Canada: HR In Acquisitions

Last Updated: November 29 2016
Article by Darryl Hiscocks

Purchase of the Assets of a Business

Legal Framework

When a purchaser acquires all or substantially all of the assets of a vendor's business, the purchaser and the vendor are generally free to negotiate which, if any, of the vendor's non­union employees will be offered employment by the purchaser and which, if any, will remain employed with the vendor. If the purchaser chooses not to offer employment to a vendor's employee, or if an employee chooses not to accept the offer, then the employee's employment will typically be terminated and she will have grounds for a claim against the vendor for, among other things, notice of termination or pay in lieu of notice. The vendor will, therefore, typically wish to take steps to negotiate provisions into the asset purchase agreement to reduce or avoid this potential liability, to the extent possible.

In that regard, the parties to the transaction should be aware of three main sources of law that may govern the employment of the employees, namely:

  • Statute
  • Common law.
  • Contract.

Statute

The Employment Standards Act, 2000, S.O. 2000, c. 41 (ESA) prescribes minimum standards of employment for all Ontario private sector employees governed by provincial jurisdiction. Under section 9 of the ESA, if there is a sale of a business by the vendor to the purchaser, and a vendor employee accepts the purchaser's offer of employment, the purchaser must recognize the employee's past service with the vendor for all ESA purposes. In these circumstances, the ESA deems the employee's employment to be continuous for all ESA purposes, provided the employee ceases employment with the vendor and commences employment with the purchaser within 13 weeks of the date of the termination (usually, the closing date of the transaction).

If a vendor employee's employment is instead terminated with the vendor and not continued with the purchaser within 13 weeks (including if the purchaser offers the employee employment and the employee rejects it), then the employee is entitled to receive ESA minimum notice of termination or pay in lieu of notice.

If the vendor has an annual payroll of $2.5 million or more and the employee has completed at least five years of service with the vendor (as of the end of the notice period), she will also be entitled to ESA severance pay, calculated as one week's notice for every year of service (and a part week in proportion to each part year as of the end of the notice period), to a maximum of 26 weeks.

There is no reduction in these obligations of the vendor if the employee finds new employment or self­ employment after her termination from employment. Unlike the position at Common Law, there is no mitigation principle that applies to termination or severance pay under the ESA.

In the termination context, the ESA requires that an employer pay a terminated employee her accrued vacation pay calculated up to the end of the employee's ESA notice period. In the context of an asset transaction, if the employee accepts employment with the purchaser, the normal practice is for the purchaser to assume the vendor's accrued vacation obligations to the employee as of the date of the closing of the transaction. The vendor may then give the purchaser a purchase price adjustment, reimbursement or other form of credit to compensate the purchaser for assuming these obligations.

Common Law

The technical position at common law is that, upon the purchase of the assets of a business, each of the vendor's employees is dismissed from employment. As noted under Legal Framework, the dismissed employees will then typically have grounds for claims against the vendor for, among other things, notice of termination or pay in lieu thereof. However, an employee has a common law duty to try to mitigate any losses arising from the dismissal and is, therefore, obliged at law to seek and accept comparable, alternative employment.

Accordingly, purchasers often agree in the asset purchase agreement to offer employment to most, if not all, employees of the vendor upon the closing of the transaction on the same or substantially the same terms and conditions as these employees were employed under with the vendor. Provided they each accept an offer of employment (as they are generally expected to do under the common law mitigation principle discussed above), the employees will typically not suffer any damages at common law with respect to the termination of their employment with the vendor. An employee who refuses an offer of employment on the same or substantially the same terms and conditions will likely be deemed to have failed to mitigate her damages and will, therefore, probably have no claim for wrongful dismissal damages against the vendor.

However, it is possible that an employee who accepts an employment offer with the purchaser but then ceases employment with the purchaser within the common law notice period running from the termination date (usually, the closing date) will have a basis for a wrongful dismissal claim against the vendor or the purchaser, or both, for common law notice less employment income received from the purchaser. The vendor may, therefore, try to seek protection against this potential liability in the asset purchase agreement, including through covenants from the purchaser to continue to employ the employees for a minimum guaranteed period from the closing date and indemnities.

If the purchaser offers employment to the vendor's employees, the costs associated with dismissing the employees without cause in the future will relate to the entire combined period of employment with the vendor and the purchaser and not just for the time period employed with the purchaser (subject to any enforceable agreement between the purchaser and the employee). The costs of dismissing employees (especially long­ service employees) without cause can, therefore, be significant in Ontario.

If, however, the purchaser does not wish to offer a vendor's employee employment on the same or substantially the same terms and conditions, the vendor may look to the purchaser for reimbursement or compensation for the liability it may face with respect to the termination of the employee's employment, such by indemnification under the asset purchase agreement.

Employment Agreements

The parties to a mergers and acquisitions (M&A) transaction should always consider whether there is any binding written employment agreement in effect that could be triggered directly or indirectly by the transaction. For example, the agreement may contain change of control or termination provisions that may be triggered by the transaction.

A related consideration is whether there is any employment agreement in effect that contains an assignment or assumption provision, by which the agreement may be transferred to and assumed by the purchaser (if the parties wish that). This may be particularly attractive to the purchaser if the agreement contains provisions that may be advantageous to it after closing, such as termination provisions that provide for less than common law entitlements or restrictive covenants that exceed the employee's basic common law obligations.

If there is no written employment agreement in effect, the ESA and the common law will govern, as discussed under Statute and Common Law respectively.

Representations, Warranties and Covenants

In both asset and share purchase transactions, the purchase agreement will typically include various representations, warranties and covenants to:

  • Identify matters and facts pertaining to the vendor's workforce and business. 
  • Set out closing and post­closing obligations of the parties.

Vendor's Representations and Warranties

The representations and warranties provided by a vendor will usually cover a variety of subject matters and address both existing and anticipated liabilities.

To begin with, the purchaser should request that the vendor provide an employee list, identifying all relevant employees. A vendor will usually represent and warrant that it has provided the purchaser with a current list of those employees who may form part of the transaction. This list should provide such information as:

  • Each employee's:
  • title;
  • years of service;
  • salary or wage rate; and
  • bonuses, commissions, other incentives, perquisites and any additional employment income (including under equity compensation plans).
  • Whether or not the employee is currently away from work (for example, on a leave of absence or disability).

This list can also contain details about the vendor's directors, officers, agents, consultants or contractors. 

The purchaser will usually ask the vendor to:

  • Represent and warrant that it has provided the purchaser with all material employment agreements and templates.
  • Covenant that the vendor will not provide any salary increases, additional compensation (for example, change of control payments), acceleration of benefits or loans to any of its employees, directors, officers or consultants, whether or not in connection with the transaction, unless it is otherwise disclosed or in the ordinary course.

The purchaser will also wish to ensure that it has no liability with respect to any pre­existing payment obligations that are triggered in connection with the transaction, such as change of control payments.

Typically, the purchase agreement will also contain representations and warranties that:

  • The vendor is not subject to any pending, threatened or anticipated claim or legal proceeding involving any current or former employee, officer or director.
  • The vendor has acted in compliance in all material respects with all applicable laws.
  • All assessments, levies and penalties under the Workplace Safety and Insurance Act, 1997, S.O. 1997, c. 16 (WSIA) have been fully paid and that no reassessment has recently taken place. As a closing condition, the purchaser may also require the vendor to obtain and provide a satisfactory purchase certificate, issued under the WSIA.

If the vendor's employees are not unionized or members of an employee association, the purchaser will usually wish the vendor to represent and warrant that there are no collective agreements applicable to its employees and that none of them are represented by any bargaining agents. The purchaser may also request a  representation and warranty from the vendor that there are no pending applications for union certification and that the vendor has not committed to negotiate to voluntarily recognize a bargaining agent or to enter into a collective agreement.

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