View from 30,000 feet: Issue 5

When advising new US clients on their investment and divestment transactions, we often encounter points of English law and practice that our clients find surprising.

While such issues are always surmountable, we find that prior familiarity with the key points can allow for superior transaction planning, outcomes and a reduction in timelines and costs.

The purpose of the “View from 30,000 feet” series is to provide a brief, high-level introduction to the key issues our US clients encounter on a regular basis with a view to reducing the number of surprises. The first notes will focus on some key UK purchase agreement points and subsequent editions will branch out into other areas relevant to institutional US clients.

These notes are not exhaustive (nor are they intended to be) as each transaction will turn on its facts. We are always available to discuss and engage with any follow up questions and we hope you the series useful.

Issue 5: Understanding TUPE in the context of M&A Transactions

When exploring acquiring UK-based businesses, investors should consider the effect that the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) may have on the transaction.

TUPE applies where there is a business transfer or service provision transfer of a UK-entity. It covers a transfer of a business, undertaking or part of a business or undertaking where there is a transfer of an economic entity that retains its identity. It also often applies where there is a change of service provider or often when the buyer is acquiring assets if the assets form an identifiable business in their own right. It does not extend to stock transfers, as there is no change in the identity of the employer (which continues to be the acquired company). 

While TUPE is a UK-specific regulation, it needs to be considered with cross-border transactions. For example, where a business transfers out of the UK, TUPE may still apply even though, post-transfer, the business will be outside of the UK. It derives from EU legislation, so there is similar legislation in other EU countries, although the UK version is more pro-employee than many others.

As the name suggests, the overall intention is to protect employment. Several legal consequences result from the application of TUPE. In particular:

• the transferee (the buyer) will inherit all the transferor's (the seller's) employees who were assigned to the relevant transferring business
• they transfer on the same contractual terms (with small exceptions) and with the same employment history and continuity of service.  It is as if the seller’s name has been removed from their contracts of employment and replaced with the buyer’s name. This happens by operation of law; there is no point giving them new contracts
• any attempts to vary terms are void if the reason is the transfer. This is the case even if the workforce agrees to the changes. This can be very frustrating for buyers that want to harmonise the newly acquired workforce with the existing one
• there are information and consultation obligations prior to the transfer that can cause significant financial penalties (up to 13 weeks' gross pay per affected employee) if not followed
• with exceptions, any dismissal connected to the transfer is deemed to constitute an unfair dismissal, so giving rise to employment tribunal claims. The exceptions include a redundancy/RIF process after the transfer but any attempt to trim down the workforce prior to the transfer is likely to fall foul of these rules

There is much more. This is just a brief summary. The law relating to TUPE transfers is extraordinarily complex, largely due to cases in the European Court of Justice (pre-Brexit) as well as in local tribunals and appeal courts. The rules go against normal principles of contracts. It is sometimes difficult to comprehend for businesses in jurisdictions where the labour market is more flexible.  Advice must be sought on each potential transaction and Shoosmiths has TUPE experts within its team of 60 Employment specialists.

Previous issues

Issue 1: “Locked Box” purchase price adjustment mechanics

Issue 2: Conditionality provisions in a UK purchase agreement

Issue 3: Warranties, representations, indemnities and disclosure in a UK purchase agreement

Issue 4: National Security & Investment Act Considerations on an M&A Deal with a UK Target