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APPRECIATING HUMAN CAPITAL: PRESERVING M&A
VALUE THROUGH EMPLOYMENT LAW
by Jeffrey L. Berger, Esq.
Jeffrey L. Berger
specializes in management-side employment and business law, and related litigation in
Washington, D.C., and nationally. Other articles are available at www.bergerlaborlaw.com.
Proactive employment relations management is an integral
component of successful M&A deals and
leads to enhanced value. Competitive business
advantage frequently flows from unique employee knowledge and experience. The extent to which these “assets” are
enhanced or depreciated through mergers and acquisitions affects the real value of the
target to the buyer. Under our employment
laws, change in ownership opens a window of
opportunity for restructuring employment relationships.
Thus, both sides should assess the value of human capital to the transaction
and structure employment relationships at the pre- and post-merger stages to (1) enhance
retention of key employees, (2) smooth work force integration, (3) limit competition and
use of intellectual property by departing employees. and (4) minimize employment law
claims that arise during workplace change.
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During the 1990’s merger mania, analysts
would step back briefly from the deal-making frenzy to consider why the majority of
M&A transactions failed to meet their promise. Although
workforce issues were identified as a prime reason for failure to achieve financial goals,
these concerns were generally given no more than lip service, especially by investment
bankers who are trained to focus on financial, rather than human capital. In fact, most companies still concentrate on
“number crunching,” overlooking employment
decisions that can make or break an M&A deal.
Companies that successfully navigated the 1990’s and can
take advantage of acquisition opportunities today, would be wise to avoid the “merge
now, workforce integration later” approach that beset Time Warner/AOL and other 90’s
deals. The year 2000 brought a sea change in
M&A; rather than expanding, companies began divesting non-core assets to focus on
their principle businesses, with executives and employees being tossed around in the
process. Since terminated employees in
a tight job market are more apt to sue, today’s employers contemplating M&A
transactions will especially benefit from attention to employment law and workforce
issues.
Although M&A transactions are frequently promoted on
efficiencies of scale or marketing, the driver for many high tech and service industry
acquisitions is that the target company’s employees provide knowledge and experience
that cannot be obtained elsewhere. In those
instances, the acquirer must focus early on identifying management and staff that are key
to deal value. Indeed, both sides in the pre-acquisition stage should assess the value of human capital to the
transaction and use “carrots and sticks” to encourage the transition of key
employees to the new entity. Examples of
“carrots” or incentives are retention bonuses, change in control agreements,
stock options/appreciation rights, and deferred compensation. The “sticks” or disincentives to
employees leaving include non-competition, trade secrets, no-solicitation, and no-raiding
restrictions.
The Sell Side. When
a semiconductor company wanted to position itself to be acquired, our firm created a
multi-tiered change in control agreement that divided its 630 employees into categories
based, in part, on their importance to a potential purchaser. The employer offered each employee, by group,
severance if the new employer did not hire them or substantially changed their position. This agreement also served as the quid pro quo for
non-competition and no-solicitation restrictions, and was important in retaining key
employees through the acquisition. Of course,
buying employee “loyalty” during the pre-merger uncertainty phase has a price to
balance against value created. Many employers
are now in disputes with executives seeking to open golden parachutes after the promise of
their deal failed. Likewise, when companies
try to increase profitability to prepare for acquisition, such as by layoffs, this can
spawn discrimination claims by plaintiffs’ lawyers who use the due diligence process
as leverage for settlement. To reduce such
claims, employers should implement a personnel management system supporting strategic
goals well in advance of sale, including employee handbooks, overtime and EEO compliance,
and restrictive covenants to protect customers, and trade secrets.
The Buy Side. Similarly,
a prospective purchaser should assess the importance of the seller’s employees. If the purchaser plans efficiencies by integrating
the seller’s operations and eliminating redundancies, it will need to hire only
certain employees and must quickly align their pay and benefits. Conversely, if the seller’s operation is to
be left intact with minimal interaction of employees,
the buyer has more interest in the seller’s human resources system and less need to
meld pay and benefits, unless discrimination is an issue.
Government contractors have multiple exposures. They are subject to EEO, overtime, and pension
laws, and to discrimination claims from the Office of Federal Contract Compliance (OFCCP)
and under the Federal Acquisition Regulations. In
the late 90’s, after 11 acquisitions in 7 years, CoreStates Financial agreed to $1.5
million in back wages for 142 workers to settle OFCCP charges of pay discrimination
against women and minorities. When making
acquisitions, the bank simply adopted local salary structures, which when compared across
its business units favored white males. In
settlement, CoreStates agreed to analyze salary grades across the company; a task it
should have considered during the merger.
Basically, the acquirer should treat the target's employees as
applicants in its hiring process based on the acquirer’s needs. A classic
discrimination scenario is where a successor employer’s supervisor discharges
minorities or older workers who were highly regarded by former management. Likewise, the
acquirer may be in for a surprise, and a negligent hiring claim, if it fails to utilize
background screening. When Lucent acquired
Octel Communications in the late 1990’s, Lucent reportedly took on a manager who
became its director of recruiting overseeing million dollar deals. After the employee died, Lucent learned of his
criminal record including forgery, resume fraud, and embezzlement that was unknown to
Octel.
If a target company is unionized, planning of ownership,
control, workforce continuity, and operations integration is critical to the buyer's legal
obligations as a "successor" liable for the predecessor's labor law violations.
A prospective purchaser should review all of the target's employment relationships,
such as employment agreements, personnel handbooks, benefit plans, and lawsuits.
With high tech and service industries, review of trade secret and non-competition
restrictions is critical, as a company's competitive edge is often aligned with the
know-how of its professionals. Finally, the purchaser should "cost out"
employment obligations and liabilities, factor them into the deal, and, if necessary,
create a reserve. That way, even the "number crunchers" will be happy..
© 2003 Jeffrey Berger
REPRINTED FROM:
ACG/WBJ CORPORATE DEVELOPMENT SUPPLEMENT - APRIL25, 2003
The Berger Law Firm, P.C. 1825 Eye St. N.W., Suite 400, Washington, D.C.
20006.
Phone: (202) 861-1361 Fax: (202) 861-1362
Legal advice is case specific and is not intended to be provided by this article.
The Berger Law Firm, P.C. may not be held responsible for any consequences
that may arise in connection with the use of or reliance on the information provided.
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