Acquiring a business: the crucial role of HR

Does your HR team have a role in deciding whether to pursue an acquisition?

Does your HR team have a role in deciding whether to pursue an acquisition? 

Very often the decision of Company A to acquire Company B is shrouded in mystery and any due diligence exercise is carried out by an acquisition team who will look at profit and loss accounts, an order book, the customer schedule, market share and profitability (or otherwise) without considering ‘people issues’. 

However the HR team can play a crucial role in any acquisition. We consider the areas in which HR can have maximum impact and the actions required for HR to effectively fulfil their part in the process. 

Your HR team is likely to be aware of the provisions under Regulation 11 of the TUPE Regulations in relation to “employee liability information” (ELI). The transferor is obliged to release information dealing with: 

  • The identity and age of the employee;
  • The written particulars of employment given to the employee;
  • Any disciplinary action taken against, or grievance lodged, by an employee in the last two years; and
  • Any collective agreements that will have effect after the transfer. 

This information however only has to be released 28 days before the transfer and many acquisitions will have been the subject of the due diligence process for many months. These obligations may well also not apply to a transaction which is a share purchase. The due diligence enquiries will normally have a warranty attached to the responses to the effect they are true and accurate. In addition there will normally be an indemnity underpinning the warranty. This would not only apply to commercial issues such as ongoing customer contracts etc. but to all employment matters such as ‘we have promised Mr Brown £10,000 if he achieves a particular task’. 

So, what is expected of your HR team when the MD says ‘we are considering acquiring X and want you to be part of the due diligence team to see if it’s worth buying’? The starting point is to recognise that in essence in a TUPE transfer the transferors’ rights, powers, duties and liabilities under the contract of employment transfers to the transferee. Equally, anything done before the transfer is completed, by reason of or in relation to the transfer, is considered as being done by the transferee. Armed with that basic premise, your HR team should be asking whether or not there are or have been: 

  • Any enhanced ad-hoc benefits e.g. notice periods have been extended; improved redundancy terms; golden hellos for people introducing new employees to the business; golden handshakes for leavers; any rights under share options; any commission schemes which have an extended fruition time line; anyone who has the benefit of a personal pension plan (as this may fall outside the definition in Regulation 10 of TUPE which relates to the non transfer of occupational pension scheme rights); or 
  • Any promises made to any of the staff who are about to transfer which does not form part of a section 1/statement of Terms and Conditions.

Assuming the scenario being considered is not the transfer of a service through second generation outsourcing, where there is a limited or no negotiating power on the part of the transferor, then your HR team should consider drawing together a schedule of ‘areas of concern’. This could include the following, any or all of which, dependant upon the circumstances and number of staff affected, could be ‘deal-breakers’. So, in addition to the standard ELI details, the HR team needs to consider: 

  • Notice periods for termination of individuals and when that notice period was introduced;
  • If there are any benefits over and above those in the statement of T&C’s apply;
  • If overtime is contractual or voluntary  and whether employees can carry over holidays;
  • Whether there are any ‘custom and practice’ arrangements in place (discounted product purchasing; free products; enhanced sick pay schemes; share options);
  • Whether there are any shop stewards. If so, which Union? Do they have time off for their activities? Is there any time off facility granted? If so, how much?
  • If there are any restrictive covenants in contracts and whether they are enforceable;
  • If the potential transferor has been subject to inspection from the HSE and if they have been issued with either an improvement or prohibition notice;
  • If there has been any change to the T&C’s in, for example, the last 12 months, (particularly in respect of Senior Executives);
  • If there are any County Court judgments against the transferor;
  • If there have been any resignations in the previous 6 months (which might indicate potential outstanding Employment Tribunal claims);
  • If there is anyone on long term sick. If so, how long have they been off? What are the reasons for absence? What contact has been made with the individuals? Is there any indication if and when the individual will return to work?
  • Whether there have been any Tribunal claims in the previous 2 years. If so, how were they resolved, fought, won, lost settled or withdrawn;
  • Sickness absence levels; and
  • Attrition rates (i.e. the ‘normal’ rate of reduction in staff numbers). 

The list is not exhaustive but may well give your organisation, as the purchaser, a ‘feel’ of the Company potentially being acquired. If the organisation has Trade Union representation your HR team may well seek to have discussions with them to obtain a different slant on the business. Requesting sight of more ‘employee centred’ policies such as Equal Opportunities, Dignity at Work and Life/Work balance (Shared Parental Leave, Flexible Working) may give a feel as to the ethos of the business which may be instrumental in deciding whether it’s a ‘good fit’ with your organisation.  

As indicated above it will be important for your organisation as the transferee/purchaser to obtain both a warranty as to the accuracy of the information supplied and an indemnity to provide protection if the information is inadequate and consequent loss or damage is suffered. 

Only armed with such additional information can your HR team take an informed view as to whether the purchase is viable from a ‘people acquisition’ stand point. Whilst the overriding considerations on any acquisition will be commercial, no HR function wants to be in the firing line when its MD suddenly identifies that all the Senior Executives are entitled to extended paid leave and expensive company cars! 

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