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Dec. 24—The most important HR question in cross-border merger and acquisition (M&A) deals is what happens to employees of the company being sold once the deal is done, Donald C. Dowling Jr., a partner at White & Case LLP in New York and an expert in international employment law, said during Bloomberg BNA's recent webinar How to Lead the Employment Law Piece of Global Merger & Acquisition Deals.
Whether or not the seller's employees become the buyer's employees after the deal, their fate must be part of the due diligence, Dowling said: “If you're being asked to do anything, whether it's due diligence or something to do with a post-merger integration or something about a purchase agreement . . . if you don't understand exactly what's going to happen to the seller's employees” and what the local laws are relating to them, “you're not going to be very helpful on the agreement.”
“A lot of times M&A people—and certainly the clients—don't put enough importance on the [personnel] issues,” Dowling said, even though in today's high-tech world, M&A deals are often driven in part by the need to acquire talent.
“You can't just do the deal first and sort out the people issues afterwards,” Dowling said, adding that while employment may not be the foremost matter in an entire M&A deal, failure to consider it can “blow up” an agreement, as he said happened in the merger between AT&T and NCR and caused major problems with the Daimler-Chrysler merger. Employment-related liabilities, such as a seller's unfunded pension plan, can wreck a deal, he warned.
Other employment issues can pose major obstacles to an M&A deal, according to Dowling. Pre-closing layoffs are illegal in some parts of the world, for example, the European Union's Transfers of Undertakings Directive (for instance) saying “basically thou shalt not fire people because of an M&A deal—that addresses the buyer and the seller both.” More broadly, the U.S. is almost alone in the world, apart from Singapore and Nigeria, in being an employment-at-will jurisdiction and in lacking any concept of vested employee rights, a fact that allows private, nonunion U.S. employers to unilaterally change the terms and conditions of employment.
The EU also requires that employees be consulted before any M&A deal, which can cause conflicts with securities laws that require publicly traded companies to keep these deals confidential until they are concluded, Dowling said.
Regardless of the country, Dowling said, the buyer can't come in and unilaterally change terms and conditions of employment by (for example) laying people off, changing employees' positions in a restructuring, changing pay rates or moving the offices to a distant location. In one case Dowling is currently involved in litigating in Latin America, an employee who was moved from an office into an open cubicle has filed a lawsuit claiming the move amounted to a constructive discharge.
In asset purchase deals, where the buyer wishes to acquire only “inanimate objects” and not necessarily the employees, “outside the U.S. and Nigeria you don't have the advantage of being able to pick and choose who you take on, at least without a heavy cost,” Dowling said.
All other countries are divided into “acquired rights jurisdictions,” a common term among international legal experts, and what Dowling calls “de facto firing jurisdictions.” In the former—examples of which are EU member states, as well as Brazil, Singapore, South Africa, South Korea and Turkey—an asset sale cannot deprive employees of their vested employment rights, and “the employees by operation of law transfer to the buyer at the moment of closing” at the same terms and conditions of employment.
The “de facto firing jurisdictions”—including China, India, Japan, Latin America except for Brazil, Puerto Rico, Nigeria and the Philippines—are not at-will employment jurisdictions either, so the seller's employees still have a contractual agreement with the seller, which must transfer them to another employer or pay them severance and cannot lay them off except with good cause.
Dowling also noted that in the EU, Mexico, Israel, Japan, the Philippines, South Korea, South Africa and some other countries, there are very strict rules about the transfer of personal information about employees, which can affect a buyer's ability to get information on the seller's executives.
Some of the other HR due diligence issues for the buyer in an international M&A deal mentioned by Dowling include:
A master global checklist should be used, Dowling said, but the buyer also needs a customized checklist for the relevant country.
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