Employment and Benefit Plan Issues in M&A: Due Diligence Checklist, Transaction Strategies, Risk Mitigation

Strafford

When negotiating M&A transactions, parties often focus on the business and revenue drivers of the target during the due diligence process and leave labor, executive compensation, and employee benefit plan considerations as a secondary thought. However, employees are often the backbone of a business and employment, executive compensation, and employee benefit plan issues can be material and, in some cases, fatal issues in M&A transactions because of countless matters that may arise during the lifecycle of a deal and after the transaction.

In equity acquisitions (including mergers), the target company's legacy employment, executive compensation, and employee-benefit-related obligations and liabilities will transfer to the buyer by operation of law. Even if the deal is structured as a sale of assets, it is possible for the buyer to be held liable in many cases as a successor employer if there is substantial continuity between the buyer and seller entities. As a result, it is vital to conduct a thorough investigation of the target company's employment policies and practices and pending employment claims as well as executive compensation and employee benefit plans, programs, agreements, and arrangements prior to the acquisition in order to avoid potentially serious legal and financial consequences in the future.

A buyer will want to consider the extent to which the seller's employment policies and executive compensation and employee benefit plans and arrangements will be assumed and continued for affected employees, particularly after the transaction. Some key considerations for the buyer are issues relating to change in control and severance arrangements, vesting and distribution of benefits under equity and other incentive arrangements, defined benefit pension plan exposure (including under multiemployer pension plans), IRC Section 409A and 280G exposure, and potential employment litigation.

A seller will be required to fully disclose the executive compensation and employee benefits and employment policies in effect as well as any known compliance risks. Sellers may desire to negotiate certain ongoing employment and/or benefits for its employees who will continue with the business following the closing of the transaction.

Listen as our authoritative panel discusses the myriad of potential employment law and benefit plan issues in M&A deals and provides practical advice on how to address these issues during due diligence and when negotiating the deal to ensure a positive result for your client, whether buyer or seller.

Outline

1. Overview: key employment and benefit plan considerations in M&A deals
2. Impact of deal structure on employees and benefits plans: asset transaction vs. stock transaction
3. Potentially costly benefit plan liabilities
4. Affordable Care Act compliance
5. Executive compensation issues: employment and severance agreements, equity compensation, change in control and other retention bonuses, and IRC Section 409A
6. Golden Parachute (IRC Section 280G)
7. Exposure to liability for worker misclassification
8. Collective bargaining issues
9. Pay and payroll practices
10. Pre-employment and hiring practice compliance: background checks, immigration, medical exams, and drug tests
11. Examples of employment-related offer and acceptance provisions, representations, and covenants in purchase agreements and related documents
12. Other issues and considerations

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