Beyond Borders: Labor Law Strategies for Cross-Border Deals

Pauline Stadler  

Welcome to our series Employment and Benefits Unpacked, where we dive into many interesting employment and benefits issues that companies are facing across jurisdictions. Each episode is hosted by the Mayer Brown attorney from our Global Employment and Benefits Group. We'll be offering perspectives and insights for HR professionals, employers and in-house counsel. My name is Pauline Stadler . I am an employment lawyer in Frankfurt, Germany. I will be one of the two hosts today. I'm delighted to be joined by my colleague, Marine Hamon, co-host for today. She's an employment lawyer in Paris, France.

Today, we're going to be unpacking the interesting topic of cross-border transactions from a labor law perspective with obviously the example of Germany and France. So, Marine, what's the purpose of today's episode?

Marine Hamon

Hi Pauline, thanks a lot for the introduction. So yeah, we've been working over years on a number of cross-border cases and a few months ago actually we were reached out by mutual clients of ours based in both Frankfurt and Paris, and we're asked to provide pragmatic advice on how to handle the selling of one of their line of businesses and part of our job at the time was basically to review all options on how to organize that contemplated carve-out so because the file raised so many interesting cross-border issues from an employment perspective, we just thought that it would give us some very good materials for today's podcast. So today will basically impact how German and French labor rules play out in cross-border deals and how to be fully prepared to bring your project to an end within your set closing dates.

Pauline Stadler  

Right. Also, I mean, whether you're on labor, labor law side or the corporate law side of a transaction, your goal is mutual, getting the deal done smoothly and with not so much surprises along the way to closing. So let's talk about why labor can make or break a deal. I mean, labor topics directly influence timing, valuation and overall certainty.

I mean, in Germany, even small consultation missteps can delay operational steps or even derail a mass redundancy process. And even in a cross-border deal, that applies all the more so because misalignment becomes visible instantly, right? German and French or whatever country we're talking about, employee representatives, they need to compare their notes.

Often within hours they talk and if the story that your company is telling the representatives doesn't match, they will push back. So the solution that we advise is not improvisation; rather, it's the design of the entire situation. So you need an early plan, you need to sequence your steps, the documents and all the stakeholders.

So if you discipline yourself with that, it will prevent any surprises along the way. So if you set expectations early about what is final and what is only preliminary and what will be updated along the way, that will help to prepare the deal.

Marine Hamon

Absolutely. And on the French side too, it's very key to provide adequate planning to your client from the beginning. And in fact, there are a few events that you can plan and foresee. For instance, the information consultation of your works council basically sets the tone and if the information you provide to the works council at the beginning is incomplete, then your clerk doesn't really start. Your works council can also appoint an expert, which adds another one month or maybe two months to your global consultation timeline. There is also the Hamon law, which was not named after me, but which also provides its sets of nightmares to corporate lawyers because basically it gives the opportunity to employees to basically present a bidding offer in such a deal.

Pauline Stadler  

Sorry, that's interesting. It’s like the employees can buy their own company? Is that how I have to think about it?

Marine Hamon

That's very theoretical because it does apply for the selling of shares or the selling of a company. That only applies to very specific types of companies, would say, know, small to medium. And yeah, you need to inform the employees of the possibility that they have to bid.

Pauline Stadler  

Okay.

Marine Hamon

In practice, almost no employee ever presented a bidding offer because prices are just so high, but the information obligation is still there and you need to observe that obligation. So that definitely adds up to your global consultation timeline because that should occur two months before the contemplated sale.

You can reduce that time frame if you get the corresponding letters from your employees saying that they're not really interested in providing an offer. Last but not least in my view, and this is oftentimes something that clients do not have in mind when you work in a partial transfer, which is basically the type of transfer we were involved with. Partial transfer means that you're not selling the entire company, only a part of it. So only a very dedicated staff will transfer. And if amongst the staff you have employees that are protected, meaning that they have a corporate office, are members of the works council or they are union members, for instance. So that's the case you need to apply for the prior authorization from the labor authorities, and the labor authorities have up to two months to work with the authorization. So these are many events that you need to have in mind when you start the whole process and basically, yeah, clients need to be aware that this will have to be complied with.

Pauline Stadler  

Yeah, that's right. I mean, in Germany as well, the basic principle is similar. If business units transfer, the employees assigned to that unit will transfer with it, including all of their terms and conditions. So if you're talking about carve outs or splitting teams, that will make it more complex. So if that's part of your transaction, you have to keep in mind that there's a lot more work to do from the labor side on probably a clear allocation path, which employee is allocated where and what happens to the remaining tasks and all that adds up to your storyline. It has to be coherent for both countries really. Also don't forget about the European Works Council. If there's a cross-border impact, you may need to run a consultation at the European top level.

And all of that needs to be considered when we are talking about deal architecture. And I think we've already touched on that. So let's talk about consultation rights when we're having a cross-border transaction. I mean, in Germany, it's obvious the works council, if you have a works council, is your key counterpart. It has very strong co-determination rights, especially on social matters, and it must be informed and consulted with. And you may even deal with several layers of works councils. We have the establishment works council, which is the local works council. We may have a works council on a company level or on a group level. And then also the European level. So that's a lot to consider. And one issue that's always very important is confidentiality, right? So we have confidentiality rules. I think it's the same in France.

But the works council will test the boundaries of such laws if they feel excluded or misinformed. So my recommendation for consultation with regard to Germany is simple. Prepare a complete and consistent information package and agree with the works council on a realistic timeline.

So that will make the process far more manageable. How's it in France?

Marine Hamon

Yeah, that's interesting. Well, in France, we don't really have to agree on the timeline because this is prescribed by law. As I said earlier, we have the works council in France, the Comité Social et Economique. We call it the CSE. And as in Germany, you can have establishment CSEs. And on major transactions akin to Germany, the CSE has a right to be informed and consulted. But a major difference with the German Works Council is that the opinion is not binding. So obviously, it's always better to have a positive opinion and we all dream to have only positive opinions for, you know, a peaceful social climate, but this doesn't really happen in practice. So as long as you have an opinion, whether it is negative, neutral or positive, you can move on with your project and proceed to the next step. Again, as mentioned earlier, the CSE can appoint an expert that has very extended rights in terms of the type of documents they can consult and the type of information they can have access to. And last but not least, as you mentioned, confidentiality. It does apply but it does not apply on all the documentation. So when you draft the information at the beginning of the consultation process, it's important to flag with the client what information is really key to the deal and what really needs to be confidential. And so it will be flagged accordingly because the entire document cannot be flagged and marked confidential.

Pauline Stadler  

Okay.

Marine Hamon

So that's something important to have in mind as well when preparing the documentation.

Pauline Stadler  

That's interesting. I think in my experience in Germany, the key element is timing of consultation. I've now learned that in France there are statutory deadlines. In Germany, there are not. The standard is simply in good time, which can mean everything and nothing, and leaves a lot of room for interpretation.

What usually happens is that works councils tend to slow things down. They don't want the changes. Typically, but not always, good things are connected with changes, so they slow things down. And then your whole timeline of the entire transaction may be in danger to slip. And in some cases, if it really escalates, you may even need to involve labor courts to just keep the process moving.

So that's why timing is very key in Germany. And as long as you provide a detailed and complete information package and propose a consultation schedule to the Works Council, that will save you time.

Marine Hamon

Yeah, in France, even though timelines are predictable, it is true that if you give an information node that is very succinct and does not exactly depict what you intend to do and provide enough information, the works council can basically say that, you know, the clock hasn't started because they do not have the information to start the consultation and provide an opinion. So in a way, I think it's more or less the same thing. Again, you know, and this is something we've been discussing a lot in our past deals. When a company has subsidiaries in France, in Germany, or in another country and the consultation process is happening at the same time, it is paramount to have a narrative that is very consistent. Of course, there can be differences because the way businesses are operated from one country to another is different, but overall, it's important to have the same tone and to provide the same level of information to avoid being challenged on those technicalities.

Pauline Stadler  

I mean, yeah, let's address the obvious there, right? French Works Council and German Works Council, they do talk to each other. They pick up the phone and, you know, have you heard of this and that? And that's never a risk that you are able to eliminate. It's really a reality you have to consider and manage. So, yeah, I agree with you. Align your messages, your numbers and timelines across all involved jurisdictions, right? So, I remember having a lot of phone calls with you in one of our recent transactions and I said, “Hi, Marine, can I do this or that in order to not jeopardize your French schedule and your French timeline?” Yeah, communication among the employers in both countries is key too.

Marine Hamon

It is. It's also important to have the communication that is consistent within the group. That applies to cross-border corporate deals, but that also applies to global redundancies. And oftentimes when you have a worldwide organization, something is announced in the US where everything can happen very quickly. You have the announcement on Monday and on Friday, people are just leaving the company. As you know, this is not true for Europe. It's not true for Germany and definitely not for France. But when you have global communications and when a CEO is announcing, you know, global redundancies that can jeopardize your internal communication and your internal procedure with your local works council as well. Yeah, consistency amongst in-house lawyers, outside counselors, and within the group for those who know global reorganization is really important.

Pauline Stadler  

Yeah, absolutely. Let's assume we've done all that. We've done a very coherent communication. Everything has been informed. We are now coming to a transfer of employment that is associated with our transaction here. I know a lot of this is European law, but every country has their own specifics. So in Germany, when the transfer happens, employees move along with their terms and conditions and all of the collective agreements as well. But I also know there's one difference. I know that from our mutual work on several transactions in Germany, employees can object to that transfer, which will have to be taken into account. So there's no guarantee that all of your German employees will follow along with the transaction and that even maybe have to be considered in the APA or SPA, right? You know, what happens if a lot of or even all of the German employees object to their transfer? So there are obviously big risks involved in practice. And I remember in our recent project, we hosted a Q&A session with the employees, specifically informing them about their transfer rights.

And that calms their nerves quite fast, which I think. And also it's worth explaining what won't change, because that's the vast majority of terms. That's just important to communicate as to inform about what will change.

Marine Hamon

Yeah, in France, employees can object to the transfer assuming the TUPE provision, the legal provision, organizing automatic transfer of employment contracts do not apply. So if those provisions apply, that means if we have an economic entity that transfers with all its assets and material and immaterial means and the activity is then pursued post-transfer, then the transfer is automatic and the employee just cannot object to their transfer and the contracts are supposed to continue to apply with their initial terms, nothing really changed. On the contrary, if TUPE provisions do not apply, then you have to enter into tripartite agreements with the employees, the new entity and the initial employer, and employees can object to the transfer in those circumstances. And this is when we sometimes have negotiations of new terms because the new employer will wonder if the employee may be subject to their contractual terms and conditions. So that's basically the analysis that needs to be conducted very early on because that will from this analysis will depend a lot of different consequences.

Pauline Stadler  

Right.

Then, I mean, considering all of that, our corporate colleagues have to consider these labor realities into their SPA and APA design, right? So any completion of the works council consultation should be a condition precedent in that transaction agreement. And the long stop dates, the duration of the transaction, the closing date has to consider consultation timing requirements, especially on the German side. So simply assuming that the Works Council will agree to all of this, that's not a strategy that we would recommend, of course.

Marine Hamon

Yeah, same here. It's the same in France.

Pauline Stadler  

Okay, shall we end this episode with some key takeaways and pitfalls? I thought about three takeaways because from the German side it is so important. My first key takeaway will be timing discipline, right? Establish your critical labor steps on day one. What are your steps and when do you want to conclude them? And then second is the message alignment, right? One storyline for all countries, fully consistent. And then the third may be documentation quality. Also, information must be complete and aligned across all jurisdictions involved. So I guess if you manage these three elements or keep those in mind when you're preparing such a transaction project, you will significantly reduce any surprises and protect your closing date.

Marine Hamon

I fully agree. Yeah, again, bear in mind that they communicate between works council, so you shouldn't be ignoring this. Also, do not consider that you have open-ended timelines in Germany. Plan adequately and in line with your foreign counterparts. So yeah, again, if you manage those, your deal is far more likely to close on time and integrate smoothly.

Pauline Stadler  

That is our mutual goal here. Well, thanks for listening everyone. If you're planning a cross-border deal, set up your labor workstream early and that's basically the best insurance you can have.

Marine Hamon

So that brings us to the end of this episode. Pauline, thank you so much for joining me today to shed some light on the challenges arising from cross-border transactions. For our viewers and listeners, there are more episodes to come. Please check out our Employment and Benefits Unpacked page on the Mayer Brown website or your preferred streaming platform. And if you'd like to discuss any of the issues we've covered today, please get in touch. And if you have any suggested topics for future episodes, as mentioned, please send them to unpacked@mayerbrown.com.

Until next time, thank you for joining us.