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Why are there employee clauses in a sale and purchase agreement?
In our last blog we looked at the range of employee-related topics that are typically covered in the employee matters agreement (EMA) and other HR-related sections of the sale and purchase agreement (SPA).
In the second post in our series on SPAs, we explore some of the key areas that are fundamentally more important to the deal terms and pricing, and require careful consideration and negotiation between the parties before signing.
Be ready for negotiation on key employee areas
First and foremost, HR should own the EMA content and terms. Don’t outsource this to the deal team or the lawyers. Once an agreement on principles is reached it can be translated into legal language, however HR should ensure that the final legal language conforms to the agreed principles and can be translated into executable processes.
Questions to consider relating to transferring employees typically include:
- Which groups of employees are transferring, including those in shared service centers and back office roles? What about long-term disabled employees? What are the automatic transfer requirements?
- What compensation and benefits (C&B) programs post-closing are included, and what does comparable mean and for how long?
- How are pension and other post-employment liabilities included? And which groups of former employees are included (if any)?
- How are employee-related liabilities and assets to be calculated — including pensions, post-retirement medical and other post-employment or long-term benefits? What happens to these items at close if they remain with the seller or transfer to the buyer?
- How will the current incentives be managed, particularly long-term incentives (LTI) based on share grants? Pay close attention to the straddle period across the target close date.
- Who has the power to amend plans or restructure employee groups during the different phases of the deal? What restrictions are placed on the selling group to make changes or conduct hiring?
- What happens if additional information comes to light after the deal closes, for example benefit programs that were not disclosed in due diligence? What indemnities do both sides offer?
Tips for successful negotiation
Negotiation is required across all of these areas so that each party’s interests are protected and the opportunity to meet the transaction’s goals are maximized. Key points to bear in mind during the negotiation process include:
- Understand the deal goals up-front and ensure these are reflected in your positions taken in the negotiation
- Use an “HR term sheet” to summarize negotiations and then transition to contract language afterwards, so you don’t get lost in the legalese
- Develop an agreement in principle so both sides agree on what you are trying to achieve, before jumping to writing the appropriate legal terms in the SPA
- Relax during the process and don’t jump to accept the other side’s proposed HR terms immediately at face value — give yourself time to understand the implications
- Present proposals with supporting rationale in anticipation of the other side’s issues and reactions
- Explore alternatives and understand the related people and financial implications
- Know your “red lines” and where you may be willing to compromise. For example, a buyer may not be willing to take on retirement liabilities under any circumstances, other than where required by law
- Understand what defines “material” for both HR and in the broader deal context
- Escalate material financial issues to the M&A deal team for resolution in the context of broader business valuation
Bearing in mind these points as you work through the negotiations on employee-related matters with the deal team should help you reach a sound agreement.
However, there are pitfalls to look out for and in the next blog in our series we will highlight some of the common traps that buyers and sellers fall into during employee-related SPA negotiations.
