LEGAL ASSIGNMENT ON MERGERS AND ACQUISITIONS
Asset Sale and Purchase Agreement
Belinda and Angela Brown raise genuine question if the assets acquisition is going to flow smoothly and yield the desired benefits. The two sister’s concerns range from the transfer of trading contracts, the liabilities and benefits that might accrue from the target business debtors and creditors to the transfer of employment contracts. Below is a detailed response on each of these issues.
Q1: Trading contracts
In clause 6.1, the Asset Sale and Purchase Agreement state that “on and from Completion the Buyer shall take the benefit and burden of the Contracts”. Under the principle of “privity of contracts”, this assertion might be difficult to implement since it is only the parties to a contract have the legal obligations and the right to fulfil and enforce it. However, a party may overcome the restriction of this principle by the way of a novation agreement. A novation agreement has to be consented by the three parties, the buyer, seller and the seller counter-party to the contract. T has to be a tri-partite agreement.
If such consent will not have been received by completion, it means that the novation will be deemed to have been unsuccessful. Such is a possible scenario because the original party may not understand the benefit of having the original contract novated or may still need more persuasion that it won’t be worse off as a result of the novation. In addition, the original party may delay the consent to squeeze extra concession from the new party. According to clause 6.3 of the Asset Sale and Purchase Agreement, where novation is unsuccessful, the buyer may require the seller either to “terminate the relevant contract or to exclude the same from the Assets whereupon the seller will indemnify the Buyer in full against any liability or obligation in respect of such contract and all liabilities arising from such contract or its termination or exclusion from this agreement. Bearing in mind that what motivates Bold Designs Limited from this acquisition is the lucrative contracts, Belinda and Angela Brown need to be aware of these clause. The meaning of clause 6.3 is that the new buyer may end up acquiring LS division minus the lucrative contracts unless the original party consents to the novation agreement.
Clause 8 of the Assest Sale and Purchase agreement provides that if any sums are received by ML, after the completion date in payment of any or more of the Book Debts, ML shall account to Bold Designs Limited for such sums within 5 days of receipt.
The buyer does not assume any liability beyond those specified in the agreement. Where there may be liabilities arising out of the seller’s act of neglect or default, the buyer is indemnified.
Q4: Simultaneous transfer of asset
In clause 4.1(b) the Asset Sale and Purchase Agreement provides a list of what the seller must do before completion. By performing this list, the agreement provides for a simultaneous transfer of assets. Under the same clause, Bold Designs Limited is not “obliged to complete if ML has not fully complied with the list of obligations. In addition, those provisions which will not have been performed by the time of completion will have the same force and effect so far as is possible.
Q5: Right of employees
UK has enacted regulations to implement the Transfer of Undertakings Directive 2001/23/EC issued by the European Union. The directive protects the contract of employees when their employer changes due to transfer of an undertaking. Employees working in the LS business fall under this protection. The UK implemented the directive by the Transfer of Undertaking (Protection of Employment) Regulations 2006 as amended by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (amendment) Regulations 2014. The amended regulation does not apply to asset acquisition that took place on or before 30th January 2014. The regulations are normally abbreviated as TUPE.
The spirit of the directive, which is now part of the UK law by the virtue of the TUPE regulations, is to ensure that employees are not disadvantaged by the transfer of undertakings. According to the regulation 4(2) of TUPE, “all the transferor’s rights, powers, duties and liabilities under or in connection with the transferring employees’ contracts of employment are transferred to the transferee”. The regulations go further to affirm that a transfer of undertaking shall not operate so as to terminate an employee’s contract. Any dismissal resulting from a transfer is automatically unfair. The basic rule of the regulation is that all that a transfer of undertaking does is to novate the relevant contract of employment.
Before the transfer, the regulation mandates the employer, in this case ML, to consult and inform the affected employees on when and why the transfer is taking place, how the transfer will affect them, any expected reorganisation and the type of work they will undertake with the new employer (Hardy and Derbyshire, 2014, p. 10). Failure to inform and consult on the side of the transferor amounts to a violation of the laid down regulations. It is important to point out that any employees have a right to refuse to transfer, although this may disadvantage them in terms of their legal rights.
When finally the transfer takes place, Bold Designs Limited needs to be aware that it has inherited employees under their existing terms and conditions of employment including all their existing employment rights and liabilities (Brewer and Youngs, 2007, p. 103). This means that Bold Designs Limited has no right to reduce the inherited employees pay, holiday entitlement or cut short they employment period as this would amount to a breach of employment contract. This is in realisation that by acquiring LS, Bold Designs Limited will have inherited the employees’ employment contract as it is. TUPE, however, does not protect pension contribution. The only option that Bold Designs Limited has to alter the contract of employment is through justifying an economic, technical or organisation (ETO) change that is unconnected to the transfer.
Q6: Harmonising terms and conditions after TUPE transfer
The question on whether it is possible to harmonise terms and condition after a TUPE transfer is a common concern among employees. It is easier to understand that, from a human resource perspective, difference in terms and condition of employments may lead to disharmony between the existing and incoming employees. However, while this concern is genuine, employers have a limited chance to harmonise terms and conditions following a TUPE transfer. Bold Designs Limited should trend with care while dealing with this issue.
The starting point in this case is that any variation of the terms and condition of employment that is connected to a transfer is could be void under the TUPE regulations. For the harmonisation to be justified, Bold Designs Limited has to persuade the incoming employees to consent to the variation. It is not always easy to persuade employees to accept lesser terms. In that regard, the limited chance that, Bold Designs Limited may have to harmonise the terms and conditions of its employees is to justify that the changes to the contract is for an economic, technical or organisation (ETO) reason. However, the desire to achieve harmonisation can rarely pass as an ETO reason since in this case is connected to the transfer.
There are limited cases that show the willingness of the court to allow employers to vary employees’ contract after a TUPE transfer. In Smith and Others v Trustee of Brooklands College the employment tribunal agreed with the employer that the variations of employees terms after TUPE transfer was justified since it sought to reflect an industry standard practice and was not related to the transfer. In Enterprise Managed Services v Dance & Ors, the tribunal found that the employees who were unfairly dismissed after refusing to accept new terms. However, the tribunal was quick to point out that the variation was not connected to the transfer since the employer has a pre-arranged plan to increase productivity. In a recent case, Hazel v The Manchester College, where the employer has moved from employment tribunals to the Court of Appeal with limited success points out how varying employee’s contract post TUPE transfer can be problematic. The outcome of these cases indicate that Bold Designs Limited has a limited chance of changing the terms and condition of LS employees.
Q7: Unfair dismissal
Paul may bring the claim of unfair dismissal. As discussed earlier, TUPE regulations protect employees from a dismissal that is connected to a transfer. If an employee is dismissed before or after a TUPE transfer, the dismissal is regarded as automatically unfair dismissal. Paul can make his case stronger by showing that his dismissal was connected to the transfer and there was no valid ETO reason. In that regard, Bold Designs Limited may try to minimise potential liability by showing that there was a valid ETO reason for the dismissal. Such a valid reason may be a change of staffing structure, profitability and equipment used. However, given that Bold Designs Limited is in the same business as LS –design work- the case for an ETO reason becomes increasingly weak.
List of References
Department for Business Innovation & Skills (2014) Employment Rights on the Transfer of an Undertaking. London: Stationery Office
Smith v Trustees of Brooklands College UKEAT/0128/11/ZT
Enterprise Managed Services v Dance & ORS UKEAT/0200/11
Hazel & Anor v The Manchester College  EWCA Civ 72
Transfer of Undertaking (Protection of Employment) Regulations 2006
Collective Redundancies and Transfer of Undertakings (Protection of Employment) (amendment) Regulations 2014
Transfer of Undertakings Directive 2001/23/EC
Brewer, M & Youngs, A (2007) TUPE transfers 2007: rights and responsibilities special report. London: Workplace Law Group
Hardy, S & Derbyshire, W (2014) TUPE: Law & Practice. London: Spiramus Press Ltd