In any M&A transaction, there are a variety of risks that are associated with human capital. Mercer has recently released a report, People Risks in M&A Transactions (the Report), based on a survey of M&A professionals. It provides an
Studies reveal that 50 to 70% of M&A transactions ultimately fail to realize expected synergies and, in fact, many actually dilute shareholder value. One of the causes of M&A failures is that companies often neglect to adequately consider the psychological
Human capital is a critical component of any merger or acquisition. High profit margins and synergistic gains cannot be realized without key talent who are able to motivate employees to achieve high levels of performance. Although there is no simple
This post was contributed by Éric L’Italien, Lawyer, Norton Rose Canada
Given the shaky economy over the past couple of years and the reduced number of takeovers, mergers and acquisitions, one would have expected a decline in indirect compensation such as golden parachutes.
However, according to a recent Alvarez & Marsal study, there has been a 32% increase over the past two years in the average value of the change-in-control benefits (i.e., golden parachutes) provided to US executives. Considering that the evolution of change-in-control benefits in Canada tends to be influenced by what takes place in the United States, it’s likely that a similar trend exists in Canada.
Change-in-control benefits generally take the form of an employment contract clause by which the company agrees to pay the employee (usually an executive) significant benefits in the event of a change in the company’s ownership. These benefits are typically severance payments, bonuses or stock options. Such benefits are rarely, if ever, tied to performance.
This practice has made shareholders and boards of directors reluctant to reach agreements that enable executives who haven’t been terminated or had significant changes made to their terms and conditions of employment to receive benefits upon a change-in-control.
From an employment and labour perspective, buying the assets of a business may be preferable to acquiring its shares, as buying assets enables the buyer to clean house and hire new staff.
When considering the merits of an asset transaction, however, a buyer should consider the points raised below regarding the seller’s workforce, as these can significantly affect valuation.
Provincial jurisdiction
Unlike with unionized employees, generally speaking there are no rules protecting non-unionized employees after a business is sold—a buyer can keep the seller’s employees or let them go, even if it continues the same business.
Obviously, the seller will be stuck with the often high cost of dismissing its employees unless it negotiates the transfer of its employees to the buyer. While this may push up the purchase price, it need not be an obstacle, as the buyer can pay the seller a premium on top of the sale price to clean house.
This post was contributed by Jean Allard, Partner, Norton Rose Canada
There are many business and tax reasons for acquiring the assets of a business instead of its shares.
From an employment and labour perspective, buying a business’s assets may be preferable to acquiring its shares because the buyer can clean house and recruit new staff.
Provincial jurisdiction
Each Canadian province has its own legislation governing collective labour relations. This legislation contains provisions defeating the principle of privity of contract and, if the asset sale has the effect of transferring the business to the buyer, requiring that the collective agreement binding the seller will also be binding on the buyer.
In addition, this legislation transfers trade union bargaining rights from the seller to the buyer. Therefore, even if the seller’s collective agreement has expired by the time of the sale, for example, because of a hiatus in operations prior to the sale, the buyer may still be bound to the trade union’s bargaining rights. The buyer will then be obligated to negotiate with the union in good faith to form a new collective agreement.
This post was contributed by Jean R. Allard, Partner, Norton Rose Canada
In a recent Quebec Court of Appeal decision,[1] the court reversed a decision of all previous courts in a case regarding unfair termination for refusal to sign a non-compete agreement three years after the hiring date.
In this case, the employer, a pharmaceutical company, had recruited a chemist who lived in France.
The offer to the employee said he’d be asked to sign a non-compete agreement and a confidentiality agreement. However—and unfortunately for the employer—, only the confidentiality agreement was signed on the employee’s first day of work.
A few years later, after promoting the employee to director, the employer asked the employee to sign a non-compete agreement. The employee decided he wouldn’t sign the agreement unless the employer compensated him with a large sum of money and respected his demands on the duration of and territory covered by the non-compete clause.