Relationships with employees in acquisitions or restructurings

By Liu Zhenghe and Zhou Ning, AnJie Law Firm
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Q: How do relationships with employees change when a company is involved in an acquisition or restructuring? A: Company acquisitions/restructurings can be divided into equity and asset acquisitions.

刘正赫-Liu-Zhenghe
Liu Zhenghe
Partner
AnJie Law Firm

Article 33 of the Labour Contract Law specifies that, “a change by an employer of its name, legal representative, main person in charge, investors, etc., shall not affect its performance of employment contracts”. Pursuant to this provision, in an equity acquisition it is only the name of the investor or the company that changes, without the entities to the employment contracts changing, or the employment relationships being transferred. The existing employment contracts remain in effect. The company may not unilaterally amend or terminate the employment contracts on the grounds of the equity transfer.

Where an asset acquisition occurs, and the assets on which an employee relies to perform his or her routine work are transferred elsewhere, a change in the entities to the employee’s employment contract and the content of such a contract will generally be directly involved. The acquirer and acquiree should formulate a specific settlement plan for employment-related issues, such as the change in the entities to the employee’s employment contract, the change in the content of the contract, termination of the contract, etc., according to laws and in light of the actual circumstances.

Q: In an asset acquisition, is the acquirer required to accept the acquiree’s employees? What does the employee settlement plan specifically involve? A: Current laws do not compel an acquirer to also accept the acquiree’s employees in an asset transfer.

周宁-Zhou-Ning
Zhou Ning
Associate
AnJie Law Firm

If the acquirer does not accept the relevant employees, and the assets on which they rely to perform their routine work are transferred elsewhere, making the existing provisions of their employment contracts unperformable, the acquiree is required to reorganize, adjust and hold consultations with the employees on amending their employment contracts, or terminate the employment contracts with them according to the law.

If the acquirer accepts the relevant employees, they transfer together with the assets to the acquirer and provide labour to the acquirer. In this case, a change in the entities to the employees’ employment contracts occurs, and the employees are required to terminate their contracts with the acquiree and execute new contracts with the acquirer, or, where the provisions of their employment contracts remain unchanged, the employees, acquirer and acquiree reach a consensus through consultations to change the entities to the contracts.

Q: In an asset acquisition, if the acquirer does not accept the employees, what means are available to the acquiree to terminate the employees’ employment contracts? A: This includes reaching a consensus on terminating such contracts through consultations, or, in the case of a change of objective circumstances, unilateral termination of the employment contracts by the company according to item (3) of article 40 of the Labour Contract Law, or economic cutback of personnel in accordance with article 41 of the Labour Contract Law.

Termination agreed upon through consultation. Termination of an employment contract agreed upon through consultation is not subject to the restrictive and prohibitive provisions of laws relating to the unilateral termination of employment contracts. Where a company and an employee reach a consensus through consultation and execute an agreement to terminate such contract, the employment contract can be terminated.

Termination based on a change of objective circumstances. Item (3) of article 40 of the Labour Contract Law specifies that if “the objective circumstances relied on at the time of the conclusion of the employment contract have materially changed, making performance impossible, and the employer and worker fail to agree on amending the employment contract after consultations”, the company may unilaterally terminate the contract with the employee.

Article 26 of the Explanations of the Ministry of Labour of Several Provisions of the Labour Law gives a definition of “objective circumstances”, which includes the situation where the assets of an enterprise have been transferred elsewhere. However, when a company relies on such provisions to unilaterally terminate an employee’s employment contract, it is required to hold consultations with the employee on amending the provisions of the contract, and only if the consultations prove unsuccessful can it unilaterally terminate the contract.

Economic cutback of personnel. Article 41 of the Labour Contract Law specifies that, “if an employer needs to carry out a personnel cutback involving at least 20 persons, or a personnel cutback involving less than 20 persons but accounting for at least 10% of the enterprise’s workforce, due to any of the circumstances set out below, it may do so after explaining the circumstances to the trade union, or all of the employees, 30 days in advance, listening to the opinions of the trade union or employees and reporting its personnel cutback plan to the labour authority if: … (3) the enterprise is to switch production, undergo a material technological makeover or adjust its mode of operation, and still needs to cut back personnel after amendment of employment contracts; or (4) another material change in the objective economic circumstances relied upon at the time of the conclusion of the employment contracts occurs, making the performance thereof impossible.”

In an asset acquisition, if the acquiree satisfies the above-mentioned conditions, it may carry out an economic cutback of personnel. But it should be noted that, in addition to satisfying the substantive conditions, a company is also required to satisfy the procedural conditions of giving an explanation of the circumstances to the trade union, or all of the employees, 30 days in advance and reporting the cutback to the labour authority.

Q: if, in an equity acquisition, the company’s business strategy, way of conducting business, organizational structure, etc., changes after completion of the acquisition, what means are available to it to terminate employees’ employment contracts? A: The same means that are available in an asset acquisition. it should be noted that when termination is done on the basis of a change in objective circumstances, as a material asset transfer does not occur in an equity acquisition and there is no change in the entities to the employment contracts, a company, in judicial practice, will bear a much heavier burden of proving that there has been a material change in the objective circumstances. Similarly, in an economic cutback of personnel, a company is also required to prove that the change in it after the equity acquisition satisfies one of the substantive conditions for an economic cutback of personnel set out in article 41 of the Labour Contract Law.

Liu Zhenghe is a partner and Zhou Ning is an associate at AnJie Law Firm

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