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When a company acquires the business and assets of another business, this will normally amount to a transfer of an undertaking under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (as amended) (TUPE). Such a transfer gives the employees of the acquired business significant rights. It is widely known that TUPE does not apply when the shares of the target, rather than its business and assets are bought. However, it is not often appreciated that the integration of the buying and target companies can itself amount to a TUPE transfer.

TUPE implements the EU’s Acquired Rights Directive, and is intended to safeguard employees’ rights on the transfer of a business. The broad principle of TUPE is that the person acquiring a business steps into the shoes of the seller in relation to the transferred employees’ rights. This includes both their rights under their contracts of employment and any rights they may have for things done by their old employer before the transfer. TUPE also limits the ability of the new employer to change the acquired employees’ contracts, and to dismiss those employees. In addition, there is an obligation on both the old and new employers to inform and (if appropriate) consult employees or their trade unions in relation to employees who may be affected by the transfer or any measures to be taken arising from it. Failure to comply with TUPE can lead to material penalties – for example a failure to consult can expose the employers to paying compensation of up to 13 weeks’ pay to each relevant employee.

There have been several reported cases in the UK where integration steps taken immediately following a share purchase have resulted in a TUPE transfer, with claims by employees following. These have included claims for failure to properly inform and consult. In each of these cases, the issue in question was whether the steps taken by the buyer post-completion created a “transfer” of a business or undertaking for the purposes of TUPE. In each case the facts of the matter were slightly different, but the key was that immediately following completion of the share purchase substantial control of the acquired companies passed to the buyer. For example, in one case the board of the target ceased to operate as a separate entity immediately following completion; the buyer started paying the acquired employees directly and completely took over the sales function of the target; and the acquired employees were told that the target would be “fully incorporated” into the buyer. In another instance, while a separate board of the target continued to operate, the old directors all resigned and were replaced by buyer nominees on completion; there was an immediate announcement that there would be an “integration” including the wholesale replacement of the target’s systems, policies and procedures with those of the buyer; the buyer’s management ran the integration with the person responsible for the process reporting to the MD of the buyer; and the management of the target (including its new directors) had no input into the integration process including the dismissal of various employees of the target.

While claims from employees relating to TUPE transfers arising from share purchases in this manner are currently rare, it is likely that they will become more common as employment lawyers become more aware that there are possible grounds for claims. In this context, buyers can take steps to protect themselves including by:

  • as far as possible ensuring that any integration issues are managed through the board of the target, which should formally approve any proposed integration steps. This should certainly extend to approving any redundancies;
  • not referring in communications with employees to a “takeover” or “merger”, and carefully considering the language of any communications to ensure they reflect the idea that any changes of policies and procedures are for harmonisation purposes;
  • ensuring that the target’s board manages or directs communications with its employees about any changes, rather than those communications coming directly from the buyer; and
  • taking legal advice should there be any doubt as to whether the correct protective steps are being taken, or if an employee raises the possibility of a TUPE transfer.

While currently not substantial, the risks of employee claims under TUPE arising from integration after a share purchase are real and likely to grow in future. Through taking simple steps buyers can minimise this risk.  If in any doubt, please do not hesitate to contact John Young – Partner, or any member within our Corporate & Commercial and Employment teams for advice.

Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing.

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