Reducing Potential Legal Threats in Mergers and Acquisitions

By Stuart Jackson

It is no surprise that mergers and acquisitions are a complicated business. There is a lot of work that must be done in a small window of time in order to finalize a transaction. When two companies merge, the main focus is generally on the economic aspects of the deal. However, mergers and acquisitions go beyond assessing the financials and property assets of the companies. Effectively integrating the workforces of both organizations is one of the main factors in the deal’s long-term success.

According to Vortylon, a merger and acquisition advisor specializing in company integration, less than half of mergers and acquisitions survive more than three years. If a buyer wants the transaction to survive and the new business to thrive, it is necessary to develop an overall integration strategy that starts well before the transaction occurs and continues well after the transaction is finalized. Part of that strategy is understanding the key workforce-related issues that can arise.

Potential Legal Threats

Companies are becoming more focused on potential employment liabilities during mergers and acquisitions. This focus is due in part to the on-going rise in wage and hour claims and class actions as well as sometimes varying state employment laws. It is important to learn if there are any employee lawsuits pending against the target company and whether the target company has any practices that potentially violate federal or state employment laws. Some of the main labor and employment issues that have the potential to expose a buyer to liability are misclassification of employees for compensation purposes, unpaid overtime or other wage and hour-based issues, and issues surrounding employee benefits. If employees of the target company are represented by a union, the buyer must also understand its potential obligations under existing contracts.

Including certain provisions in the transaction agreement can help shield the acquiring company from liability. Representations and warranties by the seller about any legal violations or litigation and an indemnification clause will help make clear who is liable for any potential claims that occurred before the transaction. A deep dive into the employment practices of the seller is also necessary before finalizing the deal, and quickly integrating the seller’s employees into the new organization will also help mitigate against any flaws in the seller company’s past practices.

Redundancies in the Workforce

One of the most difficult aspects of mergers and acquisitions is facing the possibility of employee layoffs. When two companies merge, there are often redundancies in the workforce, and it is necessary to determine who will be kept on, reassigned or laid off. Establishing a formal process to determine which employees are let go can help shield a company from liability. Arbitrary or entirely subjective decisions will expose a company to claims of bias, whether they be based on age, gender, race or some other protected category. Ideally, workforce decisions should be made by using factors that are as objective as possible, such as seniority, experience or past job performance.

Claims of bias are not the only danger when considering reductions in force. The Worker Adjustment and Retraining Notification Act (WARN Act) or similar state laws may be triggered if a large number of positions are eliminated. The WARN Act requires an employer to give a certain amount of notice to laid-off employees and certain government officials or agencies before the actual day the layoffs occur. Most state laws vary on what number of layoffs trigger the notice requirement and how much notice the employees must be given; therefore, it is crucial to check the laws of the state where positions will be eliminated in order to ensure that any responsibilities are complied with.

Merging Policies and Operations

Another aspect of integration that affects employees is determining which operations and policies to adopt. After a transaction, the buyer may decide to completely discard the seller’s policies in favor of its own, or continue to use some of the seller’s policies. Human resources staff can help shed light on things like performance expectations, how problems within each organization are handled and the management style of each company. Once it is decided which policies will stay and go, it is necessary to update the HR-related documents, such as the employee handbook and employment agreements, and communicate the changes to all employees.

A buyer must also think about whether it will continue to offer any of the seller’s existing employee benefits. The seller’s benefit plan may have an impact on the financial value of the transaction and may have tax consequences for the buyer as well. Beyond the economic considerations, certain benefits may be key to retaining employee talent and preserving morale. Additionally, the buyer must decide how it will handle accrued but unused benefits from the seller’s plan, such as vacation or PTO hours. All of these considerations should occur before a transaction is finalized, including how the changes will be communicated to employees.

Culture

Cultural differences are bound to arise when two organizations combine. The two companies will have their own cultures and norms and a significant challenge is determining how to help everyone adjust. It is never a bad idea to discuss the desired culture from the beginning and implement practices that reinforce that culture as soon as possible.

Analyzing whether the companies can successfully integrate also requires a look at the culture of each company. Involving the HR department from the beginning can help leaders determine whether the companies are a good match. A business can understand the characteristics of a target company by considering its leadership approach, decision-making practices, company values and communication style.

Communication

Communication is a final key to any successful integration. Even the best plans can fall apart if they are not effectively communicated. Mergers and acquisitions can cause worry and anxiety for many employees. Active and consistent communication can boost morale among the workforce and also help facilitate a genuine cohesion between the companies’ workforces.

Communication should be planned ahead of time. It may help to establish a central location to announce merger updates, receive questions and provide answers. An intranet page or blog are two helpful ways to widely disseminate information. Training managers and encouraging them to frequently check in with their teams is also helpful in combating confusion or inaccurate information. Whatever the method, it is crucial that information is provided in a reliable and consistent manner.

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Completing a merger or acquisition is no easy job; however, there is a lot of work left to be done once the deal is finalized. Workforce issues are one of the main factors that determine whether a transaction will survive. Identifying potential issues from the outset and establishing a comprehensive integration plan will help ensure that a merger or acquisition enjoys long-term success and that the two (or more) organizations effectively assimilate into one company.

Editorial assistance provided by summer associate Shelby Howlett.