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Legal Insight: M&A rule changes - an HRD guide to getting it right

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4th Oct 2011
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New merger and acquisition rules introduced on 19 September mean that companies involved in such activity will have to bring HR into the picture at a much earlier stage of the due diligence process than was previously the case.

The changes were introduced by the Panel on Takeovers and Mergers, an independent body that is intended to ensure the fair treatment of all shareholders during takeover bids. Its key functions are to issue and administer the City Code on Takeovers and Mergers and to supervise and regulate takeovers and other matters to which the Code applies.   The Code changes imposed a strict timetable of 28 days for a bidder to be identified and to make or withdraw their bid and for targets to publicise any approach they receive. Employee representatives have also been given the right to respond formally during the bid process and any statements about bidders’ operational plans that affect workers – such as site closures or likely job losses – will be considered binding for a period of at least 12 months.
But these alterations mean that HR directors will need to become involved in the M&A process at a much earlier stage than they used to in order to answer any employee-related questions about the deal.   Employers’ M&A duties - TUPE   The Transfer of Undertakings (Protection of Employment) Regulations 1981 (as amended) set out the responsibilities and liabilities involved in transferring personnel from one employer to another. TUPE applies when transferring a business or part of a business to another organisation but not to acquisitions that simply involve a share purchase.   It requires that employees’ existing terms and conditions, including collective bargaining agreements, automatically move over with them. Post-acquisition changes in terms and conditions may be invalid. TUPE likewise sets out how and when organisations should inform and consult their workers.   M&As that involve employees in more than one EU member state will also need to take the Transnational Information and Consultation of Employees Regulations 1999 into account, however.     More specifically, under TUPE, employers that dispose of a given business have a duty to:  

  • closely follow the provisions of TUPE and any new legislation governing the transfer of undertakings
  • be clear about which employees transfer to the new employer and when
  • make provision for workers who choose not to transfer
  • hold elections to select appropriate representatives, if necessary
  • provide information about the transfer in advance
  • consult appropriate representatives when required.

  Employers taking on the new business have a duty to:  

  • closely follow the provisions of TUPE and any new legislation governing the transfer of undertakings
  • understand the rights of their new employees and the liabilities of the old employer as they will be transferred over to them
  • recognise that all workers will transfer over to their new employer on their existing contractual terms and conditions of employment
  • ensure that any changes to new employees’ contracts are not made because of the transfer
  • take over any existing collective agreements with recognised trade unions, except to the extent that they relate to occupational pension benefits
  • ensure that the appropriate employee representatives are in place, informed and consulted
  • understand that if an employee is dismissed in connection with a transfer of undertakings, it will automatically be deemed unfair unless the employer has a “permitted reason”.

  Factors in managing a successful merger   The following factors will help to achieve success:  

  1. Planning is essential - as with any project, a plan must be devised, which includes clear phases and defined responsibilities for the people involved
  2. Speed is important — experienced acquirers move rapidly into integration activity, often before the ink has dried on the deal
  3. Project management skills are necessary — the key learning from organisations with a lot of experience of these scenarios is to treat the merger as a project, with definable end points at each phase
  4. The most effectively managed mergers are those where different groups or work streams share specific responsibility for handling the activity and there is an appropriate co-ordination framework - a structure that is maintained until the new organisation starts to flourish
  5. A temporary accountability structure should be set up to control the pace of integration, but the merger project should run parallel to ‘business as usual’ in order to maintain or improve customer service
  6. Top management should outline the terms of possible acquisition/merger activity, establish the likelihood that it will be accepted and determine a realistic timescale for integration.

  When the decision is taken to go ahead with the acquisition, transition teams and others need to plan ahead as much as possible with regards to: 

  • levels of HR integration
  • estimated changes for employees in line with the HR transition plan
  • how to address cultural differences
  • how to combine potentially disparate corporate cultures.

  Managing change   M&As are likely to test HR directors’ change management skills to the limit. If they are to have a real influence on shaping the new organisation’s culture and organisational structures, however, it is crucial to focus on what the move is trying to achieve in order to help the business achieve this goal.   The two main questions for HR are:  

  • where can HR add the most value?
  • how can HR add value?

  Adding strategic value   M&As represent a key area for HR professionals to contribute strategic value to the organisation. A study by executive education providers and researchers Roffey Park, which looked at more than 40 UK and European mergers, revealed a strong business case for taking people issues seriously.   It also indicated that employers driven by HR-related issues anticipated and resolved many of the people issues while the merger was taking place, enabling true integration and synergy to take place.   Culture change   Radical change such as that introduced by M&A activity provides an opportunity for implementing major cultural change as the status quo in both the acquiring and acquired organisations is temporarily disturbed.   Mergers bring massive changes to many employees. As a result, they go through a roller-coaster of emotions as different elements of the plan are rolled out. An important thing to bear in mind is the move will shape the culture and climate of the new organisation and employees’ personal experience of it will determine both their effectiveness and commitment to the new business.   Because intellectual capital is a major driver of many acquisitions, failure to retain key talent can become an own goal for acquiring companies.   Other HR considerations   While both ongoing businesses will need to be protected and any potential risks mitigated, the new organisation must also exploit short-term synergies, boost performance levels and take advantage of new strategic opportunities.   Leveraging assets and skills beyond a “best of both” model will require selecting appropriate staff, finding ways to retain high performers and building an employee value proposition. As a result, HR will need to:  

  • integrate its own function swiftly and get involved in the merger at the earliest possible stage
  • get an early feel for big issues and any hotspots
  • identify and prioritise tackling those organisational issues where most value can be gained
  • ensure that appointments and exits are handled properly and keep in touch with high-potential staff and key specialists in order to retain key players
  • handle redundancies and relocations sensitively
  • integrate terms and conditions, TUPE transfers, benefits, pensions etc
  • re-evaluate and possibly re-define the HR strategy
  • integrate other HR systems, policies and IT
  • carry out business mapping activity and establish baseline data and tracking capabilities
  • get involved in organisational development and ensure feedback is passed upwards
  • carry out merger-specific training
  • identify future competencies
  • integrate culture, vision and values
  • develop effective performance management policies and practices
  • work on developing effective industrial relations
  • advise the ‘top team’ on succession planning and remuneration
  • manage communication and feedback.

    Richard Smith is head of product development and HR expert at HR and employment law consultancy, Croner.      

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