Employment law issues for share acquisitions

When ownership of a business changes hands as a result of one business buying the shares of another, the seller remains as the employer. But where the sale of a business takes place by way of an asset purchase that falls within the scope of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), which involves a change in the employer of the seller’s employees, special protections are afforded to the seller’s employees and additional obligations are imposed on both buyer and seller. 

Due diligence

It is important for a buyer to fully understand a wide range of information relating to a seller’s workforce. This is typically achieved by sending one or more detailed lists of due diligence questions. Relevant information relating to the seller’s workforce includes the following: 

Who are the employees?

It is critical for buyers to obtain a detailed understanding of who is employed (or engaged) by the seller’s business and how they may be impacted by the acquisition.

Employment terms

All relevant employment terms should be fully understood. Key terms typically include (depending on the buyer’s “materiality threshold”, if any) those relating to notice periods, redundancy entitlements, salaries, bonus and commission arrangements, health insurance, permanent health insurance, share schemes and pensions. Understanding the seller’s employment terms will help a buyer to assess the cost of “honouring” those terms and to and identify, if there are any funding deficiencies.

Who are the key employees?

Buyers typically want more information relating to key members of staff or management, who are more likely to have enhanced entitlements, including entitlements that may be triggered by the acquisition itself or on dismissal. Such additional information typically includes information relating to notice periods, garden leave and post-termination restrictive covenants (in each case to help understand any business related risks and the related contractual protections that are in place and associated costs relating to any post-acquisition dismissals of senior employees) and details of any enhanced entitlements, for instance “deal bonuses”, that may crystallise upon completion. 

Redundancy/severance arrangements

Buyers should request details of any redundancy or severance related policies or schemes or individual entitlements, to understand any additional costs, should they choose to make redundancies following completion. 

Employment claims

Buyers should have a full understanding of any existing or threatened legal proceedings by current or former employees, or indeed employee representatives, to understand what financial and non-financial litigation related risks may crystallise following completion.

Other risks

Other areas of risk that should typically be fully understood relate to any history of accidents in the workplace, any health and safety prosecutions or latent prosecutions or claims, any investigations by the Equality and Human Rights Commission and any history of bribery or corruption.

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