Michael Starkey, Associate
Divestment and acquisition are processes that are most often viewed through a regulatory lens. While it is certainly important to assess whether a divestment or acquisition will add value to your organisation, all too often, a key determinant of whether this is likely to be the case is overlooked – that is; the human “aspect”.
An organisation is in essence only as good as its people, and the truth of this is evident in the context of divestments and acquisitions. As well as covering off important employment-related basics, this article provides guidance on how organisations can adopt a strategic focus to managing people issues that arise in divestment and acquisition, with a particular emphasis on how organisations can enhance the retention of their best talent throughout this process and beyond.
Questions to ask during due diligence
While due diligence is often tedious, frustrating and time-consuming, it is essential in determining whether or not it is worthwhile for a business to enter into a transition in the first place, what might need to be negotiated in order to get the best deal, and whether the business is going to be well-positioned to complete its post-acquisition objectives. Investing time and resources into a thorough due diligence process from the outset helps a business avoid unexpected problems and the unnecessary costs that may be incurred to rectify these at the back-end of a transaction.
In considering the type of questions to ask during a due diligence process, it can be helpful to think in terms of certain categories.
Operational questions include asking what is the overall structure of the business that is being acquired, what roles exist within the business, what terms and conditions of employment are common within the organisation, and which parts of the business are doing well and which are not. It is important for a purchaser to ask these questions so that they know the landscape they are entering, and what things they may need to change in order to achieve the post-acquisition goals.
From an employment perspective, a thorough knowledge of the terms and conditions of employment that are applicable to the business is important for a number of reasons. In the first instance, it helps gauge what are likely to be the expectations of any employees who you may wish to offer future employment to as part of the acquisition. It is also important to know the source of the employees’ terms and conditions of employment, and particularly whether the employees are covered by a modern award or enterprise agreement. There are circumstances where the terms and conditions under an award or enterprise agreement will “follow” the employees upon their transfer.
The next category we suggest are questions relevant to compliance issues. The focus of these questions is often about the “nitty gritty” of the employment relationship; for example, ascertaining the state of documentation such as employment contracts, what employment-related liabilities are accrued (for example leave balances), and the details of any current or threatened legal action against the business.
Apart from giving a clear picture of the current employment landscape within the business, these questions are directed to determining whether the business has had any compliance issues in the past, and whether there may be any record-keeping or documentation issues which could give rise to compliance issues in the future.
Ascertaining the current state of existing employment contracts is also vital in an acquisition so that the incoming organisation can determine what is the most appropriate documentation to use when the business is acquired. In most cases, best practice will be to issue new employment contracts. However, there may be circumstances in which more simple documentation that makes reference to previous employment contracts can be utilised.
The final category, which is often overlooked in the due diligence process, relates to questions that are more strategic in nature. These are questions which are less likely to be answered by looking at data and employee records, and requires a purchaser to actively engage with relevant personnel in the business that is being acquired.
The first type of question we recommend in this category goes to the skills of relevant personnel. If a purchaser intends to continue to run the business following its acquisition (either as a separate entity or within an overarching corporate structure), it pays to have a thorough knowledge of which personnel are the “brains”, “key players” or “star performers”. By making offers of ongoing employment to these people, an organisation can help establish some continuity in a time of change, and can capitalise on their skills moving forward.
Another consideration for an incoming employer is what the culture of the organisation is like. While it is unlikely that a prospective purchaser will have access to all levels of the business in question, it may be possible to conduct a high-level cultural audit with executives and key personnel of the target business to determine whether they believe there are any major impediments to acquisition – for example, how does the organisation generally deal with change? Does the organisation go through change often, or is it more of a static organisation? While it is almost certain that there will be some obstacles to change, an organisation with knowledge of these obstacles is better positioned to address these issues in a proactive manner.
Finally, a prospective purchaser should consider what its organisation can contribute to the business, not just what they can take from the business. For example, organisations should consider whether they will be able to improve a business by providing better managerial oversight, transferring valuable skills, and sharing capabilities. If the answer to these questions is no, it may be time to reconsider the acquisition.
One of the most difficult issues for organisations to handle, particularly during divestment, is retaining talent up until the point when the business ceases operating in its current form. During an organisation’s “wind down” period, there will usually be a tension between employees seeking to either secure redeployment or “jump ship”, and the business’ need to remain well-managed and profitable up until completion of the sale.
Organisations need to accept that a loss of employees will be inevitable. In some cases, this may not necessarily be a bad thing. An organisation need only be concerned if it is losing employees who add value to the business, or who are a vital part of the transition team. However, there are a number of strategies an organisation can implement to help keep people happy and “the wheels spinning” during this time.
Transparent and well-timed communication
“What’s in it for me?” Within all levels of an organisation employees will ask the same questions regarding their pay, recognition of prior service, retention of benefits, location and job title. Therefore, a strategy around clear communication, onboarding and other transitional processes should be developed with those questions and answers in mind.
Some organisations might think they are assisting their employees by giving them as much notice of a business sale or acquisition as possible. However, on occasions, this can be to the organisation’s detriment, particularly in respect of employees for whom there is no position in the new entity or with the new employer, or for employees whose position may be uncertain. By providing employees with a long period of advanced notice of the event employers run the risk of employees “jumping ship” during the transition period.
Employers who are covered by a modern award are required to comply with the consultation provisions contained in the award. These provisions generally require that employers consult with employees who are likely to be affected by a major workplace change once a “definite decision” to introduce that change is made. When a “definite decision” is made will often be open to interpretation. However, in previous cases, courts have held that there is no requirement to commence consultation where a redundancy only remains a possibility. In a divestment context, this means that in most circumstances it will be unnecessary to begin consultation prior to the business sale being finalised, including any agreements between the outgoing and incoming employer in respect of the possible transfer of staff. It has also been held that in certain circumstances, the period between consultation beginning and a redundancy being implemented can be short. For example, the Fair Work Commission has held that (subject to particular circumstances) it may be reasonable to inform an employee of a redundancy (during consultation) and provide a termination date of the next day1.
However, this flexibility must be balanced against other considerations. For example, employers should consider how their communication process will be perceived by employees, particularly those who are remaining with the business. If there is a perception of unfairness or unreasonableness, this can have an impact on morale and, consequently, performance. In circumstances of change, it is also the case that employees are highly likely to appreciate communication that is transparent and honest. While none of us like to hear bad news, many people can appreciate that it is better to be prepared for change and its possible consequences, than to feel it has been sprung on us. Employees who leave an organisation where they perceive that communications have been handled in an open and honest manner are less likely to be bitter about their circumstances, and may be less likely to pursue some form of claim.
Another key to talent retention during a transition period is to promote opportunities for employees in facilitating the change. For example, during mergers and acquisitions, it is often the case that an employer will need to establish a transition team to lead the business through the period of change. Where employees are placed into roles in which they feel like they are actively contributing to the transition, rather than waiting out their days in an organisation, they are likely to be more satisfied with their work and more likely to remain with the organisation.
Incentives to stay
In cases where there are the financial resources available, organisations may wish to use monetary incentives, such as retention bonuses, for employees who “stick it out” until the end. Such bonuses need to be carefully considered, bearing in mind exactly what it is the organisation is trying to incentivise. Retention is only really valuable if the staff retained are continuing to add value to the business by performing their duties to a high standard. Therefore one option is to link retention bonuses to performance outcomes during the transition period.
Alternatively, employers may be able to offer employees additional services as a component of a redundancy package on the basis that employees remain with the business until its final day. An example of this is career transition support services, which can be of significant value to employees, particularly where they are not confident about their capacity to secure alternative employment.
In the case of award-free employees, it should also be made clear that in order to receive a redundancy payment, they will need to remain with the business up until the date on which it has been determined that their employment will come to an end as a result of a redundancy. In other words, if an employee resigns prior to this date, their employment has not terminated at the employer’s initiative, and there is no entitlement to redundancy pay.