know that the different types of acquisition has on the employees and the business. What about the legal process though? I mean, does that change much depending on whether we're dealing with an asset sale or a share sale?

Natalie Wood: 11:11

It does. Yes, so in terms of the DD process, the starting point, for example, will be that in a share purchase, or even an asset purchase, is caveat emptor. So buyer beware. In a share sale, the seller isn't under any obligation to actually disclose to the buyer defects or liabilities of the target company and a buyer has to do its own investigation. That's interesting. Yeah, and with share purchase transactions, DD is a comprehensive exercise and would typically cover everything from employees, pensions, property, commercial contracts, arrangements and tax and from an employment perspective, the inquiries need to cover both former and current employees.

Katie Harris: 11:54

They're quite expensive then for sure, Exactly exactly.

Natalie Wood: 11:58

So, whereas under an asset sale the seller is obliged under TUPE to provide employee liability information which you touched on earlier, and they need to do that 28 days before completion at a minimum.

Natalie Wood: 12:12

And this basically is a set of information about the employees who will transfer under TUPE.

Natalie Wood: 12:18

So it will include things like their name, their age, their job title, if they've got any claims or grievances against the company, and in most cases this information won't necessarily be sufficient for due diligence purposes and wider inquiries will still need to be made.

Natalie Wood: 12:36

These inquiries can, however, be more limited than in a share sale, so a buyer will only be concerned really with the things it's buying. You know, there might be a hundred biscuits in the box, but if they're only buying two biscuits, they'll only want to do DD in relation to those two biscuits, and a buyer, for example, probably won't be concerned with former employees because they won't be transferring. So the primary purpose in DD exercises is to identify areas of risk and to provide a buyer with an overview of the employment costs and general workforce makeup. But, in summary, the key differences are then a share sale the buyer is inheriting everything, and so the DD process, as Katie sort of very correctly said, is more wide and broad ranging, whereas in an asset sale the DD can be more focused and there can also be less certainty over which employees will be inherited by the buyer, so that generally in an asset purchase is one of the first tasks of the DD process to identify which employees are assigned to the business immediately before the transfer.

Katie Harris: 13:42

And obviously that's quite an important thing to do. But you know, is it straightforward to do that? I mean, it sounds like it should be fairly straightforward, but I'm thinking. Well, we know, it's actually not that straightforward, is it?

Natalie Wood: 13:56

Not at all, unfortunately, as sometimes employees who work in the part of the business being acquired are employed by another entity, such as a group, company or third party, and sometimes they might work across different parts of the business, so it isn't clear if they're wholly assigned to the part that's transferring or not. A buyer will be keen to ensure that any key individuals they want to acquire will be transferring. Equally, a seller or probably want to hang on to those people. But just because one party says an individual transfers and another says they don't, it doesn't necessarily mean that's the correct approach. As you mentioned earlier, obviously TUPE is applied by operation of law and an individual transfers by operation of law. So it's sort of almost in some respects, immaterial how you label somebody.

Katie Harris: 14:43

But you know, in particular, reacting for a buyer is really important. Part of the due diligence is to sort of really grapple with these different issues and undertake thorough enquiries so we know who's in scope. Yeah, and that could be quite tricky, particularly when we're dealing with employment status issues as well, because TUPE only applies to employees perhaps workers, and I think the employment status definition is a bit broader than the normal under TUPE but it doesn't apply to self-employed contractors.

Natalie Wood: 15:16

Yeah. So determining whether an individual is an employee, worker or a contractor can be a bit tricky, and it's not always enough that somebody is simply called a worker or an employee, or indeed a contractor. You need to sort of look at what's actually happening on the ground. So what are their benefits? How do they work? What the level of control is there All of this fun stuff. And where individuals are identified as contractors, buyers need to be mindful that they could in fact be employees or workers and therefore a risk that they could transfer under TUPE. So when dealing with asset sales, it isn't just about identifying individuals transferring. One of the other things to consider is to identify particular rights and liabilities that will transfer under TUPE.

Katie Harris: 16:01

Yeah, that's absolutely right. So we'll see in the due diligence process and the most important thing is to sort of identify potentially who's transferring or who might be in scope of transferring. But once we've kind of got a handle on that, particularly when we're acting for a buyer, we're also going to be concerned about what rights and liabilities are transferring with those employees. Now I touched on it at the beginning In most cases all rights and liabilities will transfer, but there are certain things that don't transfer and it's trying to identify what our buyer is inheriting and what they won't be inheriting. So, for instance, we know under TUPE that contractual rights will transfer. So if an employee has a contractual right to a particular salary, for instance, that contractual right will transfer, which sounds straightforward, but actually sometimes there can be huge question marks over the extent to which something is a contractual right.

Katie Harris: 16:59

So bonus schemes are a typical one. Is there a contractual right to a particular bonus? Is that right discretionary? If it is discretionary, what is the extent of that discretion? So these are all things that we need to look at and try and identify. Another particular issue that frequently arises is in relation to pensions, and the application of TUPE in relation to pension schemes is a really complex area of law but as a sort of a high level overview, generally speaking, benefits relating to old age survivors or in validity under an occupational pension scheme won't transfer to the buyer under TUPE, but certain other rights and benefits under an occupational scheme. That's really interesting.

Katie Harris: 17:44

Yeah, it's interesting and it's a very difficult area, but it's obviously an area of potentially really high liability for the buyer, and so it's something that you need to be across really well as part of your dd process. Similarly, there are some rights that do transfer because they're contractual rights, but the buyer might not actually physically be able to provide them. So an example of that is rights in the existing employers' share incentive scheme. That's a contractual right that the employees have, so it will automatically transfer to the buyer under TUPE, but the buyer can't physically do it.

Katie Harris: 18:24

The buyer can't decide to allot shares in the old company to the employees, so that's a tricky one to navigate as well. And then, finally, a buyer will also want to understand and compare the existing terms and conditions, rights and benefits with the employees' inheriting, with this existing workforce to see whether it needs to make any changes. And changes could range from a simple change in payroll date, so the existing workforce might be paid on the end of the month. The workforce that the buyer is inheriting might be paid mid-month and that might be difficult to square off with payroll, so we might need to equalize those dates out Could extend to more extensive changes such as to holiday allowance or pension provision. I mean, I think there's a common word that's used to describe those kind of changes, which is harmonization.

Katie Harris: 19:18

The buyer will understandably want all of its employees to be on the same terms and conditions, because that makes life easy for administrative and payroll reasons. So you know, and it's really, really important to identify, or for the buyer to identify, whether these changes need to be made early on in the process. And that's because for the reasons we've already discussed, and that's largely the implication of TUPE, because first of all we need to work out whether these changes or the buyer can make these changes legally. And secondly because the buyer you know if it is going to make any changes. These will likely be measures and the buyer will have an obligation to a inform the seller under TUPE that they intend to take those measures. But also you know that will need to be the subject of consultation with the transferring employees which needs to be built into the timeframe. So really important that we get you know, really grapple with these issues and identify these things very early on in the DD process.

Natalie Wood: 20:22

So it's sort of almost a looking at the current state of affairs and also with the forward thinking lens, really sort of that.

Katie Harris: 20:30

Absolutely, yeah, yeah, and that's really important to know your client, because you need to not just you know you're not in a bubble just looking at this particular acquisition. You need to understand the future direction as well and what that what you're, if you're acting for a buyer, what, what their intentions are and plans for that business, what's important to them, what isn't important to them, so that you can properly advise them.

Natalie Wood: 20:51

So moving on to sort of a separate part of the transaction but obviously all together the SPA or the APA, obviously depending on the type of transactions. So in a share purchase we'll have a share purchase agreement and in an asset purchase we'll have an asset purchase agreement. So as employment lawyers, we get involved with marking up warranties and indemnities or drafting new warranties and indemnities in these types of documents. So once we've gone through the DD process and we've identified the key areas of liability, how would we approach an APA versus an SPA or vice versa, depending on the type of transaction that we have?

Katie Harris: 21:33

There are differences again which reflect the different nature of the transactions. Generally speaking, however, the goal is the same for both, particularly from the buyer's perspective. It's to manage an apportion risk that we've identified through the DD process. But in a share sale it's traditionally only acceptable to include indemnities in a share purchase agreement where we've identified very specific liabilities and risks. And I think Chris talked about in the last podcast the importance of both sides being well advised and the importance of having early and sufficient information so that that advice can be commercial and pragmatic. Just because you've identified a risk there doesn't always mean that we're instantly going to fall onto an indemnity. It's about understanding the nature, the level of the risk and the relevance of that to your particular client will help you provide that advice of is this an indemnity that we really need, or can we take a more pragmatic approach here and perhaps deal with it in a different way, through warranties?

Natalie Wood: 22:43

Or for example, a pre-completion obligation on the seller Exactly.

Katie Harris: 22:49

Once we've identified a liability, there are lots of different ways potentially of dealing with it that don't always need to result in an indemnity. Obviously, everyone wants these acquisitions or transactions to go ahead and complete, and if we're throwing up barriers in the way and asking for indemnities unnecessarily, that's going to be problematic. So it is so important to be commercial about this, whilst obviously protecting your client. In contrast, under an asset purchase, it is much more common to have indemnities, and this is largely again because of TUPE. TUPE obviously, as we've already discussed, imposes certain obligations on the parties, and the interesting thing TUPER is that, for instance, with information and consultation, each party so the seller and the buyer has an obligation to inform and consult with their own employees.

Katie Harris: 23:42

However, the liability TUPE is joint and several, so the buyer could potentially be liable for failings of the seller and vice versa, and so it is almost standard practice nowadays to have indemnities in the APA. That kind of reverses and equalizes the operation of TUPE, and what that might look like is the buyer will indemnify the seller for its failings TUPE and likewise the seller will indemnify the buyer for any failings caused by its fault TUPE as well. So the starting point normally in an asset purchase is it's much more acceptable and common practice to have indemnities in there. But we will go on and talk in much more detail about the use of warranties and indemnities and from an employment perspective and typical ones that we come across and how they're used to a portion risk, in one of our future podcasts.

Natalie Wood: 24:41

So it's all really interesting stuff and we've spent a lot of this podcast talking TUPE and talking about the differences in a share purchase and asset purchase. In our next podcast we are going to delve deeper into the interesting area of TUPE, so namely what it is I know we've touched on that today but when it applies and how it will impact the employment aspects of an asset acquisition.

Katie Harris: 25:11

That was Natalie Wood, Associate Solicitor in the Employment Team at Boys Turner and, as Natalie said, the next episode will be all about TUPE. So really helpful for anyone who's looking at dealing with asset purchases, because it's a very important part of the process to understand. Just subscribe or follow the podcast and you'll be able to listen to the episode as soon as it is available. Thank you and goodbye.