Dom Wrench
MDR ONE
Hi everyone. Just going to wait a minute or so for some others to join, then we’ll get started. Okay, we’ll, we’ll get started and then for everyone that can join as we go, that’s great. So, welcome everyone. Welcome to the third and final instalment of our webinar series focussing on navigating employment, labour and executive comp challenges in global M&A transactions. Welcome back to those of you who joined our first couple and for those of you that this is the first time for, welcome along. It’s not like all the great trilogies, you can join this third one and still know what’s going on, but we’ll share the links to the first two after this session if there’s anything you’d like to catch up on. As a recap, our first webinar in the series focussed on due diligence issues and deal dynamics relating to people issues and transactions. Our second webinar then took one step back and looked at transaction readiness and today, we’re going one step forward from that first webinar, looking at post-closing issues so, integration, harmonisation and incentives. If you’ve got any questions as we go through, please do pop them in the chat, again, if we get time at the end this, we’ll, we’ll address those specifically, otherwise we’ll get back to you separately after.
So, joining me today on the webinar, we have Candace Quinn who is 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 a US and international perspective. Candace’s colleague, Christian Antkowiak is also joining us from the US. Christian is also a shareholder and co-chairs Buchanan’s labour and employment benefits and immigration section so, again, has extensive experience both in the US and cross jurisdictional. Back in the hotseat in the UK, is my colleague and Partner at Mishcon de Reya, Liz Hunter. Liz is part of the Remuneration and Incentives Team here at Mishcon de Reya and specialises in advising clients in all forms of share plan, equity incentive and employee ownership arrangements. My name is Dom Wrench. I’m a member of MDR ONE, we’re one of the group companies here at Mishcon de Reya and we focus solely on international employment law from a people perspective. So, I’ll be kicking things off today to talk about post-closing integration from the global employment perspective. So, I think the first thing to say is breathe, the deal is closed, our dearly beloved corporate colleagues are going to be slightly less stressed – and I emphasise just slightly – but now we turn our heads to kind of post-closing matters and I know some of the feedback from previous sessions is that we could share some more stories, so hopefully there’ll be some kind of practical nuggets as we go through today’s webinar. So, from, from the global labour and employment perspective, I think there’s kind of two aspects to talk about here. The first is deal related considerations, there’s things that specifically come out of the transaction itself and then secondly, integration and harmonisation from an organisational perspective.
So, talking the deal related considerations first. To me, this means kind of any immediate actions that have been promised in the purchase agreements for example, it can relate to things that have been planned for weeks or months in advance but actually only executed at closing or close to closing. And there’s a practical element to this too, you know I think sometimes from a deal perspective we lawyers can get really, you know stuck into the documents and the language and the drafting but then these things actually have to be implemented from day one onwards so, a great example of this is, you know some employment contracts so, let’s say we have some employees transferring entities or we’re getting them set up with new contracts from day one, well it’s all well and good from a legal perspective, but practically from a HR perspective, there may be a number of things to consider so, whether these people are and individuals are set up in payroll, such that they can actually get paid from their first day of employment, whether there’s certain notifications to authorities that are required, whether the new employees or new contracts or also kind of mandatory insurances or things that have to be in place from day one. So, as well as the kind of the deal perspective, I think it’s very useful to be thinking about practically what those pieces we implemented in the deal actually mean in reality. And then in terms of kind of some of the specifics from the transaction itself, things to think about, retention of key individuals, so you know how, how are we going to keep certain key individuals to stay in the new world, you know let’s me honest, M&A can be a tumultuous time for some businesses and it can be rocky sometimes as we get through the integration stage, so sometimes it’s really important to ensure that the key individuals are retained and some of that comes in the form of stocks and incentives, some of it in terms of bonuses with the retention periods so, again, it’s important to identify those key individuals from the deal and how they can stay in it. And again, any other actions that have arisen from the transaction itself, so any notifications that were required kind of immediately post-closing, so any works councils or authorities, especially in terms of things like visas and immigration permits, that kind of thing. And there’s also a number of things that maybe there wasn’t time for pre-closing or just couldn’t be achieved pre-closing, but now the deal’s closed, there is time to look at those. And then once those kind of immediate actions perhaps from the purchase agreement have been looked at and covered off, the business can then turn its head to integration and harmonisation and I think the first point I wanted to really raise here was that these can actually mean different things and it’s important to understand what we’re talking about here. So, integration generally refers to the process of combining and uniting two organisations together, operations, systems, functions, so the kind of the broader act of bringing the organisations together while harmonisation specifically focusses on aligning different aspects of those operations so, policies, procedures, creating a consistent and unified approach across the combined organisation so, so more of a, more of a goal of streamlining operations let’s say. And again, when first looking at integration and harmonisation, I think it’s important to be cautious of kind of deal restraints so, one great example that we see in a lot of US transaction documents is that a buyer is obliged to maintain terms and conditions for a period of time such as six months or twelve months for employees, so that buy in is there in the transaction agreement and whilst there can be some minor changes, normally materially the same is something we see so, you know, the terms and conditions have to be materially the same for this restricted period after closing. So it’s worth you know those individuals that may now be involved in integration and harmonisation might not necessarily know that that was something that was agreed as a part of the transaction so, it’s important to bring awareness to that for them. And again in other jurisdictions in the EU for example, we need to be careful of where there may have been a TUPE transaction and, and the, you know the employees are protected to a certain extent so, we can’t change terms and conditions just because of that transfer and we don’t want to make any kind of changes that would actually be void because of breaches of those laws so, again, conscious of how the deal then impacts what goes on into the future.
The first port of call from integration and/or harmonisation perspective is sometimes to look back at the original diligence so, you know, what can we learn from the actions that were already previously undertaken and were kind of built into the DD report but then either couldn’t be achieved pre-closing or perhaps it wasn’t sensible for them to be done at that time. So, again, something that might not be material enough to be a condition precedent but is worth the post-close tidy up so, this basically just takes us back to that, that first webinar so, this is talking things like you know works councils and making sure you know the new business knows what they’re getting, are any consents to any post-closing actions required that kind of thing, it may be new to have a business with a works council or it might be slightly different dynamic to that works council. Again, revisiting any kind of employee census red flags, anyone that you need to bring into line and the same for any kind of individual agreements, you know I’ve seen some great ones in my time, everything from you know some, some very beneficial severance arrangements that have been agreed in the old business, to guarantees of bonus payments based on the whole you know organisation’s turnover, that kind of thing, so it’s worth relooking at what was picked up in diligence but may need to be rectified going forwards. Same for things like benefits, pensions, looking again at any litigation that’s still active, perhaps now is a good time to kind of assess the stages of those litigations, especially for the buyer once they’re in control of that business and assessing whether things should be settled or kind of still pushed through the litigation pipeline and again, immigration as I mentioned is a key pointer again in that diligence, we might have identified where there are sponsored visas for foreign workers and whether there is any specific notifications that need to happen immediately post-close to keep people working and in the business.
So, that’s to me, I kind of describe that as the reactive, so what have we learned from diligence that needs to be rectified? And then there’s the proactive piece and for some clients this will be business as usual, you know, they have bought a profitable business that is functioning very well so there might not be many things they want to do immediately, it might be something they might want to change six months rather than eighteen months down the line or they may be very minor things and they’re happy with the business. Other clients want to be a bit more hands on with the integration and harmonisation and will want to ensure kind of more closer alignment from day one or if not day one, certainly within the first few months of the post-close world. And again the most kind of common things that we see from a labour and employment perspective, you know, it won’t surprise you are employment contracts, policies, bonus schemes, benefits, things that make it feel like one organisation and for me, again, outside of the legal context, really this is a real practical issue and it goes down to culture and I know others are going to talk a bit about this piece as well but I think it’s important that we’re talking about culture because it’s one thing, especially for you know external counsels to be saying these are great things to be putting in place, well we need to make sure that they’re actually going to be well received in the new workforce and are going to practically work so, I think it’s worth always considering the cultural piece and like I said, you know after transactions there can be sometimes some concerns from employees or kind of sensitivities around how the new world will be so, that can sometimes determine the timeline for certain post-closing actions and also ensuring that the integration is a bit more seamless and smooth.
We can’t really talk about integration and harmonisation without talking about restructure and risk and I think we could probably run a whole series of webinars, not just a single one on RIFs and RIF plans, but we’ll wait to see what your feedback is first before we do that by the way, but that’s just, just something that came to my mind. Sometimes the RIFs are planned in advance, we’ve had some clients sometimes be ready to move on day one with certain actions in a fairly strategic and somewhat aggressive manner, let’s say. Others, people take it a bit slower and will look to see how the new business operates in the new world before identifying where there’s possible optimisations and this is a bit of a shameless plug, we have a, a RIF roadmap for managing a global RIF, which if anyone that’s joined this would find that useful just, please do reach out and I can share that as well, but the key things I think for the post-closing RIF are basically the same as if it was in you know normal circumstances for a RIF so, you know strategy, preparation, looking at the costs, the actual implementation, if the same kind of concepts apply, it’s just in the post-closing world, we just need to have one eye to the deal again if the transaction documents or whether there’s any restrictions there or anything that would change the approach necessarily to those RIFs.
And my final point that I just wanted to touch on here was that I think it’s really important at the end of the deal, especially from a, you know a labour and employment perspective to reflect, I think you know as lawyers we’re very, very quick to move on and you know in the world that many of you operate in it’s very much onto the next and we’re into the pipeline but I think the reflection piece is really important just to make sure that the next acquisition or the next merger, there are learnings, there are things that can be taken to make it a smoother process or there are maybe bits that were missed and actually would have benefited to pick them up earlier in the transaction and, and dare I say it, you know consideration of where you’ve used your outside counsel, have you used them as effectively and efficiently as you can and made sure that the work that your external counsel are doing and that you are paying for is the right kind of work that you want them to be doing. So these are all things I think that are useful to pick up and just to make sure that the next transaction that you go through is as seamless as possible. With that, I’m going to turn over the equity, reward and tax side with my colleague, Liz.
Liz Hunter
Mishcon de Reya
Thanks Dom and hello everyone. So, I’m going to start by picking up on something that Dom mentioned as well and that’s that remedial reporting aspect. One of our sessions earlier looked at due diligence and what were some of the things that can be picked up in that due diligence review. That due diligence information is not just about getting the right price on the transaction and deciding whether to proceed or abort a deal. That due diligence reporting needs to be revisited post-closing in terms of what are any payroll actions and payments needed and on what timescale. Sometimes in some jurisdictions you can have very, very little time to take that action at all, other countries you have a little bit more time to get those actions completed. There may also be some reporting that has been missed historically as well as actually dealing with the reporting and tax to the transaction itself so, having to go to tax authorities with voluntary disclosure and completing actions that should have been done historically but weren’t by the target and now, being the acquirer, it’s your responsibility to get that housekeeping up to date. So I would say that is one of the first actions to take and it is important because if there are delays with that, you are going to be on the back foot in terms of additional costs, in terms of the penalties that tax authorities can levy. If you go with voluntary disclosure, you’re going to have opportunity to mitigate penalties in a way that will not apply if you don’t take action quickly and actually the tax authorities come in and do what may be just a very routine compliance review but actually they then are picking up all these reporting failures that have not been addressed. You then are going to be in a very, more punitive regime in terms of the sanctions applied. So that’s the first thing, kick off that remedial action, do not delay on that.
Now, I’m going to highlight a case, Ponticelli v Gallagher, that was decided last year in the UK and it’s thrown the cat among the pigeons a little bit – to use an idiom we have here in the UK – when it comes to transactions because until that case, it was very much that the view that anything that was an equity award, you know a share plan, a stock plan, interest, sat very clearly outside the employment contract and we are always taking care that all the documentation very clearly states “this is separate to and gives no right to entitlement for claim of loss under your employment contract”. This case was looking at an all-employee arrangement that was tax advantage in the UK, so not a discretionary selective participation plan, and it involved the deduction from pay on a monthly basis into sort of a savings account but was then used to buy shares in the business and slightly unusually, this wasn’t sort of an annual incremental award, this was a sort of an evergreen arrangement. And an employee who had been TUPE'd across, that had been employed in target that was then acquired, brought a claim that post that transaction, he had lost rights under this share plan and buyer had not implemented an equivalent arrangement. They had offered a cash compensation arrangement, as is typical, if you can’t replicate something, you may give you know some cash compensation to smooth over the kind of the goodwill position around, around loss even though you may not be contractually obliged to do so, so something was being offered but the court held that wasn’t enough. The nature of this was so intrinsically linked to pay because of these monthly pay deductions that there was an obligation under TUPE for buyer to put in place an equivalent arrangement post deal. Okay, so this is new case law that really has kind of upset thinking in terms of for equity, you may not have this obligation to replicate an equivalent arrangement and it’s difficult because the structure of the new enlarged group may not lend itself to rolling out exactly the same, there’s no definition of what ‘equivalent’ is, if it has to be the same form and its tax advantaged and the buyer does not meet the criteria for eligibility for such an arrangement, it is simply not possible to offer that therefore y is not an equivalent in value cash compensation suitable. So I bring that case to your attention, there are factual circumstances where we think it can be set aside in some cases, but if you are dealing with a business that has an all-employee arrangement with something you can intrinsically link to a pay deduction rather than a discretionary you know award, this is something that now needs to be taken into account in terms of might there be an obligation for you to do something equivalent? And we can think about the sort of the, the reward elements into a few buckets. There will be contractual elements, things that you will be obliged to replicate going forward. There will be discretionary awards where you may want to pause and think well, is this something we want to continue? Can we optimise it or do we want to colour? Do we want to replace it with something else? There will be awards that it will custom and practice, there’s nothing contractually stated but it has become such a regular practice within the target organisation or within the sector that that target operates in that there is a very real expectation that that same benefit would be provided post deal. So we’ve got these different buckets of things where some action you will have no choice, you will have to do it at least for a defined period of time afterwards and there will be other things where actually you might pause and think well what do we want to do and look at the total reward offer and what are going to be the constituent parts of that going forward. And to some degree there is going to be the realism of how do we care? You know, Dom was talking about sometimes there is a very clear view that there is perhaps going to be a cohort of workforce that is immediately let go afterwards that are going to be surplus to requirements and others will take time to, to see how the arrangements and operations bed in before making that decision. But for those who are really key, you are going to want to make sure that you are not risking losing them as part of the fallout that this can be, as Dom said, a tumultuous time and it’s one thing if, fi you have attrition from people that are you know easily replaceable or actually surplus to requirements but if you’ve got key sales people or key talent with rare skills that you really need, you probably want to be going above and beyond the minimum and voluntarily showing that actually, they are important to you, you want to retain them and going above and beyond towards that. Culture, them and us, you know how divisive is this going to be? Don’t necessarily think this is about imposing your reward offer onto your newly acquired business. Actually, think about what has been in place in target and maybe there are some things that have been offered there that you could build into your offer as part of this harmonisation and say actually, we can cherry pick the best of breed here around where we have choice and even if something has been contractual in target but not in your organisation, think well maybe should we roll that out more widely so that we have a more unified offering and rollout rather than this sort of mixed bag of offerings that can be divisive because people will talk and they will know what is often, on offer more widely in the organisation. And the impact of structural change, you know, what was possible in target may not as I said be possible in the enlarged group because of eligibility requirements for certain arrangements and as Dom touched on, the KPIs that have been in place before maybe based on divisions, on entities and the whole group structure may be going through a post-close reorganisation and revamp, so there may need to be a bit of pause to see how structurally and operationally things are going to lie before setting the new go forward metrics against which accountability and reward will be measured and delivered. Where people are going to be in which jurisdiction is also going to be an influential factor when you’re talking about global organisations. So with that I will move on so that we hear from our US colleagues in Buchanan.
Christian Antkowiak
Buchanan
Thanks Liz, thanks Dom, appreciate the opportunity to be back again for round three to talk about this important issue. You know, I heard the word ‘tumultuous’ referenced a few times and I agree initially with, with Dom’s comments about how our corporate colleagues probably have an opportunity to breathe a bit of sigh of relief at this point but I will tell you from my experience, I think our HR colleagues probably, their stress level increases exponentially at this point, so it’s a bit of a trade-off, I think HR in this phase at least, has the monumental task of trying to bring together you know two different workforces in a way that allows them to thrive as one organisation into the future and I think if things don’t start out on the right foot, those teams don’t necessarily mesh and that causes that increase in turnover and that tumultuous nature that, that can accompany that post-merger integration phase, you can lose key talent and potentially you know the value that you sought to achieve through this merger may not materialise and in the worst of all cases, it could certainly collapse. So, you know, in my experience at least, I think there’s a couple of things you can foc… on, focus on to plant the seeds for success and I want to go through those and they’re listed here kind of on this slide. There’s been a little bit of reference to culture, I want to kind of focus my first point in that regard, particularly because I think in this context of HR, HR does play a monumental role in evaluating cultural differences and developing that plan to harmonise those cultures. Every company has a distinct culture that makes it unique, it’s what sets them apart. It tends to create loyal and engaged long term employees and even when you enter into a merger there’s a risk that those, that there will be a cultural clash, that can certainly impact the success of that transaction, that’s why I put it first on this list. I do think it’s HR’s most important task. There’s three risks that I typically see, there’s more but you know we’re going to focus on these three for a minute and I’m going to talk about three suggestions to try to, try to mitigate those risks as we think about HR’s role in this process. The first is employee resistance and I think in an M&A transaction, employee retention and morale are absolutely critical. Talk a lot about the mechanics of a deal and the finances but you’re really bringing together two groups of people and when there’s a clash of values and working styles, think you end up in a situation where employees could resist change, that could decrease morale, certainly decrease productivity and have a real impact on engagement. So I think integration efforts can be derailed by lack of employee buy in and certainly that will lead to an exodus of key employees and that could be extremely detrimental. The second risk is communication breakdown. When two companies engage in different communication styles and practices, I think there’s a significant risk of creating misunderstanding and misinterpretation will absolutely follow and I think in this phase HR can play a really important role in helping to craft effective communication, aligning goals, managing expectations and most importantly probably the building of trust between employees from both organisations. The third point I wanted to talk about was cultural delusion, you know when companies attempt to assimilate cultures too quickly, there’s a risk of losing some aspects of what makes those organisations respective cultures unique and valuable and it’s what I talked about you know at the very beginning of this segment. That can lead to a loss of identity and decreased employee satisfaction and again it can, it can contribute to attrition so, you know, culture is a lot of what makes an attractive place for people to work in, you need as HR professionals find a way to create that new culture inside the new organisation. So what can you do about these three areas that I’ve just talked about? I think the first one goes back to cultural due diligence. If you joined us in the first programme, you heard a lot about this issue when we talked about the diligence phase of the transaction. I think if HR professionals and business teams put some work in on the front end, when it comes to cultural diligence, it’s going to pay tremendous dividends in this phase of the transaction and this can help to identify potential challenges in, and also opportunities so examples of some things to look for: identifying shared values and beliefs; understanding how each of those respective companies engage in their decision-making process; what’s the collaboration dynamic and you know, one other thing might be how does a company hand conflict resolution? I think even just having those conversations at the front end of the diligence process, it’s going to go a long way to road mapping that cultural integration in this phase. On the communication piece, during a merger acquisition, communication with employees I think is absolutely key and we see this happen all the time, you know without good communication and a good communication plan, rumours start, panic can set in, you need to develop a good communication plan to keep people informed and I consider appointing somebody to be sort of a central voice to establish trust, to harmonise the communications you know in this role in order to make that aspect of the transition work really well. And of course I think the last item is putting together a roadmap, being really intentional about how you’re going to bring those two cultures together, there’s a lot of moving parts in this phase as the other phases we discussed, those that I see succeed in this phase are ones that bring intention to the process and actually create sort of a structured integration plan, it might include activities such as cultural training and we’ll talk about that in a minute, workshops, initiatives to promote cultural exchange and understanding, finding ways to give people a voice in the process, it’s their company too and you want to be able to create that kind of going forward. I’m not going to spend a lot of time on the second bullet point, obviously there are legal, contractual restrictions, we talked a little bit about RIFs and we certainly could spend a full webinar talking about RIFs though it would be quite a depressing topic to focus on terminations for the entire time, but that is an unfortunate part of this process, there’s going to be redundancies when you bring two companies together. You do in the United States have to be cognisant of we talked about this before, the WARN Act and what that may require in terms of certain notifications to employees who laid off but you also, as my colleagues mentioned in the last segment, need to be mindful of separation agreements, change of control agreements, what those payout obligations look like, so on and so forth. You know the truth is you’re likely going to have a lot of turnover I think in the few months of a merger, whether it’s because of intentional reductions in force or because of, you know, not getting buy in or you might have panic with some employees who don’t understand the future. Again, I think that’s where HR can play a tremendous role. It’s an often overlooked issue but for those employees that remain, I think HR professionals need to closely manage and monitor their performance, look for signs of disengagement and low morale and be ready to pivot to make that work going forward and to implement things to improve the likelihood of integration and harmonisation among those two groups of employees. Give an example of some things you might be able to do devising an employee performance review process, incorporating various KPIs giving you know creating 360 feedback processes and other tactics, depending on how the business operates. Of course, you know, Liz mentioned total rewards and I think that’s a huge aspect of this as well and we’ll talk about that maybe a little bit later. The third point briefly, introduce and provide training on new policies and practices. You know, change makes people nervous and when you create, in order to create a new company successfully cultures and roles have to be redefined at all levels and expectations need to be clearly communicated and I think employees on both sides of the transaction are going to wonder what the deal means for them or how they fit into the new company. When we advise clients, we make it a point to remind business teams all the time that new company’s leadership has to be consistent when communicating their stories, their goals. I think you can avoid a lot of stressors to morale by focussing on how’s the deal going to benefit your people in the future rather than necessarily on the synergies it’s going to produce for the organisation. So, to give you some ideas of things that we’ve talked about previously: holding town halls; holding one on one meetings with managers, new managers; finding ways to integrate those teams together; teambuilding exercises; education on policies and practices is important but also on the new company’s mission, its strategic objectives, getting buy in, I think those are all really critical.
I mentioned immigration because this is a cross-boarder you know M&A in labour and employment transaction discussion so, not to get too technical for a minute but at least from the US perspective, for companies that sponsor non-immigrant work visas of the Green Card process. A merger can have significant impacts on the status, the visa status and permanent residency timeline of employees and you need to understand the deal dynamic in order to be able to mitigate that and just, I wanted to flag for the purposes of this discussion, I think an important initial distinction is to make the difference between where you have a change in ownership and a change to result in a new employing entity of foreign workers so, if the sponsoring company undergoes an ownership change but otherwise continues to exist and operate at least in the US under the federal, same federal employee ID number, I think the impact on workers is probably minimal but in acquisition or ownership change that results in one entity now employing these individuals that wasn’t previously employing them, that’s going to have more significant consequences and that change of employer is going to trigger the most ramifications for existing and in process visa and permanent resident applications, you have to work with good immigration counsel to really nail that process down.
And the last point, maintaining process discipline and performance expectations. I think this can really be boiled down to one word and that’s ‘organisation’. Successful teams from my perspective, divide the integration activities into different categories like sales, facilities management, certainly Human Resources and then I think specialists in those functional areas can be tasked with outlining and performing integration goals within their area of expertise. You know, in my opinion, this makes the integration run faster and smoother as experts and users are sort of connected and become owners of that process and more involved. In that respect the integration plan has to be clear and you have to hold people accountable for their tasks along the way and you have to be ruthless in that regard because otherwise you risk all aspects of this transaction falling apart after you’ve put in all the hard work to get there. Obviously, I covered a lot of topics at a high level. All these essential places I think you know in the post-merger integration process and there’s a lot of smaller tasks you don’t want to miss so, if I can leave you with one piece of advice, make sure to put your, your integration plan down on paper and seek guidance from your favourite legal advisors so, with that I kick it to my colleague.
Dom Wrench
MDR ONE
Can I just jump in on a couple of things Christian because I just think they’re really important just to touch on, on briefly. The first I think is what you mentioned about you know sometimes you just look at the workforce that are the target, right, but you need to communicate with your own workforce and how it, they fit in together as well. Sometimes the focus is much more on the target, but there needs to be some core messaging internally as well and the second, I think for all your really sensible kind of warnings and mitigation at the start, I think the key, and correct me if I’m wrong, is that HR involved in M&A right from the outset, sometimes…
Christian Antkowiak
Buchanan
Yeah.
Dom Wrench
MDR ONE
…some deals where you know the deal happens and then they kind of just go, “Hey, HR have this, have this company” and that’s where it can get a bit messy but all these things that you’re talking about are kind of proactive and having their engagement early on, right?
Christian Antkowiak
Buchanan
Yeah, I think that’s absolutely key because if you bring HR into the tent from the beginning, they can certainly be thinking about the ways in which to lay the groundwork for that successful third phase when you get there, it’s much more difficult for them to have to come up to speed or maybe even unwind something at the very end so, having them as a partner in the process is I think oftentimes overlooked but I find that in successful mergers, they’ve been a business partner from the beginning.
Dom Wrench
MDR ONE
Yes, totally agree, totally agree. Sorry, I interrupted.
Christian Antkowiak
Buchanan
That’s alright. Candace, you’re up.
Candace Quinn
Buchanan
Okay. Thank you, thank you Christian and thank you Dom and Liz for the opportunity to join you, join you folks today and hello to all. Employee benefits and executive compensation and the post-merger integration and harmonisation. Well, before addressing how to manage this, it’s very important to understand that we first have to look to determine whether the merger and acquisition is an asset or stock transaction, exactly similar to what Christian just discussed regarding immigration. Employee benefits integration, decisions also depend on the type of the transaction so, if it’s an asset purchase, the buyer is purchasing of course some or all the sellers assets and at this point normally the employees of the seller are terminated and often the buyer will rehire those employees and they will become employees of the buyer. Now if it’s a stock purchase, in a stock purchase the buyer is purchasing all the stock or ownership of the seller or the division and then that stock purchase the employees of the purchased business remain the employees of the business but now you have two parties that have two different businesses coming together that have to be integrated. Now the stock sale the buyer is responsible for integrating those employee benefit plans, communication and onboarding those new employees. Now the buyer will need to conduct a benefit plan review and determine a strategy to proceed including addressing the costs, again both Christian and Dom and Liz all mentioned the due diligence report and I would go back to this again and stress looking at this to determine what potential costs could be involved with regard to these employee benefit plans, I mean clearly as Dom mentioned you could have litigation regarding some of these plans and you certainly want to be looking at them now to determine how you’re going to proceed. Now, also the buyer will need to address the legal and compliance requirements for the employee benefit plans in this merger and in order to harmonise. Now generally there are three types of employee benefits, three categories. Now the first category is qualified pension and 401(k) plans, okay, terminating, merging, freezing qualified pension 401(k)s, what can a buyer do? Well, a post-merger company can become a new plan sponsor or one company can merge their retirement plan into that of the other company or either or both can decide to terminate their retirement plans. In that case, there may be no retirement plan or one company that merged can terminate their plan and the participants can join the other retirement plan. Now one thing to remember, if the retirement plan of the company is being merged into a post-merger company, care must be taken not to violate what’s called the anti-cutback rule. Now, under this rule the company cannot reduce or eliminate any of the protected benefits of those participants and the accrued benefits can, benefits can include the accrued benefits, early retirement and other features of the plan. Okay, now do you terminate retirement plan in a merger? Well, what happens? Well, if the company terminates a retirement plan then it must notify all the participants and upon termination each employee is a 100% vested in their accrued pension benefits if it’s a defined benefit pension plan or in their 401(k) balance if it’s a defined contribution plan. Now the participant may be able to roll over the distribute assets from the terminated pension plan or 401(k) possibly into another retirement plan but this will depend on the facts or they may look to an IRA. Now the buyer will need to comply with, in the US, known as the Employee Retirement Income and Security Act and the buyer will need to be aware of those requirements as well as the tax issues because in this area those are the two statues that govern the administration of those, of qualified retirement plans. Now in addition, the buyer will have to address planned documents that may require plan document amendments, updates on summary plan descriptions and have to address compliance and IRS reporting requirements. The second category of employee benefits is executive compensation incentive plans, now in assessing executive compensation structure, base pay, bonuses and various incentive plans to integrate and harmonise after the merger and for optimisation, this will require the company to address aligning the pay of the employees, communicating clearly what the company goals and objectives are and designing incentives important for this integrated group. Now also the company will need to create key employee retention strategy and retention programmes, as Christian mentioned, and design incentive plans to drive economic performance goals and create post-merger a reward system for the employees to help them and incent them to reach their targeted metrics for the new company. Now to integrate and harmonise executive compensation incentives for newly hired employee in an asset transaction, this could be creating new awards. Now, if it’s approved by the board of directors, including stock options, and in the US we have a tax advantage stock option plan, it’s called an incentive stock option, which I discussed in our earlier webinar. Now this can be used by using common stock if it’s available and pre-approved plans. Now the buyer could address incentives by creating new, new types of plans and these could create new opportunities for the shareholders, now these plans will be subject to strict compliance requirements under the US code section 409(a), again which I discussed in more detail earlier in our presentations and failure to conform to these requirements can result in serious violations. So if it’s a stock transaction then the buyer will need to decide how to address if the merged company has incentive plans, what do they do to them, do they keep them, do they terminate them, do they merge them and a lot of that will depend on the actual terms of the incentive plan. Now, as you can see a buyer in a US merger can navigate a lot of federal and state income tax and also securities issues. The securities issues at the federal and state levels as each state has different rules so all of these will have to be addressed as they integrate the executive compensation incentive plans. Now in the third category of employee benefits is health and welfare plans and this tends to be very complex, there are several statutes that are involved in this area so, addressing health and welfare plans depends again on the is it an asset or a stock sale and how these benefit laws will be applied. Now in complying the benefit laws such as we mentioned in the employee retirement income, security act, the tax laws and other health and welfare statutes including the Affordable Care Act and the Consolidated Omnibus Budget Reconciliation Act, also known as COBRA, sorry for the acronym, they have strict rules that are applied. Now, I going for an example, in a first step in addressing health and welfare plans you look and determine if this sale is an asset or a stock sale and you, and if it’s an asset sale you have to be very careful because if the buyer purchases the assets of the seller, as we talked about, and these employees are terminated by the seller, while they await being hired potentially by the buyer, there could be a transitional period after the transaction. Now if the seller provides an extension to these former employees of their benefits, there could be an inadvertent creation of what’s known in the US as a multiple employer welfare plan. I don’t want to say it but it’s MEWA, another, another creation of the law. What happens here is unless the seller relinquishes responsibility for providing that coverage then this MEWA has its own compliance requirements, can you imagine? So, now you’ve thought you had, just sailing through, you’ve got your team together, your HR team and you’re just coordinating, now all of a sudden because this area wasn’t overlooked, you have potential compliance issues in state and federal level so I highly stress, stress, before you extend that extra benefits to these employees, be sure to speak to ERISA counsel to make sure you don’t have any unavoided consequences. So, if the transaction is a stock sale, the buyer is buying everything and the employee bands will have to be integrated. Now, there’s the other statute I mentioned, the Affordable Care Act, which is, it is our healthcare statute and this also is going to be involved in this area because the employer will have to make sure that they provide certain requirements. So, the Affordable Care Act applies if you have 50 or more fulltime employee equivalents, now if you have part-time people there will have to be calculations to determine if you have 50 fulltime equivalents. Now if the employer does meet this requirement, the Affordable Care Act has specific mandates. First, is that the coverage offered should be to at least 95% of those fulltime employees independence 26 years or older and the coverage offered must affordable and what affordable means is that it cannot exceed a certain percentage of the individual's salary and also under the Affordable Care Act the coverage must be of minimal value, that means that the pay for the coverage must, must make sure it covers at least 60% of the cost of the healthcare services. Now this area is very complex, Christian and I have worked on multiple clients in this area and it really is a handful so I, I, again I stress to be very careful, there’s many traps for the unwary here. For multinational companies, if they purchase a company in the US, understanding the laws and requirements and how they proceed is very important and then there is especially when we’re talking about termination, another key aspect of, is the, is COBRA, the Consolidate Omnibus Budget Reconciliation Act, this is a law in the US that provides that if an employee has a certain qualifying event such as a termination, which can occur in, as we’ve discussed with RIFs etc in employee, in merger and acquisitions then a qualifying event such as a termination or a reduction of hours that causes the employee to lose their health coverage, can create the opportunity for a COBRA event, which allows them to decide whether they want to continue on the employer’s coverage but they usually will have to pay for it themselves. There’s also a very strict notice requirements under the statute and the penalties are very severe if the proper notice isn’t given to let the employees know they can potentially continue their coverage. Now lastly, for purposes of our discussion is the Health Insurance and Portability and Accountability Act, this is a federal law that protects healthcare data privacy and maintains health insurance coverage, it protects the privacy of individuals’ medical records and personal health. For multinational buyers, it is important to be aware of all of these laws and there’s more, because failure to comply can result in some strict penalties that I don’t think are necessarily considered when they’re putting together their transaction. So, with that, I’m going to forward it over to Liz. Thank you.
Christian Antkowiak
Buchanan
I think I’m up next so I will, I will be brief and then, that’s alright, and then we will get to Liz. So, just in the few minutes we have left, I will, I will be brief. Post-deal incentives, mergers and acquisitions, you know, as we talk about are stressful experiences for everybody but there sure is one way to get everybody excited and onboard and that is cash, cash does wonders in this regard and one of the things I encourage companies to do in this stage is align compensation programmes with their overall business strategy and one of the ways you do that, I think is really important, is to start by doing a market analysis, you know you might be thinking about the way compensation work with old co but new co is a bigger company, there’s more revenue and so do you need to go and look at the market for what is now your new band in terms of compensation trends and make an informed decision about structuring comp in this new reality, especially if you want to retain top talent. I think it’s important in that context to also look at pay equity issues, assessing internal equity and addressing any pay disparities. It’s a perfect time to fix those issues when you’re integrating two different companies with different compensation structures and to me, fairness and transparency are absolutely key as part of this process when you want to create that heightened sense of morale and engagement in that post-merger world, establishing clear criteria for determining how comp will be effected, you know maybe using formulas and clear performance metrics, marked data, all of that’s going to inform greater transparency which hopefully is going to lead to better engagement and morale. Liz mentioned previously, total rewards and that proposition, I think that’s incredibly important. Some studies suggest around 45% of organisation modified bonus structures post-merger. You’ve got to think about your bonus plans and maybe introducing performance based incentives for getting people excited and engaged and obviously rewarding them for that level of engagement. Legacy equity and transition into a unified equity programme, based on my experience probably around 75% of companies revise their equity comp plans following a merger, that’s really important and looking at ways in which you can retain and keep and excite your top talent is going to be critical. And finally, developing a unified plan to attract and retain talent, if you haven’t picked up on it, that’s probably a theme of mine in this webinar today because I think HR plays such a critical role in that and I tend to think of mergers from the human side and getting the right team in place is going to promote a successful outcome. So you should put together a checklist to address every aspect of integrating organisations and establishing everything from new company policies to compensation and benefits, merging workforces, monitoring new team and employee performance, identifying offboarding and redundant staff, again I mentioned this in my previous segment today, having a strong roadmap, being intentional and deliver it is going to pay tremendous dividends. So, Candace, why don’t you take that last bullet point and we’ll, we’ll kick it over to Liz.
Candace Quinn
Buchanan
Okay, sounds, that’s great, thank you. A buyer post-merger will look to be designing and creating a system of plans for rewards and retention of key employees. An effective method may be to create short term and long term incentive awards to motivate and integrate the employees and provide avenue for increased economic performance and let the employees have an opportunity to share in the growth of the company. Short term incentives could include bonuses tied to short term performance goals or sales goals and then pay the, paid annually if the target metrics are provided. And briefly, and the buyer could implement a number of different types of long term incentives which could include individual and company performance goals over several years, including investing provisions to retain key employees and they could include incentives such as you know restricted stock and other types of equity based and also non-equity based which look to valuing the increased appreciation of the share awards and providing a cash opportunity at the end of a vesting period. And what, the time limit is here, I will just like to point out one particular incidence and that is if a multinational company buys the stock of a US company and decides to input a incentive plan that’s based on the stock option of the multinational foreign parent company stock, which I see a lot, very frequently, I think it’s very important for the, the company to understand that if that stock option, must have a US valuation under 409A or there could be severe penalties and it would be counter to the point of the whole programme, which is to incent the key employees. So, again, discounts on exercise price is prohibited and again, I see this a lot, the foreign company parent stock may have an opportunity under their plan for discounts but the exercise or strike price, this is not allowed in the US so I just want to point that out, something to be careful of and with the time constraints, I’m going to kick it over to Liz now. Thank you.
Liz Hunter
Mishcon de Reya
Thanks, Candace. So, absolutely, when we’re looking at those equity arrangements, the key is which jurisdictions, which countries, how many different jurisdictions have we got in play and recognising that one size does not fit all, absolutely there are going to be local obligations whether that’s securities laws, tax laws, regulatory regimes in each country and you will want to be compliant with those regimes so that there are not you know penalties as a consequence so, realistically, what you need to assess is the headcount and you will want to optimise and do something that is efficient locally where you have either critical mass or very senior VIP, senior talent, okay, the rest is going to be collateral damage, you will offer something, it may not be optimised but you have to be pragmatic in looking at the administration and the cost benefit analysis. There may also be more cross border working, you may have people moving between target and buyer to aid the training, the collaboration, the knowledge sharing, the unified approach to doing business, you know buyer’s way perhaps, that is going to have implications as well, how are you managing that cross border activity from an immigration perspective, from a tax perspective, you could have trading liabilities in different countries to manage. The structural impacts I touched on earlier will drive what you can and cannot do so, you may need to think about how something is being communicated. Christian’s point communication is key, if something is going to change, it’s going to be different, there will be scepticism that this is going to be worse than what they’ve had before. It may not be, it may be better but you need to have that compelling and clear articulation and communication of that. Square peg to round hole, yeah, one size does not fit all and the maturity of the buyer’s total reward programme may drive what’s on offer. Sometimes actually smaller businesses are far more creative and, with their offering and it can come as quite a shock when they go into what’s perceived as a very large, sophisticated organisation and see the offering actually shrunk and this curated choice that’s very important to younger workers gets, gets shrunk. Timeline, what needs to be done when, what are the rulings, the tax authority approvals that may be needed and you know, really that, that cost benefit analysis, it’s a journey, you can’t do it all at once, sometimes phasing things, perhaps because of where you are in the reward cycle or the financial calendar is going to be a factor as well. So that’s kind of a whistlestop tour round and I’m going to ask Candace just to give us our closing for those of you that need a key word, it’s coming up, so hang on.
Candace Quinn
Buchanan
Thank, thank you Liz and thank you very much all for joining us today. The key word is “integration”, so for CLE credit, you will need to just input the key word of “integration”. So, this is the final session in our webinar series that started last year on this topic. If you missed or you want to revisit the earlier sessions, as Dom mentioned earlier, then you are able to do so by clicking in the links to the recording, which will be following up after this, after this email event. Now, there is also a survey following this Zoom. Please use this survey to not only input the key word, “integration”, but also you could suggest any topics you would like us to cover in a new webinar, please do not hesitate to include those. Thank you all very much and I hope you have a great rest of the week. Thank you.