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Vetting the Deal: Employee Agreements

Acquisition due diligence is an investigation into various aspects of the target company, in order to get an accurate view of its true assets and liabilities. One essential focus area in any such effort should be to review the employee benefits offered and maintained by the target. This focal point is vital whether the intended deal structure is an asset purchase or a stock purchase; the basic objective is to identify all of the potential issues and liabilities that flow from the target company’s employee benefits. Thorough identification of future obligations created by the deal structure will inform the proper valuation of the deal, and prevent unforeseen problems that can turn a seemingly attractive deal into a headache. In a stock purchase deal, the employees of the target company will continue their employment after the deal closes, with the buyer inheriting all of the target company’s employment obligations—including employee benefit plans. The stock purchase agreement will contain a section of representations and warranties relating to employee benefits. In these sections the target company undertakes specific promises to the buyer concerning the types of employee benefit plans, practices, agreements, policies, etc, that it maintains; whether such plans comply with applicable law; and the liabilities associated with the plans. Understanding the costs associated with these commitments requires a careful examination of the target company’s employment agreements. A qualified attorney should be retained to review various types of documents related to employee benefits plans that may be relevant to an acquisition. Those documents can include, among others, employment, retention, and severance agreements; stock option or any equity compensation plans; non qualified deferred compensation plans; health and welfare plans; qualified retirement plans; and post retirement benefit plans. Despite the need for this additional scrutiny, stock purchase deals are often favored by buyers who wish to avoid immediate and potentially large payments to employees that may result from asset purchases involving terminations. In an asset purchase, if the buyer does not opt to retain the employees of the target their employment will terminate when the deal closes, giving rise to any legal obligations created by the employee benefits plans in place. Often, the buyer must make lump sum payments to each terminated employee. If the total cost of these payments is known before the deal is closed, offsets to the price can be arranged with the target and incorporated into the deal terms. The transacting parties are generally free to determine how they want to address the costs involved with employment termination, and are only limited by their creativity and the creativity of their attorneys. In either case, a buyer can limit its exposure to liability and guard against hidden, value-destroying employment issues by hiring an experienced attorney to perform a thorough due diligence review of the target.


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