Key Labour and Employment Issues in M&A Transactions
Mergers and acquisitions (M&A) are tools used for the growth of business and optimisation of resources. M&A transactions impact target-entity employees and the success of these transactions depends on establishing a fair balance between employees’ security and business interests.
“Merger” is not defined in the Companies Act 2013 or the Income-tax Act 1961. Generally, a merger means the combination of two or more entities and their businesses into a single entity. In a merger, only the resultant entity continues to exist, and all other entities are dissolved.
An acquisition involves either:
- Purchase of controlling shares of one entity by another person or entity (share purchase acquisition); or
- Purchase of a business in the form of assets and liabilities along with employees on a going-concern basis (commonly referred to as a “slump sale acquisition”).
In some cases, buyers purchase certain identified assets and hire only selected employees of the target entity, but not the entire business on a going-concern basis. Such transactions are generally categorised as pure asset purchase transactions (asset purchase acquisition).
M&A and employment arrangements
Mergers
Mergers of companies are carried out under the supervision of the National Company Law Tribunal (NCLT) and/or the jurisdictional Regional Director (RD) of the Ministry of Corporate Affairs, which are quasi-judicial bodies. The scheme of merger of entities, which is placed before the NCLT and/or RD for approval, contains, among other things, provisions about the rights and benefits that the resulting entity will provide to the employees of the merging entities.
Share purchase acquisition
In a share purchase acquisition, a buyer purchases the shares of the target entity, and the employees remain with the target company.
Slump sale acquisition
A slump sale acquisition involves transferring the entire business as a going concern without cherry-picking certain identified assets liabilities, or employees. This is a requirement under the Income-tax Act 1961, where the parties wish to avail themselves of tax benefits. In a slump sale acquisition, the employees are transferred without any break in service and the acquirer assumes obligations in respect of all accrued employees’ benefits and liabilities, such as gratuity, pensions, leave and other rights for the period of employment with the target or transferor entity.
Disclaimer: This update is for general information purposes only. It does not purport to provide comprehensive legal or other advice. The publisher and the contributors accept no responsibility for losses that may arise from reliance upon information contained in these publications.
