Things to know about before a merger or acquisition

Over the past 18 months or so, M&A activity has been steadily increasing.  Whilst most of us don’t think too much about planning for an M&A transaction until we’re told that it’s on the cards, there are a few overarching considerations that you really should understand before your CEO knocks on the door to deliver the news that you’ll be responsible for coordinating the employee issues surrounding the deal.

Firstly, it’s important to understand the transfer of business and continuity of service rules in the Fair Work Act.  Generally, a transfer of employment from a seller to a buyer results in the new employer being required to recognise the transferring employee’s service with the old employer.  This results in the new employer being required to take on all of the transferring employees’ service related entitlements.  However, where the buyer and seller aren’t associated entities, the new employer can elect not to recognise prior service with the old employer for the purposes of calculating annual leave and redundancy pay.  In these circumstances, the old employer remains responsible for these payments.  This is very useful to understand, particularly for the new employer who can reduce their transaction costs by negotiating for the seller to make those payments.  Similarly, there are provisions preventing employees from “double-dipping” so if it can be negotiated for the seller to pay out those entitlements which are capable of being paid out prior to settlement, the buyer will be relieved of having to pay for those entitlements after the transfer.

An often forgotten about aspect of effecting a merger or acquisition is the requirement under all Modern Awards to consult with employees about “major workplace change”.  Awards set out requirements as to how that consultation process is to be undertaken but initially, the important thing is to remember that this is a requirement in these circumstances and that failing to do so is a breach of the Award with the potential for very high penalties to be imposed as a result.  This is something that your CEO will expect you to know!

Of course, you will also need to understand how to conduct a thorough due diligence investigation into employment matters.  You may need to push for this as the focus of upper management at these times tends to be around financial and legal due diligence.  However, conducting proper employment relations due diligence can be invaluable in determining the value of the business (especially where there is a substantial amount of accrued liabilities for employee entitlements) and, in some cases, determining whether the deal should go ahead.  For example, an enterprise agreement which covers employees with the old employer may actually transfer to their employment with the new employer, even though the new employer is not a party to the agreement.  Where the enterprise agreement contains terms and conditions which the potential buyer cannot or does not wish to meet, the discovery of this information at an early stage will ultimately save the buyer money.  Other things to think about when conducting a thorough due diligence investigation include reviewing and understanding the terms and conditions upon which transferring employees are employed, what policies and processes are in place, what is the value of accrued employee entitlements, what is the old employer’s WorkCover claims history, if the acquisition involves purchasing shares in the employer company, are there any threatened or ongoing claims?  Of course, many of these issues can be dealt with through the use of indemnities and warranties in the sale contract but it is always better to understand the risks up front than to discover the existence or the extent of the risks when it’s too late to do anything about it.

The final broad brush consideration is the impact of the change on employees of both the buyer and the seller.  Will there be a need to effect redundancies?  If so, are you aware of the consultation obligations under the relevant Award?  Have you adequately canvassed redeployment opportunities?  How will you choose between candidates for retrenchment?  You will also need to think about how you will approach the blending of two distinct firm cultures.  Will you need external assistance (for example, from a workplace psychologist who specialises in change management)?  If so, is there money in the budget for this or will you need to push for that?

These are just a few of the pre M&A considerations which should be taken into account by HR Managers and business owners to ensure that the transaction runs smoothly and that employee issues are correctly dealt with when the time comes for you to deal with a merger or acquisition.  How prepared are you?  Have you done what you can before a merger or acquisition is considered however to ensure you have increased the value of the business – after all it is from people’s performance that profits are created.

At HR Business Direction we can assist with the Industrial Relations, Change Management and Cultural aspect of Mergers & Acquisitions.

 

Melissa Fitzpatrick LLB (Hons); B.Int.Bus; IRSQ
Industrial & Employment Relations Specialist
melissa.fitzpatrick@hrbd.com.au
07 3890 2066
www.hrbd.com.au