Transferring employment relationships as part of share & asset deals

published on 10 June 2021 | reading time approx. 3 minutes

Share Deal and Asset Deal – two popular terms whose meaning is generally clear. A share deal means the sale and transfer of shares in a company by the seller as its shareholder to a third party as purchaser, resulting in a transfer of the company as a whole, including all rights and obligations. By contrast, an asset deal is about selling only individual “assets”. In this case, the seller is usually the company itself that sells and transfers certain or all assets to the purchaser. So far so clear. But what are the particular differences between the two, especially with regard to employment relationships?

There is this ominous passing of a business (Betriebsübergang) regulated in Article 613a of the German Civil Code (BGB); a topic that most transaction parties feel they do not like because it is problematic. But, it is not as bad as it seems, actually. Of course, as always, the devil is in the details but let's start from the beginning:

The easier one first: the share deal

The share deal is generally the easier type of a transaction. With the transfer of all rights and obligations, also all contractual relationships are normally passed to the new owner (the purchaser) of a company (there are always exceptions – keyword: change of control clauses). This also applies to employment relationships. For those involved, nothing changes. The employer (the company), employment contracts and terms and conditions of employment remain the same as before. Only the corporate structure changes, but on the outside, everything looks the same. Thus, in terms of transferring employment relationships, no special steps are necessary.

Despite this, or perhaps exactly because of this, it is advisable to have a closer look on the employment relationships as part of a due diligence review conducted before a share deal and prepare a risk analysis. After all, along with the obligations of the company arising from employment relationships, the purchaser also takes on liability connected with those matters. If the seller failed to meet its obligations arising from employment relationships – unpaid salaries being the simplest example – then employees may assert their claims against the purchaser. If the predecessor has violated labour law regulations, the consequences of any offences subject to fines may hit the purchaser; it is not always only about offences (very expensive at that), sometimes also crimes are committed. And the selection of regulations to violate is broad; the acts on working time and minimum wages are only a small chunk of it.

But no reason to panic, there are solutions. If such risks are detected during due diligence conducted ahead of the transaction, they can be appropriately addressed in the share purchase agreement (SPA). Popular methods here are for example the inclusion of an appropriate price adjustment clause or incorporation of indemnities into the SPA thanks to which the problem ultimately remains with the seller. In short, as always, the rule applies: better safe than sorry.

And now onto the asset deal: transfer of business

Things are a bit different with the asset deal and here the already mentioned transfer of business comes into play. In short, Article 613a BGB reads that if a business or part of a business passes to a new owner, then all employment relationships existing at that time are passed along and such employment relationships cannot be terminated because of such a transfer of business or, if terminated, such termination will be invalid.

And the question in what situation a business or part of a business is deemed to be transferred is to be answered on a case-by-case basis. Either individual (production) areas of a company can be transferred or sometimes alone the transfer of equipment used for operating the company may constitute such a transfer. The decisive keyword is the so-called organisational unit.

If such a transfer of business takes place, several aspects should be observed. For example, employees have the right to object. This means that the company must notify the employees of the transfer of business and that they can object to it within one month of the date they receive such information. This is because forcing employees to work for a new employer is prohibited; and this rule applies here because unlike in a share deal, the employer changes as a result of the asset deal.  

The crux of the notification required under article 613a(5) BGB

And the crux sometimes lies precisely in this notification requirement: the hurdles to ensuring the correctness of such a notification letter have now become so big that it sometimes seems almost impossible to formulate it correctly. Employees must be informed of all details of the transaction such as the timing, the reason, the legal, financial and social consequences of the transfer and measures planned to be taken in respect of the employees. Easier said than done. And it can get really complicated if both the seller and the purchaser are bound by collective agreements or have advisory councils and works agreements in place. In this case, employees must be precisely informed what rules will apply to them in the future. In such cases, Article 613a (1) BGB provides for a mechanism that is not crystal clear even after reading the provision several times.

But where is the problem? What damage does an incorrect notification do? Well, an incorrect notification may cause that the above-mentioned deadline for raising objections by employees will not begin to run. And now imagine the following scenario: You want to acquire a certain business unit that is useful to you only if acquired in its entirety with employees working there. Incorrect notification can lead to a situation that employees may still be able to leave long after the transfer by exercising their right to object.
Perhaps, this is rather a theoretical problem and, furthermore, employees should think it through whether to exercise their right of objection because if they do, they go back to their previous employer. But if he has no vacancies to fill – in the end he sold the business – then he can terminate the employee’s employment on the grounds related to the company and such termination will not be held inadmissible due to the transfer of business. Nonetheless, such risk should be taken into account beforehand or, ideally, a correct notification letter should be prepared so that it is clear at least after the one-month deadline for raising objections which employees will work for the purchaser in future.

Nothing is impossible

The bottom line is: okay, it's not easy, but it's not impossible, either. Depending on the type of the transaction, the relevant risks and issues should be examined, discussed and resolved in good time beforehand so that there are no unpleasant surprises afterwards and so that, also in the case of a formal issue (as with a transaction), the words of the Hermann Hesse poem "Stages" saying "A magic dwells in each (new) beginning" can come true.