On demand 1h 2m 20s Intermediate

HR Due Diligence in Mergers and Acquisitions

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HR Due Diligence in Mergers and Acquisitions

Poor due diligence can result in mergers and acquisitions failing to meet their goals and disregarded H&R considerations can be a chief offender. In today’s course, attorney Chuck Dalziel, will walk attorneys through detecting potential employment-related liabilities and avoiding mistakes during integration and transition planning during mergers and acquisitions.

Transcript

Well. Good morning. My name is Chuck Dalziel, and I'm making a presentation today regarding due diligence that HR departments should do in mergers and acquisitions. I'm a member, a sole member of a law firm in Atlanta called, magically, Dalziel Law Firm. I've been practicing law for 43 years at this point. I graduated from University of Georgia Law School magna cum laude, in 1980. I'm a member of the order of the Coif. I was on the law review. I first wrote down a corporate department of a large Atlanta law firm for four years. Then I spent 17 years at a specialty litigation firm in Atlanta, where I did a lot of insurance related work, including a lot of insurance coverage work that involved D.A. policies and also did a lot of non-compete work. A lot of what we would call business divorce type work, those would follow the sale of business acquisition in some cases, and then also mergers. But it would also include small businesses where people were in a small corporation or a limited liability company or a PC, even a partnership. And they wouldn't really have a clear way to separate, you know, once they decided they didn't like each other. So it did a lot of that kind of work as well. I spent substantial time advising HR departments, and I've presented on a lot of different topics relevant to HR professionals. So today I'm going to use all that experience that I have to talk to you about the due diligence that HR should be doing in a merger and acquisition situation. And. Let me give you sort of a general background before I get into the meat of the presentation. Okay. We're going to talk about different kinds of mergers. And so what we're going to learn is that there are different kinds of mergers. And so the due diligence has to be tailored to the particular type of merger that's being effectuated. So we have a horizontal merger. The partners in this type merger are parallel in the market, mean they sell the same services or products generally. They may be doing so in the same geographic area, or they may be selling in substantially different geographic areas. Their customers overlap a little bit or a lot, and they may be targeting the same market or substantially different markets. So think of that kind of merger. And what leads to mind if you read the business news, is the proposed merger between the Kroger supermarket chain and the Albertson's supermarket chain. And in that situation, you know, they're saying that that's okay. The proponents of the merger are because they serve different geographical areas, so they won't have any antitrust implications, or it won't have antitrust implications sufficient to stop the merger. But that is debatable. And I think I am not clear as I sit here, whether they've gotten that one through regulatory approval. I don't believe they have. But that's sort of the issue is even if they're serving geographic, different geographic areas now, if they merge, you know, and then they're serving them as one unified unit, it might have antitrust implications because they have become too large and will hurt the markets. Then we have the vertical merger. In this situation. What we have is. Companies that are in different places in the supply chain, and so they want to merge in order to. Minimize cost and highlight efficiencies and put a couple of examples in the paper, like, for example, a company that makes airplanes might buy an engine manufacturer, or you might have a drug manufacturer that. It buys a drug distribution company. You might have an accounting firm that provides litigation support, and that is a small, relatively small part of their business. But they want to make it bigger that a bigger part of their business. So they would acquire an electronic discovery management firm. And so in this situation, a lot of time to what you want is you want control of other people that are in the supply chain that you don't have presently. And a good example of that would be when John D Rockefeller was shipping oil from western Pennsylvania and Cleveland, where it was refined, you know, East. He did two things. He got control of the railroads, either by buying some of the railroads and merging them into his operation or getting favorable. Pricing from the railroads. And then later he actually started a shipping line that actually took the oil on ships. And so he was wanting to control the delivery mechanisms for his product. And so he engaged in vertical mergers. Then we have the concentric merger. And this one, what it does is it combines spheres of influence. So the companies are in the same market relative to customers, but not as the products. What they sell is generally competitive, not competitive, excuse me, but rather mutually beneficial. So for example, the a good example of this would be when and this is a little dated though if you think about it, when Fedex bought Kinko's and you know, in a lot of situations, what people would be needing to do is to actually get their final document ready to go for the overnight delivery. And so cankers Kinko's, excuse me, was a copying service and etcetera, etcetera, etcetera, so that you could produce your product that you needed shipped right into in the Fedex Kinko's office. And today what they've done is actually de-emphasized the copiers tremendously. And now they have computer stations there where what you can do is have your document on your computer, and then you access it through, like your email, and you can actually print the documents that you want to send. Actually at the Fedex location, the it's called print shop and that's printing ship, not printing ship. And that's why they do it that way. Because then we have the conglomerate merger, okay. And that one, what we do is we have a big ball of bubblegum or something like that. And what we do is we put other pieces of bubblegum on the on the big ball. And a good example of that would be how Jack Welch led GE when he was the CEO of GE. And so he you know GE you're thinking like light bulbs and other electronic devices and that sort of thing. But once he became the CEO they acquired RCA the TV maker. And then that opened up acquisitions of their other lines of businesses, which included NBC and later universal. And then they decided that there was a lot of money to be made in being a lender. And so they started GE capital and other financial subsidiaries so that they could. You know, my money lending money and some of those financial arms were actually acquired, you know, as independent financing companies and then brought in under the conglomerate merger. And then they bought a insurance company in Virginia. Um, that's now called Genworth. It's been spun off and they were in the insurance business, and the insurance business didn't treat them too well. And actually when they spun Genworth off, the stock still only trades at like $5 a share, in part because the underwriting on the Genworth products, including long term care insurance, was pretty poor. And so, you know, they sort of had to ditch that acquisition. Then they started acquiring companies that did medical devices. They had power generation businesses on and on and on and on. They acquired all these things. And. You know, part of it. I mean, you could also think about, like, your food products type things. You know, you got Unilever and Unilever is made up of. Breyers ice cream and Hellmann's mayonnaise. I think they still own Ben and Jerry's. They own, I believe it's the dove line of. Soaps and shampoos and body washes and that sort of thing. So in a lot of these situations, these companies. Feel like the earnings will be pushed better by experienced managers from the other businesses that are within their company now. And that has some good results sometimes, but not so much. A lot of times, you know, Welch was seen as a hero. You know, for a long time. And when he exited, he actually got a retirement plan that included him having a free use of a corporate jet and, you know, very excessive retirement benefits, multi-million dollar house in New York and all that kind of stuff. And so what happened was the shareholders, you know, activist shareholders attacked that, and they ended up in the process of that, attacking GE's accounting practices. And so the SEC in 2009 had GE pay a $50 million penalty for, you know, accounting errors and violations and intentionally deceptive accounting. And then there was another $200 million fine in 2020 for misleading the investors about Jen's was horrible losses in the Long-Term care business. And they also had a horrible performance in the power generator business. And so what ended up happening was the market cap in 2001, when Welch was a hero, was 80 or excuse me, was 450 billion. Now it's 85 billion. And so. You know, that is a situation where a lot of the mergers, especially in the conglomerate field, didn't work out. And some of that was due to, you know, poor due diligence. And so we're going to talk about that after we talk about this, which is there could be an asset purchase only acquisition so that you don't have a merger. Okay. And so the selling entity sells the assets to the surviving entity. And the surviving entity survives the acquisition. It's still an entity after it. And you don't have to worry about the liabilities of the selling end because you're not buying them. All you're buying is the assets. And then you have a stock purchase. And in that situation, all assets and liabilities come with the entity. The ownership of the stock in the entity now becomes the whole entity, and the selling entity does not survive. And a good example of that was the freestanding brokerage firm E-Trade was bought by Morgan Stanley. And the way it was structured. Morgan Stanley agreed to pay a premium on the E-Trade stock to the. Shareholders in E-Trade, where they got both cash and then stock in the new entity. And they also had a favorable valuation of the E-Trade stock as it transferred into stock of the merged E-Trade and Morgan Stanley. And in that situation, E-Trade didn't survive. No selling entity in the stock purchase type of acquisition survives. Okay, so the board of the directors has the ultimate responsibility. For the merger and acquisition transactions. And you have a situation where the individual directors have a fiduciary duty to the entity. And so in some situations, the activist shareholders will claim that the individual directors breached their fiduciary duty to the entity and decided to go forward with the acquisition or the terms or something like that. But they have to show a sort of generalized injury to the entity, and they have to do it in the form of a derivative action, where the shareholder represents the entity on behalf of the other shareholders. Against the individual directors. And so the individual directors on the selling side and on the acquiring side, both, you know, they need to be aware that the exercise of good judgment, you know, or business judgment, as they like to call it, that's really not the standard anymore. The duty of good faith to the entity that surpasses business judgment. And these fiduciary duty is on both the directors of the target, the selling entity and the acquiring entity. And depending on the state, as I said before, the duty could reach the level of the utmost good faith. That is the standard in Georgia. The standard is. Uh in Georgia. Code Annotated or Official Code of Georgia Annotated 23 to 58 is a standard of the utmost good faith. And that's a very high standard, because in a lawsuit about something like that, either a derivative suit or you might have a situation where shareholders are actually complaining of a special injury that they suffered. And like, you know, one situation where that might occur would be where there was different classes of stock. And so certain class members might take the position that they were uniquely injured as opposed to the other shareholders. But, you know, basically what you could do in a lawsuit about breach of fiduciary duties, draw a line on a board and put all the things that the directors could have done to better protect the entity. On one side, you know, they said this, they could have done, but they didn't. This could they could have done, but they didn't. This they could have done, but they didn't. And then on the other side, you can identify things that they did wrong, that they shouldn't have done. And, you know, on both sides of that that wouldn't reach the level of the utmost good faith. And so you'd have a breach of fiduciary duty case. And so HR due diligence has to know that the entity has to meet a very high standard of care. To help the directors of the target company and the acquiring company meet their duties. The fiduciary duties that they owe to the entities. Okay. So what we're going to do is we're going to master the due diligence checklist by topic. And. Part of the issue would be whether the HR department is in the acquiring company or the target company, but we'll talk about that a little bit further. Okay. So. Too far. All right. Okay. So now what we're going to do is talk about the due diligence undertaken by the acquiring company. I refer to it as the acquirer. I'm talking about the acquiring company. Okay. So the first thing that they want to know from an HR standpoint is what is the current status of human resources within the target in some situations. That's part of the argument is that, you know, HR and personnel issues have hindered the profitability of the target. And if we can just get our really super duper people who work in HR for the acquiring company in there, then we can improve the financial results of the company that we're buying. And so for the acquirer, you have to do some real deep dive due diligence about the HR department itself. You have to determine clearly what the staff and organizational structure of the target is. You have to figure out how they have actually tried to implement the structure. Through the use of employee policies, employee handbooks, codes of conduct. You know, one of the things that. I actually found out in watching another presentation the other day was actually it was a presentation from a former. A corporate executive at Lockheed who was running 2 or 3 of their plants, including. The Atlanta plant is located in Marietta. And she was actually saying that in their organization that these mission statements that you think of, you know, is just fluff, you know, that everybody ignores in their company. They were actually trying to coordinate the accomplishment of those, you know, objectives that were stated in the mission statement. You know, or or maybe they had corporate objectives or values that were. Stated in some sort of document or electronic presentation, and part of the accountability that they were implementing was. The success of the efforts in over in accomplishing these overall goals. And so, you know, that's a big one. And the, you know, the ESG movement and otherwise, you know, you would think that that's actually going to be a bigger one in years in the future than we have the compliance and litigation. And on the HR side, that would particularly be relating to the Fair Labor Standards Act, if you have non-exempt employees and then the EEOC compliance and Americans with Disabilities Act compliance and the Age Discrimination in Employment Act compliance, that sort of thing, you have to. Foul every year. Employment information report. It's called a EEO one, and it actually reports on the demographic background of the employer's workforce. And that's particularly important if you if the company that you're acquiring the target actually has contracts with the federal government or other governments that mandate diversity. And so you have to look at how the or what the effect of the merger would be on these demographics. Then you have to look at cover records to make sure that that's all done. I had a case actually, where a guy had a massive brain tumor, and when he was fired, they didn't send him the cover notice correctly. And I was actually able to force them to provide him health insurance for 18 months because they didn't do that. So any holes in that area would be something that you would want to discover. And then you have ERISA records. You know, you probably have ERISA plans in these companies that are being acquired. And you have to look at the administrator and, you know, all of the you know, how it's structured, how it's funded, the ERISA plans, you know, if you have ERISA retirement plans, same thing. And yes, there's a lot of work to do in that area. Okay. The acquirer wants to make sure that all of the employees are legal. So they are checking the I-9 to make sure that everybody is there. You want to make sure that all the records are complete, and all the payroll records generally want to make sure that unemployment tax is not only funded, but it's also properly documented. So you have to have record retention for that. You want to make sure that you get all of the tax compliance information, including the employer identification numbers, to pass tax returns that they filed a W-2 for the employees records of the tax deposits that they made and withholding records. And I'll say this, that my son and his accountant, he actually works with small businesses, including restaurant franchises, franchise Z's on particularly the tax deposits involving sales and use taxes. And that's a big danger. Sometimes you go to your favorite restaurant and you realize that they've immediately closed. That actually happened down in a restaurant in Fernandina Beach, Florida that we used to like to go to. And the reason that they were closed was because they hadn't complied with the sales tax requirements. So that's a big issue that could actually have sudden and unexpected impact if it's not realized and corrected. They have to see what kind of written contracts you have with employees or independent contractors, other people that provide services, you know, even compensated direct outside directors and things like that. You have to look to see what sort of liabilities these contracts create, because, you know, if you had a whole company that you were acquiring full of at will employees, then you wouldn't be acquiring any liabilities. But to the extent, for example, that the upper management has golden parachutes or to have contracts that have a specific time duration that would go well beyond the merger, you have to be aware of that and figure out whether those contracts might be bought out in some instances. You know, where you have a situation where you know the management changes. You can even see some situations where and these are more in small businesses. But I think it's been in other situations as well, particularly with respect to like restricted stock awards and stuff. The occurrence on these cases has repudiated the contract. And the thing about it is, if, just as an aside, if you're a beneficiary of one of these contracts, you need to make sure that. Whatever money you're expecting to get paid in the future in the form of a golden parachute or retirement or something like that is with a third party payor, not with your company. Because when management changes, your company's attitude towards your retirement can change, and there may not be any legal consequences if it is changed. I've had a case that I worked on regarding a president of the chiropractic college here in Atlanta, and I was his lawyer, and we were in this situation where his golden retirement was actually supposed to be paid out of ongoing college funds after he'd been pushed out, basically. So I had a pretty difficult time getting that one resolved. But I did start a mediation at 9 a.m. and finish in about 5 a.m. the next morning. Okay. Regarding the due diligence undertaken by the acquiring company concerning the target. These are just other things that we need to consider. We need to make sure that we've got a compliance system set up for the federal E sign and the state Uniform Electronic Transactions Act. For example, Georgia Ocga 1012 one or, you know, the Uniform Electronic Transactions Act, codification in your state, I think, has been codified in like 48 states. But obviously, you want to make sure that the contracts that the company has are enforceable and in some instances, that requires that the E sign, you know, if they were electronically signed, it requires that they were signed in compliance with these statutes. So you want to look at that so you don't get any bad surprises about a contract that you want. Potentially to continue. And then there's some resistance to that after the transaction. I guess I could also be relevant if there's a contract that you might want to get out of. Although my success in litigating the idea that these statutes weren't complied with when the contract was made, if I wanted to attack the contract on that basis, haven't had a ton of luck with that, although I've argued a few times. Okay. We also want to look at the employment and independent contractor and vendor contracts that we have. And this is mainly in the merger situation, not the asset purchase situation. Because again, you know that these are potential liabilities that these contracts create. And in an asset purchase we're not purchasing the liabilities. Um. All right. The interests that are served by acquiring contracts. Okay, so one of the things that we're looking at in a merger situation is that, yes, we're going to. A contracts contain potential liabilities for us, but they also can contain benefits that are served by acquiring them. And so one of them is continuity and management. And so, you know, this might be a good example of that. You might have a bank merger where, you know, what you have is a is a big national entity, and there's a regional bank that they want to acquire. And so they do it in a situation where the stock and the regional bank becomes stock in the big entity. And then they think with. Elimination of some of the positions in the acquiring or the, excuse me, the acquired company, that they'll have better cost performance. And so the regional bank will be more profitable. But the key to that, and a lot of situations, is to keep the management at the regional bank or the other entity there. And later in the presentation, I'll talk about a situation like this involving a regional bank, where the whole effort was to keep the top management of the well managed regional bank that was acquired there and not have them go to competitors. But over three years the whole management left. And so you have to figure out. What the obligations are that you are acquiring. And then you also have to try to figure out how to preserve the benefits that the people under contract deliver. And that would be a very good exercise for HR to get involved in, to see, you know, among the 16, how many or what kind of responsibilities does number one serve? Does he perform them well? Number two which ones does she provide? Do she provide them well? Or are they getting a good bang for the buck for what she's doing, that sort of thing. And then you could actually get into a situation where you might have a 16 person team and you want to cut six of them and keep ten, and, you know, you'd want to have a plan about how to make the acquired entity most effective going forward. If you don't acquire the contracts, you might have some kind of cost that would be. Effective in trying to sever it. And the best example that you can have that would be the Michigan State's football team do good for one year. And so a bunch of donors got involved and got the. President and. You know, the administration of Michigan State to give Mel Tucker of $95 million contract. And, you know, now they've severed it because he had an inappropriate relationship with somebody that was involved with the football team that he says was consensual. But they went ahead and terminated him. And now there's a big it's about an $80 million issue now about whether they had the ability to terminate him because what they were most likely doing was terminating him for cause. And so there will be litigation or arbitration about whether there was cause. That's actually in talking about the contract. That's actually something that HR should be looking at too. Is that to the extent that any employees were under contract, was there an arbitration provision in the contract so that if some dispute arose about the contract, it had to go to arbitration where the arbitration would be, what the anticipated cost of the arbitration would be, because these, you know, the jams and a Triple A's in the world charge a lot of money to put on an arbitration, regardless of what your result is in the arbitration. So those are a lot of things to consider. And then also, you know, you might have people in the acquired entity who are loyal to the management or people that consider that they've been mentored by upper management in the entity. So to the extent that you want to terminate some of those people, it might have a far reaching impact down the chain of employees, not just at the level of the people that you terminated. And then whatever the product or service was that was delivered by the acquired entity. One of the interest in having the same people run it is that you'll have a consistency in the products and services they delivered. Also, the customer relationships there would be. A situation where if you terminated the people, in fact, if they didn't have effective non-competes, they might actually try to take the relationships that had been used for the benefit of the acquired company and now get somebody else to try to exploit those relationships for the benefit of their business, as opposed to the business of the acquirer. Okay. The choir also, though has interest in exiting the contract and part of it is that. You know, the people in the acquired company, we could refer to them as the old Codgers and their old codgers, in the sense that they've kind of done business the way they've always done it. And part of the basis of the acquisition is, well, if we do it sort of differently than they used to do, we're going to make more money. And so in order to reach that goal, in a lot of situations, you know, the better idea is to have new management because it creates an atmosphere where there's less controversy about change. You can integrate the companies quicker. And one of the things too, is that if you have a strong acquirer and the acquirers management and their appetite and you know, their profitability and all that sort of thing is better respected than the company that they're acquiring, that helps investor relations. That's a story that they can sell. When they put the merger document out there on in public record, you know, and they have the SEC filings about why the acquisition is being made. You have a better argument if. You can control what you can control and you got less control if the old codgers stay there and more control if they're gone and you're more loyal to you, management is installed. Okay. We have special issues with independent contractors. And the first is for HR to get in there and actually look at the situations where the independent contractors are being employed. And I guess what you would probably do in a big company is just sort of group the people who are serving in various independent contractor roles that were similar. But then what you'd want to do is actually make sure that if they are classified as independent contractors, that they are in fact, legally independent contractors as opposed to employees. And in some situations, what the company does is actually contract not with the human being, but with their entity. And so in that situation, what HR should be looking for is proper documentation of the relationship. Including. If a business name is used, you actually need to make sure that the business name that was being used is actually the legal name of the business that the people who are serving as independent contractors are working under. And you need to make sure that proper tax accounting has been done with respect to the independent contractors. And sometimes we have to ask is. Just a flat out question. Well, number one, you know, the acquirer might be hostile generally to using independent contractors, or they may have other reasons why they don't want to use this particular independent contractor. And so you have to make sure as H.R. When you're looking at this, that you know, what top management thinks about whether they want to maintain the relationship or not. And then in the independent contractor situation, if you're the target. You have to look at two things. Number one, if the contractor's contract is assigned. To the acquirer. Well that business stay intact so that you get the same volume, the same number of customers go. Or is it possible that once the mergers talks starts, that the contractor might vote to serve another company, to try to take the customer relationships with them? And then also you have to look at how the contract is structured to see if the target has any liability. If they decide that they just want to terminate the contract, because you have to know what the monetary risk would be about that, and that would be a function that HR would probably serve. Um, with respect to the vendor contracts, one of the big issues is whether they're exclusive and actually, in a non-compete world, you see a lot of times where employees, even fairly low level employees, are actually asked to agree not to solicit the vendors, because I guess the idea is that the vendors provide uniquely beneficial services to the employer, and so they don't want that really good vendor to be serving other entities. So you have to look at that. And then you also have to look at whether specific types of vendors for the target are sort of segregated into units. And then if they are how that will affect the unit, how the merger will affect the unit, the acquisition by new people, will all the vendors want to stay in the tent? Basically, is what I'm saying there? Then you have to look at the financial condition of the vendor, including the target's history with the vendors, other creditors and customers, any lawsuits the vendors is involved in. That's a good one. You don't want to put a bad apple in your vendor bin, and you have to look at all those issues. Regarding non-compete and confidentiality agreements. Well, the first thing that's going to happen is you have a non-disclosure agreement between the acquirer and the target regarding the potential transaction. It could be one sided or mutual. Generally, it will be mutual because you wouldn't want to see like the target running around saying, hey, our stock is really going to go up because people are thinking about acquiring this. It. These types of agreements create limits on the individuals entitled to receive separate information. So one thing that actually. Um, would be a good exercise for HR to see how diligent the people in the acquiring acquired company, how diligent they were, would be to see whether they actually complied with the provisions in these non-disclosure agreements, where people are given the information, and the contract specifically says that they can't have it until they sign a separate document agreeing to the non-disclosure agreement restrictions. And so it would be a good test to see whether they actually followed that policy would be a good test to see whether they actually followed the policies in the non-compete agreements, non-solicitation agreements, confidentiality of the agreements that they had with the current employees. Apart from this document about the transaction itself, they have to make sure that you cover insider trading issues that could be created by the actual potentiality of the acquisition, and you have to make sure that you have. It in mind, what the potential breaches, what the consequences of the potential breaches of this non-disclosure agreement about the transaction would be, and what remedies you can obtain if. There is a breach. Because you want to. You want to keep it secret, particularly if you're in a public company situation. Um, you have to look at the non-compete contracts with the key personnel who work for the. Acquired company because they're an asset unto themselves for the acquirer. They protect the customer relationships of the target. The trade secrets and the confidential information. The relationships between the target and the employees. What I'm talking about there is that, you know, like, if a key personnel leaves and he's got, like, a tribe of people who claim to be his mentees in a department of the company that's acquired all the employees might want to go with him or her. And don't let me make sure I'm not sexist about it. Um, and so that's a real big issue, particularly for the acquirer and then also the relationships with the vendors. And then you look at all these as, as benefits that these contracts create. But there's also the benefit of continuity. That's what you want is you want a smooth transition into the future with good continuity. And, you know, the merged company just continuing to operate efficiently and seamlessly. And these non-compete contracts assist with that. Okay when you have a. A situation where employees don't who don't favor the merger leave. These contracts are still assets for the company. And as I said before, they prevent. You know, key personnel that want to leave from attack of the assembled workforce. The confidentiality of the information, the trade secrets, which are the bone backbone of the business and the customer relationships. And, you know, a lot of situations. The customers don't have contracts with the acquired company for a specific duration. And so the customer relationship is a lot more amorphous. And. You're in a situation where in a lot of instances, the customer can argue that and the employee that wants to take him can argue that the customer can do business with whomever they please. But these contracts that contain provisions that say that the information about the customers is confidential is a big deterrent. It's kind of a scary you type of effect that these contracts have. And then. One thing to note about this is if you sever people. Okay. You know, the way it used to work under Georgia law is it was very much hostility to non-compete contracts. And so if you could point out that it had been a term and it had been held defective before, it would be thrown out as unenforceable, but that kind of analysis wasn't applied to a severance agreement. So if you agreed, you know, sort of not to work and to receive money for not working, it was much more likely that the covenant would be considered. To be enforceable in comparison to one where the employee had decided at the start of his working with the company. Okay, so the severance, in fact, the severance agreement in a lot of situations, the cases said that they weren't subject to any scrutiny at all, that they were always enforceable. And so there could be situations where you might actually have to forfeit the severance money that you got if you violated the agreement. Okay relating to non-compete contracts. Due diligence. Okay. Again, the contract is primarily in a customer facing business. Going to include Non-solicitation. Customer of customers. Provision. And that's because they don't require a territorial restriction. And instead they can actually be written where a specific. Uh, companies. You can't go to those companies and then solicit the acquired company's customers for that other company. You can talk very briefly about whether there's a forum selection clause in the contract. The HR person would need to know that because it's a matter of state law, whether it's enforceable or not. And it matters greatly which state law applies. And so you have to look and make sure that in a situation where you're acquiring these contracts, what law is going to apply. It could be law that generally enforces non-competes, or it could be a state that's quite hostile. So you have to have legal counsel probably look at the enforceability for the key employees. Um, you have labor relations concerns. In fact, you have so many concerns that it's stated twice on my PowerPoint. So you have the Warn act. And so if the employer has 100 or more employees working in aggregate of 4000 hours per week, then if there's going to be a plant closing that results in a defined term, employment loss of 50 or more employees and mass layoffs, meaning that at least a third or 50 more employees are laid off or in any case, of 500 employees suffer employment loss. They have to give a 60 day notice of the upcoming closing or mass layoff. So you need to be aware of how many people might lose their job in connection with your transaction. Um. The Warn act requires notice to the union, and if there's no union, it requires that it's given to the individual employees. And like the Georgia has a law. Uh, that has created a rapid response activities agency in Georgia. It's the Georgia Department of Labor. This is. Coordinated under this federal statute, the Warn act. But the state agencies have to know they want to celebrate when a new plant like the Rivian plant or the Hyundai plant down in Savannah are coming. And so they want to be able to prepare, you know, for a situation where a company is leaving. Okay. National Labor Relations Act obligations in a merger. Okay. If there's unionized, you're going to have to bargain with the union about the transaction, and you may have a union contract that's enforceable. And in that situation, if there's a provision about severance that includes severance payments, you might have to comply with that. Okay. Then another way to go about it could be that you could. End up in a situation where you want to renegotiate the existing contract, and part of it would be the employer would be saying, well, we got to renegotiate it because, you know, on an ongoing basis, you know, this facility doesn't make a lot of sense under the current contract. Or it could be a situation where the union is saying that the transaction is really going to benefit management. So they want the employees to share in the benefit. So in those situations, you have to be in a situation where you're bargaining with the union. Okay. You have to understand the obligations that the target undertook to the employees as far as wages, benefits, retirement, severance and. The how the workers are organized, not union organized, but organized within the entity. Their possessions raise levels of compensation. Are they preserved? The person that has to do this. Or fulfill these obligations is just to understand for the for the buying company, what they have to do is understand all this is what I'm saying. But the acquired company, they actually have to negotiate with the union about some of these things, because they're the one with the contract with the union. Okay. And there's an exception. And that will be when the acquirer is the alter ego of the of the target, or the merge of will be so similar that it could be regarded as a successor. And then in that case, the acquirer has to get involved more with the union than they would otherwise. Okay doing a compensation and benefits review. You access to people who have control over the current compensation, and you have to look to see whether the pay is comparable for comparable positions, or is it widely differentiated? Are the benefits the same? Do they need to be harmonised? What about the retirement programmes. Or you got to leave the private programme separate or combined. Like there was a a plant in Murphy, North Carolina that made. Uh, hardware parts and stuff like that. And it was acquired by Snap-on. And they actually kept the same old retirement plan for the old employees separate. And they didn't combine them until after the merger for several years. And so in that case, what you might have is a discrepancy between the retirement that's available under the old plan versus the new plan. So that could create some problems. Um, the biggest mistakes in integration and transition planning are rolling out air power struggles between statements of parties. There's financial advisers and consultants that want to deal to close, close, close, close because they don't get paid until it closes. And so they might want to gloss over a lot of the issues. You might have human resistance to change and ineffective communication of the plan, how it's going to work with companies combined versus rumors and gossip about it. And one of the things that you need to do is to acquire is actually try to create loyalty in the acquirer among the the. Employees and even project some sort of loyalty to anybody that you're intended to sever or any group. And. That might be all of them. Believe it is so H.R. has a big job in. Connect and considering what issues are going to arise. Obviously the biggest issues monetarily are the financial equipment. Financial commitments that the company that's going to be acquired has made, both to the top level management and to the. Employees. One of the things for a public company that could be a little eerie is that the upper management might have contracts that are animated, payments are animated by a change of control. And I read an article not too long ago about a guy who'd become an in-house lawyer with a public entity, and he'd only been there about nine months. And. They went through a change in control and in his contract he had such a provision. And so what that meant was that he got way more than he was paid for the nine months of actual work under the contract. You know, in. Payment of the amount that he was due because there was a change in control. So that's a major type of contractual issue that needs to be determined. The confidentiality of the transaction and the confidentiality of the business information of the company that's being acquired is a huge issue, because a lot of times in these situations, what is also confidential besides. In the acquiring acquired companies information, and the terms of the deal is that the intentions of people who are affected by it or concealed. So I had a situation where my company down in Florida was bought by, was actually a employer that gave most of the employees stock in the company. And so when it was acquired, all the people that had the stock that were employees, their stock went up very significantly in price. And so they stay quiet about it. And then as soon as the transaction was consummated, they sold their stock at the inflated price. And then as a group, went to another company because they believed that that was a better move for their careers. And so then there was a huge situation involving the enforceability of their non-competes. And there's actually a legal theory where you can say that if you take a whole of workforce like that, then that taking of that whole independent workforce might actually be a. A situation where you have a tort that's independent called rating. And I'm aware of a situation in the brokerage industry where the company that lost several people and several locations to another company, you know, after consolidation, that company was actually assessed of $60 million worth of damages and $3 million in attorneys fees, basically, for making repetitive hires from the same competitor. You know, like in Jonesboro, Arkansas, we took a couple of people in Fort Smith. We took a couple of people in little Rock. We took a couple of people. And so it turned out that the arbitrators in that situation regarded that as a sort of a plan to destroy, not to just hire people, but to destroy the business of the competitor. And so we had a monetary award in that amount. Another thing that. Should be considered. Yeah, all. I can do it this way. Okay. One. One other thing would be to consider whether the merged company. How are they going to be so integrated, or they're going to be so few people that leave? Or are they going to be the successor of the target? And in that situation, you might find that people who are adverse to the. Target might actually then try to turn the liabilities of the target into the liabilities of the merged company, although that's not consistent with the acquisition document. And so that's a a situation where the HR should actually be also reviewing the potential acquisition docket document. Excuse me. In order to make sure that. The air. Decisions that are made are consistent with the document that is going to be used to accomplish the merger. So that would be another of the many duties that I've heaped on HR.

Presenter(s)

CD
Charles Dalziel
Principal
Dalziel Law Firm

Course materials

Handout

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