Although acquiring a local enterprise may facilitate the establishment of a company’s presence in China, for the smooth business operation it is not only necessary to retain the key Chinese personnel but also to become familiar with their way of thinking. Here, it is necessary to stress that only by understanding the locals and their culture, it is possible to develop a business activity in the most profitable way.
Whether an M&A transaction is structured as an equity or an asset deal the interest of the employees of the target company are usually involved. For a State-owned target enterprise, formal consultation with the employees on their settlement arrangement is required by law, and the final settlement arrangement plan of the employees is subject to the discussion and adoption of the employee representatives’ assembly.
Turning now specifically on the two types of M&A transactions, it is necessary to highlight that in an asset acquisition, employees employed in the business that is being sold are not automatically transferred with the business. Each employee must agree to transfer to the buyer’s employment If an employee agrees to transfer, his/her employment with the seller will be terminated, and he/she will be re-employed by the buyer. Because an employee cannot be compelled to transfer, there is a risk that some employees may defect and find alternative employment which may affect business operations in the short term. Whether an employee decides to transfer will depend on variety of personal and economic factors, including the relative attractiveness of the new terms offered by the buyer compared with either existing terms or to the benefits he/she would be entitled to if he/she is made redundant. There is no rule in the PRC that provides that employees are automatically transferred on the same terms and conditions on a transfer of the business in which they are employed. There is therefore potential for abuse in that transferring employees could be offered terms less favorable than their current terms.
If an employee does not agree to transfer, the seller can either continue to employ him/her, make him/her redundant, or terminate his/her employment on the ground that the ‘objective circumstances’ existing at the time he/she was employed no longer exist. (Reference must be done to the new Labor Law, which is available at the following web-site:
http://www.lehmanlaw.com/resource-centre/laws-and-regulations/labor/labor-contract-law-of-the-peoples-republic-of-china.html
).
When restructuring in China, the Staff may be affected in any case. In such occurrences, reference must also be made to other laws and regulations such as for example:
Reduction of staff for Economic Reasons Regulations, 1995
, or
Economic Compensation for Breaches and termination of Labor Contracts Procedures, 2005
. In any case the Ministry of Labor and Social Security has to be consulted when structuring a M&A transaction which could affect the labor force in a determined company especially is State Owned. (Ministry of Labor, a general introduction introduction is available at the following web-page:
http://english.gov.cn//2005-10/02/content_74187.htm
).
The seller will be liable for certain statutory severance payments. Such payments have to be made even if the employee unreasonably refuses an offer of suitable alternative employment with the buyer. Moreover, in an asset deal the buyer assumes liability for social insurance obligations only after the relevant employee has transferred to it and, then, only in respect of those liabilities arising after the transfer of employment. The previous liabilities relating to the transferred employees remain with the seller, including any interest for late payments.
In an equity acquisition the employees of the target company remain as employees. In fact, there is no change in their status, and there is likely to be more stability in the workforce. In the case of contract workers engaged through a service company, there is also no change in their status as they remain employed by the services company that has seconded them to the target company. It is unlikely that there will be any disruption to this arrangement assuming the services company wishes to continue doing business with the new owners of the target company. As regarding social insurance obligations, in an equity deal, each group company will remain liable for social insurance payments.
Human resources are, indeed, of paramount importance for the smooth functioning of a business especially in China when the proprietor is not Chinese and he/she is not very familiar with this particular environment. A M&A transaction involving a Chinese counterpart implies a number of challenges to be faced, from the evaluation of the target company to the necessary understanding of the
modus operandi
of the subordinates to better interact with them.
The staff should be regarded as the most important intangible asset of the company. For the full success of the investment a key issue is the integration of employees. Chinese staff and foreign staff should integrate and work together in order to create synergies and to operate the new acquired local company smoothly.
– Cristiano Rizzi