M&A: Who take responsibility to develop labor utilization plan?

HM&P 's Managing Partner Van Phuc Nguyen and Associate Nhat Duong Nguyen share their thoughts on which enterprise needs to develop labor utilization plans in the process of M&A in The Saigon Times (No. 23-2023) on June 8th, 2023. Below is the English version translated by HM&P of this article:

M&A (“Mergers & Acquisitions”, the common Vietnamese term is “Mua bán và Sáp nhập”) is an increasingly popular economic centralization operation in Viet Nam. The defining feature after the transfers are the changes of rights and obligations of enterprises in the case of mergers or changes of the structure of ownership/control of the target enterprises in the case of acquisitions. M&A in essence commences/alters/terminates rights and obligations of enterprises in legal relations of which enterprises are a party, including labor relations. However, each enterprise may have different labor utilization plans, regimes, and policies for their employees. Thus, when there are changes of subjects receiving rights, obligations from enterprises or of structure of ownership/control of the target enterprises, it is inevitable that changes of labor utilization plans, regimes, and policies for their employees ensue, either for the benefits or the drawbacks. To best protect the interest of the employees, the lesser party in labor relation, Labor Code 2019 requires enterprises to develop labor utilization plans in some certain M&A operations, affecting many employees’ employment[1]. In reality, many enterprises have not paid full attention to this regulation and that has led to certain risks and problems for themselves in M&A operations.

Not all M&A operations require the development of labor utilization plans

The Law on Competition 2018 stipulates that the merger of enterprises is an act whereby one or several enterprises transfer all of its/their property, rights, obligations and legitimate interests to another enterprise, and at the same time terminates the existence of the merged enterprises[2]. Acquisition of enterprises means an act whereby an enterprise acquires the whole or part of property or shares of another enterprise sufficient to control or dominate all or one of the trades of the acquired enterprise[3].

Whereas, in the aspect of labor, Labor Code 2019 stipulates in case the full division, partial division, consolidation, merger of the enterprise; sale, lease, conversion of the enterprise; transfer of the right to ownership or right to enjoyment of assets of the enterprise or cooperative affects the employment of many employees, then the employer shall develop a labor utilization plan[4].

Comparing the regulations mentioned above, regarding M&A, it can be seen that enterprises shall develop labor utilization plans if:

1. Merger of enterprises affects the employment of large numbers of employees and;

2. An enterprise acquires the whole or part of a property of another enterprise sufficient to control or dominate all or one of the trades of the acquired enterprise.

Clause 1 Article 43 Labor Code 2019 does not require enterprises to develop labor utilization plans in case of acquiring the whole or part of shares of another enterprise sufficient to control or dominate all or one of the trades of the acquired enterprise. This regulation may stem from the fact that the target enterprise still hold the same legal status, only change in structure of ownership/control. Thus, labor relation between the target enterprise and employees remains unchanged. If after the M&A transaction is completed, there are changes in the employment of a large number of employees, for example, the acquiring enterprise (hereinafter referred to as the “Buyer”) with its power of control, makes changes in the business plan of the target enterprise by cutting unsuitable business areas, in effect, laying off a large number of the employees; or because the buyer wishes to use its own employees who work in both the acquiring enterprise and the target enterprise at the same time, i.e., they do not demand for the employment of the existing workforce in the target enterprise, then the target enterprise must comply with other regulations of the Labor Code 2019 to terminate the employment contracts of its employees.

Who take responsibility to develop labor utilization plan

Clause 1 Article 43 Labor Code 2019 does not specify which enterprise needs to develop labor utilization plans. This regulation may stem from the difference of the subject to develop labor utilization plan in different situations.

1. Mergers

In mergers, rights and obligations of the merging enterprises shall be transfered to the merged enterprise. Therefore, in theory, the merged enterprise shall carry on executing Employment Contracts the merging enterprises concluded with the employees. While, according to Point a Clause 2 Article 201 Law on Enterprises 2020, one of the main contents of merger contracts is the labor utilization plan. Thus, as seen, in all mergers, enterprises shall prepare labor utilization plans notwithstanding Clause 1 Article 43 Labor Code 2019. Additionally, since the labor utilization plan is one of the main contents of merger contracts, this can be seen as one of the contents that both parties shall agree upon. In essence, labor utilization plans in this situation ensure employment of the employees but also must be suitable for the demand of labor from the merged enterprise. Therefore, labor utilization plans must first be based on labor utilization scheme of the merged enterprise. Also, comparing with Labor Code 2012[5], Labor Code 2019 does not require merged enterprises to utilize the existing workforce of the merging enterprises, thus, the continuation of employment of those employees wholly depends on the merged enterprises. Since the merged enterprises are  subjects to receive all rights and obligations of the merging enterprises, including rights and obligations per Employment Contracts concluded between merging enterprises and employees. In a reasonable manner, merged enterprises shall develop labor utilization plans.

2. Acquisitions of property

Regarding acquisitions of property of enterprises, for example when United Overseas Bank  (“UOB”) acquired the trade of resale from Citigroup in Viet Nam (“Citi”). As followed, 575 employees working for Citi were to be transferred to UOB^[6]. In this case, Citi selling its whole trade of resale to UOB directly affected the employment of employees working in Citi’s trade of resale, resulting in the prospect of unemployment among the employees. Different from mergers, in this case, UOB did not hold obligations to receive any rights and obligations from Citi, including rights and obligations to the employees.

Particularly, after the transfer was completed, the target enterprises do not terminate their operations, rights and obligations to the employees remaining with the target enterprises. It might be, the difference is that the employees’ work per Employment Contracts are no more and the target enterprises shall develop plan to utilize these employees. Then, the target enterprises shall negotiate with the buyer so that the buyer may continue to utilize the employees affected by M&A. The choice to continue utilizing target enterprises’ employees is wholly dependent on the buyer. If the buyer decides not to, the target enterprises shall find alternative plans such as employees retraining to continue employing, employees transfer to part time employment of termination of Employment Contracts. This is the content of the labor utilization plans of which target employees shall develop. In the deal above, the plan chosen by Citi was to transfer the workforce of 575 strong working for Citi to UOB, of course, in accordance with the agreement of the parties.

Exception of acquisitions of shares

As stated above, regarding acquisitions of shares, the target enterprises are not required to develop labor utilization. However, on the other hand, the buyer should note, the target enterprises after completion of M&A shall not dismiss their employees per Article 43 Labor Code 2019. Thus, usually, the legal inspection of target enterprises shall include labor inspection, one of the main aspects of enterprises. Labor inspection plays a vital role, since the buyer  will have the most details  into the existing workforce of the target enterprises, policies, labor regulations applied by the target enterprises. From then, the buyer may negotiate with the seller/target enterprise regarding labor terms, e.g.: demand the seller/target enterprises to agree to terminate Employment Contracts of employees not in the utilization plan after M&A completion, demand the seller to jointly be liable for paying employees the difference in welfare after M&A completion (may be executed by modification of acquisition price),

In all, when executing M&A, enterprises must note the type of M&A planning to be executed, In the case of being required to develop labor utilization plans, enterprises need to comply with regulations regarding the development and execution of labor utilization plans, particularly in Article 43, Article 44 Labor Code 2019. In the process of development of labor utilization plans, enterprises need to exchange and cooperate with merging enterprises (in mergers) or acquired enterprises (acquisitions of property), because after ratification of labor utilization plans, both the “existing employers” and “next employers” shall be responsible for the execution[7]. While, in the case of acquisitions of shares, the buyer needs to labor inspect in a careful manner, then puts forth appropriate demands from the seller/target enterprise regarding human resources issues, core employees to keep ensuring its best interest after completion of M&A.

Read the article in Vietnamese at: https://thesaigontimes.vn/mua-ban-sap-nhap-doanh-nghiep-ai-se-phai-xay-dung-phuong-an-su-dung-lao-dong/