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Corporate transactions - overviewPreliminaries
Before you start working on a transaction, find out:
which party you are acting for. The buyer usually prepares the first draft of the sale agreement, unless the sale is by tender
how the deal is being structured (ie asset or share sale)
who your instructions will come from
what issues are important to your client. This will depend on their plans for the business (eg large scale redundancies). Equally, there may be key staff whom the buyer will wish to incentivise to remain
what room there is for negotiation. Key issues may already be resolved, such as whether warranties or indemnities will be given
whether there is a de minimis threshold (a fixed value below which claims cannot be brought). If there is, it may be that only a few employment liabilities could ever exceed the threshold, so there is no point in either side spending huge amounts of time negotiating warranties: better to take a sensible, moderate position with a view to reaching easy agreement with your opposite number
which legal issues are your responsibility. If you are expected to deal with more than pure employment issues, such as pensions, incentives, immigration, data protection, health and safety etc, you need to know before you start
Remember to remind your client about the obligations to inform and consult employee representatives before completion. Failure to comply could hold up the transaction or expose the client to the risk of claims and compensation awards. Remember also that, in TUPE transfers, there is an obligation to provide certain employee liability information at least two weeks before completion.
Types of transaction
Where the shares of a company change hands, the buyer acquires the company 'warts and all'. The company remains the employer of its employees and there is no effect on contracts of employment. Whatever rights, obligations, powers and liabilities it has towards past, present and future employees are unaffected by the change in ownership.
Where a business is sold but not the company that owns it, TUPE applies.
Where there is a change in the provider of a service, TUPE can also apply.
A non-TUPE assets sale usually will not involve any employee issues. Any employees of the seller will remain with the seller (unless made redundant by it).
The key differences between a share sale and a TUPE transaction are:
Share saleTUPE transactionAll rights and liabilities remain with the company and, in effect, become the buyer's responsibility, including claims from past employeesMost rights and liabilities of current employees transfer to the buyer. There are a few exceptions (eg occupational pension protection is more limited) and liabilities to past employees transfer only in limited circumstancesNormal rules on unfair dismissal applyIn some situations, dismissals connected with the transfer will be automatically unfairThe company can change terms and conditions of employment in the usual way (normally with employee consent)Changes to terms and conditions after the transfer may not be valid if transfer-connected, even if agreed by employeesThere is no specific statutory obligation to inform and consult on a share sale. There may be obligations to employee representative bodiesThere is a specific statutory obligation under TUPE to inform and consult. There may also be obligations to employee representative bodiesWarranties are key and relate to past and present employees. It is not usual market practice to use indemnities for share sales, except in relation to current litigation and specific identified liabilitiesIndemnities are used to reapportion the liabilities passing under TUPE, so that the seller retains responsibility for claims caused by its actions. Warranties need only relate to current employees and those automatically unfairly dismissed in connection with the transferDue diligence
In all transactions, it is important that your client knows what it is taking on. This process is known as due diligence. TUPE imposes obligations on the transferor to provide certain information to the transferee before the transfer.
For more information, see Due diligence.
Indemnities
The seller may give indemnities for specified costs or losses the buyer incurs. An indemnity is an agreement to bear the financial consequences of a particular event. For example, a seller may agree to pay the buyer's costs of dealing with employee claims relating to pre-completion events. Indemnities are useful where there is an unquantifiable risk of a claim and it is difficult to make a price adjustment to reflect the risk accurately. They may have thresholds, both individually and collectively (ie costs are not recoverable unless they exceed £x under the particular indemnity and/or £y in aggregate). They may also be capped along the same lines. Indemnities are not limited by disclosure.
Warranties are a way of reallocating risk. Indemnities are a way of reallocating cost. There is a big difference between what can be recovered for breach of warranty and what can be recovered under an indemnity. Damages for breach of warranty are usually the market value of the business had the warranty been true, less the actual market value.
For more information, see Indemnities in corporate transactions.
Warranties
Sometimes - perhaps because of time limitations or because the seller does not have good records - it is not possible for the buyer to do an exhaustive due diligence process. On other occasions, the cost of full due diligence would be disproportionate to the value of the assets and liabilities being acquired. The seller may therefore agree to give warranties about various facts instead of the buyer checking them out himself. A warranty is a statement that a particular fact is true - for example, a seller may warrant that none of the employees of the company have contractual notice periods in excess of three months. The seller will usually disclose information against the warranties in a Disclosure Letter. The warranty will then be that a fact is true save as disclosed.
For more information, see Warranties in corporate transactions.
Handover issues
There are a few handover issues that need to be dealt with in the transaction documentation:
P45s: on a TUPE transaction, the transferring employees need to come off the seller's payroll and onto the buyer's. Normally the only way to take an employee off the payroll is to issue a P45. When only part of a business is being transferred, it will be necessary to issue the transferring employees with P45s even though their employment is not being terminated (and this should probably be explained to them!). However, if the whole of the seller's business is being transferred, HMRC will usually allow the payroll itself to be transferred, in which case there is no need to issue P45s
apportionment/accrual: check whether there is a general clause in the transaction agreement to apportion costs up to the completion date. Consider how entitlements which accrue over time but do not need to be taken or paid until later (eg, holiday entitlement) are to be treated - will an apportionment be made where employees have taken more than their entitlement at the transfer date and vice versa? The documents need to reflect what is agreed on this issue
management of claims: where indemnities are being given for claims, the party giving the indemnity may want some control over how the claim is managed, whether it is settled etc. Similarly, the party benefiting from the indemnity may want assurances that the other party will assist it in defending the claim. This may be covered in a general clause but, if not, consider whether to make such provision for the employment indemnities
transitional management: where the sale is of part of a business, the seller may agree to provide some functions for an interim period (eg site management). This will usually be reflected in a transitional service agreement, which will need to address the risk that TUPE will apply when the service ends
employee records: the transaction agreement will need to provide for the handover of employee records. If acting for the buyer, it is worth reminding the buyer to review what it receives to see if it is still current and needs to be kept - data protection laws require employers not to store unnecessary or out-of-date employee data
Restrictive covenants
You may also be asked to draft restrictive covenants preventing the seller from competing with the business it has sold for a fixed period from the point of sale. The covenants should be no wider than is reasonably necessary to protect a legitimate business interest but remember that the courts tend to take a more lenient approach to duration and scope of these kind of covenants given the consideration involved and the relative equality in bargaining strength of the parties.
Where individual sellers remain as employees, there may also be restrictive covenants to draft in their service contracts. These will need to be more modest in duration and scope and protect any threat to the employer's legitimate business interests arising from their access as an employee to confidential information or customer connection (not as a shareholder). Remember that these covenants will run from the end of the employment (whereas the sale covenants should run from the point of sale).
For further information, see our Restrictive covenants topic.
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