Please find a 2024 updated guide here.
This short guide is for any HR professional or corporate leader who is asked to assume responsibility for the people side of a proposed merger or acquisition.
What are the most important things for HR to know when they are involved with either the sale or the purchase of a business? M&A is not always familiar territory for HR, and the aim of this short guide is to help readers get up to speed quickly and spot the employment and immigration law issues that arise in the course of the negotiations.
We expect merger activity to be on the rise in 2021 as the business world adapts to the changes brought about by Covid-19. For some businesses, the pandemic and a more remote way of life have provided conditions for increased demand and higher profitability (think Zoom, Ocado, Peloton and numerous others), whilst many other firms are struggling to stay afloat before lockdown restrictions are eased. The uneven split between winners and losers will no doubt fuel merger activity.
We discuss the particular issues facing HR in the context of M&A activity below, including the very important issue of what to do where foreign national workers and sponsor licences are involved.
In this article we cover:
- How might the sale of a business be structured and what impact does this have on the employees?
- What are the consequences of choosing an asset sale instead of a share sale?
- What protections does TUPE confer on the employees?
- If TUPE applies, to what extent might an employer still be able to change terms and conditions?
- When assets are being bought from a company in administration, does TUPE still apply?
- What paperwork is involved in the transaction?
- Generally, what steps need to be taken by the HR team in relation to a corporate transaction?
- What about where the buyer or the seller is a partnership and not a company?
- Are there employment law issues arising from Covid?
- What are the key and fundamental issues to consider where some of the employees are non-UK nationals working on sponsored visas?
The team at Fox Williams is happy to assist with any of these issues.
1. How might the sale of a business be structured and what impact does this have on the employees?
Broadly speaking, there are two ways of structuring the sale of a business: a share sale or an asset sale.
- A share sale is where the buyer acquires the shares of the target company from the seller. This means the target company will end up as a subsidiary of the buyer. As a result, for the employees of the target company, nothing changes: the target company remains their employer and their contract terms and any liabilities will not be affected, so it’s very much business as usual so far as the employees are concerned. The only change on the date of the acquisition is the ownership of the company which employs them, although the new owner may of course have all sort of changes in mind for later on!
- In an asset sale, the buyer only acquires certain assets which may be tangible (such as shops, factories, plant and machinery) or intangible (such as brand names and other intellectual property). The buyer can choose which assets of the business it wishes to acquire and acquires these from the seller instead of purchasing the shares in the company owning the assets. This allows the buyer to leave behind certain assets and liabilities of the seller. Owing to the pandemic we are likely to see a rise in asset sales (as opposed to share sales) as investors pick out only those assets they wish to acquire leaving behind onerous leases and bad debts. Some assets will be bought from administrators appointed over an insolvent company.
2. What are the consequences of choosing an asset sale instead of a share sale?
Where a transaction is structured as an asset sale, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) may operate to transfer the employees from the seller to the buyer.
TUPE will apply where the assets sold to the buyer comprise the whole or part of an “undertaking” or business (essentially a grouping of economic resources such as a shop or factory) which retains its identity following the transfer. Continuing with the example of a shop, if a new company acquires the premises, stock and the infrastructure such as cash registers for the purpose of running the shop itself, then there will have been a transfer for the purposes of the TUPE Regulations.
The main effect of this is that the employees who were employed at the shop will automatically transfer to the new owner. This is the effect of the TUPE Regulations which ensure that employees are not “left behind” while the buyer cherry-picked the assets it wanted.
Those who work elsewhere for different parts of the business will not have their employment transferred automatically and will remain employees of the seller.
The employees whose employment transfers to the buyer will also enjoy other very significant protections, which we describe below.
Conversely, where the acquisition takes effect as a share sale, TUPE will not apply because the identity of the employer (the company whose shares are being acquired) remains the same.
3. What protections does TUPE confer on the employees?
- As described above, the employees who are assigned to the undertaking or part of an undertaking being acquired will automatically transfer to the buyer on their existing terms and conditions of employment.
- Both the seller and the buyer will not generally be permitted to make changes to the employees’ contracts if the reason for the change is the transfer. This can impede buyers from trying to align (“harmonising”) the employees’ terms and conditions of employment with their existing employees’ terms and conditions.
- An employee who is dismissed because of the transfer or a reason connected to it is automatically unfairly dismissed unless the dismissal can be justified by reference to an economic, technical and organisational reason: see question 4 below.
- Where substantial detrimental changes to an employee’s terms and conditions of employment are made as a result of the transfer, employees can resign and will generally be treated as having been unfairly dismissed by virtue of TUPE.
- Both the buyer and the seller are required to inform recognised trade unions or elected employee representatives of any affected employees of the transfer in good time prior to it taking effect and, if “measures” are proposed by the buyer (i.e. some form of change to the employees’ arrangements), the buyer and the seller must consult their respective employees in good time prior to the transfer taking effect. Businesses with fewer than 10 employees may in certain circumstances be able to consult with employees directly.
- The buyer has an obligation to inform the seller of any measures it proposes to take to enable the seller to consult with the affected employees who are to transfer to the buyer.
- The seller is required to give the buyer a prescribed list of information about the employees called “employee liability information” at least 28 days prior to the transfer.
4. If TUPE applies, to what extent might an employer still be able to change terms and conditions?
As mentioned above, the general rule is that changes to terms and conditions that occur by reason of the transfer are void. However, there are some exceptions.
The main exception is where the changes are made for an “economic, technical or organisational” (“ETO”) reason “entailing changes in the workforce”. A reason relating to profitability (economic), a production processes (technical) or governance structure (organisational) all potentially apply but they must also entail changes in the workforce, such as a reduction in the numbers or possibly functions of employees.
In practice, save where there is a restructuring or redundancy situation, it will be difficult for employers to change terms and conditions of employment without risking invalidation. This said, there are steps that an employer can take to disassociate the changes from the transaction and thereby minimise the risk of the changes being void.
Some changes may be capable of being made within the existing terms of employment: for example, a mobility clause in the contract which allows the employer to require the employee to work in a different location can still be used as a means of changing the place of work.
It is not only changes to the employees’ detriment which may fall foul of this principle. It can also apply to very favourable terms inserted into employment contracts as a benefit which arises upon the occurrence of a transfer. This arose in the recent case of Ferguson v Astrea Asset Management Limited  ICR 1517, in which directors of a property asset management business inserted very favourable remuneration clauses into their contracts prior to the transfer of the business to the transferee. These changes were also void and did not have to be honoured by the transferee. This seemingly went against previous case law and Government guidance which suggested that entirely beneficial changes to terms for employees would be permitted under TUPE and not invalidated.
5. When assets are being bought from a company in administration, does TUPE still apply?
Where assets are being bought out from a company in administration, TUPE can still apply. However, there are more relaxed rules in such cases. For example, certain pre-existing debts relating to the employees will not be passed onto the transferee and will instead be paid by the Secretary of State from the National Insurance Fund.
There are less stringent rules relating to variations to terms and conditions: changes are permitted where they are made with the intention of ensuring the survival of the business, provided other conditions are met such as ensuring that representatives of the employees are involved.
6. What paperwork is involved in the transaction?
In any M&A transaction, there will be a large number of documents governing the transfer of the target company or assets from the seller to the buyer, all of which are aimed at ensuring that the buyer knows what it is getting and that both parties have allocated the risks involved between them.
Two of the key documents will be:
- a share purchase agreement (“SPA”) for share sales or an asset purchase agreement (“APA”) for asset sales
- a disclosure letter
The reason why the documentation is invariably long and detailed is because of the legal starting point for all transactions is caveat emptor (let the buyer beware). This means, in the absence of any contractual protections, the seller is not under any duty to disclose anything unusual or defective about the target company or assets. The buyer will therefore need to undertake extensive enquiries about the state of the business or assets it is acquiring, known as “due diligence”, to minimise the risk of nasty surprises after the purchase is completed.
In addition to the due diligence exercise, the buyer will also want the protection of warranties which will be set out in the SPA or APA. Warranties are statements given by the seller that certain facts or states of affairs exist. These include facts relating to the employees of the target business.
The seller must ensure that the warranties are true and will try to restrict their scope, whilst the buyer will wish to ensure it obtains reassurance on all of the key facts relating to the employees.
The disclosure letter is an opportunity for the seller to qualify any general warranties it has given.
7. Generally, what steps need to be taken by the HR team in relation to a corporate transaction?
The HR team are likely to be called upon to assist with the warranties in the SPA or APA relating to the employees. These warranties will encompass matters such as what types of contract the employees are on, what the terms of the contracts are (e.g. what they are paid, their hours of work and their notice periods) and whether there is any pending litigation from any of the employees. The benefit to the buyer of being given a warranty is that it can take legal action (e.g. sue for damages, subject to limits on liability in the SPA or APA) if the statements given by the seller turn out to be untrue.
If the sale is an asset purchase to which TUPE applies, HR will need to ensure that any information and consultation obligations are complied with (as set out above) in good time before the proposed transfer is expected to happen and that the employee representatives are consulted on any measures proposed.
What due diligence should the HR director of the buyer undertake prior to the purchase of a company or an assets purchase?
As a bare minimum, the HR director will wish to see a list of all of the employees with key particulars of their employment terms and benefits which apply. The seller should provide a warranty that the information provided is true. Generic statements about employee terms and conditions will in most cases be qualified by caveats in the disclosure letter which will highlight the specifics of each worker, including those who are absent (e.g. due to long-term sickness), and also of any litigation brought by any current or former employees.
Other HR and employment issues which may commonly arise in the due diligence exercise include:
- where the employees are engaged on different forms of contracts: this will make legal due diligence more difficult as it will involve the consideration of a number of different contracts, rather than the commercial terms applicable to each employee or class of employee. The buyer can take some comfort from seller warranties in this situation but this should not be a full substitute for reviewing the underlying contracts
- another problematic issue arises from holiday pay where (owing to changes in the law) employees may be owed back holiday pay due to its not having been calculated correctly (for example if the seller has not taken account of overtime or allowances in addition to basic salary)
- where the purchaser is acquiring just part of a business, meaning TUPE will apply, it may not be clear which employees will automatically transfer to the buyer. For example, if a company is selling Hotel A, but not another hotel which it owned (Hotel B), but the cleaning staff worked on both sites, are they caught by TUPE? The legal test is who is “assigned” to the transferring undertaking but sometimes that is just not clear, meaning that the parties need to agree commercially who is to transfer in the APA and to apportion liability for any claims by the employees.
These are just a few examples of some issues that may arise.
8. What about where the buyer or the seller is a partnership or LLP and not a company?
Where the seller is a partnership, the transaction will be an asset purchase and TUPE will apply to the transfer of the employees of the business to the buyer.
Where the seller is an LLP the transaction may be an asset purchase or may be an acquisition of the interests of the members of the LLP. A purchase of members’ interests would be similar in terms of transaction structure, to a sale of shares in a company. TUPE will apply in an asset purchase transaction but will not apply in a purchase of members’ interests because the employees will remain employees of the LLP.
Where the purchaser is a partnership or LLP an agreement will need to be reached on which partners in the partnership, or members in the LLP, will become partners or members in the buyer. TUPE does not apply to partners or members who are not employees. The position may be more complicated if some partners can be classed as workers.
Where the purchaser is a company, if the transaction is a sale of members interests in an LLP, the LLP will become a subsidiary of the buyer and an agreement will need to be reached with the selling members on which members the buyer wants to retain with the LLP and which members may leave. For members who remain, they will often become employees and cease to be members. If the transaction is a sale of assets, any partners or members staying with the business will need to become employees of the business. The terms on which the partners or members become employees will be one of the key issues in the transaction.
9. Are there employment law issues arising from Covid?
Yes there are.
Buyers are concerned about the way the business has been run during the pandemic. One of their key areas of concern is how the target business has used the furlough scheme. Has it been used in accordance with the regulations in force at the time? Initially employees could only be fully furloughed and could not work for their employer at all during the time when furlough pay was received from the UK Treasury. This was subsequently changed so that employees can be partially furloughed but accurate records must be kept showing that employees have not worked during their agreed furloughed hours. The penalties for non-compliance can be serious and may be inherited by the buyer.
Some of the target businesses will have been forced to impose pay cuts on employees. Buyers will wish to know that these were carried out in a manner which will not give rise to future claims from the employees.
Accrued holiday pay may also be problematic as many employees have not taken their full holiday entitlement during the pandemic. Buyers will want to understand how much accrued holiday (or holiday pay) is due to the employees.
10. What are the key and fundamental issues to consider where some of the employees are non-UK nationals working on sponsored visas?
Where a business is sponsoring foreign national workers, the key point to remember is that a sponsor licence is not transferable. Therefore, any change in ownership or controlling number of shares will trigger the requirement to obtain a new sponsor licence.
Sponsors involved in a corporate transaction, which can include a takeover, merger / de-merger, and a restructuring, are required by the Home Office to make certain reports and undertake certain actions within a defined and tight timeframe.
Where there has been an immediate change of ownership (either where the business is sold as a going concern or a share sale resulting in the controlling number of shares being transferred to the new owner), the existing licence will be revoked or made dormant, and the new owners will need to apply for a new sponsor licence within 20 working days, unless they already have one. This also applies where sponsored workers are transferring under TUPE. Failure to do so will result in the visas of sponsored workers being curtailed (reduced) to 60 days, meaning these individuals will be unable to continue work for their employer.
The requirement to make certain reports within a defined timeframe applies to all parties involved in a takeover or a merger, including both the entity being taken over and the entity taking over.
It is also important to consider the corporate structure and where the entity will sit within that. In some cases, it might be appropriate to group several entities under a single licence, whilst in others it might be appropriate to obtain separate sponsor licences for each entity.
The key issue to remember however, is that any entity with sponsored foreign workers involved in a corporate transaction will be required to undertake certain actions, make reports and submit a new application within a particular timeframe. From our experience failure to address these issues from the outset can put an entire transaction at serious risk. This becomes even more serious where there are senior sponsored employees. Remember, from 1 January 2021 this also includes EEA nationals. It is therefore crucial to flag and address these issues as soon as possible so that they do not cause any unnecessary complications down the line.
If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.