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Changed work culture raises M&A challenges

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08 July 2021

The Covid-19 pandemic has, arguably, done more to change the culture of work than any other event in recent history, presenting all businesses but particularly those looking to restructure or those contemplating acquisitions, with a new set of legal and organisational challenges.

Image of a skyscraper with blue tinted windows

The immediate priority for many employers is to decide what work should look like when the world emerges into the new post-Covid reality.

For many of our clients that means embracing hybrid work patterns, with a mixture of remote and office working, and some considering mandatory Covid-19 testing for employees when they do return to the workplace. However, most appear to have rejected the idea of mandatory vaccination given the legal challenges this approach presents both in terms of privacy and employment constraints in some jurisdictions.

It remains to be seen how many employers will take the opportunity of revised work patterns to push through deeper restructuring programmes and reduce their workforces.

Here the impact of the crisis has yet to be fully felt in many jurisdictions.

Covid-19 impact affected by government support in some countries

Initially, the consensus was that we would see an upsurge in redundancies and a raft of distressed M&A deals as the pandemic first took hold in early 2020.

But unprecedented levels of government support for companies and for employees, through furlough and short-time working schemes, have meant that much of this activity has been postponed and may not take effect until those schemes are progressively withdrawn.

The impact has varied from sector to sector. For example:

  • airlines quickly shed tens of thousands of jobs as international travel grounded to a halt
  • the auto industry is one of a number of, perhaps surprising, industries that have seen profit margins soar during the pandemic
  • in some jurisdictions, such as the U.S. and UK, key sectors such as hospitality are actually struggling to recruit the staff they need to fully reopen

In Greater China, businesses have not received the same levels of direct financial support and we have seen a number of companies push through restructuring and focus on refreshing management teams to try to stimulate new growth.

Changes to the employment landscape

It seems likely that it is only a matter of time before we do see restructuring activity in many jurisdictions and an upsurge in distressed takeover deals. At that point, employers and acquirers will find that Covid-19 has changed the employment landscape in subtle but important ways. Germany, for example, introduced two key measures to support businesses through the crisis:

  • lifting some of the legal obligations for companies to declare themselves insolvent due to indebtedness
  • offering employers financial support to put staff on paid short-time working with up to 67% of their net wages met by the state

Both schemes are likely to have some drastic effects as they are removed.

For instance, there is growing concern that insolvent businesses will be unable to pay other companies they have continued to trade with, leaving many otherwise viable businesses vulnerable to financial difficulty and even failure.

Similarly, businesses that have taken advantage of the short-time working scheme without the necessary consultation with works councils or the appropriate contract cover, may find themselves liable to repay government financial support.

Interestingly, we are also seeing some employers where no works council had been established before, being confronted with works council elections. At the same time employees are becoming increasingly interested in joining a labour union, since the overall perception that strong employee representation can help employees in times of change and crisis has significantly increased.

There have been no new legal provisions in the UK to cover M&A deals, where employment rights are still governed by TUPE, the transfer of undertakings regulation. This EU regulation continues to apply post-Brexit and includes specific provisions for distressed takeovers.

However, balancing the need for company administrators to agree a sale and maintaining confidentiality, while meeting obligations under TUPE to consult with employees in a reasonable timeframe, remains as complex as ever.

Common themes emerging globally

These are not common concerns for employers and acquirers in the U.S., where union representation in the private sector is declining and much of employment law is driven by the employment contract.

However, a number of trends are emerging across many jurisdictions. For example, the adoption of representations and warranties insurance in M&A transactions is growing in the U.S. and Germany, with employment issues writ large in such provisions and affecting both buyers and sellers.

The distinction between full-time employees and contractors hired on a freelance basis continues to be an issue in many jurisdictions, particularly around the issue of so-called “disguised employees” who, despite being contractors, are, in reality, working on a full-time basis.

Although this is a concern that pre-dates the pandemic, Covid-19 has exacerbated the issue and is likely to continue to do so as employees continue to work remotely and more flexibly. Where, for instance, does the employer’s liability for tax and social security payments lie when an employee opts to work in a different jurisdiction?

In the U.S., the issue is further complicated by the fact that some states and cities levy income tax, while others don’t. An employee could, for instance, work for a company based in New York, which does levy tax, but choose to work remotely from Florida, which does not.

Cultural issues and employee activism playing a part in transactions

More significantly we are seeing cultural issues, particularly around gender and race representation as well as workplace culture, play a much bigger part in transactions and in the calculations of buyers.

Acquirers are now likely to put a far greater emphasis on such concerns as part of the due diligence process than ever before as they seek to unearth whether the target company has outstanding #metoo or broader discrimination or bullying issues. We have even see buyers walk away from deals where such concerns have been brought to light.

Although this is a particular feature in key sectors, notably the media, film and TV, it is very likely to become more prevalent in other sectors.

Employee activism is another common theme across jurisdictions, with employees increasingly coming together, often through social media platforms, to advocate for change within their company on key cultural issues such as climate change, social justice and equality.

This activism has been spurred on by the #metoo and Black Lives Matter movements, but has accelerated during the pandemic and is equally apparent in the U.S., the UK, Germany.

It is clear that, overall, the pandemic has given companies the chance to rethink work in interesting and often innovative ways.

It’s equally clear that the “new normal” will pose many new and complex challenges for employers and dealmakers in the months ahead.

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