HR Professionals: The Key To Smooth Corporate Acquisitions

by Dentons
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Although human resources professionals are not always recognized for their efforts during a corporate acquisition, the work which they do behind the scenes can often make the difference between an acquisition succeeding or failing.  The following is a brief summary of key issues for HR professionals to stay on top of, long before an acquisition is ever contemplated, during the due diligence phase and right through to closing.

There are two types of transactions which can result in the purchase and sale of a business – a share purchase and an asset purchase.  In a share purchase, the corporate identity of the target company does not change and as a result, the employees remain employed by the same purchaser after closing.  Unless new employment agreements are negotiated with the purchaser, the employment terms and conditions of those employees will not change on closing.  In an asset purchase however, only certain assets of the target company are purchased and the employees are therefore generally terminated by the target company unless they agree to accept new employment with the purchaser.

Keeping Your House in Order:

All too often, proposed acquisitions fall through after the purchaser becomes aware of potential employee liabilities which it will have to assume in the event of an acquisition.  As an HR professional, you can assist with minimizing those liabilities long before an acquisition is being contemplated, by ensuring that: (i) well-drafted employment agreements are properly entered into; (ii) the company is protected with any necessary confidentiality, intellectual property and restrictive covenant agreements; (iii) there are no significant wages, vacation pay and overtime pay accruals; (iv) employee claims and complaints are kept to a minimum; and (v) mandatory statutory obligations are complied with (eg. WSIB registration; compliance with the Occupational Health and Safety Act; compliance with the Pay Equity Act).  When potential employment liabilities are kept to a minimum, it greatly reduces the risk of a purchaser walking away from a deal due to the added costs of correcting the liabilities.

Due Diligence:

HR professionals should be aware of the fact that even in an asset purchase, the Employment Standards Act, 2000 contains successor employer provisions.  In particular, section 9 of the ESA states that if a purchaser hires an employee of a vendor within 13 weeks of closing, the purchaser will be deemed to have taken on the employee with all of his or her prior years of service with the vendor.  Therefore, although the inclination may be to think that the purchaser in an asset deal can “fix” employment problems hand-in-hand with the hiring of employees on closing, sometimes employees will balk at going to a new employer if they are not being hired on similar or better terms to those which governed their employment with the vendor.  In this regard, it is often helpful for the vendor to work with the purchaser during the due diligence phase in order to determine who will be provided with offers of new employment and what the new and continuing terms of employment should be.

HR professionals in Ontario should also be aware of the fact that the Personal Information Protection and Electronic Documents Act (PIPEDA) does not yet have a business transaction exemption.  Although employee personal information is not generally caught under PIPEDA, it can be subject to PIPEDA when employee personal information is being collected, used or disclosed for commercial purposes such as an acquisition.  In order to ensure that there are no personal information breaches in connection with the acquisition of a company, if you work for the vendor it is wise to get the employees to sign a consent to the disclosure of their personal information at the time that they are first hired, as to do so in the midst of a transaction can tip employees off before the transaction becomes publicly known.  Whether or not the employees have signed consents at the time of hire, it is also wise for the vendor and the purchaser to enter into confidentiality agreements with respect to employee personal information which may be disclosed in relation to the transaction.

Closing:

As the closing of the transaction approaches, it is particularly important for HR professionals for both the vendor and the purchaser to try to work together to determine such issues as who will take responsibility for accrued vacation, whether releases will be sought from employees who are part of an asset purchase, whether and what type of new employment agreements will be offered to those employees who are remaining on, and ensuring that employees who are not remaining on are properly terminated at or prior to closing.  As well, there is often a need for certain key employees to remain on for a limited period to assist with transition work, and thought often needs to be given to whether those employees should be provided with a special retention bonus agreement or whether the expectation is that they will simply work out their notice of termination period doing transition work.

As always, it is important for HR professionals to obtain legal advice from an employment law specialist in conjunction with the above steps.  Together, they can make the difference between a difficult acquisition and a successful one.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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