Company acquisition: The trap of business transfers

In particular with insolvency or in a restructuring phase, the purchaser will usually only wish to take on only the essential business equipment ("asset deal") and a part of the employees. Which then are chosen selectively and thus the purchaser should focus on key employees. This is naturally in conflict with the protection of the interests of the employees. The involved entrepreneurs usually know that with redundancies due to economic circumstances a social selection of the workers to be dismissed has to be made. This protection, however, is not enough for the legislator in the context of M&As. Instead, the future employer acc. to § 613a of the German Civil Code (BGB) automatically takes over the rights and obligations of the existing employment relationships when a business or part of a business is transferred to him (transfer of business). Notices of termination solely based on the transfer of the business are invalid due to this reason.

 

The law does not elaborate here, but also does not state other conditions. As a result, it is the task of the courts to decide how the diverse arrangements of the respective case which arise in practice are to be treated. This leads to numerous rulings in Germany over which the European Court of Justice also has an increasing influence.
 

In terms of employment law, the share deal is the easiest option because with the transfer of the company or part of the company, the owner of the company does not change. The employer remains the same which means that § 613a BGB does not apply. A planned reduction of personnel is governed solely by employment protection legislation because the company remains the employer even if the shareholders have changed.

 

This is more difficult, yet more “structurable” with the asset deal, where selected individual assets of the company are sold. The acquiring party selects what obligations and contracts he wants or does not want to commit to. The individual assets such as production lines, patents, licences, rights to names, real estate and buildings are transferred individually. Is it possible for the purchaser to make a selection among personnel and avoid having to take on personnel when he really only purchases the customer base? If the regulation § 613a BGB did not exist, the decision would solely be in the hands of the purchaser. But as the law stands a check has to be made if a transfer of the business has taken place and if the employment relationships which are linked to the respective business or also part of the business by law are passed on to the new employer.

 

If this is the case, the purchase contract should include clear regulations on the release from liability of the purchaser, otherwise he will also take on economic risks arisen in the time, where the employees still worked for the seller. If this is not the case, the purchaser will not have the personnel required for the further operation of the company. The solution is to design the transaction in a targeted way: Whether it leads to a transfer of (a part of) the business or not, the transaction can be designed flexibly.

 

Case law on the subject of the transfer of the business is constantly in a state of change, whereby the Euro­pean Court of Justice has played a significant role. According to the highest judges, it is decisive, whether an economic entity is continued with its identity or not. Therefore, if assets are exclusively acquired, one cannot speak of a transfer of the business. According to the European Court of Justice, the same or a similar type of activities as in the business of the seller must be performed. If, however, only the pure function is continued, a transfer of the business is not considered to have taken place.

 

The sector, the type of the affected business and the transfer of materials and/or intangible assets and finally also the question of whether the majority of employees will be taken over or not, are a big part of the assess­ment of individual cases. Depending on the business sector, the assessment of the importance of the individual components will vary depending on whether the company operates in the production industry or is a service provider. Therefore in the services sector, it is insignificant, if hardware is taken on or not, because in this sector the main components are the personnel and the customer base. In the production industry the focus is rather more on the machines in the company and not on employees.

 

The matter becomes even more complicated, when only certain parts of the business are taken over and other parts are to be discontinued. Then as a logical result plant closures exclude the transfer of the business.

 

The transfer of the business has consequences for the liability of the purchaser, which is only limited in the case of insolvency with regard to pay claims and pension entitlements of the employees. Consequently an analysis of the risks with regard to employment law is advisable in order to enable appropriate arrangements to be made. As a result, it is also possible in the case of insolvency that employment contracts based on the purchaser's concept are cancelled on the part of the insolvency administrator. This enables the use of shortened periods of notice of termination (maximum three months) in the event of insolvency and the purchaser may have an immense influence on the number of the employees being transferred.

 

Further risks lie dormant with the transfer of the business when the transfer is associated with changes to the company and the company has a works council. In this case, there are also measures which can be taken to alleviate the situation in the event of insolvency. The employer can, for example, conclude a settlement of interest with the works council to which a list of names of the workers, whose contract will be terminated, is attached. For the affected employees, the law assumes that the contract terminations are due to economic reasons. In the process the employer therefore benefits from a reduced burden of proof which is not insig­nificant. In practice the new employer is usually already involved. In addition, there is the possibility to obtain and also create a balanced personnel structure. This possibility is seldom used in practice.

 

In addition, it is important to identify risks outside of the insolvency proceedings in order to limit liability. If a transfer of the business is not to be avoided or is even desired – for example, because in times of shortages of skilled workforce, the central objective of the transaction is to gain well-qualified personnel – the employees have to be comprehensively informed in writing about the resulting consequences and planned measures. If this information is not complete or incorrect, the opposition period of four weeks against the transfer of the employment relationship will not commence so that employees can sometimes still assert their right to return to the old employer years after the transaction. The German Federal Labour Court (BAG) sets high requirements in this respect and as a result if the purchaser is unable to receive comprehensive documentation or information, he should protect himself through an appropriate design of the purchase contract.

 

The vague definition of the law on the transfer of the business entails risks, but also leaves room for a creative contract design. This, however, needs time. When decisions have to be made quickly it is correspondingly more important to make an in-depth analysis of the facts and establish a clear concept for the planned measures. The interaction of tax, entrepreneurial and thus also employment law aspects is an interesting and challenging task.