Considering employees during mergers and acquisitions

Updated 26 Mar 2024

Mergers and acquisitions – or M&As – can be an exciting process for a company, its stakeholders, and the top people behind it. However, there can be misapprehensions on the part of employees during mergers and acquisitions.

Naturally, questions and worries from employees can arise, like “Is my job still safe?” or “What happens next?”

Viewed from the lens of Canada’s labour and employment laws, this article will discuss the legal implications of M&As on employees. This article can also be used by lawyers as a client education piece, whether their clients are employers or employees in an M&A transaction.

What are some employment considerations during M&As?

Both the acquiring and the acquired company must consider a few issues when it comes to their employees during and after an M&A.

On the part of the acquiring or buying company, its concern would be how it should integrate the employees from the other company, who will be integrated and who are not. The acquired or target company may look at letting go some employees or process the transfer of employees who will now be working for the acquiring company.

Generally, here are some of the important considerations when it comes to employees during mergers and acquisitions:

• What are the costs when assuming the companies from the other party in the M&A?
• What is these employees’ value to the new business formed after the M&A?
• Is there a union from either company, or what are legal considerations for unionized workers?

Here’s a video on how M&As affect employees in the workplace:

Bookmark our Labour & Employment page for more client education articles and recent court cases in this practice area.

The acquiring company’s considerations

As to the acquiring company in an M&A, there are several factors to consider whether to assume the employees of the target company or not. The first matter for an acquiror to decide “is what they need to do to run the business going forward,” says Brenda Gosselin, a corporate and securities lawyer at Goodmans LLP in Toronto. Gosselin’s practice includes M&A and corporate restructuring.

The acquiring company’s lawyers must look at the client’s big picture. This includes:

• who the company is
• what the company is that they are acquiring
• what their vision for the M&A is

“That's ultimately going to drive how the deal is structured and then what gives rise to the various considerations,” Gosselin says.

Share sale or asset sale

An acquiring company’s responsibilities towards employees from the target company will depend on whether the M&A deal is a share sale or asset sale:

• share sale: the acquiring company buys the shares of the target company and the assets and liabilities that go with it
• asset sale: a buyer will purchase certain assets of the company but not the entire company

In a share sale, the target company’s employees remain with the company, although they typically receive formal offers of employment from the acquiror.

Here, the concern is not much on letting go of employees and its lengthy process, but on how to integrate the employees with the new business. Related to integration is the company’s efforts to make sure that the employees adapt well after the M&A.

In an asset sale, non-unionized employees need not be kept on, while unionized ones may continue their employment depending on the bargaining agreement.

Compared to the share sale, the acquiring company in an asset sale must carefully consider Canada’s laws on terminating employees. This includes labour and employment laws, looking at the individual employment contracts, and the union’s bargaining agreement.

Assessing employment liabilities

Marni Outerbridge, a civil litigator and employment lawyer at SV Law in Guelph, Ontario, shed some light on other considerations when integrating employees during M&As.

Potential liability associated with acquiring the vendor’s personnel includes the number of employees, each employee’s length of service with the vendor, position duties and compensation, including their benefits, says Outerbridge.

Also, are there any current or threatened employment-related claims against the target company? Do employees have detailed contracts and, if so, what do they say?

“No matter how the deal is structured, whether that's an asset or shared [sale] deal, the disclosures are still going to be very important in order to assess employment-related liabilities,” Outerbridge says.

Importance of looking at employment contracts

Gosselin says that understanding the key terms of employment contracts of senior personnel is especially important.

This includes looking at incentive plans under which they are currently getting compensation, which may be affected and triggered by the sale.

A vendor is bound by common law in severing an employee whose letter of offer simply indicates, say, a salary and a requirement to be bound by company policy, says Gosselin.

What’s considered a reasonable award under common law will change over time and jurisdiction, and “of late, age, and an older age, has become a more relevant factor,” she adds. “Someone in their fifties may not be employable in the same way as they were in their thirties. Courts are starting to focus more on that.”

What are the rights of employees during mergers and acquisitions?

Aside from all these practical considerations, employers must also look at the rights of employees during mergers and acquisitions.

At this point, it’s important to consult with a labour and employment lawyer in Canada, not just post M&A or during integration, but also from the start of the M&A planning.

For a quick recap on HR issues affecting employees during mergers and acquisitions, watch this video:

Bookmark our Corporate Commercial page for more news and cases on corporate Canada, including mergers and acquisitions.

Overview of rights of employees during M&As

The rights of employees during M&As – along with the obligations of employers – are found to be both statutory and contractual in nature.

First, since employees from the private sector are covered by the provincial laws on labour and employment, companies in the M&A must first look at these statutes.

Second, more contractual rights may be provided in the employment contracts between the employee and the acquired company.

Unionized employees during mergers and acquisitions

The collective bargaining agreement between the acquired company and its union may also play a role when looking at the rights of employees during M&As.

Under Ontario’s Labour Relations Act, among other similar laws in other provinces, the purchasing company inherits the state of play in a unionized workplace.

If the collective bargaining agreement has expired, or will soon expire, there are residual rights that employers may have to re-negotiate.

Patrick Galizia, who practises employment and labour law, advises negotiating with the union through the vendor. "Saying ‘if you don’t accept the following conditions, we’re not buying the company’ isn’t bad-faith negotiations. It’s a condition of the sale that you’ll get working conditions favourable to you,” he says.

Lauren Butti, a litigator at Goodmans, says that labour unions may be more inclined to negotiate if there is a long-term relationship with the target company and a desire to preserve jobs.

“But [negotiate] in advance, before the deal is made,” adds Butti, who deals with business disputes, including in contracts and employment.

What happens when employees are terminated during M&As?

Companies must be careful when terminating employees during M&As, not just because the law says so, but also to prevent any future litigation against employees on the matter.

Severance and termination rights

For employees who are not kept — or who choose not to sign on — severance obligations will arise on the acquiring company.

For those who are offered employment, the terms must be essentially the same as what the employee currently has — or even a better one.

If the benefits offered by the acquiring company aren’t equivalent to those offered by the acquired company, employees may have grounds to claim constructive dismissal.

Galizia offers some insights on Québec’s law on severance in M&As. Aside from practising employment and labour law, he’s also a partner at Norton Rose Fulbright Canada LLP in Montreal.

In Québec, no formal offer of employment needs to be made to employees of the target company by the acquiror, says Galizia.

“If it’s a share purchase agreement...employees simply continue to work for that new buyer. There’s no offer of employment presented to them; we simply inform them of the new owner, based on sections 2096 and 2097 of the Civil Code of Québec.”

This highlights some differences in the labour laws between provinces, which both acquiring and acquired companies must be aware of during the integration phase.

What happens when employees are retained during M&As?

The situation differs when employees are retained by the acquiror because of the M&A. Aside from the continuation of current employee benefits as discussed above, there are other considerations that the newly formed company must take note of.

Getting employees on board

Retention bonuses and increases in salary may be offered to key personnel to bring them on board, says Galizia. This may be based on the condition that they will stay with the company for a set period. Contracts with higher-level personnel should be made pre-sale and include a restrictive covenant, he says.

Gosselin adds that acquirors should start with good communication in retaining desired staff.

“Once the deal is signed and announced, the messaging by the acquiror and the target should present a united front, with town halls for employees attended by both vendor and buyer. Having Q-and-As prepped in advance that everyone’s on side with will alleviate a lot of necessary concerns and questions,” Gosselin says.

This will also present a positive view of the acquisition; for example, one that is being made by a strategic buyer that will add value to the company rather than simply a financial investor.

What are the pitfalls to avoid regarding employees during M&As?

There are 3 major scenarios to avoid when dealing with employees during mergers and acquisitions:

1. Terminating then hiring employees from acquired company

In Ontario, one of the pitfalls that Outerbridge has seen is when the acquiror insists on terminating employees and being paid by the vendor before being rehired by the acquiror.

In most cases, this is because of a mistaken belief that the acquiror will not be responsible for entitlements accrued during the employees’ prior tenure.

Ontario’s Employment Standards Act considers employment to be continuous in the event of a corporate sale, “even if there's been that termination and rehiring,” Outerbridge says.

Employees who are terminated and paid by the vendor based on length of service, and then rehired by the acquirer, will still get credit for prior length of service. This applies even if the successor-employer terminates the employee later.

The exception is when there is a 13-week gap between the termination of employment by the vendor and reemployment by the acquiror. However, Outerbridge describes this as tending “to be functionally impossible.”

2. Overlooking the personal side of personnel in M&As

“Jobs are very personal to people,” Butti says. This is why employees take pride in their work and in the companies they work for.

Acquirors need to pay attention not only to job roles, titles, salaries, pension and benefits, but also to the “soft” issues that affect culture. This includes an employee handbook that doesn’t conform to Canadian standards.

“You want a happy workforce,” Butti says. “With that comes extra time to ensure policies are Canadianized; you then get a more all-encompassing buy-in.”

3. Overlooking severance pays

When calculating the M&A’s purchase price, both the acquiror and the acquired must consider severance costs. Since it is the vendor who must pay severance to employees who will not continue with the acquiror, that may substantially affect the purchase price, says Butti.

An example is where there are very senior long-term or large-scale terminations resulting from a transaction. “Often you will see in the structure of the deal that there's a price adjustment for the fact that the liabilities triggered have to be paid for.”

Looking after employees in a merger or acquisition

A merger or acquisition is an important transaction for everyone involved, especially for employees. In this article, we’ve looked at what employees can expect during the transition phase. This includes what their roles and rights are, and how the law applies to them.

There’s no question: both companies in a merger or acquisition have a lot to consider. Perhaps the most important is looking after employees on both sides in a merger or acquisition. Keeping things simple, respectful, and clear can help everyone move forward together successfully.

Check out our Special Report on the Top Labour and Employment Law Boutiques in Canada if you’re looking for a lawyer for concerns on employees during M&As.