LEGAL STRATEGIES IN PRIVATE MERGERS AND ACQUISTIONS
Purchase & Sale of Businesses and/or Business
Assets: Labour & Employment Law Issues
These materials were originally prepared by Nicole Marie Byres, QC, of Miller Thomson LLP, Vancouver, BC, and Martin Sheard, of TevlinGleadle Employment Law Strategies, Vancouver, BC, for the Continuing Legal Education Society of British Columbia publication Employment Law Conference—2015 (May 2015) and have been reproduced for May 2015.
PURCHASE & SALE OF BUSINESSES AND/OR BUSINESS ASSETS:
LABOUR & EMPLOYMENT LAW ISSUES
I. Introduction ... 1
II. Legal Framework ... 2
A. Right to Reasonable Notice (or Pay in Lieu) on Termination ... 2
B. Presumption of Continuous Service at Common Law ... 2
1. When New Employers Represent a Change in Name Only ... 2
2. When the New Employment Offer is Silent on Previous Service ... 3
C. Vendor and Purchaser’s Joint Liability for Common Law Severance ... 4
D. Duty to Mitigate ... 4
E. British Columbia Employment Standards Act, R.S.B.C. 1996, c. 113 (the “ESA”) ... 5
1. Section 97 (Deemed Continuous Employment) and ESA’s Termination Provisions ... 5
2. Breaks in Employment & Effect on Termination Provisions ... 5
F. British Columbia Labour Relations Code, R.S.B.C. 1996, c. 246 (the “Code”) ... 6
1. Successorship ... 6
2. Adjustment Plans ... 7
III. Managing Other Risks & Issues ... 7
A. Communications ... 7
B. Benefits ... 8
C. Privacy ... 8
D. Retention of Key Staff ... 8
E. Retention of Vendor/Owner Post-Closing ... 9
F. Preservation & Protection of Intellectual Property ... 9
IV. Practical Tips ... 10
I.
Introduction
In this paper, we address labour and employment law issues which commonly arise out of the context of the purchase and sale of businesses or business assets. We begin with an analysis of the law in its current form, before exploring those issues which arise most commonly in the experience of the authors. Once we have established this legal framework, we suggest practice points for both litigators and solicitors, as well as considerations for corporate entities involved in such transactions. For the sake of simplicity, we have referred to the original employer, or selling entity as the
II. Legal Framework
A. Right to Reasonable Notice (or Pay in Lieu) on Termination
Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986 is a seminal case in the field of employment
law. Two of its edicts are as follows:
● First, where legislation (such as the Employment Standards Act, R.S.B.C. 1996, c.113) provides for minimum standards regarding notice and/or pay to be provided upon termination of an employee, those standards cannot be averted via contract. ● Second, absent a binding contract otherwise, employees are entitled to Reasonable Notice—we capitalize this phrase as it is a term of art. What is reasonable will turn on the unique circumstances of each case but the most commonly cited factors in setting a notice period are the employee’s age, the nature of the position held and the prevailing conditions of the job market. Most importantly for the purposes of this paper, an employee’s length of service factors into calculating reasonable notice. Often this includes service with the vendor—and many of the cases discussed below address whether such service ‘continues’ or is recognized after closing of the
relevant transaction.
It is important to recognize that Reasonable Notice is the presumption or implied contractual entitlement of all employees under Canadian common law. This presumption can be displaced via a binding contract to a different effect. Where employees affected by a sale of business have
employment contracts with the vendor that have a binding clause limiting notice of termination or pay in lieu of notice (severance), the issues relating to respective vendor and purchaser obligations arising from the transfer and termination of employees are much simpler. This paper focuses on situations where no such employment contracts are in place.
B. Presumption of Continuous Service at Common Law
1.
When New Employers Represent a Change in Name Only
Sorel v. Tomenson Saunders Whitehead Ltd., 39 D.L.R. (4th) 460, 15 B.C.L.R. (2d) 38, [1987] B.C.J.
No .1332 (QL) (“Sorel”) is an oft-cited authority in BC, and the logical starting point for our summary of the relevant law. In Sorel, the plaintiff was a very long-serving employee whose service had spanned two corporate mergers. After both mergers, Mr. Sorel was employed by a new legal entity, but he continued to perform essentially the same functions throughout as if there had not been any changes in ownership. After 37 years of continuous service (albeit with three different entities) he was terminated without cause.
A major issue in the litigation, and the principle for which Sorel is most frequently cited, was whether his entire service with the predecessor organizations should be recognized for the purpose of calculating Reasonable Notice, or whether either/both of the mergers should lessen the notice to which Mr. Sorel was entitled. The court wrote the following, specifically addressing how a change in corporate ownership affects matters, and providing policy reasons for its answer (at 4-5):
In every case, of course, the judge must assess reasonable notice based on the particular circumstances before him. Where there has been merely a change in ownership, it is open to the judge to consider the period of continuous employment as a whole.
We think the legal situation might be conceptualized as follows:
1. When a purchaser acquires a business as a going concern, there is an implied term in the contract of employment between it and those employees continuing in the service of the business, that the employees will be given credit for years past service with the vendor for purposes of such incidents of employment as salaries, bonuses and notice of termination.
2. This implied term may be negated by an express term to the contrary. In other words, the purchasing employer may, at his option, advise the employees that he does not intend to give them credit for past services to the vendor. If this is done, the employees have the option of entering into the new contract of employment on these terms or of declining to work for the purchasing company and suing the vendor for wrongful dismissal and damages in lieu of notice.
3. Where the new employer does not advise the employees that he is unwilling to
contract on the basis that the employees have credit for past years of service, the employer is deemed to have contracted with the employees on the basis that the employees will be given such credit. [emphasis added]
The italicized portion of the above excerpt is highly important. In the years since Sorel, defendants in a variety of cases have advanced a multitude of defences based on something other than explicit notice to the plaintiff regarding how prior service would be treated. The authors are aware of no instance where such a defence has succeeded. Only expressly telling the employee that his/her prior service will not be recognized at the time of the sale of the business will result in the disentitlement of that employee to expect recognition of past service for all purposes.
2.
When the New Employment Offer is Silent on Previous Service
Rhodes v. Koksilah Nursery et al., 1999 BCCA 283 (“Rhodes”) involved a situation where a private
company acquired the Koksilah Nursery business from the Province of BC. Mr. Rhodes was an employee with 30 years’ service with the Ministry of Forests, and he had spent 15 years as the Acting Nursery Supervisor at the time the business was sold. Mr. Rhodes was given the option of remaining an employee of the Province, or accepting employment with the new owner of the nursery. Mr. Rhodes accepted the offer of employment with the purchaser; the employment contract was verbal and the issue of recognition of prior service was never discussed between Mr. Rhodes and the new owner. Unfortunately for Mr. Rhodes, the nursery experienced financial difficulties and his employment was terminated after only two years.
One of the issues at trial was whether Reasonable Notice should be based on two years of service or the cumulative 32 years of service. The defendant/purchaser argued that Sorel only applied in situations where the choice given to the employee is to accept employment with the purchaser, or be terminated. Since Mr. Rhodes had the option of continued employment with the vendor, the defendant argued that it was not a ‘successor’ employer to Mr. Rhodes.
In its decision, the BC Court of Appeal agreed with the trial court’s finding that the purchaser had implicitly recognized Mr. Rhodes’ prior service for all purposes and accordingly, Reasonable Notice owed to Mr. Rhodes should be based on 32 years of service. Thus, the court specifically rejected the notion that just because an employee has the option of continued employment with a former
employer, the implied term of credit for past service with a new employer/purchaser is negated.
Rhodes was one in a line of cases which followed very closely the exact language of point 3 from the Sorel excerpt, italicized above. Despite the fact that the law appears to be settled on this point, in
the writers’ experience, purchasers continually fail to address the issue of prior service when hiring employees from a purchased business, including in the author’s recent case Hall v. Quicksilver
Resources Canada Inc. (September 18, 2014, unreported) (“Hall”). In Hall, the purchaser
incorrectly assumed that it was sufficient to have assurances from the vendor that the plaintiff had agreed on terms of a severance package. Instead, the court reaffirmed that only direct statements to the contrary were sufficient to rebut the presumption that all prior service would be recognized. As a result, many purchasers find themselves with unexpectedly large severance costs because of
implied or deemed recognition of past service.
C. Vendor and Purchaser’s Joint Liability for Common Law Severance
It is also important to recognize that both the vendor and the purchaser bear liability for common law severance in the asset sale context. The defendant learned this lesson in Major v. Philips
Electronics Ltd., 2005 BCCA 170 (“Philips”). In that case, the defendant Philips (the vendor in this
case) sold business assets to a purchaser who also offered employment to Philips’ employees including the plaintiff, Major. As part of the new contract of employment, the purchaser agreed to recognize Major’s prior service with the vendor. The purchaser subsequently terminated Major’s employment; Major then settled his severance claim against the purchaser on the basis of 17 weeks’ pay in lieu of notice. The plaintiff even signed a release as against the purchaser; interestingly, an original draft of the release included the purchaser’s predecessor(s) (i.e., Philips). Major refused to sign that draft.
Major then sued Philips for the balance of the Reasonable Notice he said was entitled to given his total service (with the vendor and purchaser). The vendor defended the claim on the basis of, inter
alia, novation which it said occurred on the establishment of a contract between Major and the
purchaser. This defense failed. The court held that for the vendor to be successful in its position that the original employment contract (and rights to sue) had been extinguished when Major entered into the new contract of employment with the purchaser, there had to have been some agreement or notice to Major that in accepting the new employment, Major was abandoning his rights against the vendor.
The Court of Appeal in Philips confirmed the principle that (in the absence of any clear notice or agreement to release the vendor, and where the purchaser has expressly or impliedly agreed to recognize prior service), the vendor and purchaser owe equal and independent obligations to pay common law damages to a terminated employee in lieu of Reasonable Notice. The court was clear, however, that Major had no right to double recovery. While he had concurrent claims, he only had a right to recover damages in lieu of notice once for any discrete period of time.
In many situations, failure of a vendor to take steps to ensure that it was released from future claims for severance would not result in additional liability to the vendor if the employee remained
employed by the purchaser longer than the Reasonable Notice period the employee would have been entitled to with the combined service. However, as the Philips decision exemplifies, it is risky for the vendor to assume that employees will remain employed by the purchaser for any length of time after closing of the transaction. In Philips, the vendor faced liability in circumstances which it could not control (i.e., where the purchaser decided to wrongfully dismiss its former employee). Thus the vendor and the purchaser both need to turn their minds to such issues in the purchase and sale scenario.
D. Duty to Mitigate
It is trite law that employees have a duty to mitigate their loss arising from the wrongful
termination of employment. Also, as Evans v. Teamsters Local Union No. 31, [2008] 1 S.C.R. 661 confirmed, a wrongfully terminated employee will be expected to accept alternate employment
within the same organization under most circumstances. This legal principle usually works in favour a vendor in a sale transaction where employees are offered employment with the purchaser. In virtually all such cases, the vendor will be able to argue that a reasonable person would accept an employment offer from the purchaser acquiring the business the employee was already working for. Thus, while employees are not required to accept employment with the purchaser, a vendor can be relieved of all or part of any severance liability (except for Employment Standards Act liability which will be discussed below) depending on the terms offered by the purchaser.
However, as the recent decision of Maxwell v. British Columbia, 2014 BCCA 339 confirmed, the duty to mitigate does not apply where employees have contractually-defined severance rights, unless of course, the contract in question specifically references mitigation obligations. In such cases, whether or not the purchaser offered alternate employment, and even if offered on the same terms and conditions, the vendor would still be liable for the full severance promised in the vendor-employee contract.
E.
British Columbia Employment Standards Act, R.S.B.C. 1996, c. 113 (the “ESA”)
1.
Section 97 (Deemed Continuous Employment) and ESA’s Termination
Provisions
Section 97 of the ESA is intended to save vendors the expense of providing the notice or pay in lieu of notice required by ss. 63 and 64 of the ESA, where there is a legal change of employer due to a sale of assets of a business, but no actual interruption of employment or earnings. Section 97 of the Act states:
If all or part of a business or a substantial part of the entire assets of a business is disposed of, the employment of an employee of the business is deemed, for the
purposes of this Act, to be continuous and uninterrupted by the disposition.
[emphasis added]
Thus, despite the fact that employees commence employment with the purchaser and stop working for the vendor, because of s. 97, these employees’ employment will be deemed to be continuous so that the individual (s. 63) and group (s. 64) termination provisions do not apply.
The presumption of continuous employment conferred by s. 97 also means that s. 18 of the ESA, which requires employers to pay out all wages earned by the employee (including accrued but unused vacation pay) within 48 hours of termination, is not applicable.
It is important to remember however, that s. 97 and deems continuous employment for the
purposes of the ESA only. This means that s. 97 is not intended to modify common law principles such as constructive dismissal.
2.
Breaks in Employment & Effect on Termination Provisions
It was once thought that s. 65 (1)(f) of the ESA, which exempts an employer from the operation of s. 63 and 64 if an employee refuses an offer of reasonable, alternate employment by the employer, applied in the situation where a purchaser offered employment to an employee of a purchased business.1 However, the BC Employment Standards Tribunal reversed that interpretation with
decisions such as 538592 B.C. Ltd. operating as Sweet Pea Produce, BC EST #D207/02 and
1 Re Wille Dodge Chrysler Ltd., [1997] B.C.E.S.T. No. 402 (QL).
Re Kootenay Uniform and Linen Ltd., [2007] B.C.E.S.T.D. No. 126 (QL) (“Kootenay Uniform”).
In the Kootenay Uniform decision, the Tribunal limited the application of s. 65(1)(f) so that a vendor could not rely on the purchaser’s offer of employment to relieve the vendor of s. 63 and 64 termination benefits, because the Tribunal found there had been a break in employment.
(a) if there was no break in employment, s. 97 applied and ss. 63 and 64 were never triggered, BUT
(b) if there was a break in employment, any offer of employment by a purchaser (even if essentially the same position) did not represent an offer by a “current” employer so the offer did not relieve a vendor from its obligations under ss. 63 and 64.
The decision of Re Nanaimo Seniors Village Partnership, [2007] B.C.E.S.T.D. No. 10 (QL) further expanded on the notion that an unequivocal notice of termination by the vendor created a “gap” in employment during the sale of a business, even if a purchaser eventually hired the same employees. In that decision, the Tribunal held that s. 97 had two requirements: (1) that (a) all or part of a business, or (b) a substantial part of the entire assets of a business is disposed of, and (2) there are employees employed by the business. The Tribunal held that if a vendor provided an unequivocal notice of termination to its employees prior to or on the date of disposition, then s. 97 did not apply even if the employees did not actually lose any employment income because their alternate
employment started shortly thereafter.
As a result of these decisions, counsel for vendors should typically dispense with the word
‘termination’ in their notices to employees, preferring instead to inform their employees that they will be offered employment by the purchasers effective on the closing date, and that if they accept such offer, their employment with the vendor will end.
F.
British Columbia Labour Relations Code, R.S.B.C. 1996, c. 246 (the “Code”)
1.
Successorship
Section 35 of the Code, ensures that a collective agreement bargained by one employer continues in effect and is binding on the new or successor employer. This is true whether or not the purchaser is acquiring only part of the business governed by the collective agreement, or the purchaser already has its own collective agreements. Section 35 of the Code states:
(1) If a business or a part of it is sold, leased, transferred or otherwise disposed of, the purchaser, lessee or transferee is bound by all proceedings under this Code before the date of the disposition and the proceedings must continue as if no change had occurred.
(2) If a collective agreement is in force, it continues to bind the purchaser, lessee or transferee to the same extent as if it had been signed by the purchaser, lessee or transferee, as the case may be.
(3) If a question arises under this section, the board, on application by any person, must determine what rights, privileges and duties have been acquired or are retained. (4) For the purposes of this section, the board may make inquiries or direct that representation votes be taken as it considers necessary or advisable.
(5) The board, having made an inquiry or directed a vote under this section, may (a) determine whether the employees constitute one or more units
appropriate for collective bargaining,
(b) determine which trade union is to be the bargaining agent for the employees in each unit,
(c) amend, to the extent it considers necessary or advisable, a certificate issued to a trade union or the description of a unit contained in a collective agreement,
(d) modify or restrict the operation or effect of a provision of a collective agreement in order to define the seniority rights under it of employees affected by the sale, lease, transfer or other disposition, and
(e) give directions the board considers necessary or advisable as to the interpretation and application of a collective agreement affecting the employees in a unit determined under this section to be appropriate for collective bargaining.
If a transaction results in a merger of two businesses with separate collective agreements and certifications, s. 35 gives the Labour Relations Board jurisdiction to decide which union is the appropriate union for the merged business, and resolve disputes or issues such conflicting collective agreement terms, or merging seniority lists.
2.
Adjustment Plans
Section 54 of the Code requires an employer to give the union at least 60 days advance notice of any change that affects the terms, conditions or security of employment of a significant number of employees, and must meet in good faith and endeavor to develop an adjustment plan that may include provisions relating to alternatives to the proposes changes, retraining, severance pay or notice of termination, entitlement to early retirement benefits.
There are a number of reasons why a vendor will not want to announce a pending sale of a business until there a binding agreement has been signed, and as a result, often the time between signing transaction agreement and closing does not allow for clear 60 day notice to the union. Practically speaking, if no layoffs or closure is planned, or there are no major changes planned by the purchaser at the time of closing, it is unlikely the union would have reason to complain to the LRB over short notice. If, however, material changes are planned by a purchaser but there is insufficient time to meet with the union to negotiate an adjustment plan, then the vendor would want to ensure that the purchaser implements such changes after closing only after it has had an opportunity to meet with the union to negotiate changes required.
III. Managing Other Risks & Issues
In addition to the legal and statutory issues already discussed, there are other hidden costs that vendors and purchasers will incur, depending upon how the sale of a business is handled. The following is a discussion of some of the issues that need to be managed in order to mitigate some of these costs.
A. Communications
Rumours of a pending sale of business are worrisome and distracting to employees. This in turn can affect productivity, customer/client service, and safety—distracted employees have more accidents.
Employees who are concerned about what a pending sale will do to their employment security or current benefits, will usually take steps to make use of such benefits provided under extended health and dental claims, and as most lawyers practicing employment law know, some employees worried about a pending termination may elect to make a disability claim.
Valuable employees who have options of alternate employment with a competitor, may be more likely to leave rather than worry about future, uncertain changes that may result from a change in ownership. As a result, maintaining confidentiality of the negotiations until a binding agreement has been concluded is very important but very difficult, especially if the negotiation or due diligence periods are prolonged, and/or a large number of vendor employees are involved in the transaction. Once the pending sale is announced, managing the communications and employee relations
throughout the process is also very important. The purchaser has a vested interest in engaging the ‘hearts & minds’ of employees of a purchased business, particularly since there inevitably will be some cultural if not organizational changes the purchaser wishes to implement after closing of the transaction. Thus, a purchaser should not ignore what is communicated about the purchaser’s plans, even before the closing date. Further, how layoffs are handled and exiting employees treated will affect the ongoing commitment of the remaining employees to stay with the purchaser, work with employees of the purchaser’s existing business (in the case of a merger), or get on board with the changes the purchaser wishes to implement.
B. Benefits
Typically, a purchaser will want to place its own employee benefit program, particularly if it already has such plans in place for other operations. Since even brief gaps in coverage can have significant cost implications if there is a loss or claim during the gap period, it will be important to ensure that there are no gaps in coverage, when switching employees from one benefits program to another. If insurance plans mandate waiting periods before the new coverage applies, it is advisable to either negotiate a period of extended coverage post-closing by the vendor, or place some form of temporary coverage for the duration.
Often, small employers do not have written policies or other documentation outlining benefits they are offering to employees. Thus, it is important that lawyers look closely at the responses to due diligence enquiries regarding benefit plans in place, so as to uncover any special arrangements or undocumented promises of benefits, additional vacation, performance bonuses or other compensation.
In any transaction where Defined Benefit pension plans are involved, it is necessary to obtain specialized advice (legal, actuarial, accounting as applicable) to ensure that all statutory and pension plan requirements are complied with.
C. Privacy
Purchasers usually require employee personal information prior to entering into a binding purchase agreement, and will always need such information prior to closing. This exposes a vendor to
liability under BC’s privacy laws if the employee information is disclosed or otherwise not properly secured or protected by the purchaser. Purchasers too can be responsible for improper use and disclosure of such information. Thus, an agreement relating to the protection of personal information, and return of such information in the event the transaction does not close, is a necessary part of any initial Letter of Intent or Agreement stage. Further, both vendors and purchasers need to ensure that normal ‘standards’ or systems intended to protect personal information do not fail or are prematurely dismantled during the transaction.
D. Retention of Key Staff
Vendors may have an interest in ensuring “Key Employees” stay with the vendor through the negotiation and transition phase of the sale of the business. Purchasers may have an interest in
ensuring “Key Employees” remain with the purchaser after closing. In both cases, retention agreements can help vendors and purchasers achieve those objectives.
Whether retention agreements are sought by vendors or purchasers, there are important issues related to the timing of the negotiation of such agreements. For example, where the vendor is publically traded, securities regulations apply to when a vendor may implement Change of Control severance bonuses.2
The timing of pre and post-closing retention agreements with employees is important for a number of reasons, including:
● The closer the vendor and purchaser get to a binding transaction or the date of the closing, the more leverage key employees will have for their demands.
● Purchasers wishing to negotiate a post-closing retention agreements will by necessity, have to engage in negotiations with key staff before closing occurs, and sometimes before a binding purchase and sale agreement is signed. This will make it even harder to maintain confidentiality of the pending sale to the other employees, and if the sale does not close, the vendor’s key staff may leave anyway rather than face future uncertainty.
E.
Retention of Vendor/Owner Post-Closing
There are times when the parties to a transaction want the vendor/owner of the business to stay as an employee after closing. In our view, this is a separate topic from retention of key employees for several reasons. For a recent case touching on aspects of this topic, see Payette v. Guay Inc., [2013] 3 S.C.R. 95, 2013 SCC 45.
An important consideration in drafting terms of such post-closing engagement is to be clear as to whose benefit such employment is for (i.e., the vendor or the purchaser?), and to ensure that the “deliverables” are, to the extent possible, built into the post-closing employment agreement. Sometimes purchasers will delay full payout of the purchase price pending completion of the milestones or deliverables.
Also, vendor/owners often underestimate how difficult it will be to remain with a company that they once owned and controlled, particularly if the business is merged with another business with a distinctly different culture. Vendors will want to ensure that they have favourable severance clauses and options to trigger his or her own departure without any or at least material reduction overall compensation. Purchasers will want to clearly identify post-closing deliverables and tie material compensation or payment dates to achieving them.
F.
Preservation & Protection of Intellectual Property
If Intellectual Property, particularly unpatented IP and know-how, is a key component of what the vendor is selling, vendors will want to consider whether old employment contracts adequately address confidentiality and ownership of IP well in advance of any transaction for sale of the business. If that has not occurred, purchasers will want to confirm and protect the IP it is purchasing as part of the acquisition through its new agreements and policies with employees.
2 Change of Control agreements are usually offered to induce key staff to stay and assist with a proposed sale of the business.
Remember also that whether or not IP is adequately protected by contract, disaffected employees who leave after closing can undermine or dissipate the value of the acquired IP.
IV. Practical Tips
There is no pro-forma approach to the treatment of employees on the sale of business. The overall concept is often determined at the initial negotiations for the sale and purchase of a business. This is why it is very important that employment lawyers have some input at the outset, before any binding agreements have been entered into (or the parties have firmly settled on price of the business). Early advice from an employment lawyer on these deals can have a material effect on the overall employee costs associated with the transaction, and help minimize unintended financial
consequences including major severance costs, or loss of know-how, goodwill or other assets because of departures of key employees. When acting for a vendor or purchaser, it is important to understand the client’s overall plans and key post-closing priorities. This will then form the framework for the structure of the overall terms and conditions affecting the employees, and help your clients maximize on the value received whether selling or buying a business.
