Employees can be an organization’s greatest asset but also – in the circumstances of a corporate transaction – its greatest liability. Depending on the nature of the transaction, the transaction itself may have the effect of terminating the employment of the vendor’s employees and trigger unforeseen severance obligations.
Corporate transactions take two forms: asset sales and share sales. In an asset sale, the vendor agrees to sell some or all its assets. The purchaser is not buying the company per se. It is purchasing its assets. In a share sale, the vendor sells its shares to the purchaser and (unless agreed to otherwise) the purchaser assumes all the assets and liabilities of the vendor. The distinction between the two types of transactions is important because employment contracts cannot be assigned without consent. An asset sale results in a termination of employment as the purchaser is not buying the shares of the vendor and employees cannot be purchased. A share sale does not result in the termination of employment.
Employees have an obligation to accept substantially similar offers of employment. As a result, the severance obligations of a vendor in an asset sale are generally satisfied if the purchaser agrees to offer new employment to the vendor’s employees. That said, the purchaser in an asset sale is not obliged to offer new employment to the vendor’s employees and a refusal to offer new employment to the vendor’s employees will likely increase a vendor’s severance obligations. The parties will also want to consider who is liable for severance payments if the purchaser hires the vendor’s employees but terminates them shortly after the closing date. Depending on the circumstances and the wording of the asset purchase agreement, the vendor (to its surprise) may be liable for severance payments despite not being involved in the decision to terminate the employees’ employment.
If a purchaser offers new employment to some or all of the vendor’s employees, the purchaser will want to strongly consider whether it will agree to recognize the employees’ prior years of service with the vendor and have employees execute a new employment agreement prior to the closing date.
Many parties to a corporate transaction are so focused on “getting the deal done” that they do not stop to consider the potential severance obligations resulting from an asset sale, including pay in lieu of reasonable notice, contractual severance pay, change in control provisions, termination pay and group termination pay. Vendors and purchasers both benefit from knowing the employment obligations and liabilities that flow from a corporate transaction. Failing to account for these may result in considerable unplanned costs.
