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HR employment considerations when facing an M&A deal

This year has been challenging for dealmakers given declining deal volume. However, forecasters predict that deal flow could soon open up leading to an uptick in activity in mergers and acquisitions (M&A).

Below are some key points and practical tips for HR should a deal land on your desk.

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Employee rights, benefits and pensions

Employee transfers


Other practical steps

What happens to employee rights, benefits and pensions?

On a share sale, employees remain employed by their existing employer post completion. This means their existing employment contracts continue and they receive the same benefits and incentives.

However, if only part of a group is being sold, it should be checked in due diligence if the relevant benefit plans will transfer with the entity being sold. If not, the buyer may need to replace or replicate these benefits on completion.

On a business sale, employees will no longer be employed by their original employer post completion but will automatically transfer on the same terms of employment to the buyer’s business.

It is not permissible for the buyer to make changes to contractual terms and benefits because of the transfer which makes it difficult for buyers to harmonise terms of employment and benefits with their existing workforce (as is commonly wanted).

Changes are permitted in limited circumstances such as where the change is unrelated to the transfer, the employment contract permits or where the business can demonstrate an economical, technical or organisational reason entailing changes to the workforce and the employees agree to the change.

The automatic transfer principle won’t apply to the old age, invalidity and survivor benefits under an ‘occupational pension scheme’ (i.e. pension schemes providing benefits on retirement, on reaching a specified age or on termination of service in employment).

Where such a scheme is in place on a deal, specific pension advice should be sought.


Which employees transfer on a sale?

On a share sale, all employees employed by the entity being sold will transfer with the company.

On a business sale, employees will automatically transfer to the buyer where they are “assigned” to the business being sold.

Who is assigned is a factual question taking into account multiple factors, but it is common to principally look at the percentage of time that the employee spends working in the business being transferred.  

Employees who perform shared services (e.g. finance, HR) may also transfer, even if they perform some duties for other parts of the business not being sold.

Ultimately, an assessment will need to be made on a case-by-case basis to determine who will be ‘assigned’ and we recommend that legal advice is sought if you are unsure about who will transfer.


What are the immigration considerations?

In a business transfer, any right to work checks carried out by the seller are deemed to be carried out by the buyer.

Therefore, if the seller failed to complete the checks or didn’t complete them correctly, the buyer could be liable if an employee is working illegally.

However, from the date of transfer, the buyer has 60 days to conduct any right to work checks and must have a sponsorship licence (or apply for one within 20 working days of completion) if it is employing any sponsored employees.

There is no equivalent grace period on a share sale, meaning that the buyer should identify any right to work and immigration issues during the diligence process.

Where a company holds a sponsor licence and there is a change in direct ownership or the controlling number of shares are being sold, then the transaction must be reported by the company to the UK Home Office within 20 working days of completion and the new owners must apply for a new sponsor licence within this period.

If an application is not made (or refused), any sponsored workers may have their permission cancelled. 

In all other circumstances, the sponsor will retain its licence, but must report to the Home Office within 20 working days of the change.

In addition to the company reporting requirements, there may be reporting requirements in respect of the individual migrants.


Other practical steps

To ensure that employees are ready to immediately start work post completion, employers should ensure critical systems such as payroll are set up. Bear in mind that this can take a long time where the buyer does not have an existing entity in the UK.

In addition, think about the practicalities of what employees need to do their job. Have car leases been transferred? Is there adequate desk space and does everyone have access to IT systems?

Although perhaps obvious, such matters are key to ensuring a smooth transition and good employee experience on joining a new business.


Nicola James is partner and Jessica Lim, associate, at GQ|Littler