In an asset purchase, there is a change in employer and, technically, all employees are terminated at the moment of sale, except in Quebec where there are successorship provisions which stipulate that the employment contracts are not terminated further to a transfer or alienation of a business and that they remain binding upon the purchaser, unless some or all of the employees are specifically excluded from the purchased assets. However, if the employees are rehired by the purchaser, severance costs are avoided because each Canadian jurisdiction has “sale of business” legislation which provides that where a business or part of a business is transferred, disposed of or sold to a purchaser, and the purchaser employs the employees, the employees’ service is deemed unbroken for purposes of the legislation. Similarly, at common law, if an employee accepts equivalent employment with the purchaser, he or she has mitigated any wrongful dismissal damages. If the employee declines an offer of comparable employment from the purchaser, he or she has failed to mitigate and in any claim for damages at common law damages will be limited or not awarded. In some provinces, such as Ontario, employees have the right to refuse an offer of employment from the purchaser and still receive their statutory termination and severance pay.
Occasionally, purchasers from outside Canada seek to hire the employees of the target business as new hires with no past service. This is ineffective for statutory severance purposes, as employment standards legislation protects past service and employees cannot contract out of these statutory rights. At common law, while it is possible to avoid past service, this would be unusual and may not be acceptable to the seller. As well, this would have to be explicitly stated in each employee’s offer letter or contract and carefully drafted to ensure that it does not run contrary to the employment standards legislation.
Due to the cost of severance (and often out of concern for the employees), the seller will typically try to require the purchaser to hire all of the employees. As well, the seller will normally want a clause requiring the purchaser to make offers of employment on terms and conditions that are substantially similar in the aggregate to those enjoyed by the employees before the sale. Obviously, if the offers are inferior, the chances increase that the employees will not accept the purchaser’s offers. Unless the asset purchase agreement allocates liabilities otherwise, the severance costs will be to the account of the seller. An asset purchase can allow a purchaser more flexibility as to how many employees it wishes to assume and on what terms, subject to what it can negotiate with the seller.
A purchaser should be aware that a unilateral adverse change to significant terms and conditions of employment (especially with respect to pay, bonus plan, calculation of commissions or benefits) made after the purchase can constitute a constructive dismissal. Where an employee does not accept an adverse change, he or she is entitled to quit and sue for damages for constructive dismissal. If changes to employment arrangements are contemplated and the purchase is by way of assets, the time to set them out is in the offer letter to the employee.
The comments above with respect to due diligence and seller’s representations and warranties, apply equally to asset transactions. The asset purchase agreement normally should provide that all employee costs and claims that arose before the closing date are to the account of the seller, and all costs arising after the closing date are the responsibility of the purchaser.
Additional posts from the blog
Last week the Canadian Government introduced amendments to the Investment Canada Act (ICA) to implement its revised policy towards state-owned enterprises (SOEs) which it announced in December last year. At that time, while it approved the acquisition by Chinese SOE, CNOOC, of Canadian oil and gas company, Nexen, the Government announced its intention to prohibit acquisitions of control of Canadian oil sands businesses by SOEs except on an exceptional basis. It also stated that joint ventures and minority investments were welcome. In addition, the government indicated it would closely monitor SOE acquisitions in other sectors of the economy and would distinguish between SOE and non-SOE investments when setting the ICA review threshold. (See Focus on Foreign Investment Review, December 2012)
The Autorité des marchés financiers Proposes An Alternative Approach to Securities Regulators Intervention in Defensive Tactics
On March 14, 2013, the Autorité des marchés financiers (“AMF”) published for comments a consultation paper (the “AMF Proposal”) pertaining to defensive tactics in response to take-over bids. This consultation is taking place concurrently with the one launched the same day by the Canadian Securities Administrator (“CSA”) with the release of proposed National Instrument 62-105 Security Holder Rights Plans and proposed Companion Policy 62-105CP Security Holder Rights Plans (collectively, “62-105”). Unlike the CSA’s 62-105, the AMF Proposal addresses all defensive tacticsii, not only security holders rights plans.
The Canadian Securities Administrators published for comment a proposed new regulatory framework for rights plans under proposed National Instrument 62-105 Security Holder Rights Plans and proposed Companion Policy 62-105CP Security Holder Rights Plans (collectively, “62-105”). If adopted, 62-105 would provide issuers with a game changing tool to respond to hostile take-over bids, where a target board will be able to use a rights plan as leverage to negotiate with a potential bidder.