Dom Wrench
MDR ONE
Hello. Welcome to the second in this series of three webinars that we’re running relating to navigating labour, employment and executive compensation challenges as part of global M&A transactions. Welcome back to those of you who joined our first webinar and thanks for joining us if this is your first time. As a recap, our first webinar focussed on due diligence issues and deal dynamics relating to people issues in transactions and if you missed that, there is a recording available online and we can share that with you today after today’s session. We got into the heart of M&A issues in that first webinar, but in today’s webinar we’re going to be taking one step back and looking at transaction readiness. So, whilst this is largely a sell side focussed webinar, it’s helpful for buy side parties too so that when you pick up your transaction, you can identify those sellers who prepared well and are more likely to contribute to a smooth deal flow. If you have any questions as we go through today’s webinar, please do pop them in the chat channel and if we get time at the end we’ll address some of those but if not, we’ll follow up directly with you.
So, please let me introduce the wonderful panel of speakers joining me today. We have Cadace Quinn joining us from Buchanan in New York. Candace is a shareholder at Buchanan and brings a wealth of experience on executive compensation and employee benefits from the US and the international side. Candace’s colleague Christian Antkowiak is also joining us. Christian is also a shareholder and co-chairs Buchanan’s labour and employment benefits and immigration section and again, like Candace, has extensive experience for labour and employment experience in the US and also cross jurisdictional with partner firms. Here in the UK, I’m joined by my colleague and Partner at Mishcon de Reya Stephen Diosi. Stephen leads the Remuneration and Incentives team and has experience advising on the strategy and implementation and compliance of UK and global employee incentive arrangements. My name is Dom Wrench. I’m a member of MDR ONE, we’re one of the group businesses here at Mishcon and we focus solely on international employment law and I work extensively on our international M&A deals so, I’ve taken a nice break today from M&A deals to come and talk about M&A, so it’s a large part of my life. So, let’s get started. So, over to Candace to you first to talk us through some transaction readiness from a US angle.
Candace Quinn
Buchanan
Thank you so much, Dom and thank you all for joining us today. So, M&A transaction readiness for executive compensation and benefits matters, now to prepare for the upcoming transaction seller will really be looking to get ahead of any red flag issues and potential matters that could impact a potential price or even the interests of a buyer. The key for the seller is to look at the pension plans, the executive compensation agreements and other agreements to make sure that they do no impact the viability of the potential transaction. For future potential buyers, they are going to be looking at assessing those risks and determine if there are any red flag issues. Now first the seller wants to look at the type of the transaction, are they thinking of an equity sale or an asset sale? Then they also have to take stock, is this a publicly listed company, a multinational company, as part of a controlled group, are there risks that affiliates? So these are things sellers will need to determine beforehand and then also now let’s look at specific plans and types of agreements. Now mergers and acquisitions deal readiness is all about mitigating potential issues so one of the first areas that you, that sellers want to look at is the qualified retirement plans or pensions. Those pensions are governed by two statutes in the US, first is the Employee Retirement Income Security Act, also known as a ERISA, and then also the Internal Revenue Code. Failure to comply with those sections of the law can result in significant costs and potential penalties for a buyer, so if a seller wants to get ahead of this and look at the qualified status of their plan, the funding status, are there any compliance issues? Is there an IRS or Department of Labor audit that could impact the sale? And any related litigation ongoing or risk of litigation. The next area in employee benefits and exec comp is to look at the incentive plans and awards, I think it’s known as share schemes in the UK, also deferred compensation agreements and executive agreements and in this case the seller is looking to see are there any terms in those plans that could be triggered upon a change of control and activate or accelerate vesting of stock options and also they want to look at any of the agreements provide for guarantees by the company that they’re going to gross up executives for taxes or that they’re going to reimburse the executives for any 409A violations. Buyer will want to know this when they do their due diligence because those are cost issues. Another area is tax risks, so the seller’s advanced planning here is going to be important to determine if there is something known in the US as ‘golden parachutes’ which is Internal Revenue Code Section 280G and they’re going to want to also determine can they mitigate any potential issues if there is this golden parachute potential issue with a shareholder vote exception. So being in advance in planning is really important. So these payments are limited to only certain types, they are transaction bonuses, severance or related agreements, incentive plans that relate to the transaction, acceleration of any equity awards and also any increases in compensation within twelve months of the change of control. Now the risk here is for the recipient. First, they could be subject to a 20% excise tax on the amount of that excess parachute payment 6.17 unclear tax deduction. Now parachute payments only apply to certain people, they’re known as disqualified individuals in the US and they only apply if the payments are made because of a change of control of the ownership or a substantial amount of your assets and they only apply to certain payments that equal or exceed three times a base amount which is usually an average of compensation for that disqualified individual over five years. So who is in the category of disqualified individual that the seller wants to pay attention to what kind of awards they’d be getting? First it’s an officer by authority, not title, the company. It’s a shareholder that has great than 1% of the fair market value of the outstanding shares and it’s also a highly compensated employee who is one of the highest 1% by compensation of that company. Now you can mitigate the impact of this 280G golden parachute rule if you are a private company and the company wants to take what’s called is a shareholder exception. That means by a vote of 75% of the target company shareholders excluding that disqualified individual, they have to agree to approve the excess amount of the payment. Now this requires that all those payments have to be disclosed to all the shareholders and secondly, the disqualified individual has to agree in advance in writing that they will forego the excess if the shareholders don’t agree. So as you can see, preparing for this is really important in advance. Another tax risk is known in the US as Internal Revenue Code 409A and unless there’s a specific exception, if there’s deferred compensation that does not satisfy that strict law, there can be a 20% tax to that recipient, that’s in addition to their state and federal income tax. So that code section 409A is significant and it reaches beyond vanilla deferred compensation and it also applies to stock options and stock options whose exercise price does not equal the fair market value of the underling stock. So any discounts under fair market values and exercise price will violate it. Now this is really typical an issue for multinational transactions where US employees are granted foreign company stock or shares that are discounted for fair market value. I’ve seen this in a number of multinational transactions and we have to address this with a special addendum for the US recipients. So, unless the company is publicly listed, one way to get ahead of this issue is to have an independent fair market value by an appraiser before the grant the shares or stock options. Another issue under 409A, there is a what’s called a six month delay to any payment that is paid to a specified employee, another category but those payments only are for separation from service, so you can have a change of control but if the individual is determined to be in that category and they receive what’s considered to be one of these payments then they will have a six month delay. Now this, you have to be careful because it doesn’t apply, it does apply not only to US publicly traded shares but also shares of a company that’s granted, that are on a foreign national exchange. So this is something that has to be careful, definitely in a multinational transaction as well as a US. Now the last area for sellers to verify their compliance of their plans is health and welfare plans. Now the status of these plans is governed by a number of laws in the US, not only the Employee Retirement Income Security Act or ERISA Internal Revenue Code, Affordable Care Act, better known in the US as Obama Care, and Cobra, but these notices, these requirements all have certain very strict penalties in some cases for violation, for instance just failure to provide what’s called a Cobra Notice to let employees that may have been terminated that they have the right to continue health coverage, is $110 a day by the Department of Labor and the IRS can exercise a penalty. Also, penalties for failing an annual return such as a Form 5500 which in some cases require an audit by a certified public accountant can be from the IRS $250 a day with a maximum of $150,000 per return and the Department of Labor can charge $2586 a day with no maximum. All for failing to file form 5500 so, very important to review because there are amnesty programmes that the seller can apply to that are to protect any compliance issues such as this but they’re not available if the plan is under IRS audit or has received a notice. So as we’ve seen, the Internal Revenue Code and ERISA requirements can significantly impact an M&A transaction so it’s very important to get ahead of these issues. We recommend a mock IRS due diligence review to find and address the issues in advance. So with that, let me turn it over to Christian to tell us about labour issues and employment issues with regard to M&A transaction readiness. Thank you very much.
Christian Antkowiak
Buchanan
Thanks Candace and thanks to the Mishcon team. I just want to start by apologising in advance, we had a lot of great feedback after the last presentation, one point of controversy was that there weren’t enough British accents on this so you’re going to have to suffer through my Pittsburgh-ese for a few minutes before I turn it over to the real stars of the show next. You know, as I think about transaction readiness and I was preparing for this segment of the presentation, I read a survey that showed 67% of executives are finding there’s more scrutiny around the deal process, and that’s increased. Obviously, that additional scrutiny means things like a longer deal process, wider disparities in valuations between buyer and seller and the need for more information and you know as we think about this as folks who work in this space and do these types of deals, we think about how they can be avoided from the sell side and in one of, in my opinion one of the primary reasons for the trend is the failure to adequately prepare and so at Buchanan, one of the things we do is engage our clients in an M&A readiness assessment and so these assessments can be used to identify business issues that impede things like the speed and success of the transaction and can impact the value achieved. So in the few minutes that I have, I want to talk about at a high level a number of the areas in the employment space that we go over in these types of assessments and the first of those happens to do with talent, selection and onboarding. I think people often overlook during the acquisition readiness process but those pre-imposed transaction teams I think are crucial to the company’s future success after the combination takes place and obviously developing a business succession plan can really help to protect that continuity and reduce the impact of scale after the combination occurs. Of course you have to ensure you have key personnel in place and that at any potential retention issues throughout that process are resolved on the front end, so I think about this in terms of the who and the how. The who, of course in terms of identifying select and retaining critical employees and the how is how you accomplish that. You can use for example long term incentive plans, that’s something that somebody like Candace or the folks at MDR could certainly help with on the benefit side. You can also have retention bonus agreements and there’s a number of different vehicles you can use but that’s something you really need to be thinking about. The second is culture and change management strategies, you have to take stock of your culture and certainly that can be done anecdotally but I know a lot of clients who undertake quantitative assessments with the help of a third party that understand good fit and you need to think about that in terms of the buyer as well, for example, other values and leadership styles, workplace environments compatible with yours because a mismatch can often lead to friction post-transaction and that’s going to affect employee morale and productivity. And coupled with that I think you need an effective communication strategy that outlines how you’re going to integrate those people and systems post-transaction that’s going to help facilitate the process because you know a lot of employees are going to feel uncertain about their roles, the company culture and job stability as they look to the future and what that combination means.
The next area, identifying opportunities for cost-cutting and redundancies. We often come across situations where one company will set out their plan on paper but not execute before the deal takes place. A buyer isn’t necessarily going to give credit to those potential or future savings based on a plan that hasn’t come to fruition yet so we often advise folks to maybe execute those in advance and of course that could impact things like in the United State the Worker Adjustment Retraining Notification Act, a law that requires certain notices to go out to employees involved in perhaps a mass layoff. You also need to be concerned about the impact that mass layoffs have for class action claims in discrimination for disparate impact and so it’s important to work with an advisor who understands those risks when you execute that strategy and perhaps lean up for a combination. And the final area is something similar to what Candace touched on at the very end, the legal readiness, ensuring compliance and mitigating risks. I think legal due diligence, undertaking that exercise before you get to the diligence process, you know it can be time-consuming and meticulous part of the transaction but if you undertake that exercise in advance it’ll set you up for success in speed in the transaction as you move forward and so some of the things of course we look at are employee misclassification risk, whether they’re properly classified as employees or independent contractor or in the United States or wage hour in compensation issues that can, those types of risks can be significant and impact the value of the transaction, it’s better to clean it up on the front end. Pay in equity is another issue in the United States, it’s a hot topic of litigation now and ensuring that there’s equitable pay across different classifications of workers and of course addressing union related issues and potential organising risk in an organisation, those are probably the top three things that I would be, I would be looking at. So, that being said, those are some of the issues at a higher level and I’d love to kick it over to the folks at Mishcon for their perspective on these topics.
Stephen Diosi
Mishcon de Reya
Thanks so much Cristian and great to be here with everybody today and thank you for your time in joining us. So clearly, some of what Candace and Christian have talked about will be equally important from a UK and rest of the world perspective and at the risk of repeating I guess some of the messages that have been delivered, I did want to outline from a UK and rest of the world perspective, the way in which we think about things at Mishcon and how we advise our clients on being deal ready and that’s sometimes both from a buyer and seller perspective. I think the key message that I wanted to get across that nobody likes nasty surprises, it’s really important to prepare checklists of data and documents and to start putting that all together early and as we highlighted in our last seminar, that includes being able to identify reward arrangements and employees on a country by country basis. In global M&A, multiple advisors and teams need to work with data that also covers jurisdictional information and well prepared data presented in country specific folders in the data and can keep transaction fees on budget and the deal process on time without causing delays. It’s similar to what’s been discussed just before, health checks. In our last webinar we flagged some of the risks that can arise during a diligence phase and particularly if you are on a sell side, then you should really be looking to get ahead of those issues by conducting health check reviews, not just before the deal process kicks off but regularly as part of a business as usual compliance review. Start the due diligence work early so that any issues can be identified, remedied or mitigated ahead of the deal process kicking off with potential buyers. And from a UK incentives perspective in particular, one of the, one of the areas that we always see that the most risk and where things can go wrong is with a particular type of employee share plan called an Enterprise Management Incentive arrangement or EMI and that’s because there’s a lot of flexibility that can be delivered in that type of plan, how it’s structured from investing payout perspective performance criteria, but it’s a revenue tax advantage plan and subject to a lot of very strict requirements, some of which are quite easy to trip up on and that may be around the, the valuation process that’s conducted upfront, that might be around certain declarations that certainly need to have been given over a period of time in terms of employee status and going through that checklist at an early stage and identifying have we missed anything, has something gone wrong, how do we rectify it, will be of critical importance particularly because EMI gives capital treatment and so you’re potentially paying tax at 10% as opposed to income tax treatment at 45% with employer social security on top. So, you can imagine the disappointment and the somewhat horror of a seller and the employees and if they find out at the last minute that actually they’re paying significantly more tax than they were expecting, that’s going to be a real problem.
Moving on, I would say that, and it’s part of the same conversation, identify any high value and material risk areas, in particular it probably makes sense to give most focus to the matters where there’s critical mass, high value awards or jurisdiction requirements that could cause issue and in the context of equity incentives that also means knowing which countries and which arrangements will trigger those employer liabilities and reporting obligations. So for example, more and more countries around the world now require employers to withhold tax and impose social security charges on the excise of share options and yet on deals we too often see employers assuming that tax and reporting is a matter for employees personally, so the company is potentially opening itself up to interest and penalties for non-compliance which ultimately could be borne by the buyers.
I think also touched on by Candace when she was speaking; consider the structure of the deal and how that would impact employee equity plans. Different deals will have different impacts and this needs to be considered early in the process. Take private or a public M&A is very different from a trade sale with an earn out or where you’ve got a sale to private equity. Heads of terms need to be looked at and agreed and make sure that’s done with a clear understanding of the financial impact of the deal otherwise it’s a risk of a bigger cost to a buyer than they would expect and then maybe less proceeds due to the participants. Of significant importance in that respect is understanding and either avoiding or planning would there be any dry tax charges on the exercise of share options or other equity incentives. How do you deal with those for tax compliance purposes? It’s a significant issue if it’s a private equity transaction and payee house is requiring some sort of roller and if there is a dry tax charge that potentially means significantly less available cash to be able to do that and if there is a dry tax charge, putting that onto your employees could materially demotivate and the team go forward can be difficult to retain without some sort of solution and thinking about. And aside from purely the legal and tax analysis, just think about the general practicalities, ask whether your payroll providers can process share based payments and add ex-employees back onto the payroll for processing. Not all can do that so you might need to discuss with them early on in the timetable or even consider changing your providers. And whilst this might be a post-closing action, be aware of the country deadlines that could apply. You might only have a few days to get this done and the Buchanan team can talk about this from a US timeline perspective but in the UK, we often see a flurry of deals closing in March to lock in the current tax rates before any increases in the subsequent tax year and in this case, employers need to submit and finalise end of year payroll withholding reporting to HMRC by the 19th April so, quite a short time. So we’d often say talk to your payroll provider early, ask them to run a dummy payroll in advance of the deal closing as a test to make sure everything can be done on time. But I think the final message of this part of the slide before I hand over is be prepared and don’t be tempted to cut corners. Just as a very last example, we sometimes see equity awards cash cancelled or cash settled for the intention of taking out the administrative burden of exercising options, issuing shares and having to buy those. Now whilst this could work quite nicely in some jurisdictions, in others it might actually lead to significant employer social security liabilities and it could materially increase the tax burden on employees. And with that final thought, let me hand over to Dom, who can talk more about the UK employment aspects. Thank you.
Dom Wrench
MDR ONE
Thanks Stephen. I now have the unenviable task of talking after three experts on the same kind of issues, but hopefully there will be some little nuggets here from a UK or a global perspective. I think as all the others have covered on, a lot of the transaction readiness is legal minded but it’s more practical and I think experience based judgements on what you can be doing to get ready is just as valuable as the legal aspects sometimes. As a lot of lawyering you know it doesn’t actually really happen until the deal kicks off but one area where it does happen is the first thing I’m going to talk about today, which is restructuring and some sellers will like to think about restructuring. Often, if the deal is part of a carve out of a specific business unit or a specific product that they’re looking to sell, some restricting can be helpful such that the thing that is being sold is nicely boxed up and is a nice proposition to the market but again, within that restructuring it’s important to consider the employment aspects that might be triggered by that restructuring. Some companies leave that till you know till the deal is signed and it’s all agreed but others like to do it up front such that yeah, it’s a nicer sell to the market so, certainly something to consider there. I think everyone has kind of covered on the health check or the mock due diligence exercise in terms of flagging risk but I think this has another value as well which is it’s useful for the teams to see where there are gaps as well as risks, so where don’t they have something that we know a buyer is going to request as part of its due diligence, you know where don’t we have a handbook in place where we should, okay can we sort that now to make our life a bit smoother down the line. And the other benefit sometimes of these kind of exercises is, it allows the team to understand where the get that information and how they get it through their systems because it’s not until often the diligence exercise is going and there are a lot of requests from buyers and the internal team are kind of wondering okay so where do I pull that data from, where is that document kept, that kind of thing so, there is a practical benefit as well as flagging risks to uncover. And obviously you know we recommend people are obviously careful with that exercise as well and you can do it under and innocent guise such that people don’t think okay, we’re getting ready to sell here, so it’s worth thinking about how those questions are posed to the kind of people where you get that information from. As part of those audit and mock due diligence type exercises, one thing that is really useful to uncover early is where there are going to be any approvals or you know Works Council processes to undergo as part of the transaction. I think flagging those to the corp development team or the deal team up front is super helpful, primarily so that they can build it into their timelines because I think as we spoke about last time, they’re not going to thank us if we put a, you know a one month consultation period into their deal that they weren’t already expecting and this is, you know, this is global thing, you know whilst Europe is typically considered you know much more Works Council heavy than other countries, we’ve seen you know things like in Korea, a collective bargaining agreement which required some information and consultation so, it’s important that we’re looking at this kind of quite holistically for the deal.
I’ve put HR and business connection here because I think it’s important for the you know the business, the legal teams, the HR teams to understand fairly early on what role they’re going to have in a transaction like this and I’m going to speak in a second about how we do that in the correct kind of way but too often we see quite disparate relationships between these parts of the business and that can really slow down the deal once it gets going if people don’t know who the right people are to get the thing they need or the information they need and I think within that, I’d say think global, which sounds a bit like a strapline for you know a global haulage company or something but my point is, don’t just think about the ones and twos you know where you have big populations, think about where there are employees in smaller countries or this small headcount or you know who is part of the deal is going to have the knowledge on the employees in India, it probably isn’t the you know the team in the US so, think about who’s going to be able to get that information and have a plan in your head at least or at least you know written down and we had a checklist that Stephen mentioned of where that information is going to pull through at the relevant time.
Linked to this point, it is who is under the hood of the deal and who is aware of it and what steps you might need to take there. A lot of companies will you know get those employees under an MDA at the right kind of time in relation to the deal to make sure the confidentiality of the deal is protected and you know look let’s not forget you know, a transaction can be a really long and stressful time for employees in the company and you know they’re balancing running a business, running a team, whilst also kind of getting this in the back of their mind and remembering not to tell everyone about it. So the incentive piece I think is really important because it goes to keeping them engaged in the transaction and also making sure there is some benefit to them to keeping engaged with it as it rolls through and we don’t get deal fatigue.
Global considerations again just remember the rest of the world, you know we see a lot of US deals, US centric deals where there are very small workforces outside the US and sometimes those, they can create issues which actually end up holding the deal up or can cause last minute drama so, again my recommendation is always just to be aware of those at the outset and work through them at the same pace as we do the US diligence.
And, and my final point from a sell side is, is to consider where there’s any employment litigation and where the, as a seller you might want to look to close some of that out because you know litigation is somewhere, whereas a buyer sometimes you might see a blank cheque, we don’t know which way it’s going to fall so they may ask for indemnities or they may really push you to give a value on it that’s impacting purchase price so, if there is any litigation that you know we think can be closed out and, and the value that’s attributed to that is actually better of than having a deal that down the line is part of the process, then that’s something that I think can, can be super helpful.
So, that’s it I think from a legal transaction readiness side. We’re going to move onto some kind of more general legal updates and some kind of sociopolitical changes that can impact our deals from a people perspective. So, back over to you Candace for that please.
Candace Quinn
Buchanan
Thank you so much. US election, as many know, we had a recent election in November and I’d like to speak about the updates with regard to employee benefits and executive compensation matters. So, firstly, Tax Cuts and Jobs Act, which lowered taxes and certainly provided lower tax rates for individuals that would be receiving executive compensation is said to expire in 2025. As the Republicans in the US won both the executive and legislative branches of government, it is expected that the Tax Cut and Jobs Act will be extended or even made permanent, there are even potential discussions of potential lower taxes as the President Elect has discussed potentially lowering corporate taxes to 15%, but we will have to see. Retirement plans, health and health plans, what could be in store? Well, the Department of Labor and the Department of Labor’s Environmental, Social and Governance or ESG, fiduciary investment rule will be a key focus of this new administration. It is expected that the make up of the Department of Labor will change and the current administration’s Department of Labor ESG, fiduciary investment rule which applies to private retirement plans in the US governed by the Retirement Income and Security Act or RISA allows planned fiduciaries to consider environmental, social and governance issues as one of a multiple of factors when comparing two significantly similar investments. Now, this current rule has been under significant focus and in fact the current Department of Labor ESG rule is already under review by the Fifth Circuit Court of Appeals in Texas by a lawsuit that was brought by 27 Attorney Generals of Republican State in the case of Utah v Su. Now the Texas Appeals Court has remanded the case to the District Court for limited review after the Supreme Court – this is the current Supreme Court in Loper Bright – overturned a prior decision that had been the law since 1984 in the Chevron case that allowed agency deference for regulations that were ambiguous. Now the Court will decide what’s the best meeting of a regulation. So separate from this, it is expected the new administration will rewrite this rule regarding consideration of environmental, social and governance issues for fiduciaries that will be investing in private retirement plans and just to know that this can be in the trillions of dollars, private retirement money, so this is certainly a very important change but again it’s not unexpected because of the President Elect will head a prior administration and under that administration they had a totally different Department of Labor rule and a different executive order. For reference, under the prior Department of Labor rule held by the President Elect, under a programme titled Financial Factors in Selecting Plan Investments, private retirement plan fiduciaries that invested these ERISA funds were to make investment decisions only on non-pecuniary factors not considering ESG. Under the prior Presidential Executive Order which provided executive order promoting energy infrastructure and economic growth which sought to eliminate ESG considerations for investment decisions and retirement plans as that process may lead fiduciaries to invest in renewable energy instead of fiduciaries investing in coal, oil and natural gas.
Another area of focus will be the healthcare or under the Affordable Care Act or Obama Care. The new administration could look to expanding short term insurance health plans, although they do not provide the consumer protection that is provided under the Affordable Care Act but they have less expensive health alternatives for individuals and employees, although the length of these plans has changed under the previous administration. Now, although there was talk of repealing the Affordable Care Act during the election and previously prior congressional votes failed, now that the Republicans in the US control both the House and the Senate, they may attempt to repeal it or they may just attack certain sections of it. We will see. So now let me turn it over to Christian to tell us what’s in store for labour and employment issues in 2025. Thank you.
Christian Antkowiak
Buchanan
Thanks Candace, appreciate it. You know, when presidential administrations change, I think it’s fairly common to see shifts in things like policy and new regulations, even interpretations of law or the application of cases to case law to facts over time. I think it’s an understatement to say we’re about to see a seismic shift at this moment in US politics when it comes to employment law and in the time remaining, I’m going to focus on some of those seismic changes that I expect to see in three different agencies because I think the impacts of those are going to affect transaction readiness, they’re also going to affect employers of all types with folks in the United States. The three agencies of course at the federal level, the Equal Employment Opportunity Commission, the National Labor Relations Board and the Department of Labor. So, the first of those, the EEOC. I think the most significant changes are probably going to be somewhat delayed at least until 2026 when the current democratic majority rolls off and the new administration’s appointments are able to take hold. Nevertheless, I think the new administration’s likely to adopt a more conservative stance, I think that much is obvious based on what we saw when Trump was first in office and what Trump campaigned on with respect to things like diversity, equity and inclusion initiatives, revising or outright reversing Biden the area of policies and priorities, for example the strength and protections for LGBTQ+ workers and even other groups such as pregnant workers. And that’s important to understand those changes because they changes in law, especially with respect to DE and I could present new risks of litigation in the context of a transaction, so on the sell side you need to keep your finger on the pulse of what’s taking place there and maybe re-examine things like the scope of your DEI policy if you’re preparing for a transaction and of course on top of that, recent Supreme Court decisions including the Harvard UNC case and overturning affirmative action and a whole host of other Supreme Court decisions that could potentially impact risks in a business that then set out for risks in transaction readiness. In the Department of Labor of course, you know, the new Trump Department of Labor will look much like the old Department of Labor prioritising more employer friendly policies and rolling back regulations, there is going to be a revisiting of the independent contractor rules and I think a move in toward allowing more workers to be independent contractors of course, immigration reform is a key element of Trump’s campaign and I think we’re going to see, hear a fair way soon the deportation of workers, undocumented persons to countries of origin out of the US and that’s going to be a big issue as well and could present a risk to folks as they’re thinking about transaction readiness, making sure immigration generally is buttoned up on terms of those folks who might be employed by you on visas, making sure I-9s are taken care of, doing an I-9 audit, things of that nature. And of course the National Labor Relations Board, you know when a presidential election results in a change from one political party to the other, it likewise brings both immediate long term changes to labour law in the United States. The new National Labor Board General Counsel, in my opinion is likely going to rescind various directives by the current General Counsel under the Biden administration and that’s going to have significant impacts on things like election and related demands for recognition and the procedures that are undertaken in order to form a union and a process that goes along with that in the United States. The standard for assessing the legality of workplace rules, we’ve seen sort of a back and forth and ping-pong on this issue over time where you know fairly neutral or innocuous rules on the face such as, you know a provision that might say employees can’t be disruptive in the workplace and whether that is sufficiently ambiguous to chill a worker in their attempt to engage in collected, concerted activity and whether or not a policy like that is valid or illegal and should be struck down. The standards used to evaluate policies like that I think are going to evolve and of course that impacts transaction readiness because you don’t want to do, undertake your audit to ensure policies and practices are legally compliant and whether they need to change depending on the evolution of these standards under the new administration. We are expecting that the new board will likely back off the current board General Counsel’s position on non-competes and other various types of employment agreements so, as I said at the beginning, we do expect there to be a seismic shift in change in US employment law and as you think about transaction readiness, it’s absolutely critical to stay abreast of those issues because it’s going to be a moving target for most employers as they sort of grapple with these changes into the new administration. So, with that, those are my high level thoughts, love to kick it over to Stephen to wrap up the UK side.
Stephen Diosi
Mishcon de Reya
Thanks so much Christian, thanks again. So from a UK perspective, we have just had the first Budget coming in from the new Labour Government and I think a slight difference to what Candace said is that expectations in the US there may be tax cuts, we are seeing tax rises and I wanted to focus on three particular elements that have come out of the UK Budget which are important on an ongoing basis operational basis but again from a transactional readiness point of view and thinking ahead both in terms of the selling entity or the selling, the sellers themselves, on how to make efficiencies through your incentives. So the first change really is to highlight the income increase and employer social security contributions or social, National Insurance contributions as we call them in the UK, and that is that the rate that employers have to pay is rising from 13.8% to 15% from 6th April next year but in addition to that the thresholds are also reducing at the same time so, more pay will be brought into this charge. And whilst it’s only the employers and not the employees’ National Insurance that’s changing, this does put employers under significant pressure to either pass this cost on to their customers and clients through higher prices or by cost-cutting within the business and actually only today the retail industry in the UK publicly expressed its view and disappointment that this is going to lead to pay freezes, headcount reductions and in some cases, businesses simply not being able to survive. And in a deal context, there’s a few things I think that’s worth thinking about and how this is going to affect it. This will put worker status compliance into sharper focus. Is a contractor really a defensible contractor from a legal perspective or is it seen as tax avoidance to sidestep higher employer NICs costs which applies to employees and that’s something that has been in the radar for quite a long time and it just might come into more focus now. If the individual is an employee or a director, consider whether there’s going to be a UK NICs charge on their pay and reward. The answer will usually be yes but that won’t always be the case so, for example there might be some internationally mobile employees who work in different jurisdictions. Take advice on the impact of country by country reciprocal social security agreements to see if there is an exemption or some sort of certificate of coverage that can be obtained so that the UK company is not liable to be charged on UK earnings. And as we highlighted in the first webinar, the UK is perhaps somewhat unique in allowing employer social security to be passed on to employees. This can only generally be done in the context of share options and it needs to be properly documented at the time awards are made so, again, check the position on this. Check it now as part of the health review, revisit whether is there the opportunity and the ability and time to introduce some sort of statutory tax advantage share plan for the UK employees, where in normal circumstances this ensures that no employer social security would be paid and also think about whether you can redistribute or reweight the way in which your variable remuneration is paid. Can you do more equity and therefore use the ability to pass on employer social security or use tax advantage plans over cash, where there is no such ability.
The other big news that came out of the Budget was a change to our Capital Gains Tax rates and this was expected for some time but it’s now confirmed that for deals completing on or after the 30th October this year, our CGT rates has increased from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher rate taxpayers. This is still much lower than the combined rate of Income Tax and NICs that would apply to your normal cash base or non-share base rewards but it reduces the net proceeds employers will now be able to get. So, we may start seeing some senior executives looking to renegotiate some of their compensation packages or even asking for top-up awards to make them whole. It’s particularly worth noting in the UK that we have a specific relief called Business Asset Disposal Relief and this applies to directors and employees who generally hold shares that give at least 5% of the economic rights in the company. So typically only really available to the most senior executives or C-Suites and founders and where this relief applies a shareholder will only actually pay 10% Capital Gains Tax, although following the Budget for any share sales that happen after 5th April next year, that rate rises to 14% and then 18% in 2026. To secure the 10% tax rate we’re therefore expecting some of these shareholders to be actively seeking deals and corporate reorganisations to close out before 6th April next year and we’re already seeing additional new incentives being offered within that timeline with a goal and a performance criteria around getting those deals done before then.
And just the final point I wanted to mention is that employees should note the incoming mandatory payrolling of benefits from 6th April 2026. At the moment payrolling of benefits is voluntary and the original proposal was for mandatory payrolling to kick in from April 2025 but to give employers more time to prepare, this has now been pushed back a year but it’s significant and it’s complex and so companies should be preparing for this soon, so you might want to bring more rigour to when employees can actually make changes to their flexible benefit choices, for example, they can only make choices and changes once a year rather than more frequently and consider what sort of benefits are offered as well. So I think that really covers what I wanted to say from a budgetary point of view in the UK and perhaps I can now hand over to Dom to cover some pretty important aspects on the employment side and changes that are coming into force. Over to you, Dom.
Dom Wrench
MDR ONE
Brilliant, thanks Stephen. So, yeah, I guess not similar, not dissimilar sorry to Christian as well, we’re expecting some fairly large shifts in employment law in the UK. The Employment Rights Bill was published at the start of last month and is set to reform a number of measure in UK employment law. The majority of these are expected to take place from 2026 with the kind of consultations ongoing next year so, this is a fairly you know a UK specific piece of law so I’m just going to flag, flag some changes at high level. Essentially, key topics that employers particularly need to keep in mind for future deal readiness because these are going to be areas of change that will be the low hanging fruit for DD risk and I think are worth putting on your radar. And I split this when looking at the changes rather than just listing them out, actually looking at two kind of specific angles from an M&A perspective and the first I think is the impact on the deal itself and one big area I think that the changes might impact is restructuring. There’s essentially increased employee protections, I think is the kind of the headline figure from the new Bill and you know just looking through down that risk there, there’s going to be increased unfair dismissal rights from day one, there are some nuances to this but currently, again generally speaking, you don’t get that until two years of services so you know there could be a pool of employees that as part of restructuring you know you could think you could probably get rid of quite easily and quite simply, that, that, that may now well change. Some further protections for those on, with family rights, so maternity leave, those that are pregnant and kind of the return to work periods as well, there’s going to be some additional protections. There’s also been some proposed changes to redundancy laws and like almost the widening of the goalposts because there is an intention to remove the at one establishment reference to some of the redundancy laws so, again we’re expecting the scope of those redundancy laws to potentially be broader so again making it a more complex challenge to reduce headcount as part of restructuring and again increase difficulty for fire and rehire so, it’s something that again it’s not as often seen in the UK as in other countries but it has been an option for employers in the past and that is going to be something that may well become more difficult as well so, you know generally speaking, the environment is going to become more employee friendly in the UK and frankly, just making a stricter employment landscape for employers generally. So that’s the kind of the deal side of things and then you know fundamentally as a result, with stricter, more employee friendly regulatory environment, there’s going to be more due diligence issues to uncover and whilst you know on the face of it, I don’t think any of these you know at starting level are going to be a huge risk in terms of financial liability, they’re basically going to be another opportunity for employers to get their house in order, you know these are things that diligence exercises are going to be picking off so, you know has the employer complied with the, the you know the new duty with the sexual harassment and the proactive steps that an employer has to take now in relation to that. Have they complied with the statutory sick pay that employers are going to be available, again there’s a new day one right, the same with kind of parental leaves and you know, right to flexible working, all of these kind of fundamental aspects of UK law are set to change and become more employee friendly so, from a sell side point of view it’s going to be much like Christian said from a US perspective, firstly working out what your new duty is and then secondly, making sure you’re actually complying with it so, it’s basically just going to I think increase the complexity and timeline for those transactions which have a, you know a specific UK aspect and a large headcount here in the UK. But that’s all I’m going to talk about because there’s still some opportunity for change in that in the next year but I think it’s good for those kind of issues to be on your radar and we can pick those up again as we go into the future and this is a bit of a shameless plug so I apologise in advance but something that we do on the MDR ONE side is, we have an update channel for key global employment law updates that kind of come out, anything employment related and we have a mailing list for that, so if you do want to be part of that and get those updates globally into your inbox then please just reach out afterwards and be sure to get you in the loop on that.
So I think that’s it in terms of core content. If you could just flick onto the next slide please, Bea, the CLE key word for those that this is applicable to is ‘readiness’ and I’ll let you just read those instructions on screen but we’ll share it with you after as well in case you don’t catch it but, yeah, for those that this is the part for you, ‘readiness’ is the key word from a CLE perspective. And I’m going to hand over to Candace this time for closing comments, but thanks everyone again for joining from my side.
Candace Quinn
Buchanan
Thank you so much, thank you so much Dom and for all of you to know post-closing integration and harmonisation, now this is not the, the discussion for today but we do have a webinar in 2025 which will address this. Now if you are on the buy side, this is a crucial post-transaction phase and to remedy risk issues that you identified in due diligence and it’s from a deals perspective with post-deal new incentives to be addressed and post-closing risk terms and conditions and benefit allegations, this will be an opportunity for all of us to discuss some of the issues from the buy side, as well as the sell side, that need to be addressed with regard to post-closing. So, from everyone here, I want to thank you very much for joining us today and I hope to see you in 2025 for our next webinar.
Mishcon de Reya
It’s business. But it’s personal