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Finding the employee clauses in a sale and purchase agreement

Mergers and Acquisitions|Talent
Mergers and Acquisitions

By Kelly Karger and John Carter | March 17, 2021

A well thought-out and constructed employee matters agreement can go a long way to helping the buyer with integration planning.

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Why are there employee clauses in a sale and purchase agreement?

Employees are a crucial element in most corporate transactions. Employers on both sides of a deal take steps to protect transferring employees, manage employee-related risks arising from the transaction and ensure the transaction value for their respective organizations.
In this blog series, we examine how buyers and sellers may handle employee-related topics via clauses in the sale and purchase agreement (SPA) including:

  • Purposes of the key employee-related clauses in the SPA
  • Common employee-related negotiation terms to agree on
  • Common pitfalls that can come back to bite later
  • Different considerations in asset and share deals, including the use of transition service agreements (TSAs)

In mergers and acquisitions, employees often are valuable assets so having the details about their futures worked out at the beginning of a deal helps avoid costly delays and may prevent employees from leaving.

The sale and purchase agreement (SPA) in an M&A deal typically includes a section dedicated to employee topics, sometimes called the employee matters agreement (EMA), but occasionally it is a separate legal document. However, employee issues also are often found throughout the SPA — for example in the definitions, representations and warrantees, schedules and covenants.

When reviewing the SPA for HR issues it is important to work through the entire document so that you can:

  • Understand interdependencies of language in multiple sections
  • Review implications of definitions, such as “employee” and “former employee”
  • Provide edits consistent with language used throughout the document

What do the employee clauses in a SPA cover?

The purpose of the EMA and other employee-related clauses is to set out the responsibilities of the buyer and seller as they relate to employees including:

  • Ensure the scope of the employee transfer and related programs is clear
    • Define the employee populations that are in scope of the deal
    • State the effective date of employee transfer
    • Determine the transfer mechanism and whether the employees will experience a termination event
    • Describe the nature of the seller’s compensation and benefit programs including any global plans
  • Ensure that transferring employees are treated fairly
    • Set out the expectations of the buyer for post-closing compensation and benefit programs
    • Define how long any employee protections (e.g. comparable compensation and benefits programs) last beyond the employee transfer date and how these are evaluated and monitored
    • State what will happen at closing with in-cycle compensation plans that have yet to be paid out, such as accrued but unpaid salary, annual incentives, etc.
    • Describe how and where will service with the seller be recognized
  • Ensure that the financial implications are reflected appropriately in the deal terms
    • Describe the existing employment liabilities and which will transfer to the buyer
    • Determine the balance sheet or funding implications and how any shortfalls are accounted for in the transaction
    • State what employee protection or severance costs will be borne by each party
  • Ensure that post-close employee-related risks are adequately managed
    • Define what representations and warranties should be provided to the buyer and whether these can be indemnified or insured

Why do we need to include all of these items in the SPA?

The seller aims to provide a “soft landing” for the employees to ease the impact of the business being sold and to establish a reputation for fair treatment of employees.

The buyer wants as few constraints on its post-close behavior as possible but may not have the negotiating power to avoid them.

Understanding and agreeing to these issues — to the extent possible — in advance of the deal signing will help both sides avoid frustration and unnecessary losses, manage risks and identify any surprises before they happen.

Surprises can include potential losses due to unforeseen or inaccurately quantified assets and liabilities, and loss of critical talent and risks. Avoiding them is achieved by ensuring HR due diligence is thorough — and the results are understood by the negotiation team and translated into the legal contract in a manner that allows for practical application. This requires close work among the deal team, lawyers and HR.

A well thought-out and constructed EMA can go a long way to helping the buyer with integration planning and reduce stress on the organization and the employees transferring to the buyer. Typically, speed is of the essence when implementing the employment changes, and having the details worked out as far as possible in advance helps avoid costly delays.

In our next blog we look at the common employee-related negotiation terms in a SPA.


Senior Director, Global M&A

Senior Director, Global Services and Solutions

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