Unraveling the Maze of Mergers and Acquisitions: Privacy, and Employees

Recently we’ve been hearing about some major company changes and takeovers or potential takeovers, like Elon Musk buying many shares of Twitter, Rogers acquiring Shaw, JetBlue Airways purchase of Spirit Airlines and more, but what does that mean for its employees? These are major companies so they use large amounts of people right? Imagine being an employee, and hearing the announcement, are you concerned about who your new boss might be or if you will be let go? We will talk about considerations for the purchaser and seller, what happens during a merger and acquisition of a company to its employees and the confidential information collected.

Mergers and acquisitions (M&A) are significant in the business world. They provide companies with the opportunity to expand, diversify, and gain a competitive advantage. Whether it involves buying shares or assets, these transactions require meticulous planning and consideration of legal, financial, and operational aspects. Let’s delve into the details!

1. Introduction to Mergers and Acquisitions

Mergers and acquisitions involve the consolidation of companies, either through two or more entities or the acquisition of one company by another. These transactions are driven by various strategic objectives, including expanding market share, entering new markets, diversifying product offerings, and gaining access to valuable intellectual property.

Definition and Importance of M&A

Mergers and acquisitions refer to combining companies or acquiring one company from another. In a M&A transaction, the acquiring company aims to enhance its competitive position, achieve economies of scale, and drive growth opportunities. M&A activities are a vital part of corporate strategy, enabling companies to adapt to changing market dynamics, capitalize on synergies, and create value for shareholders.

Types of M&A Transactions

There are several types of M&A transactions, each with its own characteristics and implications:

• Horizontal Mergers: This merger involves the combination of two companies operating in the same industry and at the same stage of the value chain. Horizontal mergers aim to achieve market dominance, increase market share, and reduce competition.
• Vertical Mergers: Vertical mergers occur when two companies operating at different stages of the value chain merge. This merger lets companies streamline operations, improve efficiency, and gain control over the supply chain.
• Conglomerate Mergers: Conglomerate mergers involve the combination of companies operating in unrelated industries. These mergers are driven by the desire to diversify risk, expand into new markets, and leverage synergies across different business lines.
• Acquisitions: Acquisitions refer to the purchase of one company by another. Acquisitions can be friendly or hostile, depending on the willingness of the target company to be acquired. Friendly acquisitions involve negotiations and agreements between the two companies, while hostile acquisitions occur when the acquiring company bypasses the target company’s management and directly approaches its shareholders.

2. Determining the Ideal Acquisition Strategy

Before embarking on an M&A transaction, it is essential to define clear strategic objectives and evaluate the feasibility of the acquisition. This involves conducting thorough market research, assessing financial viability, and aligning the acquisition strategy with the company’s overall growth plans.

Identifying Strategic Objectives

The first step in determining the ideal acquisition strategy is to identify the strategic objectives behind the transaction. These goals can vary widely depending on the company’s industry, market position, and growth aspirations. Common strategic objectives include:

• Market Expansion: Acquiring companies in new geographic regions or untapped markets to expand the customer base and increase market share.
• Product Diversification: Acquiring companies with complementary products or services to diversify the company’s offerings and reduce dependence on a single product line.
• Vertical Integration: Acquiring companies in the supply chain to gain control over critical inputs, reduce costs, and improve efficiency.
• Synergy Creation: Identifying companies with synergistic capabilities, such as shared distribution channels, research and development expertise, or operational efficiencies, to create value through collaboration.

Conducting Market Research

Thorough market research is crucial to evaluate the potential of an acquisition and understand the competitive landscape. Key factors to consider during market research include:

• Market Size and Growth: Assessing the size of the target market and its growth potential to determine the long-term viability of the acquisition.
• Competitor Analysis: Evaluating the competitive landscape, identifying key competitors, and understanding their strengths and weaknesses.
• Customer Analysis: Analyzing customer segments, preferences, and buying behaviors to identify potential synergies and growth opportunities.

Assessing Financial Feasibility

Financial feasibility is a critical part of any acquisition strategy. It involves evaluating the financial health of the target company, estimating the potential return on investment, and assessing the impact of the acquisition on the acquirer’s financial statements. Key financial considerations include:

• Historical Financial Performance: Reviewing the target company’s financial statements, including revenue, profitability, and cash flow, to assess its financial stability and growth trajectory.
• Projections and Forecasts: Analyzing the target company’s financial projections to evaluate its future performance and growth potential.
• Valuation: Determining the fair value of the target company through various valuation methods, such as comparable company analysis, discounted cash flow analysis, and asset-based valuation.
• Financing Options: Assessing the availability of financing options, such as debt financing or equity financing, to fund the acquisition and ensure sufficient capital for post-acquisition operations.

3. Due Diligence: A Critical Step in the Acquisition Process

By conducting comprehensive market research and financial analysis, companies can determine the viability of an acquisition and align their strategies with their long-term growth goals.

Due diligence is a crucial step in the M&A process, letting the acquiring company assess the target company’s financial, legal, operational, and strategic aspects. Through a thorough due diligence process, potential risks and opportunities can be identified, enabling the acquirer to make informed decisions and negotiate favorable terms.

Financial Due Diligence

Financial due diligence involves a comprehensive review of the target company’s financial statements, accounting practices, and internal controls. Key areas to focus on during financial due diligence include:

• Historical Financial Performance: Analyzing the target company’s revenue, profitability, and cash flow trends over the past several years to identify any significant fluctuations or anomalies.
• Working Capital and Liquidity: Assessing the target company’s working capital position, including its accounts receivable, accounts payable, and inventory management practices.
• Debt and Financing: Reviewing the target company’s debt structure, including outstanding loans, lines of credit, and any contingent liabilities or off-balance-sheet obligations.
• Tax Compliance: Evaluating the target company’s tax returns, tax positions, and any ongoing tax audits or disputes to identify potential tax liabilities or opportunities.

Legal and Regulatory Due Diligence

Legal and regulatory due diligence involves a thorough examination of the target company’s legal structure, contracts, intellectual property rights, compliance with laws and regulations, and any ongoing litigation or disputes. Key areas to consider during legal due diligence include:

• Corporate Structure and Governance: Reviewing the target company’s articles of incorporation, bylaws, shareholder agreements, and minutes of board meetings to ensure compliance with corporate governance requirements.
• Contracts and Agreements: Examining the target company’s contracts, including customer contracts, supplier agreements, leases, and employment contracts, to assess their validity, enforceability, and any potential risks or liabilities.
• Intellectual Property Rights: Assessing the target company’s intellectual property portfolio, including patents, trademarks, copyrights, and trade secrets, to ensure proper protection and ownership.
• Compliance with Laws and Regulations: Evaluating the target company’s compliance with applicable laws and regulations, such as data privacy, labor, environmental, and industry-specific regulations.

Intellectual Property Due Diligence

Intellectual property due diligence focuses specifically on the target company’s intellectual property assets, including patents, trademarks, copyrights, and trade secrets. Key aspects to consider during intellectual property due diligence include:

• Ownership and Validity: Verifying the target company’s ownership rights and registrations for its intellectual property assets.
• Infringement Risk: Assessing the risk of intellectual property infringement claims against the target company or potential infringement by the target company on third-party intellectual property rights.
• License Agreements: Reviewing any license agreements related to the target company’s intellectual property assets, including restrictions, royalties, and termination provisions.

Employee Due Diligence

Employee due diligence involves evaluating the target company’s human resources policies, employment contracts, compensation and benefits programs, and any potential labor disputes or liabilities. Key areas to focus on during employee due diligence include:

• Employee Contracts and Obligations: Reviewing the target company’s employment contracts, non-compete agreements, and confidentiality agreements to understand the rights and obligations of employees.
• Benefit Plans and Obligations: Assessing the target company’s employee benefit plans, including pension plans, healthcare coverage, and other employee perks, to ensure compliance with legal requirements and assess potential liabilities.
• Labor Relations and Disputes: Investigate any ongoing labor disputes, union agreements, or collective bargaining agreements that may impact the target company’s workforce and future operations.

By conducting comprehensive due diligence, the acquiring company can gain a thorough understanding of the target company’s financial, legal, operational, and human resources aspects, enabling them to make informed decisions and mitigate potential risks.

4. Structuring the Purchase: Share Acquisition vs. Asset Acquisition

One of the key decisions in an M&A transaction is determining whether to structure the purchase as a share acquisition or an asset acquisition. If a company purchases the assets of the company, it gets to choose what it wants, but if a company purchases another company from shares, then the company takes the other company with its identity. You’re buying the company with pieces and assuming their company identity. Each approach has its own advantages, disadvantages, and legal considerations that impact the transfer of ownership, contractual obligations, and employee rights.

Share Acquisition

In a share acquisition, the acquiring company purchases the shares of the target company, effectively taking over the entire company with its assets, liabilities, contracts, and employees. Share acquisitions offer several advantages, including:

• Continuity of Contracts and Relationships: Share acquisitions let the acquiring company assume the contracts, relationships, and obligations of the target company, maintaining continuity for customers, suppliers, and employees.
• Simplified Transfer of Ownership: Share acquisitions involve a straightforward transfer of ownership, as the acquiring company becomes the sole shareholder of the target company.
• Tax Benefits: In certain jurisdictions, share acquisitions may offer tax advantages, such as the ability to use tax losses or carry forward tax attributes of the target company.

However, share acquisitions also come with potential disadvantages and legal considerations, including:

• Assumed Liabilities: The acquiring company assumes all the liabilities and obligations of the target company, including any ongoing litigation, contractual disputes, or regulatory non-compliance.
• Employee Contracts and Obligations: Share acquisitions generally result in the automatic transfer of existing employment contracts and employee rights to the acquiring company, requiring careful consideration of employee obligations, benefits, and potential redundancies.
• Approval and Regulatory Requirements: Share acquisitions may require regulatory approvals, such as antitrust clearance or industry-specific permits, depending on the jurisdiction and industry.

Asset Acquisition

In an asset acquisition, the acquiring company purchases selected assets and rights of the target company, rather than acquiring the entire company. Asset acquisitions offer several advantages, including:

• Selective Acquisition: Asset acquisitions let the acquiring company choose specific assets, contracts, and liabilities that align with their strategic objectives, while leaving behind unwanted assets or liabilities.
• Flexibility in Negotiations: Asset acquisitions provide more flexibility in negotiations, as the acquiring company can tailor the terms and conditions of the transaction to their specific needs.
• Potential Cost Savings: Asset acquisitions may provide cost savings in terms of avoiding assumed liabilities, renegotiating contracts, or restructuring certain parts of the business.

However, asset acquisitions also come with potential disadvantages and legal considerations, including:

• Complexity of Transfer: Asset acquisitions involve the transfer of individual assets, contracts, and rights, requiring careful coordination and documentation to ensure a seamless transition.
• Third-Party Consents: Asset acquisitions may require obtaining consents or approvals from third parties, such as customers, suppliers, or lenders, to transfer contracts or rights to the acquiring company.
• Employee Contracts and Obligations: In an asset acquisition, the acquiring company generally needs to negotiate new employment contracts with the target company’s employees, as their existing contracts do not automatically transfer.

The decision to structure a purchase as a share acquisition or an asset acquisition depends on various factors, including the desired level of control, the transferability of contracts and liabilities, tax considerations, and regulatory requirements.

So what happens to all the employee contracts?

If you have been employed with a major company like Shaw and have had a contract with them for years, and Rogers now takes over, does that mean you must sign a new agreement with Rogers? This depends on whether Rogers decides they will take assets or acquire the company through purchase of Shaw’s shares. If Rogers purchases all the shares of Shaw, then Rogers owns the Shaw company and takes the Shaw company identity. With this purchase, Rogers acquires the employment contracts including non-union employees that Shaw has and would assume all of its employees with whom it is contracted to. You would not have to sign another contract with Rogers and can continue under the same contract you signed with Shaw if you were a Shaw employee. Rogers would have to assume your contract in a share purchase of the company. However, if Rogers purchases all of Shaw’s assets, for example, purchased the Shaw towers, its customer base maybe, etc. instead of Shaw’s shares then the company does not automatically acquire all the employees of the company and would then have to negotiate or contract with any employees it wishes to have continued to work for them. In an asset purchase of a company, Rogers would have to create new contracts with Shaw’s employees, i.e. rehire Shaw’s employees as Rogers employees, because Rogers did not assume Shaw’s identity. The employees, particularly non-union employees would have to have new employment contracts contracting them to Rogers then after an asset purchase of the company. Asset purchasers, however, may become liable for obligations to union employees.

5. Regulatory and Compliance Considerations

M&A transactions are subject to various regulatory and compliance considerations, including antitrust and competition laws, securities regulations, and privacy laws. Understanding and addressing these considerations is crucial to ensure the smooth execution of the transaction and compliance with applicable laws.

Antitrust and Competition Laws

Antitrust and competition laws aim to prevent anti-competitive practices, protect consumers, and maintain fair market competition. Key considerations in relation to antitrust and competition laws include:

• Merger Control: Assessing whether the transaction triggers mandatory merger control filings with competition authorities, based on thresholds such as turnover or market share.
• Market Dominance: Evaluating the potential impact of the transaction on market concentration and market power, considering potential anticompetitive effects.
• Remedies and Conditions: Anticipating potential concerns raised by competition authorities and considering the need for remedies or conditions to address these concerns, such as divestitures or behavioral commitments.

Securities Regulations

Securities regulations govern the issuance, offering, and trading of securities, including shares and other financial instruments. Key considerations in relation to securities regulations include:

• Disclosure Obligations: Complying with disclosure obligations regarding the acquisition, including the requirement to file a prospectus or other offering documents and disclosure of material information to shareholders and the public.
• Insider Trading: Ensuring compliance with insider trading regulations, which prohibit the use of non-public information to gain an unfair advantage in trading securities.
• Shareholder Approval: Complying with shareholder approval requirements, such as obtaining the consents or approvals for the acquisition.

Privacy Laws and Data Protection

Privacy laws and data protection regulations govern the collection, use, and transfer of personal information. Key considerations in relation to privacy laws include:

• Consent and Notice: Ensuring compliance with requirements for obtaining consent and providing notice to individuals regarding the collection, use, and disclosure of their personal information.
• Data Transfers: Assessing the implications of the acquisition on cross-border data transfers and ensuring compliance with applicable data protection requirements.
• Data Security and Breach Notification: Implementing safeguards to protect personal information and establishing procedures for responding to data breaches and telling affected individuals and authorities, if required.

By proactively addressing regulatory and compliance considerations, acquirers can reduce potential legal and reputational risks associated with the transaction.

So what happens to all the private information from customers and employees?

Major companies often take in a lot of information from both their employees and customers. How is information transferred? Sometimes companies buy other companies for the databases they have even. If you signed up for a Twitter account, and Twitter is taken over, then what happens to all the information you shared with Twitter including your login information? For employees, they may share more information with their employer including their social insurance number, bank deposit information, and more. Personal information collected by federally regulated companies across Canada and provincial companies other than Alberta, British Colombia and Quebec, are governed by PIPEDA. Alberta, BC and Quebec have substantially similar legislation.

To ensure a comprehensive due diligence process, the seller must consider privacy considerations related to the disclosure of personal information. Certain types of personal information, such as employee social insurance numbers or customer credit card information, are sensitive and should not be revealed without consent or a legal basis. The seller should evaluate whether it is necessary to disclose this information for the acquisition transaction and explore options like anonymization, redaction, or providing aggregated information.

Guidelines for Proceeding without Specific Consent

Sometimes, it may be challenging to obtain specific consent for the disclosure of personal information during the due diligence process. However, PIPEDA has provisions that address pre-closing due diligence of business transactions and the notification requirements when a transaction closes. These provisions let organizations go forward with the transaction even without specific consent under certain circumstances.

To move forward without specific consent, the organization must make sure the collection, use, and disclosure of personal information are reasonable for the transaction and that it has made a reasonable effort to obtain consent. The organization must also have a reasonable basis to believe that the information is necessary for the transaction and that obtaining consent would compromise the availability or accuracy of the information.

Reviewing the Target’s Privacy Policies and Procedures

As part of the due diligence process, the purchaser must review the seller or target company’s privacy policies and procedures. This review helps assess the seller or target’s compliance with applicable privacy laws and identifies any potential privacy risks associated with the acquisition.

The review should focus on understanding how personal information is collected, used, revealed, and kept by the seller or target company. It should also examine the seller or target’s safeguards for protecting personal information, including security measures, data breach response plans, and privacy training programs. Additionally, the review should evaluate the seller or target’s procedures for handling access requests, complaints, and privacy breaches.

Drafting and Negotiating Privacy Provisions

To ensure the protection of personal information and compliance with privacy laws, it is crucial to include privacy provisions in the acquisition documents. These provisions outline the rights and responsibilities of the parties regarding handling personal information before, during, and after the transaction.

The privacy provisions should address key aspects such as the use and disclosure of personal information, security measures, data breach notification requirements, and transferring personal information. It is essential to draft these provisions carefully, considering the specific requirements of applicable privacy laws and the unique circumstances of the transaction. Negotiating these provisions is a critical step to make sure both parties are aligned on privacy-related obligations and expectations.

Conclusion

Successfully handling the acquisition process is vital for both the buyer and seller. But it’s not just limited to them; it can also pique the interest of the employees at the acquired company. This exciting endeavor entails various complexities, such as maneuvering through regulatory requirements, aligning the acquisition strategy with the company’s overall growth goals, identifying talented individuals from within and outside the organization, and deciding on the perfect acquisition approach.

Following the successful acquisition, companies face the thrilling challenge of effectively maintaining the newly acquired entity, sustaining its business lines, and managing operational risks and challenges. While mergers and acquisitions may cause the loss of jobs and experience, buyers can offset these losses with exciting growth opportunities and increased value creation. When considering an M&A decision, it is crucial to weigh the potential benefits and risks involved. Additionally, it is important to acknowledge that employees may not seamlessly transition to the new employer and may require an adjustment period as they familiarize themselves with new working conditions and cultures.

Disclaimer Note: The content provided in this article is for informational purposes only and should not be construed as legal advice. Organizations and employees of affected organizations should consult with legal professionals for specific guidance on employee and privacy law considerations in their M&A transactions.

References:

“Trade Secret Diligence in Mergers and Acquisitions.” American Bar Association, vol. 4, no. 38, 2021, https://www.americanbar.org/groups/gpsolo/publications/gp_solo/2021/july-august/trade-secret-diligence-mergers-and-acquisitions/.

Miller Titerle + Company LLP. “Mergers and Acquisitions: Public and Private Transactions.” LexisNexis Practical Guidance, 2017.

Practical Guidance Team. Privacy Law Considerations: Acquisitions. LexisNexis Practical Guidance, 2023.