M&A and labor law
Introduction
In the last 12 months, two business law enactments have been fundamentally updated with the revision of the Stock Corporation Act and the DPA. At the same time, companies had to adapt to rising prices, positive interest rates and geopolitical volatility. In this environment, transaction volumes in Switzerland decreased by around 20% in H1|2023 compared with the prior-year period. While a total of 362 transactions were registered in H1|2022, the number of registered mergers and acquisitions fell to 216 in the first six months of this year.
Industry forecasters expect transaction volumes to increase in the second half of the year, particularly in the middle market (companies with sales of between USD 10 million and USD 1 billion). It is predicted that the focus of companies on new markets and the influence of disruptive technologies will give additional impetus to the transaction market. This in an environment that continues to be geopolitically volatile and increasingly regulated by climate policy. In summary, it is assumed that companies will increasingly look for ways to shorten process and supply chains without losing touch with new technologies and market trends. This in turn will increase the importance of the human factor in future transactions: Wherever human knowledge and creativity form the core of the transaction, labor law issues will become more relevant in the context of transactional M&A advice.
The employee in focus
In the case of a pure share deal, the general conditions under labor law do not change. Employer and employees in the target company remain identical. If jobs are to be cut after the transaction for synergistic reasons, the statutory provisions on mass redundancies and the employer's duty to consult must be observed.
If the employer transfers the business or part of the business to a third party (asset deal), the employment relationships shall be transferred to the acquirer on the day of the business succession, unless the employees refuse. Existing collective labor agreements shall continue to exist for one year. In this case, too, the employees' statutory rights of participation must be observed. In the event of an intended streamlining of the workforce, the provisions on mass redundancies must again be taken into account, which results in a double participation of the workforce.
If the business or part of the business is transferred during a debt-restructuring moratorium, as part of a bankruptcy or a composition agreement with assignment of assets (distressed M&A), the employment relationships shall only be transferred to the acquirer if this has been agreed and the employees do not reject the transfer. In this special case of transfer of business, the acquirer can determine which employees it wishes to take over or not. In addition, the joint and several liability of the parties to the transaction does not apply in this case.
"Staying power bonus"
The acquirer of a target company usually seeks to retain key employees of the target company. In order to avoid involuntary terminations, financial incentives are sometimes built into the transaction (so-called holding bonuses). If these are introduced by the board of directors of the target company, conflicts of interest must be avoided. In the case of listed companies, the provisions of stock corporation law regarding inadmissible compensation such as signing bonuses and commissions for the execution of the transaction must also be observed.
Excursus: Employer contribution reserves (2nd pillar)
Employer contributions to the pension scheme and contributions to the employer contribution reserves of mandatory and non-compulsory occupational pension schemes (2nd pillar) are considered business expenses for direct tax purposes. Employer contribution reserves may not exceed five times the annual contributions to be paid by the employer in accordance with the pension fund regulations. In practice, the question arises as to whether and how the employer contribution reserves formed are to be taken into account when forming the purchase price. On the one hand, the contributions made are reserves that facilitate the financing of current employer contributions in challenging times. On the other hand, the reserves are earmarked and not freely available.
Transaction support
Wicki Partners AG assists domestic and foreign clients in national and cross-border transactions with a Swiss connection. Our clients can rely on our experience, precision and speed. We accompany transactions as a team. We are also able to coordinate international transactions. If necessary, we can access the resources of our partner networks. If you have any further questions, please do not hesitate to contact Dr. Emanuel Tschannen and Vivien Keiser.
Sources: Deloitte study, M&A activity of Swiss SMEs, H1/2023.; KPMG media release, August 22, 2023; PwC, Swiss Market Industry Trends: 2023 Mid-Year Update.
Attorney at Law Emanuel Tschannen assists entrepreneurs and legal entities in all areas of contract and corporate law. He represents his clients in an advisory capacity and as a litigator in court. His specialties are labor law and international commercial law.