An entrepreneur’s workforce grows either through fresh hires or through the acquisition of companies that bring along new employees. Whether your organization is a large multi-national in a complex mergers and acquisitions (M;&A) transaction or a start-up looking to acquire a 2-person corporation with a new development line or skill set, the employment law implications are complex, yet largely the same.
This post will attempt to scale down (in a very high level, Twitter-esque fashion) and flag key issues an entrepreneur should consider when selling or acquiring a company with a workforce.
1) Are you buying assets or shares?
If you are purchasing just certain assets of a corporation (just a division, just a software development line, etc.), you can cherry-pick the employees you want to bring over, and the seller remains on the hook for any employment law obligations for those employees the buyer does not hire.
If, however, you are purchasing the shares of a corporation, there is no change in “employer” – you step into the shoes of the employer and inherit all of the employment law obligations, including lengths of service, for all employees.
2) Due diligence – Not just for corporate lawyers on TV
Whether buying the assets or shares of a corporation, in addition to the usual corporate law document review, you will want to ask for and review all documents that speak to employment obligations you may inherit (if purchasing shares) or wish to dodge (if purchasing assets), including:
- All employment contracts, hiring/offer letters, and if applicable, collective agreements
- Employee list of all employees and contractors, including length of service, role, salary, equity entitlements, etc.
- List of current or past employees who are in litigation or have filed a claim against the seller
- List of any employees on a disability or other protected leave such as a mat leave
- Pension and benefit plans
- Employment policies (have employees been promised 8 weeks of vacation? A car?)
- Variable compensation, equity and/or incentive plans
The purpose of reviewing each of these documents is to determine whether there are any surprises in the pipeline, including change of control/golden parachute provisions that will be triggered because of this transaction, extensive termination provisions, equity that will vest in the future, disgruntled ex-employees who still have equity in the company, etc.
For an entrepreneur acquiring a smaller company, you don’t need an army of big law firm associates to read these documents – if you are dealing with a workforce of under 5-10 people, simply read through the contracts, documents and policies, see if they contain employment terms you can live with, and have a discussion with your counsel to determine whether there are any red flags that require further review. The key piece often is knowing which documents you can/should request to see upfront, prior to signing a deal.
3) Changing terms of employment
While the purchaser is not required to hire employees in an asset transaction, if you do take on employees from the seller, employment law legislation will deem their employment to be continuous employment under sale of business provisions. Thus, if you are taking on an employee with 10 years of service with the seller’s business, you will be on the hook for the usual employment law obligations of a 10 year employee.
In other words, if you agree to take on a 10 year employee in an asset transaction to drive down the price and/or to push through the deal, you cannot then fire the person on day 2 of your new regime without being exposed to the usual wrongful dismissal damages for a 10 year employee. The same principle applies to employees in a share transaction, as the purchaser steps into the employer shoes of the seller.
For entrepreneurs with a smaller workforce, employee morale and getting along are critical. You can set this tone on day one of negotiations with a seller. Employee communications and as transparent a process as possible in an otherwise confidential business transaction will be important for employee relations when you continue operations post-transaction.