Jimmy’s biotech company was doing well. A deal was on the table for a massive pharma conglomerate, Massive-Pharm, to purchase his company via an asset purchase agreement. Everything was going well, that is, until Jimmy’s top sales star, Terry, leveraged the impending purchase to secure a better-paying position at Jimmy’s competitor. After Jimmy’s company lost Terry, Massive-Pharm pulled the deal.

Believe it or not, Jimmy’s situation is not an entirely uncommon one in the M&A world. Purchase agreements often contain legal clauses allowing acquiring companies to back out of deals should the target company lose key employees prior to closing. This legal reality creates a measure of risk for companies in the midst of M&A. What’s more, the exodus of key personnel surrounding M&A deals can not only endanger the success of transactions themselves, but can also endanger the long-term success of companies whose deals have closed. PwC makes note of the “high value” of workforces, their connection to the performance of companies and the ability of human and ‘cultural’ conflict to “completely derail deal success.” Managing and retaining top talent during and after M&A transactions is critical to the success of both transactions and companies.

Who are your key employees?

Perhaps the most important step a company can take before considering how to retain key employees surrounding M&A transactions, is to define precisely which employees are critical to the success of the transaction and the future of the company. PwC defines three types of criticalness with which to assess employees. “Strategically critical” employees are those that are “most essential to the ongoing operations” of the company. “Integration critical” employees are those that are essential to the ability of the merged or acquired entity to integrate successfully with the acquiring company. “Knowledge-transfer critical” employees are those that are essential to the “transfer of ongoing information and know-how.”

After defining employees that will be critical to the success of M&A transactions and the future of the company, businesses should consider how to retain these key employees.

Retaining key employees during M&A

A recent study has determined the top five drivers of employee engagement during mergers and acquisitions specifically. Developing a plan that addresses these five drivers is a proactive way that companies can retain key talent during M&A transactions. We’ve compiled a checklist below that hits on each of these drivers:

  1. Involve key employees in decision making during M&A. Being involved in decision making, was the #1 driver of employee engagement in both M&A and organizational change as a whole.
  2. Reward and incentivize co-workers’ making personal sacrifices to help the organization. When employees see other employees committing to the success of a transaction and the future of a merging company, studies show that such visible commitment begets further employee engagement throughout the company.
  3. Ensure that senior leadership is visible. As stated in the study, during organizational change “[e]mployees want to see and hear from their senior leaders to help understand where the new organization is going, and how this change influences their job and the organization as a whole.”
  4. Provide proper training. Employees are far more likely to be engaged during change if they are confident that they are prepared to handle any new responsibilities that may arise.
  5. Help key employees understand their career path. It is critical to retaining top talent for companies to ensure that their key employees know clearly how they “fit” into the future of the company and how the company’s future can help advance their own career path.

Although this is not an exhaustive to-do list for companies in the midst of M&A deals, it is a great starting point to help ensure that key talent stays on board during deals and continues to enhance the future of companies after deals have closed.

The author would like to thank Alan Hounsell, articling student, for his assistance in preparing this legal update.

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