Background
A key issue from an employment perspective in the UK on a corporate acquisition is whether the acquisition is structured through a share purchase; so that it is the shares of a company which are bought, or an asset purchase; involving the purchase of the assets of a business.
The issue is key because, in the latter scenario, an acquisition of assets, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) will generally apply to automatically transfer employees from the seller to the buyer. The application of TUPE has a number of implications including an obligation to inform and consult with employees of the business prior to the acquisition, which can impact on the timing of the transaction, additional unfair dismissal rights for employees and potential restrictions regarding amending employee contracts in the future.
In normal circumstances, in the former scenario, a share sale, however, TUPE will not apply. This is because, in order for there to be a TUPE transfer, there must be a change in employing entity, which will not be the case purely as a result of a share sale as, on a share sale, the employer will remain the same; the company whose shares are sold.
There is however, a potentially significant caveat to the above. This is that there are two UK case authorities where, on the facts of the case, there was found to be a TUPE transfer at the same time as a share acquisition.
These authorities have now been considered in a very recent case, ICAP Management Services –v- Berry and BGC, judgement in which was handed down last month. The case is significant as, firstly, it provides guidance on the factors that will be looked at by a UK court or employment tribunal in order to determine whether there has been a TUPE transfer on a share sale and, secondly, it illustrates one particular set of circumstances where employees may argue there has been a TUPE transfer and the risks for purchasers as a result.
The existing authorities
The two cases are Richard Millam –v- Print Company and Jackson Lloyd Ltd –v- Smith.
In the first, Millam, the purchased company went into administration (a UK form of insolvency). It was found, however, that, on acquisition, the purchaser of the company had taken on a significant element of management of the company. As a result, there was found to be a TUPE transfer to the purchaser at the same time as the share acquisition, the practical impact being to give employees a claim against a solvent entity, the purchaser.
In the second case, Jackson Lloyd, immediately on acquisition, the board of the purchased company was replaced by nominees of the purchaser’s parent company. There was a press announcement indicating that the parent (rather than its subsidiary) had purchased the company. Lastly, an intensive process of integration led by an integration consultant, whose remit was to turnaround the company, “leaving the company staff in their former liveried uniform, but to all intents and purposes, controlled by the parent”, was undertaken. Given these facts, it was found that the purchased company’s activities and practical identity were wholly integrated and subsumed by the parent and, therefore, there was a TUPE transfer of a business to the parent at the same time as the share acquisition by its subsidiary.
The most recent decision - ICAP Management Services Limited –v Berry & BGC Services
On the facts in this case, there was found not to be a TUPE transfer on the share acquisition. The case, however, sets out the test to be applied by UK courts and employment tribunals in order to determine whether, on the facts surrounding a particular share sale, there will also be found to be TUPE transfer.
The test to be applied
In Millam, the court held that the issue was whether, on a share sale, control of the business had been transferred as a matter of fact to an entity other than the purchased company, However,
“the mere fact of control which will follow from the relationship between parent and subsidiary will not be sufficient to establish the transfer of the business from subsidiary to parent”.
Applying the decision in Millam, the judge indicated that,
“the critical elements of the test are whether [another group entity]
(i) has become responsible for carrying out the business;
(ii) has incurred the obligations of employer; and
(iii) has taken over day-to-day running of the business
or as the judge indicated,
“in more colloquial terms - has the new party stepped into the shoes of the employer?”
Practical implications
1. Claiming transfer to “walk” free of notice
ICAP provides a vivid illustration of a particular set of circumstances where employees and their lawyers may be looking to argue there has been a TUPE transfer on a share sale. ICAP, BGC and Tullet Prebon are all major broking companies, a sector which has seen numerous major cases over recent years regarding contested team moves as a result of attempts to recruit broking teams from competitors. Ordinarily, where a senior broker wishes to leave to join a competitor, they will be precluded from immediately doing so by being put on “garden leave” over a lengthy notice period. A TUPE transfer, however, provides an opportunity for an employee to instantly terminate his or her employment without a breach of contract, leaving the employee free (subject to any restrictive covenants) to immediately join a new employer. This is because TUPE provides every employee with a “right to object to transfer” under TUPE to a new employer, exercise of this right causing automatic termination of the employment relationship as a matter of law upon the TUPE transfer taking place. In ICAP, therefore, Mr Berry was, supported by BGC which had recruited him, looking to argue there had been a TUPE transfer in order to allow him to escape his notice obligations to ICAP and, therefore, join BGC earlier.
2. Position following these cases
Following ICAP, a third decision on this issue following Millam and Jackson Lloyd, employees/ their lawyers may look to argue there has been a TUPE transfer on a share acquisition. They could do so for a variety of reasons including to: support an employee’s unfair dismissal argument, found a claim for failure to inform and consult as required by TUPE, as in ICAP itself, argue an employee has objected to transfer and so is free to leave instantly or, even some years after a share acquisition, argue variations of employees’ contracts connected to the acquisition are legally ineffective.
3. Mitigating the risks
How then can sellers/purchasers put themselves in the best position to defend these arguments and mitigate risk?
In practice, it is not unusual for a purchaser to want to initiate an early process of integration. These authorities illustrate, however, that, particular care needs to be taken. This will be particularly so, if the circumstances are such that there may be a real risk of employees looking to run these arguments, as might be the case, for example, where significant redundancy dismissals will swiftly follow the acquisition, or where, as in ICAP, key senior staff may be looking for an opportunity to leave free of notice.
If a process of integration takes place too quickly/is too all encompassing, such that the business can no longer be regarded as being run/controlled by the purchased company, the risk will be of there being found to be a TUPE transfer. To mitigate the risks, a purchaser should ensure that announcements and practical management, at least initially, are consistent with the purchased company retaining responsibility for the day to day running of the business.
