1. There's Gold in Those Hills.
One key issue for any acquisition comes early in the process and sits in the employment attorney's wheelhouse. The carrots offered to executives in change-of-control agreements and provisions can provide them with job security, separation pay, and other guarantees that add up to serious dollars for the party that pays out. Stock option grants and accelerated vesting schedules triggered by a change in control can make employees very happy and very rich, but they can seriously impact the target's purchase price. A specialist should review key executive agreements and benefit plans, including ESOPs, ESPPs and 401(k) plans to determine whether employees are entitled to payouts, long-term employment contracts, or other guarantees if their employer is sold.
2. What about Poison Pills?
When corporate attorneys think about anti-takeover mechanisms like poison pills, they often forget that employees may hold a considerable amount of a company's stock. In any acquisition, but particularly in a hostile context, a specialist should evaluate all of a company's option grants, stock-option and stock-purchase plans, incentive and bonus plans, as well as 401(k) plans that allow employee investment in the employer's stock. In addition to the financial effect that immediate or accelerated vesting provisions can have on the overall price of a transaction, if these blocks are large enough and have enough voting power, they may prove a barrier to the acquisition.
3. We Bought It, Do We Have To Keep It?
Companies that hope, or possibly fear, they will be acquired often put in place retention plans for senior management to protect their future employment, or at least to make it very expensive to get rid of them. If a target wants to fend off potential buyers or deter them from laying off employees or closing a facility, it may put retention agreements in place for mid- and lower level employees as well, making it all the more expensive to streamline the workforce. While talent and management expertise can make acquisition targets very attractive, if an acquisition may create redundancies or require lay-offs, the buyer needs to know what constraints and costs they will face before they ink the deal.
4. How Rich Are the Benefits?
Acquirers must understand how generous are the benefits provided to a target's employees. If a target offers its employees a benefits package that is considerably richer than that offered by the acquirer — for example low-deductible health insurance, more vacation and sick time or a generous 401(k) contribution match — the inequities can cause problems. Jettisoning more generous plans can lead to serious morale problems among new employees, but maintaining richer benefits for the target's employees may not go over well with the acquirer's existing workforce. Once an acquisition or merger has the green light, specialists should compare the benefits that each company offers, evaluate the costs, and determine whether benefits packages can be amended or terminated.
5. Employee Investments after a Spin-off.
Spin-offs can divide former co-workers between the haves and the have-nots, especially when failed mergers cause weakness in company stock prices. The storied merger of R.J. Reynolds and Nabisco in the mid-1980s eventually came to an end in 1999 when the threat of tobacco litigation caused the company to spin off RJR Tobacco. At that time, RJR Tobacco Retirement Plan administrators decided that Nabisco stock would no longer be offered to RJR Plan participants, removed Nabisco as an investment option, and froze the Nabisco stock held by RJR Plan participants. In 2000 the Plan administrator divested the frozen Nabisco stock, selling it at a significant loss due to its plummeting price. A month later, following a bidding war, the Nabisco stock had spiked and the Plan's Nabisco stockholders sued for breach of fiduciary duty. Over ten years later, the stockholders' claims were eventually dismissed after protracted and expensive litigation. The RJR/Nabisco case is a cautionary tale for acquirers where company stock is an investment option in employee benefit plans.
6. United Front and Collective Bargaining.
At least some of a target's workforce may be covered by a collective bargaining agreement. While a collective bargaining agreement may be a bump in the road, it need not bring an acquisition, merger, or any other business transaction to a grinding halt. However, potential purchasers should be aware that where collective bargaining agreements are in place, buyers may be required to assume certain of the seller's obligations to the union and work with the union in good faith after the business deal has been completed. Typically, buyers are deemed successor employers and, if a buyer assumes the collective bargaining agreement in place with the union, the buyer will be bound by its terms. Working with unions and a unionized workforce raises specials issues about hiring, promotions, disciplinary actions and lay-offs, so it's best to get a qualified labor lawyer on your team early in the process.
7. Warnings about WARN.
Another issue that may spring up during an acquisition does not stem from any employment agreement, but rather from the federal Worker Adjustment and Retraining Notification Act (WARN). WARN requires employers to provide their employees with up to 60 days written notice of a plant closing or mass layoff, including when one of these events occurs as part of the sale of a business. Typically, only businesses that employ 100 or more workers are governed by WARN and WARN notifications are only triggered if the closing or layoff affects a large number or percentage of the company's workforce, but the threshold numbers can change depending on the actions the employer takes. If a post-transaction lay-off or plant closing triggers WARN, responsibility for notifying workers may depend on whether the deal has been structured as a stock or asset purchase, so it's important to get these issues out on the table as soon as possible. Even if a corporate combination is not expected to result in wide-spread lay-offs, getting the advice of labor experts early in the negotiation process can help prepare for the unexpected and hopefully avoid WARN "failure to notify" lawsuits down the road.
8. Caveat Emptor: Seller's Prior Conduct Can Put Buyer on the Hook.
In a recent decision, highlighted by Foley & Lardner in Lexology, the buyer of company assets in receivership got burned by the old maxim, caveat emptor. The buyer knew there was an outstanding $500,000 judgment against the target for violations of the Fair Labor Standards Act and attempted to immunize itself from the judgment by inserting language into the purchase agreement that it was buying the assets "free and clear of all liabilities." An appellate court found that the language was insufficient to shield the purchaser from the judgment and held that successor liability was appropriate because it would promote the enforcement goals of federal labor and employment laws. Other examples of successor liability for buyers abound in the employment context, so buyers cannot assume that agreements settled on by the parties will be the final answer concerning who is responsible for what, especially where statutory protections exist.
9. Another Buyer Risk: Employee Misclassification.
Given the number of employee misclassification cases on the dockets these days, any buyer's due diligence should include a look at how the target has classified its workers. Lawsuits involving independent contractors who say they should have been classified as "employees" continue to crop up and we see wage and hour cases concerning the alleged misclassification of non-exempt employees (eligible for overtime pay) as exempt (not eligible for overtime pay) in increasing numbers. The potential liabilities associated with employee misclassification can be huge, so it's worth a few ticks on an acquisition checklist to get an understanding of this landscape.
10. Managing Employee Expectations During and After an Acquisition.
As many of these tips demonstrate, sellers and buyers must recognize that employee expectations can play a large role in the success of an acquisition or merger. The annals of business school text books are ripe with examples of unsuccessful mergers and acquisitions where workplace culture clash was cited as the prime reason for the failure. Wherever possible, buyers and sellers should take pains to provide clear and consistent messages within all affected businesses, especially after news of a merger or acquisition breaks.
