Relationships with employees in acquisitions or restructurings

Q: How do relationships with employees change when a company is involved in an acquisition or restructuring? A: Company acquisitions/restructurings can be divided into equity and asset acquisitions.

Article 33 of the Labour Contract Law specifies that, “a change by an employer of its name, legal representative, main person in charge, investors, etc., shall not affect its performance of employment contracts”. Pursuant to this provision, in an equity acquisition it is only the name of the investor or the company that changes, without the entities to the employment contracts changing, or the employment relationships being transferred. The existing employment contracts remain in effect. The company may not unilaterally amend or terminate the employment contracts on the grounds of the equity transfer.

Where an asset acquisition occurs, and the assets on which an employee relies to perform his or her routine work are transferred elsewhere, a change in the entities to the employee’s employment contract and the content of such a contract will generally be directly involved. The acquirer and acquiree should formulate a specific settlement plan for employment-related issues, such as the change in the entities to the employee’s employment contract, the change in the content of the contract, termination of the contract, etc., according to laws and in light of the actual circumstances.

Q: In an asset acquisition, is the acquirer required to accept the acquiree’s employees? What does the employee settlement plan specifically involve? A: Current laws do not compel an acquirer to also accept the acquiree’s employees in an asset transfer.

If the acquirer does not accept the relevant employees, and the assets on which they rely to perform their routine work are transferred elsewhere, making the existing provisions of their employment contracts unperformable, the acquiree is required to reorganize, adjust and hold consultations with the employees on amending their employment contracts, or terminate the employment contracts with them according to the law.

If the acquirer accepts the relevant employees, they transfer together with the assets to the acquirer and provide labour to the acquirer. In this case, a change in the entities to the employees’ employment contracts occurs, and the employees are required to terminate their contracts with the acquiree and execute new contracts with the acquirer, or, where the provisions of their employment contracts remain unchanged, the employees, acquirer and acquiree reach a consensus through consultations to change the entities to the contracts.