United States: Corporate Divorce Series: Acqui-Hires: A Corporate Blended Family?

Blended families may be more common than organic ones these days and perhaps the same can be said about employees in corporate America.

The trend may emanate in part from the "acqui-hire" approach to building a business.  An "acqui-hire" happens when one business acquires another for its workforce, not for its products or services.  This is a particularly popular approach in the technology sector where buying a team of tech-savvy individuals who have a track record of creating value is a better business bet than money spent on beta testing a product or service that may or may not succeed in the marketplace.  In other words, don't buy the product — buy the brains that make the product.

You can't, of course, buy an employee. But you can buy the opportunity to convince the individual to stay (that perfect cocktail of job fulfillment, career development, compensation and long-term investment/risk-reward) or at least try to convince them not to leave (forfeiture of incentive compensation, equity, and post-employment covenants). The reality is that no employer can make an employee work, because at least in our presently free society, that choice remains solely within the employee's control.  The only question concerns the consequences of the employee's departure.

But setting aside those legal niceties, I thought it would be useful to cover some of the basic components of acqui-hiring to more fully understand the benefits and drawbacks of this quasi-human marketplace and to provide some guidelines for the acqui-hirer and its targets.

Is there a name change?

There are two basic types of acqui-hire: if an employee is hired in conjunction with the purchase of a company's assets, something extra has to happen to make the person an employee. You can tell you are involved in an asset deal if the employee's social security withholding starts over again at zero after the deal closes ("FICA restart" to tax geeks). In that case, in order to make the employee part of the corporate blended family, generally speaking the employee must sign an offer letter, complete all the new hire documentation and, of course, actually show up for work.

The employment relationship after a stock transaction is more organic because the employee is "employed" under the same tax identification number pre- and post-closing. In a stock transaction, there is (usually) no FICA restart because the employer identification number remains the same and – importantly – as far as the IRS is concerned, nothing has really changed from a pure employment perspective.  The actual transaction is only legally significant because someone else owns the employer.

A Step-Parent's Discipline

Why is all of this even of passing interest? Because an acqui-hire driven transaction is the reason for the acquisition in the first place. But whether or not it is an adoption or the creation of a blended family, attention and care must be paid to the voluminous and sometimes overwhelming details associated with the employment relationship, such as offer letters, employment contracts, policies, benefits and the like.  But these details are frequently lost in the transaction's shuffle.

As many can appreciate, simply relying on the transaction to complete the adoption process is ill-advised. Here are a few guidelines for the acqui-hirer:

  • Acqui-hirers should make sure to sort through all the details of the target's employment arrangements well in advance of the transaction.  Leaving the details to the future is a recipe for disagreement and unwelcome distraction.
  • An acqui-hirer should not assume any existing employment contracts or policies will apply after the acqui-hire.  In addition to potential cultural differences between businesses, different employment laws might apply based upon geographical (state and municipal) differences resulting from the corporate marriage, as well as differences resulting from changes in the number of employees.  Make this a point of focus before the close.
  • You can't make someone work. That's right – you might be able to prevent someone from working for someone else (even in California in certain circumstances) but you can't make them work for you. On the flip side, you typically can't hold them to an employment contract but decline to pay them.  This is a source of confusion for some acqui-hirers and for some an unjust policy.  But that is the American system.

In other words, while an acqui-hirer may aspire to close a transaction in order to procure talent, the acqui-hirer should not assume that talent may be bought.  Rather, homework needs to be done, cultural issues must be attended to – and the acqui-targets need to be brought willingly (and hopefully enthusiastically) on board.

Summing Up

Sometimes acqui-hirers are so blinded with the delight of finally landing the right people that they lose sight of the fact that despite the complexities of the transaction (i.e., the purchase of the business that necessarily includes the personnel), they are, after all, entering into an employment relationship that requires the same attention to the courtship and underlying documentation.  Buying the business may give the acqui-hirer a leg up on building a brand, product or service but people are people, not inanimate objects, and that means complying with the applicable employment regulations and other legal niceties as part of the acqui-hire transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Jennifer B. Rubin
 
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