Managing and Involving Employees in Your M&A Deal
Employee risk management in the mergers and acquisitions processBy Canaan Suitt, J.D. | Last updated on April 17, 2023 Featuring practical insights from contributing attorney Pete Faust
Use these links to jump to different sections:
- Make a Plan to Inform Employees About the M&A Transaction
- Make Sure Your Employees Understand Change of Terms in an M&A Deal
- Get Employee Input on Reps and Warranties Before Closing the Deal
- FAQs for an M&A Attorney
Whether you’re a buyer or seller, a merger or acquisition deal is a defining moment in the life of your business. It’s also a significant event for your employees, who face potential changes in their workplace and terms of employment.
Part of successfully navigating any M&A deal is managing your company’s human capital through the process—keeping employees informed, assuaging concerns, and leveraging their knowledge at key points.
Make a Plan to Inform Employees About the M&A Transaction
At a certain point, “You need to let your employees know about the M&A transaction,” says Pete Faust, a mergers & acquisitions attorney at O’Neil, Cannon, Hollman, DeJong & Laing S.C. in Milwaukee, Wisconsin.
Deciding on the right time should be done with your trusted transaction team advisors. The transaction team generally includes those with decision-making authority in the company, as well as investment bankers, accountants, and lawyers.
“Of course, as the business owner, you’re concerned about the timing of the announcement and that it isn’t too soon,” adds Faust.
But delayed communication when companies change management is often poor communication. Employees naturally want to know about any restructuring or retention issues. At a certain point, withholding information can cause disruptions that outweigh the benefits of secrecy.
Avoiding this doesn’t mean you have to give employees real-time updates, but a communication plan is essential. “You don’t want word to spread before a deal is definitely going to happen. But your employees do need to be made aware,” Faust says. “You want to be able to control the narrative. But at the same time, you need to be prepared that word of a potential sale will get out. It just takes one person to catch wind of it.”
Make Sure Your Employees Understand Change of Terms in an M&A Deal
“Do your employees have non-competes and confidentiality agreements? If they don’t, the buyer is going to want that,” says Faust.
“It can be a really sticky negotiation if an employer has not required employees to have these agreements and the new employer wants them. That’s not an unreasonable request on the part of the new employer, but it’s something different for the employees.”
As the employer selling your business, Faust says you “need to make sure that there aren’t employee reactions to the change of terms that could cause issues for the buyer. If employees don’t want to sign the agreements, but the buyer needs them to since they require them for everyone in that position, that can create real problems.”
Get Employee Input on Reps and Warranties Before Closing the Deal
Representations and warranties are an essential part of the M&A purchase agreement. Reps and warranties are statements about the target company as of the signing of the purchase agreement provided by the seller to the acquirer:
- Business structure and subsidiaries
- Financial and tax information
- Valuation of capital and shareholder information
- Assets, including intellectual property
- Legal and financial liabilities
- Legal and regulatory compliance
- Employment contracts and agreements
- Employee benefits, including healthcare plans and human resources management
In other words, reps and warranties provide detailed information to the acquiring company about the business they’re buying.
“Key employees are on the front lines of the business and may know about more issues than the owners do, especially if the owners are not actively involved in the day-to-day operations. Sellers want to confirm whether the employees know if any of the representations and warranties about the business are untrue as currently written,” says Faust.
“If so, the seller can revise the rep and warranty and include a description in the disclosure schedules so that the seller is not in breach of that rep and warranty when it signs the purchase agreement.”
In addition, the seller’s “knowledge” about the business will often be defined in the purchase agreement to include the knowledge of key employees, says Faust. “Certain representations and warranties will be qualified to ‘the best of the seller’s knowledge’ and that employee knowledge will be imputed to your company.”
While getting employee input is critical, Faust recommends ” asking key employees to review only certain reps and warranties instead of the entire purchase agreement.” After all, there is sensitive deal information (purchase price, etc.) in the purchase agreement that employees do not need to know.
Employees are brought in because the buyer wants to learn what they know. As the seller, “you want to formalize employee input in some way to protect yourself,“ adds Faust.
“It can be helpful to have the employees’ review of the reps and warranties confirmed in writing, via email or otherwise. Once the M&A transaction closes, those employees have a new employer, and memories and allegiances could shift. So, you’d like to have a record of what employees did or didn’t know before the closing, in case one of those employees provides a different answer after the closing.”
FAQs for an M&A Attorney
Learn more about how to find a good attorney for your M&A activity. When meeting with a lawyer, here are some questions to get the ball rolling:
- What types of M&A transactions have you handled in the past?
- What were the outcomes of those deals?
- What is the general timeline of the M&A process?
- How can I successfully prepare for the due diligence process?
- What potential risks should I prepare for during the M&A and workforce integration process?
- When does my transaction team start post-merger integration planning?
To find a highly experienced and reputable lawyer in the industry, look for a mergers & acquisitions attorney in the Super Lawyers directory.
For more information about the timeline of the M&A process, read our overview of mergers & acquisitions law. You can also learn about data rooms and the M&A due diligence process.
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