Canadian Lawyer InHouse

Apr/May 2010

Legal news and trends for Canadian in-house counsel and c-suite executives

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By Henry Dinsdale and Jeff Goodman Acquiring a workforce Identify employee issues early in M&As T he transition of employ- ment and human resources obligations from vendor to purchaser in a corpor- ate transaction can result in significant liability for both parties. The liabilities are significant and uncertain, but can be overcome by a careful review of the risks to the organization arising from potential personnel challenges and the implementation of detailed plans to address those risks, including retention, ongoing employee communication, and integration challenges. Transitioning unionized workplaces from vendor to purchaser is the least uncertain. Generally, in either a share or asset transaction, the union's status as bar- gaining agent for employees and any col- lective bargaining agreements in operation carry over provided there is a continuation of the business. Employment-related liabil- ity in a non-unionized workplace is more uncertain and contingent on, among other things, whether the transaction involves the sale of shares or assets. In a share transaction, the identity of the employer does not change and as a result legal liabilities and obligations flow to the purchaser automatically. In contrast, employment obligations and liabilities do not necessarily flow to the purchaser in an asset sale. However, if a purchaser offers continued employment to the vendor's employees, the employees' length of ser- vice with the business will usually be con- sidered in the event that employees are ter- minated. As a result, the purchaser should keep in mind the costs associated with terminating these employees relate to the entire period of employment with vendor and purchaser. Furthermore, the purchaser could be responsible for part or all of both the statu- tory and common law termination costs associated with the employee's service with the vendor. This is true even if the vendor has paid the employee his or her notice and severance entitlement when the employee was terminated at the time of closing. In Ontario, legislation stipulates an employ- ee's length of service carries over to the purchaser if an employee is rehired within 13 weeks from the date of termination. A key concern for the vendor is the purchaser makes an offer to continue to employ all employees on the same or substantially similar terms to those that existed prior to closing. If the purchaser does not offer employment to the vendor's employees, the vendor will be responsible for all employment entitlements payable at termination to those employees. If an employee does not accept an offer of con- tinued employment on the same or sub- stantially similar terms and sues the vendor for wrongful dismissal, the employee may be found to have failed to mitigate his or her losses, thereby reducing any damages that he or she is entitled to, with the excep- tion of statutory entitlements. Conversely, if an employee chooses not to accept an offer of employment not on substantially similar terms and conditions of employment and is subsequently ter- minated by the vendor, the vendor could be exposed to significant liability through potential constructive dismissal actions. Given these risks, it is crucial vendors and purchasers consider allocating risk associated with transitioning employees early in a deal to minimize liability. A purchaser should also conduct thorough due diligence, particularly in a share trans- action where all employees and employ- ee liabilities and obligations flow to the purchaser without change. A well-drafted asset-purchase agreement is important in allocating employee-related liability in an asset transaction. An APA can allocate potential costs that arise from the assump- tion of employees' length of service by the purchaser with a provision allowing the purchaser, post-closing, to claim the costs associated with terminating the employees from the vendor. The obligation for pay- ment still rests with the purchaser and the purchaser should ensure it is satisfied with the ability to claim such amounts from the vendor. Vendors and purchasers should also be aware of abstract risks that can impact a transaction. In the long term, poorly man- aged organizational and cultural issues may be more likely than financial factors to negatively affect a merger. Vendors and purchasers must ensure to communi- cate effectively with employees to assuage any uncertainty caused by a looming transaction. "Cultural" conflicts often arise when a change of control or merger impacts a workplace. In the recent Suncor Energy Inc. and Petro-Canada merger, for example, Suncor senior management and media analysts noted the success of the deal hinged on an effective blending of Suncor's entrepreneurial culture with that of the more bureaucratic Petro-Canada. A particular concern is that valued employees with specialized skills will "abandon ship" if they believe a deal could impact their position or job secur- ity. Accordingly, it is essential in the early stages of the transaction for the purchaser to identify key employees who merit spe- cial attention to ensure they stay on post- closing. These concerns may be addressed through use of cash incentives, retention bonuses, and other retention techniques, including stock options and change of control agreements. This kind of "liability," while not legal in nature, should be a focus for all parties to a corporate transaction. IH Henry Dinsdale and Jeff Goodman are labour and employment law partners with Heenan Blaikie LLP in Toronto. INHOUSE APRIL 2010 • 7

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