What is a cross-border carve-out?
A carve-out refers to the sale of assets from one company to another. A cross-border carve-out occurs when those assets, or a portion thereof, are sold to a Buyer in another country.
These transactions involve complex legal requirements and regulatory considerations and involve the navigation of laws and regulations in multiple jurisdictions. Cross-border carve-outs are a perfect choice for businesses looking for strategic realignment or to raise capital. However, they also come with non-negotiable complexities that must be dealt with compliantly – and often before the close date – for the transaction to close successfully.
Employees are usually crucial and valuable assets with an exhaustive list of required compliance activities. The variance of local HR regulations by country further complicates matters.
To help make sense of it all, we spoke with HSP Group’s most experienced M&A experts. They highlighted the disruptive complexities to consider as part of the due diligence process.
In part one of this blog series, we explore the HR and employee considerations of cross-border carve-outs. In particular, this blog highlights the key disruptive complexities and the legal consequences of not completing them properly. We also examine the interference this is likely to play in the successful closing of the deal.
Transferring employees from the Seller to the Buyer
Transferring each of the employees from Seller to Buyer is an arduous and mandatory task to protect the Buyer from employee litigation.
All European Union (EU) member states have legislation that aligns with the European Commission’s Acquired Rights Directive (ARD). The ARD ensures that when a business – or part of a business – is transferred to a new owner as part of an asset deal, the employees engaged also transfer. The list of requirements and stipulations varies by country, with the most widely known being the UK’s Transfer of Undertakings (Protection of Employment) Regulations, or “TUPE.” Its purpose is to ensure the employees involved are protected when the business they are currently employed with changes hands and legally transfers the employees and their liabilities from the Seller to the Buyer.
Many countries outside of the EU have similar legislation. Companies must preserve the employees’ service history and employment terms so they do not suffer because of the transaction.
In cross-border carve-outs, the Buyer needs a firm grasp of each of the target country’s laws related to employee transfer because they vary significantly from one country to another. It also may not be possible to terminate employees. This can add a significant financial impact to the transaction, which could play a role in the deal.
So, what three actions must take place?
1. Identify the employees and the employee liabilities:
Companies must identify the roles of all employees affected by the carve-out, including short-term absences and fixed contracts.
The Seller must provide the Buyer with information relating to the employees. This includes name, age, employment details, employment contracts, policy documentation, benefits information, grievance or employee claims, and additional local obligations. Much of this information is considered personal data, and as such, any agreements between the Buyer and the Seller should account for local and global data privacy and GDPR regulations.
Receiving as much of this information from the Seller in advance of the deal closing allows the Buyer to avoid unforeseen employee liabilities, including unpaid salaries and outstanding legal claims, and discover additional layers of employer obligations such as works council, unions, and collective bargaining agreements (CBA).
2. Employee transfer due diligence:
Local experts analyze the legal actions and offerings required for each country and each employee:
1. Does the target country have laws to protect employees when a business is transferred, i.e., if the country has legislation that accords with ARD or equivalent?
2. Can employees carry over their accrued rights (severance, pension entitlements)? Some liabilities may be difficult to uncover, like annual leave carryover or Christmas bonuses that may not be stated in writing.
3. Are there CBAs that cover any of the transferring employees, and are there additional employee rights under that agreement?
4. What benefit costs will be higher for the Buyer than for the Seller because of carving out fewer employees in a particular country (insurance rates, etc.)?
5. Do the employees have work permits?
In the due diligence process for employee transfer, analyzing these critical HR considerations is necessary to determine the drafting of future employment contracts.
Each country will have different regulations, processes, and requirements, for example:
German works councils have co-determination rights and the power to block the transfer from closing if they are unsatisfied.
France gives the Buyer up to 15 months from the date of transfer to renegotiate new CBAs.
Colombia requires that 12 months of historical payroll data be provided to transition.
When a business fails to complete any of these activities correctly or completely, it risks breaching legal obligations, facing legal claims, and derailing the entire acquisition. It can also have substantial cost implications. It is, therefore, vital that companies enlist the help of local experts to ensure these risks are mitigated, and they are aware of hidden costs that may arise.
3. Sharing the terms and conditions with the employees:
The Buyer will need to provide specific information and documents to the employees. This includes sending copies of the new company’s policies, conditions changes, and any established terms related to business practices.
Failure to complete this step completely and compliantly may result in business inefficiencies, retention issues, and legal and compliance risks, resulting in fines, penalties, and reputational damage.
Need help with your cross-border carve-out?
HSP’s team of experts can help with every stage of your cross-border carve-out, including pre-close, operational readiness, post-close, and transformation.
Get in touch today to discuss your specific requirements and to find out more about how we can help.