Limitation of labor law regulations in mergers and acquisitions of commercial banks

The article is a collaboration between our Managing Partner Nguyen Van Phuc and Lawyer Lu Hoang Duc (Asia Commercial Bank - ACB), published in the Legal Electronic Magazine on December 12, 2023. Through the article, the authors aim to provide readers with legal risks related to the restructuring of the bank's workforce during the merger process. Below is the English version:

As outlined in the Bank Restructuring Plan to 2030, bank mergers are considered necessary to build a robust banking system in Vietnam, equipped with sufficient capital, human resources, and technology to compete regionally and globally. The current reality demonstrates the urgency of bank mergers, as large commercial banks in Vietnam are actively planning to merge with smaller, weaker banks to strengthen management and capital sources, revitalize the banking system, and expand business scale. However, this merger process poses numerous legal challenges for both the acquiring and acquired banks, particularly with regard to legal risks associated with staff restructuring.

1. Human resource disruptions in commercial bank mergers

Given the unique nature of labor utilization structures in each enterprise, especially in large commercial banks with relatively complete human resource systems, the integration of a significant number of a bank's employees into a well-established structure is bound to cause some disruption. This problem arises for several predictable reasons:

First, with respect to similarities in organizational structure, commercial banks typically have similar departmental structures, such as retail banking, corporate banking, risk management, operations, human resources, legal and compliance, finance, and so on. An acquiring bank often already has a relatively tight organizational structure, especially at the head office level. As a result, merging with a weaker bank may result in redundancies of positions in similar departments.

Second, when acquiring a weaker bank, the acquiring bank usually commits to retaining the staff. However, each bank has its own specificities in terms of human resources strategy, operations and technology application. Inevitably, there will be overlap in specialized skills, and the acquiring bank will face the challenge of how to leverage these skills without creating organizational bloat and incurring excessive training and restructuring costs. For example, in the case of UOB's acquisition of Citibank's entire retail banking operations in Vietnam, the bank said that after the deal was completed, it took a long time to receive Citibank's people, technology and systems, not to mention the integration training of Citibank's employees in UOB's culture, systems and operating methods[1].

Citibank has transferred its retail banking segment in Vietnam to UOB Bank (Source: https://vnreport.vn)

Third, in practice, it is extremely difficult to meet the commitment to retain 100% of the workforce due to various factors affecting management, economic interests, harmony, etc. As a result, acquiring banks may decide to make significant layoffs to achieve economic benefits and reduce costs related to salaries, management, and training.

Finally, the number of employees of a commercial bank is significantly larger than that of an ordinary company, so the scale of conflicts of interest between the acquiring commercial bank and the employees of the merged commercial bank is even larger. Conflicts of interest arise between the acquiring bank, which seeks to maximize workforce reductions for economic gain, and the workforce, which faces the constant threat of job loss due to widespread staff reductions by the acquiring bank.

2. Limitations of Vietnamese labor law regulations in the activities of mergers and acquisitions of commercial banks

According to the provisions of the Labor Code 2019, the resolution of labor structure issues during the merger of organizations is stipulated in Articles 43 and 44 of the Labor Code 2019. However, certain provisions on the mechanism of protection of employees during mergers pose risks for employees. Here are some of the concerns:

First, the labor law does not clearly stipulate the conditions under which the acquiring bank must formulate a labor utilization plan. According to Clause 1 Article 43 of the Labor Code 2019, it is stipulated that "in the case of a merger of enterprises affecting the employment of many employees, the employer shall formulate a labor utilization plan." However, this regulation is completely unclear as to the extent of the impact on the employment of many employees. The term "many employees" is vaguely mentioned and has not been specifically defined in terms of the number of employees considered to be "many". Similarly, the employment impact provision is rather ambiguous as it does not specify how the impact is defined. For example, if an employee is transferred after the merger, is that considered an impact? Or is it only considered an impact if an employee loses his or her job? In cases where the merger involves the elimination of only a few employees out of a total of thousands or tens of thousands, the assessment of impact becomes uncertain. It can be observed that assessing the impact during a merger puts the bank in a difficult position when deciding whether to develop a workforce utilization plan. In addition, when developing the labor utilization plan according to Clause 2 Article 44 of the Labor Code 2019: "When formulating the labor utilization plan, the employer must exchange opinions with the organization representing the employees at the grassroots level for places where there is an organization representing the employees at the grassroots level. The labor utilization plan shall be publicly announced to the employees within 15 days from the date of approval.” This regulation refers to the right of the organization representing the employees to decide on the labor utilization plan together with the bank, but there are still many issues that need clarification. Firstly, there is no provision limiting the period during which the bank is obliged to formulate the manpower utilization plan and the period during which it must be implemented. Consequently, if the bank extends the time for formulating and implementing the labor utilization plan, the rights of the employees will be directly affected. Secondly, the level of participation of the employee representative organization remains unclear. Does the organization representing the employees have the right to participate in providing opinions on the protection of employees before and during the period when the bank is undergoing a merger, or is it granted participation rights only at the stage when all parties have completed the merger procedures?

Second, there is a lack of regulation of the responsibilities of the parties involved in bank mergers[2]. As mentioned in Section 1, commercial bank merger transactions typically include provisions requiring the retention of the merged bank's staff. However, compliance with these commitments is challenging due to various factors, such as redundancy in the staff structure, differences in professional qualifications, and cost-related benefits. As a result, acquiring banks may decide to breach these obligations by terminating the employment of some or a number of the merged bank's employees. In this scenario, the question of who bears responsibility for the employees due to the unilateral termination of employment contracts becomes a matter of consideration. It should be noted that there are no specific rules regarding the automatic transfer of employment relationships based on employment contracts in bank mergers. As a result, employees' rights, such as salary, bonuses, social security and tax obligations, are not clearly defined either by the practices of the implementing bank or during the period when all parties are completing the merger procedures, leaving employees without the assurance of these rights.

Third, there is a lack of regulation regarding the supervisory authority for the utilization of labor plans. As mentioned above in Articles 43 and 44 of the Labor Law 2019, the law only addresses the cooperation between banks and organizations representing employees in formulating labor utilization plans during bank mergers, but there is no mechanism to resolve situations where the parties do not agree on the plan. Even in cases where the parties have formulated workforce plans, but the bank does not implement or adhere to the plan in practice, it is unclear how the situation will be addressed. In addition, in the absence of a higher regulatory authority, disputes among the parties (including employees, employers and organizations representing employees) will force the parties to seek resolution through the courts, making the bank merger transaction more difficult, time-consuming and costly for all parties.

In comparison with the case of termination of employment due to restructuring, technological change or economic reasons under Clause 3 of Article 42 of the 2019 Labor Law, two clear conditions are stipulated. These conditions are to exchange opinions with the organization representing the employees, and to give 30 days' notice to the provincial people's committee and the employees. This provision indicates that there is still a state authority, the Provincial People's Committee, with the right to supervise the company's dismissal of employees due to restructuring, technological changes or economic reasons. In contrast, in the context of bank mergers, the Labor Law only mentions that "employees who are laid off shall be entitled to job loss allowances" under Clause 3 of Article 43. The manner in which the dismissal is carried out depends on the plan of the bank and the organization representing the employees, without the intervention of other authorities. It can be observed that the Labor Law lacks regulations on the supervision mechanism for the formulation and implementation of labor utilization plans to maximize the protection of employees' rights in the case of corporate mergers.

3. Some proposed solutions to address the shortcomings

As mentioned above, the current legal framework clearly reveals certain shortcomings in the labor aspects of commercial bank mergers. To address these legal risks in practice, we suggest the following solutions:

First, with respect to the labor utilization plan, the parties involved in the drafting should comprehensively and meticulously outline the overall merger plan. In doing so, the parties should thoroughly discuss the departmental structure, the number of employees to be retained, the number of employees to be laid off in each department, as well as the retention ratio for each bank, the support for employees, the level of support, and so on.

Second, the labor law should provide detailed regulations and specific guidelines for cases of bank mergers and transfers, given the specificity and significant impact on a large number of employees. There should be specific sanctions when a bank formulates a plan but fails to implement it in reality (monitoring and post-audit processes).

Third, the direct involvement and oversight of higher-level trade unions and labor management authorities is necessary from the moment the plan is formulated, agreement is reached with employees and the local trade union, to the actual implementation of the plan.

Mergers of commercial banks affect a large number of employees and have a significant impact on the labor market and the economy as a whole. Therefore, in order to minimize risks to banks and maintain social order, cooperation between banks, labor unions at all levels, and labor management authorities during the merger process will reduce potential risks. In addition, effective coordination and enforcement of regulations in practice will help all parties involved in this merger process, such as the merging party, the party to be merged and the bank, to achieve a harmonious balance of interests in labor relations in this case.