Comment: All smoke and mirrors

M&A activity tends to run in waves and its motivation, though often cast as a desire to consolidate in order to maximise potential commercial opportunities, is all too often far from such reasoning. In fact, it is generally either an act of mutual desperation, monopolistic, or self-aggrandisement by a CEO able to convince his (it usually is “his”) board that expansion is the only option. Moreover, though called M&A, there are few corporate transactions that are true mergers. In the most part they are takeovers, sometimes thinly disguised as an “initiative of equals”.

In a European HR context we usually have to face M&As head on when dealing with the protection of employees during a business transfer (or change of service provider). In the UK alone there are over 30,000 such transfers each year. In the European Union, back in the early days of the Acquired Rights Directive (ARD), it did not matter what kind of M&A was taking place – employers were effectively banned from making any redundancies at the time of the deal and were always required to inform and consult employees. Gradually, however, the chains loosened. Canny lawyers also discovered the ETO loophole – which states that an ARD-related dismissal will be automatically unfair unless there is an economic, technical, or oganisational (ETO) reason for making a redundancy. Under this banner employers have committed a multitude of sins, virtually making the ARD a toothless instrument.

Yet, there is still more. Now it is becoming easier than ever in the EU to classify a business transfer as not subject to information and consultation at all. Although ARD looks like it is all encompassing – and can even be applied to transfers within the same corporate group – the only companies that apply it are those who fail to take effective legal advice, are saddled with a highly restrictive collective agreement, or a works council able to exercise codetermination rights. Ironically, although for the ARD to apply the resulting entity after the M&A must be effectively the same as before, it is also necessary for the identity of the employer to change. Thus, an ARD transfer will not take place where there is just a transfer of shares.

The “only shares transfer” exemption arose in the early days of ARD where there was an attempt to remove the necessity to consider a transfer had taken place every time a significant amount of shares changed hands on the stock market. Eventually, however, all takeovers of one entity by another involving a share purchase, swap or other transfer mechanism were classified as exempt, provided the operations of the business being taken over remained unchanged up to the point of the transfer. This exemption has proven, however, to be directly against the spirit of the ARD, as the new controlling entity will be in a position to do what it wants with the new acquisition once the transfer day has passed. In fact, shareholders, suppliers, customers, and employees are often deceived by such a strategy by being told very different stories about the consequences of the transfer. Thus, the shareholders of the company taken over will typically be told it is a merger, but the shareholders of the acquiring company will be told the other company will become a new subsidiary.

One other consequence of the “business as usual” strategy for very large companies is that because the only outwardly visible change is at the top of the new group, there will be little incentive to fly up into the radar and inform competition authorities in countries where they operate about the change. The threshold for a requirement to inform the country’s authority can be quite low and there is no need for both entities to have operations in the same jurisdiction. One entity can already have market dominance and, provided the other entity makes some sales in the same jurisdiction, the deal can be called in. Often this will be the only opportunity a competition authority may have to question a local subsidiary company’s market dominance.

Finally, employers involved in an M&A often forget that it can seriously affect their current work permit arrangements, especially when the employer has to be registered as a “sponsor”. Once again, this issue will not raise its head where the local subsidiary maintains its current company registration, even though the top-level control of the company has fundamentally changed.

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