In the last edition of The Metropolitan Corporate Counsel
, we focused on the scope of the Acquired Rights Directive
("Directive") and the way it and similar local laws add additional
layers of employment-related complexities to European business
transactions. Under the Directive, all rights, duties and liabilities
of the outgoing employer ("Seller") relating to the transferring
employees' contracts of employment transfer to the incoming employer
("Acquirer"). This includes rights under the employment contract and
statutory rights, including employees' rights to bring claims for
unfair dismissal, redundancy and discrimination. For this reason, it is
essential that an Acquirer ascertain all pertinent information about
the employees it might inherit when considering whether to buy a
business or enter into an outsourcing agreement in some Member States.

This
article examines practical ways, organized below by the stage of the
transaction, to manage the employment aspects of EU business transfers
without violating the Directive or local laws.

Preliminary Considerations

At the outset, potential Acquirers should consider how the Directive may affect the contemplated transaction.

One
simple reason for this is that the deal's potential profitability is
greatly reduced if, unexpectedly, the Acquirer inherits previously
unanticipated employees and related liabilities. Therefore, Acquirers
often want to factor in these costs when formulating their bid.

Potential
Acquirers may wonder whether they can structure the transaction to
avoid application of the Directive or similar local laws. Generally,
pure stock deals are not subject to these laws. However, regardless of
the structure of the initial transaction - be it an asset deal, stock
deal, or merger - if there is a subsequent transfer of the Acquirer's
employees (such as part of an integration post-closing), these laws may
apply.

If the Acquirer completes a stock acquisition and
does not subsequently transfer the employees, then the Directive is
irrelevant. The Acquirer would, of course, still be required to comply
with all other applicable laws protecting employees, such as laws
prohibiting termination of employees, except in limited circumstances -
much different from the standard U.S. employment "at-will" doctrine.

Another
way to avoid the Directive's impact is to ensure that the acquired
business does not "retain its identity" because the Directive only
applies where the transferred business retains its identity
post-transfer. So, if the business is immediately dissipated and
absorbed by the Acquirer's existing business - rather than treated as a
discrete, ring-fenced part of the Acquirer's business - such that it
does not retain its identity, then the Directive does not apply.

Due Diligence And Pre-Closing Phase

As the Directive transfers contracts of employment and related rights
and liabilities automatically to the Acquirer, it is essential when
buying a business (or taking on a contract in an outsourcing context)
to conduct a thorough audit of the Seller's business and to have access
to all pertinent information relating to the Seller's employees who
will transfer and their terms of employment. Where the acquisition
involves only part of the business, the Acquirer should seek indemnity
against claims from any employees retained by the Seller who may claim
that they should have transferred.

The Directive also
provides transferring employees with certain rights pre-transfer. Where
there is a delay between signing of the definitive agreement and
closing, the Seller is likely to want indemnity from the Acquirer in
these areas. For example, in the UK, where the transfer would involve a
"substantial change in working conditions to the material detriment" of
an employee, that employee can treat himself as dismissed by the Seller
and sue before closing.

Pre-closing is also when Seller and
Acquirer must comply with their respective consultation obligations
under the Directive. The precise scope of the obligations varies from
country to country. Both in the UK and in France, there is no minimum
period for the consultation to last. In Germany, all individual
employees must be informed in writing about the transfer before the
transfer occurs, and the information must include, among other things,
the implications of the transfer for the employees.

Building
consultation into the pre-closing process is vital. Indeed, the
businesses concerned can use consultation with employee representatives
to their advantage. Such representatives can assist with dialogue and
become a force for change in the organization, including assisting the
Acquirer in harmonizing (where legally possible) the status of
employees and changing working conditions and arrangements. The
employee representatives are therefore an important constituent in the
business transfer process.

One final point to note at this
stage is that any collusion between Seller and Acquirer to avoid the
Directive's application by dismissing employees pre-transfer will
likely result in employees having claims against both parties for that
dismissal.

Post-Closing And Integration

After the deal closes, the Acquirer's efforts to manage the workforce
and, often, integrate the employees begins. The Directive and local
laws often impact this.

The Directive's starting point is
that harmonizing terms and conditions post-transfer is void. This poses
practical challenges in different Member States.

In the UK,
for example, any change to terms and conditions - even to the
employees' benefit - is void. However, practically speaking, employees
who are offered improved terms and conditions are unlikely to sue. This
means that in many cases, an Acquirer can successfully "wrap up" a
bundle of changes (some less favorable, but most to the employees'
advantage) without challenge. Although technically in breach of the
Directive, this breach is of no consequence because the employees have
no reason to want to challenge it.

In France, any
substantial changes to working conditions occasioned by the transfer -
including compensation changes or changes to working hours - are
permitted with employee agreement.

In Germany, what
happens to terms and conditions of employment after the transfer
largely depends on the source of those terms. If pre-transfer they were
contained in collective bargaining agreements or works agreements, the
terms and conditions are treated after the transfer as if they were
part of the individual employment agreements and may not be altered to
the employees' detriment for one year after the transfer. By contrast,
if the terms and conditions of employment were based on individual
agreements, they may be altered even to the employees' detriment
without restrictions provided that the employee consents.

Stock
options are one particular area of difficulty. Often, options in the
Seller are either cashed out or substituted with options under the
Acquirer. Where the Acquirer does not have its own scheme, however,
matters are less straightforward. In the UK, the courts have
established the principle of "substantial equivalence" where there is
an express or implied contractual right to receive equity. Recognizing
that it is impossible for the Acquirer to establish a scheme giving
options to purchase Seller stock, an Acquirer's obligation is to
provide a benefit of "substantial equivalence" to the lost options.
Under French law, transferred employees have no rights in relation to
the options they have lost, as long as they were individually informed
of this consequence pre-transfer. They cannot claim any compensation
from the Acquirer, who has no obligation to implement a new option
scheme. In Germany, stock options are not affected by the transfer if
they are granted by the parent company of the employer (or another
group company) and if the employer itself has not taken on any
obligations with regard to the options. In this case, the granted
options do not transfer to the Acquirer. If the options are granted by
the Seller itself, however, they are part of the employment conditions
and can, in principle, transfer. That said, the law in this area
remains uncertain, and it is not clear whether the change in employer
means that options are cancelled automatically with the transfer. In
view of this uncertainty, the Seller or the Acquirer should enter into
agreements with the employees cancelling the stock options for a cash
payment.

What if the Acquirer needs employees to sign new
protective contracts, such as non-competes or contracts protecting
company intellectual property? Often any contracts that the Seller's
employees signed are inadequate. This would constitute a variation to
the contract of employment that, if by reason of the transfer, would be
void. In the UK, France, and Germany, the Acquirer would be well
advised to seek to update these provisions of all employees' contracts
(not just those who have recently transferred) at once, perhaps in
response to the changing needs of the Acquirer's business further down
the line (for example), to defeat the suggestion that the changes are
being made "by reason of the transfer" and are therefore void. As with
all contractual changes, the Acquirer will need the employees' consent
to the changes.

Often, as part of the integration,
redundancies (meaning employee layoffs) become necessary. In the UK, a
redundancy situation is one of the few circumstances where dismissing
an employee protected by the Directive is not automatically unfair. The
Acquirer must be mindful of the normal principles of unfair dismissal,
however, and this includes fairly selecting an employee for redundancy
by reference to an employee pool that includes the Acquirer's own
employees. If the Acquirer does not wish to drag its own employees into
the process, it must conduct the dismissal before the integration (if
possible) or any dismissal will be unfair - meaning that the Acquirer
would be well advised to seek to have the dismissed employees sign
compromise agreements waiving all claims in exchange for severance. The
situation is the same in France and Germany and, as in the UK, the only
way to be certain of avoiding any claims would be to enter into
compromise agreements.

Conclusion

Although a business transfer can be complicated from an employment
perspective, the Seller and Acquirer can reduce these complexities by
taking appropriate local legal advice at the earliest possible stage.
Securing appropriate warranties and indemnities requires both parties
to ascertain information that allows them to identify and assess their
own particular risk areas.

It is important to remember
that the Directive gives employees an additional layer of rights beyond
those already provided by Member States (which will already be more
protectionist than most applicable U.S. law). The Directive's purpose
is protecting employees' rights, a principle that is often at odds with
the Acquirer's goals to harmonize the newly acquired business and
integrate the newly acquired employees with its own business. During
what is a time of uncertainty, the integration needs to be handled
sensitively and with caution.