What about your people?
Negotiations can protect employees when selling your company
By David Kern, for SBT
Commentary
In the context of the sale or merger of a closely held or family-owned business, the seller often has a strong interest in rewarding the loyalty of employees by ensuring their well-being in the course of the sales transaction.
There are many techniques that can be used to achieve this result.
First, it must be recognized that limited legal protections do exist to benefit the seller’s employees. For example, under the Wisconsin Business Closing Law, employees who may lose employment as a result of the sale of a business must receive at least 60 days advance notice, if certain numeric thresholds are met.
In addition, state and federal anti-discrimination statutes require that a buyer making hiring decisions with respect to a seller’s former employees not discriminate from the basis of age, race, sex, creed, disability and other protected characteristics.
In the context of a unionized business, a buyer cannot discriminate against employees based on their prior union status and cannot refuse to hire unionized employees simply to avoid having to recognize and bargain with a collective bargaining representative.
Affirmative obligations
However, for the most part, these employee protections are of limited benefit (e.g. a total of 60 days’ pay and benefits under the Wisconsin Business Closing Law) or simply provide protection against discrimination. They do not create an affirmative obligation on the part of the buyer to hire and employ the seller’s employees.
To achieve that result, a seller must address the issue through the purchase and sale agreement. Such agreements can, and often do, require as a condition of the closing that the buyer hire all of the seller’s employees on substantially the same terms and conditions of employment as existed prior to the sale.
These provisions often require a minimum period of employment with the buyer, or alternatively, the payment of severance in the event employment ends prior to that time. It is not unusual for buyers, in the context of closing such sales, to enter into employment agreements directly with the seller’s key employees, both to ensure the continued ability of expertise in running the business and to fulfill the seller’s obligation to continue employment.
Conditions at closing
If at the time of sale, the seller’s employees are already subject to employment agreements with the seller, the seller can also condition the closing upon the buyer’s assumption of those individual employment agreements.
If properly drafted, such individual employment agreements can provide the added benefit of protecting the buyer from competition by the seller’s former employees.
However, as with all aspects of a merger or acquisition, such protections for the seller’s employees do not come without a price.
Buyers sometimes balk at a requirement to hire all of the seller’s employees, since this reduces their flexibility in operating the business going forward. As a result, a buyer may agree to such a commitment, but only in return for an adjustment, sometimes significant, in the purchase price. Such a price adjustment often tests the "good intentions" of a seller who finds that his/her deal is either stalled or rendered much less attractive, based upon the inclusion of these employee protections.
Since a buyer is always free to refuse to hire the seller’s employees in the context of an asset purchase (absent unusual collective bargaining considerations), sellers should be prepared to make price concessions to achieve these goals.
These price considerations often prompt the parties to a merger or an acquisition to explore more creative ways to address the well-being of the seller’s employees. Buyers who are unwilling to commit to a period of employment for all of the seller’s employees might be far more willing to agree to immediate vesting of such employees in the buyer’s existing health and welfare benefit plans.
Alternatively, a buyer may be willing to honor prior years of service for purposes of various benefit calculations or may be willing to honor existing vacations, as a way to promote goodwill among the seller’s employees while avoiding costly severance obligations that might otherwise accompany a hiring commitment.
Regardless of the approach taken by the parties, it is clear this is an area in which a seller and a buyer have a great deal of contracting latitude. Through creative and careful drafting of the purchase agreement, the seller can almost always achieve his/her goal of recognizing the past contributions of employees by providing at least some measure of security for them.
By David Kern, a partner who specializes in labor and employment law at the Quarles & Brady law firm in Milwaukee, for Small Business Times
Aug. 8, 2003 Small; Business Times, Milwaukee
