Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Dr. Gerd Müller-Volbehr discussed The Art of Deal Making: Using External Expertise Effectively as part of the Employment chapter.
What advice can you offer international clients on harmonising employment practices and culture following a merger or acquisition in your jurisdiction?
Every corporate transaction requires the definition of a transaction structure, which raises a multitude of tax, civil, public and labour law questions. In cross-border transactions, special consideration must also be given to the cultural conditions in the target company since a workforce willing to cooperate is important for successful post-deal integration.
The optimal transaction structure must be determined for each case. Three models are available: a share deal, asset deal or a merger.
In a share deal, the operational structure remains intact. If working conditions are changed post-deal, these can be implemented through amendment agreements, but require the consent of the respective employees. The pronouncement of change notices to change working conditions meets high legal hurdles and is only successful in exceptional cases.
In an asset deal, the conditions for a transfer of business within the meaning of § 613a BGB (German Civil Code) are usually met. Accordingly, the labour law acquis is transferred to the new legal entity. The conclusion of amendment agreements for the harmonisation of working conditions after the transfer of business becomes effective. However, the treatment of works agreements and collective bargaining agreements become more complicated during a transfer of business. In principle, rights and obligations become the content of an employment relationship between the new owner and the employee by legal norms of a collective bargaining agreement or a works agreement through a transfer of business. A change to the disadvantage of the employee is not permitted before one year after the transfer. However, this does not apply if the new owner already has collective bargaining agreements or works agreements with corresponding regulatory content. This exception is important for the harmonisation of working conditions.
Do you have a best practice for incorporating collective bargaining agreements, employee benefits and pension scheme provision into the deal making process?
Collective bargaining agreements, employee benefits and claims from the company pension scheme give rise to labour costs that must be examined closely in the course of due diligence and calculated on the basis of their relevance to the purchase price of the company. Any intervention in these claims before or during the acquisition must be carefully weighed up with a view to preserving the corporate culture of the target company and employee motivation. Harmonisation measures implemented at the wrong time are likely to cause more harm than good. An exception is made for claims from the company pension scheme. In contrast to a share deal, in an asset deal claims of active benefit recipients (pensioners) and employees who have left the company are not transferred to the new legal entity in accordance with § 613a BGB. Risks could be minimised by restricting the transfer of only the claims from the company pension scheme for active employees. These risks relate to the question of whether and to what extent provisions made in previous years can cover the actual claims of employees. In view of the steadily increasing average life expectancy of the population and the zero interest rate policy of the European Central Bank, this is by no means certain.
With regard to the commitment to collective bargaining agreements, it should be noted that after the takeover of the target company the acquirer should examine its possible membership in an employers’ association. As an alternative the change of an employers’ association, a resignation from an association or also a so-called membership without being bound by collective agreements should be discussed.
In summary, harmonisation measures should always take into account the employees’ acquis. A deterioration of the acquis regularly leads to unrest among employees and promotes the change intentions of qualified employees.
Incentivisation and retention of senior management is important to ensure stability and continuity post-deal. Any examples in which you have achieved this effectively?
Special cash payments can be made in connection with an M&A process by the target and the acquiring company.
Often, in connection with the sale, owners of family businesses are prepared to give the employees a portion of the sales proceeds as a thank you and special award for past performance. When structuring such an ex gratia profit participation, tax and social security law questions arise which, depending on the disbursement by the target company before the transaction is completed or by disbursement by the former shareholders, have to be answered differently, but cannot be discussed in more
In addition, the target and the acquiring company should agree to compensate employees by granting special bonuses for the special workload that regularly arises during M&A processes. In addition, employees in key positions should not only receive a special bonus, but should also receive a retention bonus so that they do not use the professional uncertainty associated with the M&A process for professional reorientation, but remain committed to the company and use their know-how for its growth and the success of post-merger integration. Finally, in addition to the above-mentioned cash benefits, an attempt could also be
made with employees in particularly sensitive positions to agree a so-called post-contractual non-competition clause against payment of compensation for a period of leave in order to avoid switching to competitors, at least for a limited period of time.
In a challenging time, keeping staff as informed as possible is more than helpful, as is making big announcements face-to-face, either individually or in group meetings, and making sure that enough time is allowed for questions.
Top Tips – To Keep Your People Happy During The M&A Process
• The acquiring company should consider all personnel costs, including the company pension scheme, when determining the purchase price.
• When harmonizing the working conditions, consider whether these must be realised at the time of the acquisition. An M&A process always triggers worries and possibly even a career change among the workforce – especially key employees. In our opinion, the priority should be the success of the post-merger integration, which is accompanied by respectful treatment of the target company’s corporate culture.
• As long as the target company is not a restructuring case, the harmonised working conditions should not lead to a deterioration of the social acquis of the employees, at least not for the duration of post-merger integration. Additionally, the performance of employees during the M&A process should be rewarded by granting bonuses and key employees should be retained through retention bonuses and development prospects in the new group.