Dealing with staff issues when selling your business can be one of the most challenging aspects of a corporate transaction. Managing employees before the sale and preparing them for life after can take up a large amount of a seller’s time.
Importantly, at the outset your lawyers will need to know whether the proposed sale is going to be a share sale or an asset sale. These concepts were explained in detail in part 2 of this series and will make a big difference as to your legal obligations towards your employees, and also how the sale affects them.
You may have heard of the 'TUPE regulations' (short for Transfer of Undertakings (Protection of Employment) Regulations). TUPE applies to an asset sale.
TUPE is designed to prevent the buyer from being able to purchase the business assets but not take on the employees. Without TUPE many asset sales would lead to mass redundancies and job losses.
TUPE requires a buyer to take on all of the employees employed in the business on completion. TUPE also obliges the buyer to take on the employees on the same terms of employment as they have with the seller and preserves employees’ continuity of employment.
In effect on completion of a sale, the buyer steps into your shoes as the employer and in doing so takes on all obligations and liabilities owed to the employees, including liabilities relating to pre-completion matters.
Not surprisingly most buyers will seek to dilute the effect of TUPE by requiring indemnities from you (for an explanation of indemnities see last week's article. A typical set of indemnities will make you to be liable for all employee obligations and liabilities pre-completion.
Not many sellers object to the principle of this. Of course, you would expect to be responsible for paying the employees up to completion. But beware that such indemnities will often extend to disputes relating to matters arising pre-completion, even if a claim is made after completion. For example, if an employee claimed that they were subjected to a campaign of harassment pre-completion, you could be on the hook for any resulting claim.
Information and consultation
In the lead up to completion TUPE obliges you to inform the employees about the impending sale and to consult with them or their representatives, such as any recognised trade unions, about its implications for them. There are heavy penalties for employers who get this wrong, so advice should be taken early on.
We recommend that you embrace the information and consultation process as an opportunity to inform the employees about the sale, and through consultation address their concerns and make them feel involved in the process.
TUPE does not normally apply to a pure share sale. Employees may be more relaxed in a share sale situation as their employer will not change and often the change in practices and direction of business are not as sudden as they are on an asset sale.
In a share sale situation the typical position is that buyers are more likely to rely on warranties then insist on indemnities. The warranties can be comprehensive though as buyers will be looking for protection if any statement in the warranties is incorrect and the value of the target company is reduced as a result. Such warranties could include that you have performed all duties and obligations owed to the employees and maintained suitable and up to date records.
Although there is no obligation on you to consult with employees, we would usually recommend that you run some form of information and consultation process anyway, often in combination with the buyer. This helps to keep employees in the loop and may be insisted upon by trade unions in order to obtain their support for the sale.
However the sale is structured, the buyer will want to carry out due diligence to obtain as much information as possible about your employees and your employment processes.
It is critical to get things in order before going to market. Key matters to address include:
- Do all employees have up to date written employment contracts and do you have signed copies?
- Do your contracts for key staff contain appropriate tailored restrictions on their ability to compete with the business should they leave?
- Are the rules of any bonus or commission schemes sufficiently clear and in writing?
- Are your employment policies up to date? Do you have in place the appropriate policies for your business? Very few policies are required by law, but many will help reduce or avoid liabilities, such as disciplinary and grievance polices and GDPR compliant employee privacy notices.
- If you are dealing with any threatened or actual employment tribunal claims, when are they likely to conclude and what are your prospects of success? Consider whether the business will be more attractive to a buyer if such claims have gone away, which may mean making a commercial offer to settle them.
If you take advice early on and get your house in order then you will significantly reduce the risk of employment issues being a stumbling block to a potential sale. Once a sale process is in motion, choosing the right time to inform employees and engaging them in the process is key to a happy end to your working relationship with them.