Underestimated labour law indicators in planning the transaction structure

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Many of the red flags revealed in the labour law related part of a due diligence review – especially in the areas of false self-employment, employee leasing or informal company practices – can often be secured both in the share deal and in the asset deal already by correctly drafting the (share) purchase agreement, for example by agreeing on adequate indemnity declarations or guarantees of the seller. Additional – often underestimated – aspects of labour law upon which no influence can be exerted in the purchase agreement should also be included in the transaction plan.

 

Binding key employees on a lasting basis

If the intangible asset of the target company is the know-how of (individual) employees, it is necessary to identify such employees and retain them on board the company to be acquired. Both in the share deal and in the asset deal, employees with the know-how should be offered appropriate incentives in individual agreements to bind them to the company on a lasting basis. But because the asset deal constitutes transfer of business within the meaning of § 613a BGB and involves the right of the employee to object to the transfer of his or her employment relationship to the acquirer, employees with the know-how are given a kind of “a right to choose” whether to continue the employment relationship with the acquirer or the seller. In share deals, employees do not have such a right because the deal does not affect the employment relationship between the employee and the company as the employer. Employees remain bound to the company at least for the duration of the contractually agreed notice period.

 

Collective agreements and their binding effect and works agreements

Furthermore, the financial considerations should include the impact of the transaction on existing collective agreements and works agreements.

 

Because, in share deals, nothing changes as regards the company's status as a party to the collective agreement, any collective agreements and works agreements also continue to apply without any changes. Only in exceptional cases can their legal continuity be interrupted in matters involving group-related issues, in particular in the case of the so-called carve-outs. As for asset deals, however, § 613a (2) BGB regulates the future fate of collective and works agreements, which can give rise to complicated legal issues in transactional practice. The collective and works agreements binding on the seller either continue to apply in that they become part of the transferred employment relationship, including the prohibition of changes (i.e. no changes may be made to the employment relationship to the disadvantage of the employee within a period of one year). Or they can be replaced with collective arrangements ap-plicable at the acquirer’s company.

 

Right to information and participation of existing employee representatives

The transaction structure selected for the acquisition of a company affects the extent of involvement of existing employee representatives.

 

If the target company has a works council, possible obligations concerning the reconciliation of interests and a social compensation plan should be considered in both share deals and asset deals, as long as the transaction is not intended to be a mere change of owner or shareholder. As soon as any measures are taken as part of the transaction that result in a change in business operations within the meaning of § 111 of the Works Council Constitution Act (Be-trVG), the works council's participation rights under BetrVG must also be observed. Here, classic cases include in particular the introduction of new working methods, mergers of businesses or layoffs.

 

Even if measures constituting a change in business operations are not planned, share deals usually involve at least the right of the finance committee or the works council of the target company to information pursuant to § 106 (3) no. 9a and § 109a BetrVG.  If this obligation to provide information is violated, this still cannot prevent the transaction from being concluded. Nevertheless, the violation may cause additional costs and undermine future trust-based cooperation with the employee representatives. The obligation to provide information arises if the takeover of the company involves "acquisition of control". It should be carefully examined in each individual case whether the concrete situation in the light of company law can imply “acquisition of control” which triggers the obligation to provide information. This requires that the majority of new shareholders in the shareholders' meeting be able to determine the fate of the company in their favour - be it through a majority of voting rights or voting trust agreements. This is usually not the case with indirect acquisition of control, such as the acquisition of the majority of shares in the parent company. Also control agreements as a result of which the target company falls under the control of someone other than the majority of shareholders may provide an argument against the existence of an obligation to provide information.  Information should be provided in particular about the potential acquirer and its intentions with regard to the future business activities of the company and the effects on the employees resulting therefrom. In view of progress in the contractual negotiations, it should be carefully examined from a legal and strategic point of view when the finance committee or the works council should be provided information. After all, the documents to be submitted are not yet intended for any outside audience, especially in the phase of initiating the deal. Therefore, before disclosing any documents or information, attention should be paid to how far the transaction negotiations have progressed and how specific the interest of the potential acquirer in the acquisition is. Thus, it should be urgently examined whether the obligation to provide information is limited in any way where trade and business secrets are jeopardized.

 

Thus, this obligation to provide information is only of relevance if there is a change in the majority of shareholders in the company, which means that this regulation does not apply to any form of an asset deal. But also in the case of an asset deal, an obligation to provide information can arise from § 106 (3) no. 10 BetrVG, as it often falls under the category of “other circumstances” that can significantly affect the interests of the company's employees. However, this case of an obligation to provide information only applies to companies which generally have more than one hundred employees and are required to establish a finance committee. Pursuant to § 109a BetrVG, only in share deals information must be provided to the works council where no financial committee has been established.

 

Conclusion

The choice of the transaction structure and the financial considerations of the transaction parties should therefore also focus on aspects of labour law. At first glance, the share deal is much easier to handle from the perspective of labour law, as there is no change in the allocation of employees under labour law because the labour law circumstances clearly remain the same. On the other hand, the legal consequences arising from the laws in the case of an asset deal offer opportunities for future human resources management.

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