Intensive labour due diligence promises benefits for M&A

A comprehensive due diligence before a private equity investment is an indispensable part of the investment process. For investors, this is an exercise to evaluate the assets and liabilities of the target and either factor these into purchase considerations, or forgo the transaction entirely.

A significant area in any due diligence exercise is the workforce comprising the target. Employment plans can be a major source of liabilities, especially in a merger or takeover, where the target’s liabilities are transferred to the acquirer. Further, an acquirer may not want to take over the employment plans of the target, because the liabilities are unfunded or disproportionate to its actual or projected income, because the plan may not be in consonance with its own employment policies, or because the acquirer may become liable as the successor to the target, for the target’s violations of law in the administration of the plan prior to the transaction.

The findings of a labour due diligence may be used to negotiate with the target to terminate or modify arrangements before the closing of the transaction to limit the acquirer’s liability, or to agree to indemnification provisions in the transaction documents specific to such liabilities. Any changes proposed to employment or benefit plans may require the consent of the affected employees.

Ankita Goel De Mallik is a senior associate at Amarchand & Mangaldas & Suresh A Shroff & Co.