One of the considerations for the sale of a business, be it a share sale or an asset sale, is to determine firstly whether TUPE applies, and then how that will affect the sale and pre-completion obligations.
TUPE and asset sales
Generally speaking, TUPE will only apply to asset sales; however, it is not always the case that TUPE can be ignored for a share sale. If, for example a new buyer intends to restructure the business, either on completion, or post completion, then there is a possibility of a service provision change whereby parts of the business are transferred to a group company or different company entirely. In those circumstances the employees may automatically transfer to that company.
If this is restructuring has been made clear during negotiations, then the parties will need to consider whether there is an obligation to inform and consult prior to completion, on the basis that they are aware that a TUPE transfer may take place on completion, or shortly thereafter. They will also need to take this into account when drafting employment warranties. It would be prudent for a seller to ensure that if the buyer intends to restructure the business then they have to bear any risk associated with that, in relation to TUPE, and appropriate warranties and/or indemnities will need to be included in the Share Purchase Agreement.
How does TUPE potentially effect a business buyer ?
The buyer will need to consider their potential exposure, and how best they can abide by TUPE, or limit that exposure. Another issue that may arise is considering what paperwork the company has in place in relation to existing staff, so if, for example, they do not have full employment contracts, any buyer should insist that this be covered by a warranty, or agree appropriate documentation for staff prior to completion.
They could attempt to document their current terms into a contract, however, to do so they would need full disclosure from the seller as to the current terms and conditions afforded to their employees and ensure that there is no deviation from that. This may not be easy if informal relationships exist.
If a large part of the business is transferred to a new company, but the services remains predominately intact, there is a good chance that TUPE will apply. The test is whether there is a transfer of either a significant tangible or intangible asset, or a major part of the work force in terms of numbers or skills. TUPE will apply on a relevant transfer where either;
- there is a transfer of business, undertaking of part of a business, or undertaking which is a transfer of an economic entity that retains its identity, or
- a client engages a contractor to do work on its behalf or brings the work in house.
So the parties need to consider whether the same activities are going to be carried out post completion by a different company. If they are then TUPE will apply and they need to inform and consult with staff, as well as ensure that any staff move over with the same terms and conditions as they enjoy previously.
Warranties and indemnities to cover TUPE
If staff are not being retained post completion, then the buyer should insist on appropriate warranties or indemnities. It is sometimes the case, and good practice, for a buyer to insist that staff sign appropriate settlement agreements in order to waive claims, although they must bear in mind that not all claims arising out of TUPE can be validly waived using a settlement agreement. It is not possible to waive the right to be informed or consulted. This is a general right of all employees prior to the transfer.
Often parties will seek to vary terms of employment and would want to record that in a settlement agreement thus limiting their liability. This is unlikely to be valid. A tactic that is more commonly used is for employees to object to the transfer, so that their employment is automatically terminated, and they waive an unfair dismissal claim then get re-engaged on new terms.
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