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.
Monika Naef 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?
Generally, relations between employers and employees are good in Switzerland. Open and candid discussions with the employees or employee representatives (where there is an elected body, which is not always the case) are the rule and highly recommended. Employment laws in Switzerland in general are liberal, but there are certain minimum standards that need to be observed. As in many European jurisdictions, employees enjoy a certain level of protection from termination in specific circumstances (illness, accident etc.).
Similar to the European Transfer of Undertakings Directive, Swiss law has incorporated these principles. In a merger or asset deal, all employment relationships will automatically transfer to the acquiring entity based on mandatory law. Terms and conditions of the existing agreements will continue with the new employing entity. Employees have the right to object to the transfer. In this case, their agreements will be considered terminated based on the legal notice period (which may be shorter than the contractual one).
Mandatory provisions of collective bargaining agreements may be applicable, depending on the industry. These also automatically transfer and will remain in force for one year post closing.
Any subsequent changes the acquirer would like to make to existing Swiss employment agreements or their terms in order to harmonise them with overall global corporate policies, will require the consent of the employees concerned. This is usually not an issue, where the new terms are more beneficial for the employees. Alternatively, the changes may be implemented by giving the employees notice under the existing agreements and offering new agreements with the new terms at the same time. Should a large number of employment agreements be so effected, mass dismissal rules may be triggered. In this case, prior consultation with the employees or employee representatives and the involvement of the state labour office will be required, before any decision is made.
Do you have a best practice for incorporating collective bargaining agreements, employee benefits and pension scheme provision into the deal making process?
By instrument of mandatory law, collective bargaining agreements which the target entity has entered into will automatically transfer to the acquirer and will remain in force for one year. It is good practice to involve the employee representatives at an early stage prior to negotiating with the unions for an extension of the collective bar-gaining agreement.
Under Swiss law, pension schemes must be in the form of a legal entity separate from the employing entity. They are usually in the form of a foundation. This may be either in the form of individual foundation established by the employing company, or a collective foundation, often established and administrated by large insurance companies. The relevant pension scheme of the target company will be headed by a Board of Trustees with an equal number of both employee and employer representatives. A target company will, by law, have entered into an affiliation agreement with the pen-sion scheme. Where a company has set up its own foundation, this affiliation agreement is very often not found in the form of a written agreement, but a conclusive one. In an asset deal or merger, the affiliation agreement will often need to be terminated and a new one entered into by the acquiring entity with a new pension scheme. Based on recent case law by the Swiss Federal Supreme Court, this requires consultation with the employees prior to the termination of the affiliation agreement. This process must be incorporated in the transaction schedule.
In addition, an asset deal or merger may trigger a partial liquidation of the pension scheme. If the pension scheme is underfunded at this time, it is recommended to negotiate a solution on the level of the principals of the transaction agreement.
Incentivisation and retention of senior management is important to ensure stability and continuity post-deal. Any examples in which you have achieved this effectively?
Even more important than the financial aspects are the motivational factors. Keeping individuals informed and engaged throughout the process with clearly stated goals is critical. Where senior management is involved, they should feel that they are a relevant part of the merger process and truly incorporated into the acquirer’s global development policies, so voluntary retention is easier to achieve. My experience as in-house counsel and outside counsel has confirmed this. A transaction-related bonus with parts paid out in the course of the transaction process as well as post closing has worked well, particularly when combined with written recognition from the CEO or the Board of the contribution provided by the individual and the increased workload sustained during the transaction and integration process.
Retention agreements with a staggered bonus paid in set intervals combined with shares or options to the acquiring entity and a penalty in the case of early termination are also good possibilities. The actual implementation will much depend on the goals to be achieved and the existing incentive plans in place with the target entity.
Please note that for publicly listed companies, special rules apply that are more restrictive.
Top Tips – To Keep Your People Happy During The M&A Process
• Early on, maintain strict confidentiality and limit the number of persons involved to avoid anxiety in the company.
• Keep employees informed and engaged as far as possible.
• Elaborate and explain the process, the goals and the next steps; provide a clear plan on the path forward.
• Use the consultation process to understand employee and managers’ concerns and address these early on. Provide context and explain your decisions.
• Celebrate goals achieved.