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M&A in Chile – Labour Matters to Consider

OVERVIEW

It is essential to distinguish the difference between the purchase of a company and its employees, from the purchase of certain assets or a specific business unit. Simply, it is not the same to move around workers as it is to move around assets.

The Chilean law provides specific guidelines in the case of total or partial modifications to the companies ownership under the ‘labour continuity principle’ (article 4 of the Labour Code). The reason is that some would argue that continuity applies in cases where only the assets, debts or a specific business unit of a company are purchased. Such labour continuity means that the ownership changes do not affect the employee’s rights and obligations arising from individual or collective contracts, which will remain in force with the new employer. It is in general a norm of protection for employees.

ACQUISITION OF A BUSINESS

If a business is acquired in which labour continuity is not applicable, the transfer of employees from Seller to Buyer will require the employee’s express consent. This will happen whenever the requirements of article 4 of the Labour Code are not met, and therefore there is no ‘labour continuity’. For example, this may occur with the purchase of a small division of a company or in the case were the structuring did not give grounds to sustain that there was an actual modification that would justify the application of the ‘labour continuity principle’. The Labour Office has been flexible in the interpretation of such article; however, it is recommendable to review this issue by specialised lawyers considering the specific structure of the acquisition.

In certain situations when the continuity of the employees may no occur automatically, the purchaser may not be willing to accept the benefits already accrued by the employees (pending vacations, years of antiquity, etc.). In this case, the purchaser could request the seller to terminate its employees before the sale is finalized and then rehire the employees with no pending rights or obligations. This is also a manner in which the new employer may avoid unwanted labour liabilities, and starting with a fresh page This may be also beneficial for employees as they would receive severance and pending accrued rights, before starting off with their new employer. In such case, the former employer or the purchaser should agree with the employer and the employee on the terms of such termination and/or transition of the employee to the new company, as it would not be ‘automatic’.

Thus, the corresponding assignment of the labour contract should be agreed to in writing by the three parties, stating specifically the applicable rules regarding pending vacations, accrued years of work, benefits, etc. In addition, if any changes were needed in order to unify labour rights, salaries or benefits, the employee would need to accept the changes in writing. If such assignment is not agreed, employees would remain under the seller’s payroll and they would remain responsible for all labour obligations including termination costs such as severance pay.

If the purchase can be considered as a change or modification to the company’s ownership, then the company understood as the “legal entity” continues being the employer and labour continuity would be applicable. This means that the previous labour rights and obligations of the employee and employer would not be affected.

Probably the latter is the simplest way to proceed, however, it should be revised that the ‘legal continuity’ does actually apply.

In this regard, it is important to highlight that changing employees from one employer to another may not always be automatic when purchases occur. In other words, moving people from one pay roll to another is not as simple as moving assets from one balance sheet to another. Different issues need to be taken into account.

SALE OF A BUSINESS

If there is no assignment agreement and labour continuity does not apply, the seller will remain as the employer and will be subject to all labour obligations. In the case that labour continuity could be argued, such as when the whole business is sold, the purchaser would be liable for all the employment and labour obligations.

On the other hand, the sale of business could be argued as a valid fact to support company needs for dismissal, but the seller would need to pay the corresponding severance payments and all other pending benefits.

PURCHASE AGREEMENTS

Therefore, in all purchase agreements it is essential to confirm which party will bear the costs for termination and settlements with the employees who do not accept to be transferred in case where labour continuity is not applicable.

In addition, it is important to confirm who will bear eventual costs for termination of contracts with companies that provide personnel to the sold company or render services to its clients as some labour law contingencies could be triggered relating to say employees in case the purchaser maintains such contracts.

Finally, on every M&A the parties must agree on which will be the future of top executives that often are removed. In such cases, the severance should be calculated before hand, agreeing before hand who will be paying for the severances that in many occasion tend to be lucrative. For this matter it is crucial to check and confirm every top executive employment contract and see if there is any particular condition set forth in case of dismissals.

ACQUISITION CHECKLIST –

  • It is essential to analyze if the acquisition is of a business or it means a change in the company’s ownership. In this regard, the first stage would be to confirm that the principle of ‘labor continuity’ applies.
  • It should be discussed if employees would be assigned, previously terminated and hired as new employees by the purchaser or remain as the seller’s employees. This shall be done in hand with the reduction of the workforce, if that is the case.
  • Labour contracts should be updated with any new conditions agreed. This is not necessary if labour continuity applies, however, in this latter case it is recommendable to set forth in writing.
  • Severances and benefits of top executives must be clearly determined. Any labour obligations that may rise when an M&A takes place should be previously highlighted. For example: golden parachute clauses, special severances beyond legal ones, dismissal conditions, etc.
  • A proper due diligence is needed to be sure which labour contingencies may unfold. The purchaser must be clear on what is the situation regarding labour and social security obligations, having updated information of the most important issues every company must comply with – these issues range from severance payments that may be triggered with an M&A to ensuring that social security payments are up to date for all workers.

Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. Over the last 15 years we have been supporting foreign companies with their growth in Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets. 

To better understand how we can support your management team in the Region, please contact Cody Mcfarlane at cmm@hgomezgroup.com