USA LAW AND PRACTICE Contributed by: George Casey, Heiko Schiwek, Elena Rubinov, Kristina Trauger, Pierre-Emmanuel Perais, Clara Pang, Gregory Gewirtz and Vinita Sithapathy, Linklaters
2.5 Labour Law Regulations Employee benefit and executive compensation-relat - ed issues, implicating federal, state and local laws, have been known to unravel M&A transactions. Sellers may reduce risks and streamline negotiations through proactive pre-sale planning. On the other hand, buy - ers may be able to maximise their deal-related protec - tions and their post-closing alternatives by ensuring early-stage attention to the matters discussed below. Employment Employment arrangements in the United States are generally “at will”. Buyers need to consider worker classification and proper visa status of workers. Buy - ers should be aware of the Worker Adjustment and Retraining Notification (WARN) Act and similar state laws that may give employees the right to early notice of impending lay-offs or plant closings (or salary in lieu of notice). Both buyers and sellers need to assess whether key employees have a right to resign with full severance on a change in control and whether such employees are subject to post-employment restrictive covenants. Generally, employment-related covenants and agree - ments should be reviewed to determine whether they are adequate and assignable to the buyer (or surviv - ing entity). The enforceability of such agreements is determined on a state-by-state basis as certain states have restricted or banned the use of non-competes. Equity plans and award agreements Buyers need to review employee equity plans and the impact of a change of control on outstanding employ - ee equity. Numerous considerations go into determin - ing treatment of equity awards in a deal, including: • business decisions/use of cash; • dilution of acquirer’s shareholders; • prevalence of out-of-the-money options: • ability to achieve retention benefits through con - tinuation of the awards; • legal compliance issues raised in diligence; • legal limitations (eg, consent requirements, substi - tution limitations); • Section 280G golden parachutes and potential mitigation methods;
• administrative burden considerations (eg, equity tracking, employee communications, accounting, SEC registration); and • international compliance. Non-qualified deferred compensation plans Key issues for the buyer to consider include: • whether the seller maintains non-qualified deferred compensation and, if so, whether such arrange - ments are compliant with Section 409A; and • whether the arrangements that provide material benefits will be continued or whether they will/can be terminated following the change of control. Employee benefits Buyers should be aware of the Employee Retirement Income Security Act (ERISA), which governs the oper - ation and terms of certain employee benefit plans, including their treatment in connection with transac - tions. Retirement plans There has been an avalanche of litigation surround - ing excessive fees, poorly monitored investments and claims related to employer stock investments in 401 (k) plans. Additionally, compliance problems in need of correction and their impact on a possible plan ter - mination or plan merger may need to be assessed. Buyers and sellers need to also determine whether any plans of buyer and seller should be terminated prior to a change of control. If a seller maintains a defined benefit plan, actuarial assistance may be needed to understand the fund - ed position of such plans and whether the actuarial assumptions used are reasonable. Often, the Pension Benefit Guarantee Corporation may insert themselves into the M&A process if either the buyer or seller has a significantly underfunded pension plan. If the buyer has a collectively bargained workforce, attention will be needed to understand whether the buyer participates in multi-employer pension plans sponsored by a union, and whether the structure of the transaction will result in a withdrawal under the plan and withdrawal liability.
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