When a merger and acquisition (M&A) transaction is carried out, the human side to mergers is often overlooked. However, the acquirer/purchaser must address the concerns and demands of the employees while balancing it with the needs of the company in order to close the deal successfully. Read on to find out what are the major issues that organisations need to address for a successful M&A transaction.
" In order to make a smooth transition, it is advisable that the term of service and seniority of an employee should be taken into account and the conditions of service should not be any less favourable than those prior to the transfer."
Mergers and acquisitions (M&As) are instruments which cause the inorganic growth and expansion of a company. Any M&A transaction has a significant impact on the human resource of the company/ business being acquired. This article aims to discuss the issues faced by the employees as well as the acquiring and selling entities while undergoing such a transition and the possible implications under Indian Laws. The different types of M&A transactions include:
- Court Approved Mergers
- Acquisition of Shares Resulting in a Change in Control
- Sale of Business Division in a Slump Sale
1. Fundamental Issues for Employees
Amidst the transformation and growth of the acquirer company, the concerns and sentiments of the employees are often forgotten and remain unaddressed. The employees are often anxious due to the perceived job insecurity and uncertainty of their position in the acquiring company. Some of the key concerns of the employees which the acquirer needs to estimate are:
A. Continuity of Employment Benefits
Indian laws provide various benefits that the employer has to give its employees including maternity benefits, gratuity, provident fund, etc. An employee is eligible for some of these benefits, such as gratuity and maternity benefits, only after they have worked with the employer for a minimum period of time. One of the major concerns of the employees in cases of mergers and acquisitions is loss of time period with the previous employer and its impact on the continuity of service. In order to make a smooth transition, it is advisable that the term of service and seniority of an employee should be taken into account and the conditions of service should not be any less favourable than those prior to the transfer. Such conditions must be specifically mentioned in the employment agreement with the new employer.
In the case of Bombay Garage Ltd vs. Industrial Tribunal, disputes pertaining to dearness allowance and gratuity arose between the acquiring entity and the workmen, the acquiring entity contended that the gratuity should be calculated from the day of acquisition and not past service. However, the Bombay High Court held that the workmen cannot be deprived of the benefits which have accrued on account of past services in cases where the business is transferred to another person or company. It is, therefore critical that when the entity acquires the business, the benefits of the employees flow through and employees' right to such benefit is based on the length of the employment regardless of the acquisition. This principle has been upheld and applied in other cases as well, and is one of the most important factors to consider vis-à-vis the workforce when undertaking an M&A transaction. It is now one of the good practices of acquisitions to ensure that the services of employees are not broken or interrupted for the purposes of bonus, provident fund, gratuity or other statutory benefits and for all purposes are calculated from the date of their respective appointments with the old employer.
Treatment of employee stock options is also an important subject which ought to be dealt with prior to the company being acquired. Either the employee should exercise the option before the acquisition or an accelerated vesting period should be discussed in case of an acquisition.
B. Nature and Quality of the Acquiring Entity
There may also be cultural compatibility issues wherein the employees might find it difficult to assume the culture of the acquiring entity. The degree of misalignment of the values and beliefs of the target company and the acquiring entity are major contributing factors to the challenges of an M&A transaction. Further, in case the target company has a better reputation and name in the market compared to the acquiring entity, the employees may not be in favour of the transaction.
C. Lack of Communication
One of the major issues that the employees face is the lack of communication with their current or proposed employers. This lack of communication creates distrust and uncertainty, leading to lower employee retention. It is critical that the human resource is kept in the loop and is periodically informed about the decisions that may affect them. This would lead not only to a smoother transition but will also build transparency and trust leading to employee retention.
2. Challenges for the Acquirer/Purchaser
Human resources is one of the most crucial assets in any M&A transaction. It, therefore, becomes imperative for the acquirer to address the concerns and demands of the employees while balancing it with the needs of the company since unresolved issues may result in the failure of the transaction.
A. Address Employee Concerns on Retention
Prior to the M&A transaction, the acquiring entity should conduct due diligence to check for any red flags including the ones in the human resource sector. The acquiring company should also look into analyzing the employment contracts of the top management for any "change of control" clauses as well as the stock options that are given to the employees and have a plan in place to effectuate a seamless integration. Several cases which come up before the courts often highlight the importance of due diligence for an acquiring entity in an M&A transaction from the perspective of the transition of employees.
In Odeon Cinema v. Workers of Sagar Talkies, the Madras High Court, while discussing the duties COVER STORY NOVEMBER 2019 iimjobs.com | hirist.com 25 and obligations of the acquiring company held that where there is a transfer of a business of one management to another, the rights and obligations which existed as between the old management and their workers continue to exist vis-à-vis the new management, after the date of the transfer. Accordingly, proper due diligence at the time of acquisition is of paramount importance.
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