International Private M&A Some U.K. Labor and Employment Law Issues. Charles Wynn-Evans

Transcription

1 International Private M&A Some U.K. Labor and Employment Law Issues A Briefing by Dechert LLP in cooperation with the Association of Corporate Counsel Dechert LLP 30 Rockefeller Center New York, NY June 16, 2004 Charles Wynn-Evans Copyright 2004 Dechert LLP. All rights reserved. This presentation is for educational and illustrative purposes only and should not be construed as legal advice. Materials should not be considered as legal opinions on specifi c facts or as a substitute for legal counsel.

2 xc In some important respects, strategic and financial acquisitions in the U.K. and France are not foreign at all to those experienced with making acquisitions and investments in the United States. The differences, however, are more than quirks they can derail a transaction. On June 16, 2004, Dechert LLP, in cooperation with The Association of Corporate Counsel, hosted a seminar in our New York office titled International Private M&A The Differences that Can Become Deal Breakers. The panel featured Dechert lawyers James Croock (London); Charles Wynn-Evans (London); Jonathan Schur (Paris); and Paul Gluck (New York) along with general counsel John Osborn of Cephalon, Inc. and Lisa Palumbo of EDO Corporation. With a focus on corporate and employment issues, the panel addressed some key distinctions in U.S., U.K., and French law when running private cross-border M&A deals. The following information concerns U.K. labor and employment law issues that should be kept in mind when running international private M&A transactions. Should you have any questions or like further information, please contact: Charles Wynn-Evans Partner Dechert LLP London charles.wynnevans@dechert.com Charles Wynn-Evans is a partner and head of the employment practice in the London office of Dechert LLP. His work covers a broad range of employment-related areas, acting for both employers and senior executives. Charles is experienced in the employment aspects of corporate transactions. He deals with matters of redundancy, unfair dismissal, wrongful dismissal, sex and race discrimination, industrial action, boardroom disputes, restrictive covenants, agreed terminations, tax issues and employment-related litigation, including employment tribunal advocacy.

3 International Private M&A Some U.K. Labor and Employment Law Issues 1. Introduction This note summaries some key U.K. labor law considerations to be borne in mind in relation to a private crossborder acquisition and in particular: (a) (b) identifying which employees work in the company or business to be acquired and are therefore inherited by the buyer; and ensuring compliance with applicable information and/or consultation obligations. Termination and liability issues also need to be borne in mind but are not addressed in detail in this note. 2. Share Sale Or Business Transfer? 2.1. Share sales On a share sale the sale will not affect the employment contract and the target s employees will remain employed by the target both before and after the transaction. No formal offer of employment will be necessary, nor will new contracts of employment be required. However, consideration will need to be given to the consequences of the transaction in terms of whether any action is required to address employee participation in seller group benefit arrangements, (for example, share option or pension plans). 2.2 Business sales In the EU, employees are afforded additional protection in the event that the business in which they work transfers by the EU Acquired Rights Directive, which is implemented into U.K. law by the Transfer of Undertakings (Protection of Employment) Regulations 1981 ( TUPE ). Employees automatically transfer to the buyer and no formal offers of employment are necessary. Section 4 of this note addresses this complex legislation in more detail. 2.3 Unassigned employees On a share sale, some key employees may not be employed by the target company and so will not be inherited by the purchaser of the shares. In the context of a business sale, employees may spend only some of their time working for the business being acquired and other time working for other parts of the business. It is important that the issue of the employment of such employee is addressed before the acquisition takes place to ensure that they end up in the correct position. 2.4 Consultation No information or consultation obligations arise in relation to a share acquisition under U.K. law in general, although a collective agreement with a trade union may require it. Employee consent to the transaction is not required. page 1

4 2.5 Employment protection - business transfer Any dismissal of a relevant employee either before or after a business purchase, which falls within the scope of TUPE will be automatically unfair where the reason (or principal reason) for the dismissal is the transfer, or for a reason connected with it. There is an exception where the reason for the dismissal is an economic, technical, or organisational reason entailing changes in the workforce (an ETO reason). An ETO reason is a reason which relates to the running or conduct of the business including, for example, redundancy situations. Even if an ETO reason applies, a dismissal may nevertheless be unfair, pursuant to the U.K. s unfair dismissal legislation (such as the company not having following a fair procedure). The buyer will normally become liable for dismissals made by the seller before the business purchase if the dismissals are transfer-related. Unfair dismissal can lead to awards of compensation to eligible employees of up to 63,100 (subject to issues of proof of loss, litigation, etc.). 2.6 Employment Protection - Share purchase A share purchase does not provide specific additional employment protection against dismissal as there is no change in employer. The only change is to the identity of the shareholders of the company. If dismissals occur, the usual U.K. law claims and remedies apply. These include wrongful dismissal (i.e. breach of contract) and unfair dismissal. 3. Due Diligence The type of information that will be required in relation to the employees during the due diligence process will be similar irrespective of whether such employees are based in the U.K. or U.S.: service agreements for directors and contracts of employment for key employees and employees earning in excess of a specified amount per annum (the amount usually depending on the type of business and the location), in addition to consultancy agreements; full details of employees (anonymised to avoid an infringement of the Data Protection Act 1998) such as length of continuous employment, salary, position, place of employment notice periods; details of pension schemes, employee benefit schemes, bonus and incentive schemes and severance policies; details of individuals working for the target but not employed by it (i.e. head office services, consultants or board members who are not employees); details of any outstanding or potential claims by employees or ex-employees; details of any unions recognised by the target and, in the UK, any works councils, or other forms of organised employee representation, including details of any agreements (such as collective agreements), arrangements and codes of practice; and history of industrial relations and disputes in the recent past. 3.4 Warranties Standard form employment warranties for both the U.K. and U.S. will cover matters such as: full particulars of terms and conditions for directors and employees including remuneration, benefits and any other contractual agreements that have been disclosed; page 2

5 no changes having been made to contractual terms of employment; no agreements/arrangements being placed with unions, or full details of any such arrangements; no amounts being owed or promised to present or former directors, employees, or consultants other than remuneration; no claims being threatened or pending against the company on the part of present or former employees, directors, consultants, or third parties; confirmation that the company has complied with all relevant employment legislation and collective bargaining agreements; full details of benefit and incentive schemes provided; there are no outstanding offers of employment or consultancy; that no employees are working out their notice period; no key employee is likely to or entitled to terminate his employment as a result of the relevant acquisition; and 4. Indemnities there is no one on secondment, maternity leave, or absent on grounds of disability, ill-health, or other leave of absence. In relation to a transaction to which TUPE applies, the buyer will normally seek indemnities covering: liabilities with respect to transferring employees which have arisen prior to transfer and which as a matter of law are inherited by the buyer; and 5. TUPE 5.1 Introduction employees who actually do transfer to the buyer but who were not disclosed - this enables the buyer to be covered for termination costs associated with terminating those transferring who were not identified or not intended to transfer. TUPE is the U.K. statutory regime under which employees rights are protected on transfer (whether by sale or otherwise) of the business in which they work from their current employer ( the transferor ) to another person who, as a result, becomes their employer ( the trans feree ). It does not apply to share transfers or acquisitions where the relevant employees remain employed by the company whose shares are the subject of the deal. The main effects of TUPE are threefold: the buyer of a business or undertaking has to take on the seller s employees; consultation with unions or employee representatives is required; and dismissals in connection with the transfer will be automatically unfair unless they fall within certain exceptions. 5.2 What is a Transfer Falling Within TUPE? is a Transfer of Undertaking? TUPE applies where there has been a transfer of an undertaking. This covers not only a sale, but potentially also transactions where there is a change in the person responsible for running the business or undertaking. page 3

6 There are two conditions for a transaction to constitute a transfer with TUPE:- (i) (ii) there must be an undertaking. This can be a business or part of a business; it extends to anything which is an economic entity or could be run as one (including an undertaking which is not in the nature of a commercial venture). It can also extend to cover something which is ancillary to the transferor s business; and the undertaking must transfer. In other words, the operation must be continued or resumed after the transfer by the new employer conducting the same or similar activities and the operation must retain its identity. There are a variety of factors which are relevant in deciding whether a transfer of an undertaking has occurred in any given circumstances: whether buildings and moveable property have changed hands; the value of the intangible assets in the undertaking at the time of the transfer; whether employees have been taken over; whether customers are being taken over; and the degree of similarity between the activities carried on before and after the transfer. However, the question of whether there has been a transfer of an undertaking will be examined by a court or tribunal in light of all the relevant facts and circumstances. It is the substance and not the form which is important. The size of the activity or undertaking is irrelevant No one factor is conclusive and the matter must be viewed as a whole. There is often uncertainty as to whether TUPE will apply to a particular transaction. This has not been helped by a number of conflicting cases. The case law has held that TUPE can apply to the transfer of economic activities carried on by only one person. TUPE has also been held to apply to the contracting in and contracting out of specific services or functions, as well as the transfer of a contract from one contractor to another on a retendering exercise (even where there is no contractual relationship between the original and replacement contractors). In order for TUPE to apply, it is necessary for the undertaking to retain its identity. However the mere fact that it is absorbed into the transferee s existing operations will not of itself avoid the conclusion that TUPE applies (on the basis that the transferee has inherited the responsibility for the particular economic activity in question). 5.3 Consequences of TUPE Those employees who are employed wholly or mainly in the transferred undertaking automatically become employed by the transferee. In their continued employment with the transferee the only change which occurs to the employees terms and conditions of employment is the identity of their employer. In all other respects (save for certain aspects of occupational pension arrangements) they remain entitled to all existing contractual benefits and retain their continuity of employment and other statutory rights. The transferor s rights, powers, duties, and contractual, statutory, and all other liabilities (excluding criminal liability) transfer to the transferee. Also, anything done by the transferor is treated as having been done by the transferee. No detrimental change to an employee s terms and conditions of employment is valid if the operative reason for it is the transfer of an undertaking. An employee cannot waive his right to continue to benefit from his original terms of employment after a TUPE transfer, even if he consents to the change. Thus a salary reduction agreed in connection with a TUPE transfer may not be effective and the employee could claim the original salary even if he has been receiving the new, lower salary for a considerable period. The only exception is where there has been a dismissal and re-engagement. page 4

7 5.4 Which employees transfer? The employees who will transfer pursuant to TUPE are those employed by the transferor in the undertaking or part transferred. The relevant test is whether the employees are wholly or mainly assigned to the part transferred. Put simply, this means examining where the employees habitually work. Factors which point to the part of the business an employee is assigned include the amount of time spent by the employee on one part of the business or another; the value given to each part by the employee; what the contract of employment states the employee can be required to do; and how the cost to the employer of the employee s services is allocated between different parts of the business. The tribunals ensure that the TUPE is not evaded by devices such as service companies or complicated group structures which conceal the true position. Pursuant to TUPE, employees have a right to object to the transfer. Such an objection is treated as terminating the employee s contract of employment and he is not treated as dismissed by either the transferor or the transferee. However, it is clear that the objecting employee still has a right to terminate his or her contract on the grounds that the transfer of the undertaking in which he is involved would entail a substantial and detrimental change to his working conditions and bring a constructive dismissal claim. It is possible, by agreement, to arrange for an employee to stay in employment with the transferor so that his or her employment does not transfer to the transferee. However, for this to be effective it would have to be done by a freely negotiated express agreement. 5.5 Dismissal of an employee in connection with a TUPE transfer The dismissal of an employee in connection with a transfer of an undertaking falling within TUPE will in principle be automatically unfair. The classic example is dismissal of employees to facilitate the sale of a business. Therefore, provided that the employee has completed one year s continuous service, the employee may be able to bring a claim for unfair dismissal in addition to any claim in respect to the applicable notice period. The current maximum compensation for an unfair dismissal is 63, The liability for an unfair dismissal connected with a transfer of an undertaking lies with the transferee only (i.e. the person who has acquired the business). This is the case whether the dismissal is effected before or after the transfer takes place. This automatic unfair dismissal liability can be avoided if it can be established that an economic, technical, or organisational reason entailing changes in the workforce ( ETO Reason ) exists to justify the dismissal. If such an ETO Reason can be established (for example, by way of genuine redundancy situation), then the dismissal may still be unfair, but will be assessed on the normal principles of unfair dismissal law. 5.6 Employees rights upon transfer On a transfer of an undertaking, employees retain all their statutory rights (for example, continuity of employment) and contractual entitlements. However, TUPE provides that, except in respect of early retirement entitlements, employees pension rights do not transfer The transferee inherits any collective agreements which the transferor had agreed with any recognised trade unions in relation to the employees whose employment transfers. 5.7 Duty to inform and consult employee representatives On a TUPE transfer, the seller has a duty to give specified information about the transfer to appropriate employee representatives (and to allow employees to elect representatives if there are none). The seller and the buyer have duties to consult appropriate representatives if either of them envisage taking measures in respect of the employees in connection with the transfer. This will include any proposed redundancies. Failure to comply with these duties renders the employer liable to pay compensation of up to 13 weeks gross pay in respect of each affected employee. page 5

8 5.7.1 Appropriate Representatives Appropriate representatives are either: (a) (b) representatives of an independent trade union (if one is recognised in respect of the affected employees); or employee representatives elected by the affected employees for that purpose. If there is neither a recognised union nor any existing appropriate representatives, employees must be given the opportunity to elect representatives. The followingcons iderations should be borne in mind when providing the opportunity for elections: (a) (b) (c) (d) (e) (f) (g) all affected employees, regardless of length of service or hours, must be given the opportunity to take part in elections; there should be a balance of representation between the various sections of employees; employees ought to be given sufficient time to consider candidates for elections. Employees who are sick or on holiday must also be given the opportunity to take part in elections; it is probably reasonable to limit both the number of representatives and also the choice of representatives, for example, to employees within the relevant organisation; if there is a customary proc edure for elections it should be followed; it should be ensured that elections are held fairly; and so far as reasonably practicable, voting must be in secret and the election should be conducted so as to ensure that the votes are counted accurately. Once elected, employee representatives must be allowed access to the relevant employees and also be allowed accommodation and other facilities that may be appropriate. This will include the use of a telephone and probably the use of an office or some secretarial facilities. Representatives must also be allowed reasonable time off during working hours to perform functions as representative and must not be treated any less favourably because of the performance of the functions of representatives Duty to Inform The seller has a duty to inform appropriate representatives of the following matters: (a) (b) (c) (d) the fact that the transfer is to take place; when, approximately, it will take place; the reasons for the transfer; the legal, economic, and social implications of the transfer for the affected employees. This would cover such matters as: the impact of the transfer on the employees contractual and statutory rights; their pay and prospects; and page 6

9 their pensions, national insurance and place of work. (e) (f) the measures which the seller envisages it will take (in connection with the transfer) in relation to those employees or, if it envisages that no measures will be taken, a statement of that fact; and the measures which the buyer envisages it will take (in connection with the transfer) in relation to those employees. This will include any proposed redundancies and may include loss of pension benefits Duty to Consult If the buyer or seller envisages taking any measures in relation to the transferring of employees, there will be a duty to consult with the appropriate representatives with the purpose of seeking the representatives agreement to the measures proposed to be taken. Information must be given and consultation must begin in good time for consultation to take place. There is no other guidance on the length of time for consultation in providing information. If, however, there are to be collective redundancies - minimum consultation periods are stipulated (see below). In the course of consultations, the employer must consider any representations made by the representatives and reply to those representations giving reasons if any of the representations are rejected. Failure to inform or consult will leave the relevant company open to claims by affected employees for up to thirteen weeks gross pay per employee. The Employment Tribunal will award such compensation as it sees as just and equitable in all the circumstances and there is a special circumstances defence (which is difficult to satisfy) upon which a defaulting employer can seek to rely in limited circumstances. There is, however, no criminal sanction for failing to comply with the duty to inform and consult. page 7

10 Dechert s International Mergers and Acquisitions Practice The internationally recognized mergers and acquisitions group at Dechert LLP represents buyers, sellers, and advisers in planning, negotiating, and executing complex commercial transactions around the globe. With more than 100 lawyers in the United States, the United Kingdom, and continental Europe, the mergers and acquisitions group effectively leverages resources around the world, providing clients with timesensitive, full-service advice on all aspects of a transaction. The 2004 edition of the leading legal referral guide Chambers USA highlighted Dechert s ability to cooperate effectively across its network of U.S. and European offices and cited our group as among the best in the country. Likewise, the edition of Chambers & Partners Guide to the U.K. Legal Profession noted Dechert as being a prime choice for transatlantic instructions. Our practice has also earned top rankings in the latest league tables featured in publications such as Mergerstat, Thomson Financial, and Corporate Control Alert. About Dechert Dechert LLP is a law firm that focuses its strong and deep international resources in four broad areas: corporate and securities, with an emphasis on M&A, private equity, and technology transactions; litigation, with an emphasis on antitrust, securities, IP, and mass torts; finance and real estate, particularly mortgage and structured finance; and financial services. With more than 700 lawyers in 17 offices, we deliver seamless, high-quality legal services to clients worldwide. For more information about Dechert, please visit our web site at xc