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Mergers and Acquisitions in Canada

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.

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