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 (“M&A”).  

Our goal is to equip HR professionals with the essential information they need to know when they are involved in the sale or purchase of a business. This will enable them to quickly get up to speed and identify any potential employment or immigration law issues that may arise during the negotiations. M&A is not always familiar territory for HR professionals so we hope our short guide will be a useful starting point.

Whilst the UK’s M&A activity declined in 2023, various consulting firms have predicted there may be an increased appetite for deals in 2024 and beyond. The predicted uptick in M&A activity is largely due to stabilising economic conditions and other factors, such as businesses needing to acquire new technology capabilities given the rise of Generative AI. Against this backdrop, M&A deals are a means for businesses to acquire essential skills, capabilities and intellectual property at speed.

We discuss the particular issues facing HR in the context of M&A activity below.

In this article, we cover:

1.    How might the sale of a business be structured and what impact does this have on the employees?

2.    What are the consequences of choosing an asset sale instead of a share sale?

3.    What protections does TUPE confer on the employees?

4.    If TUPE applies, what liabilities transfer to the buyer?

5.    If TUPE applies, to what extent might an employer still be able to change terms and conditions?

6.    When assets are being bought from a company in administration, does TUPE still apply?

7.    What paperwork is involved in the transaction?

8.    Generally, what steps need to be taken by the HR team in relation to a corporate transaction?

9.    What about where the buyer or the seller is a partnership and not a company?

10.   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.

–       In a share sale, the buyer purchases the shares of the target company from the seller. This means that the target company becomes a subsidiary of the buyer. However, for the employees of the target company, nothing changes. The target company will remain their employer and their contract terms and any liabilities will not be affected. Therefore, it will be business as usual for the employees. The only change that occurs on the date of the acquisition is the ownership of the company that employs them. However, the new owner may have plans for changes in the future.

–       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 challenging economic conditions 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 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 who would otherwise be “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 are the employee protections provided by TUPE?

  • 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 (“ETO”): 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.
  • 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. Currently, businesses with fewer than 10 employees may in certain circumstances be able to consult with employees directly. For TUPE transfers that take place on or after 1 July 2024, where there are no existing employee representatives already in place, companies will be allowed to consult directly with employees themselves if they involve:
  • a small business (defined as employing fewer than 50 employees); or
  • any size of business undertaking a small transfer (defined as fewer than 10 employees).
  • 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, what liabilities transfer to the buyer?

If TUPE applies, all the seller’s “rights, powers, duties and liabilities under or in connection with” the transferring employees’ contracts pass to the buyer. In essence, the buyer steps into the seller’s shoes and assumes rights and liabilities in respect of all the employees who transfer. In summary, this means the following key liabilities will transfer:

  • Contractual and statutory employee benefits, such as holiday pay, medical and permanent health insurance, bonus or commission schemes, profit share schemes, maternity schemes and redundancy schemes; and
  • Any acts or omissions of the seller before the transfer in respect of the transferring employees are treated as having been done by the buyer. Therefore, employees can bring claims against the buyer for acts or omissions by the seller before the transfer.

Interestingly though, the EAT recently decided that liability under the Equality Act 2010 does not transfer to the buyer unless the claimant also transfers. In Sean Pong Tyres Ltd v Moore [2024] EAT 1 the EAT held that, where a claimant brings a harassment claim against their former employer, and the perpetrator then transfers to a new employer under TUPE (but the claimant does not), the claimant’s employer remains liable.

The above demonstrates why proper due diligence by the buyer is key to ascertain exactly what accrued liabilities and obligations it is acquiring. It is also critical that the buyer obtains appropriate indemnities from the seller in respect of all pre-transfer liabilities.

5.   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 [2020] ICR 1517, in which directors who were selling a business inserted very favourable remuneration clauses into their contracts prior to the transfer of their business. These changes were also void and did not have to be honoured by the purchaser. 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. 

6.   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 case, which are primarily designed to make the failing business more attractive to a prospective buyer. 

Firstly, 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 (“NIF”). This includes:

  • Arrears of pay (up to eight weeks);
  • Holiday pay (up to six weeks);
  • Pension contributions;
  • Statutory notice pay;
  • Statutory redundancy payment; and
  • Unfair dismissal basic award.

An employee’s pay is subject to a statutory cap for these purposes (currently £643 per week until 5 April 2024). The buyer will only be liable for pre-existing debts which are not covered by the NIF, or which exceed the statutory limits. A prospective buyer should therefore seek to ascertain the liabilities that fall outside the NIF and the statutory limits. 

Secondly, there are less stringent rules relating to variations to terms and conditions. The seller, insolvency practitioner, or buyer can make changes to terms and conditions of employment provided they are made with the intention of ensuring the survival of the business. It is recommended that those making the changes should ensure the underlying rationale for them is recorded in writing.

The ability to make such changes can be a very useful tool for a buyer. For example, where the employees who will transfer are employed on terms which may be putting a financial strain on the business, the buyer could seek to lower salaries or reduce employee benefits.

The changes must be agreed with “appropriate representatives”. If the employer recognises a trade union, they must be union representatives. If the employer does not recognise a union, they may be elected employee representatives. Where there are no union representatives, the employer must give a copy of the agreement with the proposed changes to all employees who are impacted and any guidance that would reasonably be needed to understand it. The employee representatives must also sign the agreement.

7.   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:

  1. a share purchase agreement (“SPA”) for share sales or an asset purchase agreement (“APA”) for asset sales
  2. 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.   

8.   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, or employees themselves, 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 owns (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 of examples of issues that may arise.

9.   Considerations 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.

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 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 to 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.


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