Human Resources M&A Tips: Top Three Concerns for Cross-Border Acquisitions

While there was an uptick in U.S. mergers and acquisitions (M&A) activity in 2018, various consulting sources expect that 2019 will build upon this transactional momentum during the first half of this year. According to “How U.S. M&A Will Transform Businesses in a Changing World,” published by Ernst & Young, transactions should remain strong in 2019 with an emphasis on “megadeals” (transactions valued at US$5 billion or more) in the private equity sector. According to “The State of the Deal: M&A Trends 2019,” published by Deloitte Development Services LLC, 70% of the corporate and private equity executives who participated in a survey for this publication anticipate an increase in the average number of M&A transactions in 2019, with nearly one-third of respondents expecting cross-border transactions to form a piece of their M&A landscape in 2019.

In all transactions, integration is a key component in overall success. With a forecast of continued cross-border M&A activity, the emphasis will remain on early integration efforts. Below is a list of the top three human resources priorities that should be explored at the outset of any cross-border transaction.

1. Employee Representation: Outside of the U.S., employee representation is nuanced and may have a direct impact on the success of a transaction. In Europe and Latin America, employees may be represented by nationwide and industry-specific trade unions, as well as by works councils. A works council is a “shop-floor” employee representative body regulated by law at both the national level or multinational level. Works councils must be notified of workplace changes and often consulted with before the implementation of such changes. Depending on the structure of the transaction, the parties to a transaction may be required to notify and consult with the works council in order to proceed with the transaction. In certain countries in Asia, labor unions are responsible for adopting company rules and regulations that govern the entirety of the employment relationship, and may provide an opinion as it relates to restructurings and other major business operation issues. Given the complexity of the labor landscape outside of the U.S., it is important to understand the rights of employee representatives in each stage of the transaction to avoid road-blocks to integration. From a human resources perspective, it is important to work closely with counsel of both the buying entity and the selling entity in order to craft appropriate employee communications for effective integration and continued cooperation with employee representatives after the closing.
2. Employee Benefits: Similar to the U.S., employee benefit plans and programs in non-U.S. jurisdictions may be contractual or statutory. Statutory benefit plans (those required by national or local law) may include pension benefits, medical benefits, or other “social insurance” obligations that are payable by both the employer and the employee during the term of employment and remitted to the appropriate governmental agency. In certain jurisdictions, statutory severance in the form of termination indemnities are payable to employees upon termination of employment, with limited exceptions. In addition, certain countries in Latin America require statutory bonus compensation, such as the 13^th month bonus. Statutory benefit schemes may be sources of unfunded benefit liability. Therefore, a savvy human resources executive should look to integration planning from both a place of understanding the contractual and statutory benefits provided to employees of the transaction, but also to understand the funding status of these benefit plans. A failure to identify any applicable non-U.S. benefit plans, or the unfunded or underfunded status of such benefit plans, may be a costly liability if not fully understood and allocated before the closing.
3. Employment Arrangements: For successful integration, it is not only important to understand the terms and conditions of the employment arrangements, but also to understand the target company’s historical compensation and benefit practices. In certain countries in the European Union, historical compensation practices may create an implied right to bonus or other incentive compensation. Even the use of the term “discretionary” in employment agreements may not be enough to create a truly discretionary incentive compensation clause. Not only is understanding the economic terms and conditions of employment necessary for integration planning, it is vital to understand the restrictive covenant limitations outside of the U.S. For example, in certain countries, post-termination non-competition covenants are not enforceable if the employee is not paid during the term of the restriction, while in other places, non-competition covenants are virtually unenforceable irrespective of payment. An understanding of both the current express or implied compensation and benefits structure, and the restrictive covenant protections that the target company may rely upon under applicable law, is essential to mapping compensation and benefits packages in the new organization.

Winston & Strawn teams with local counsel offices across the globe to assist clients in achieving short-term and long-term integration goals related to cross-border transactions.