Wednesday, October 9, 2013

Significant changes to case law and legislation in France, Germany and the UK impact European cross-border asset deals


As employment lawyers, we know that a European cross-border deal involves a delicate balance between meeting the commercial drivers and time-scales for the deal and complying with local laws. Typically, we advise on whether and how to comply with duties to inform and consult the European works council, local works councils, recognised trade unions or other employee representative bodies, whether the identified employees will transfer by operation of law pursuant to the Acquired Rights Directive (EC 2001/23/EC) (“Directive”) as implemented in each local jurisdiction as well as how to deal with those employees who are not wholly assigned or do not automatically transfer. When advising, we need to be alive to the latest changes in local laws and how they impact the deal timetable, structure, documentation, signing, completion and any post-deal integration activities. In this article we draw together some of the more significant recent legislative changes and current trends in case law in France, Germany and the UK including the recent Law on Employment Security (n°2013-504 of June 14, 2013) (the “Law on Employment Security”) in France and the proposed changes to the UK’s Transfer of Undertaking (Protection of Employment) Regulations 2006 (“TUPE”) announced last month.


Structuring asset deals involving France

In France, the signing of an asset deal requires prior information and consultation with any relevant works council. In order for information and consultation with the works council to be valid, the employer is supposed to still have the ability to modify the terms of the deal in light of comments raised during the consultation process even if such modification rarely happens in practice. This is the reason why the consultation is supposed to be conducted in advance of the signing of any agreement to buy the assets. A failure to comply with this obligation of prior consultation is a criminal offence under Articles L. 2328-1 and L. 2346-1 of the French Labour Code. Whilst it is possible in theory for officers of the company to be imprisoned for up to one year, the more likely sanction for breach is a fine of up to €3,750 for an individual officer of the company, €18,750 if the company itself is convicted and/or an injunction preventing the transaction completing until the employee representatives have been duly consulted. Buyers and sellers have often wrestled with the significant impact of this requirement on deal structure and timing. Historically, buyers and sellers have taken a commercial view and used the “conditional precedent” deal structure whereby the parties sign an asset purchase agreement with completion delayed pending satisfaction of a condition to inform and consult with the works council(s).

For some time now, parties to French transactions have taken a different approach which is now filtering through to cross-border asset deals involving France. This new approach is known as an irrevocable offer or undertaking and is a form of put option. The irrevocable offer (set out in a form of letter) is negotiated at the same time as the asset purchase agreement. The irrevocable offer is executed by the buyer and the offer is then presented for consultation to the works council. Once consultation is completed, the seller accepts the offer and the parties execute the asset purchase agreement. Reducing the length of French works council consultation Once the parties have structured their deal, they still need to carry out the information and consultation process. Although, ultimately, the opinion of the works council is not binding and cannot prevent the transaction, the consultation process is usually time-consuming. For example, the works council can delay providing its opinion to negotiate concessions from the buyer regarding redundancies or variations to terms and conditions that will apply post transfer. Therefore, it is not unusual for the works council process to delay completion by several months.

However, the new Law on Employment Security is a radical attempt by the French government to limit the length of this consultation. Once a new edict (expected in October) is introduced, the timeframe for consultation is expected to be reduced to as little as 15 days unless otherwise agreed between the employer and the works council. Article L.2323-3, al.3 provides that if the works council has not opined before the end of this timeframe, it will be considered to have been consulted and to have rendered a negative opinion, thus enabling the seller to proceed with the transaction. But, the parties will still need to be mindful of other obligations. For example, Article L.2323-4 provides that the works council can apply to the president of the civil court (Tribunal de Grande Instance) to extend the consultation period and order the provision of further information if it considers that the works council is facing serious difficulties in rendering its opinion due to insufficient information.

Co-employment post-transfer

Another unusual feature of asset transfers in France arises from the divestment of a business where employees are not 100% assigned to working on the business or assets transferring. In France, there is the possibility that individual affected employees may end up after a sale having their full time employment split into two part-time employments with the seller and the buyer. Under this structure an employee partially assigned to the transferred business transfers to the buyer in respect of that part of his employment but remains employed by the seller in respect of the rest. This structure of two concurrent part-time employments contracts clearly causes practical difficulties. A French Civil Supreme Court case from March 2010 (Cass. Soc. March 30, 2010 no 08-42.065, Sté Bécheret v./ Lescail) led many to consider that this practice of co-employment had ended when it held that the employee must totally transfer to the buyer where the bulk of his activity is with the transferred business. However, a more recent decision of the same Civil Supreme Court, (Cass. Soc., September 28, 2011, no 09-70.689 Sté Ciba v./ Bucher) reaffirms that the principle of co-employment remains. Therefore care still needs to be taken to address issues of assignment as part of the information and consultation process and at completion. This therefore remains something that parties to a French asset sale must be alive to.


Definition of an operating unit and allocation of employees

In its decisions of 24 January 2013 (ref. no. 8 AZR 706/11) and 21 February 2013 (ref. no. 8 AZR 877/11), the Federal Employment Court in Germany has handed down guidance to assist when deciding if article 613a of the German Civil Code, the German implementing legislation for the Directive (“article 613a”) applies to the sale of part of a business. It held that a ‘transfer of an economic unit’ for the purpose of article 613a requires an independent, separable organizational unit at the seller pursuing a purpose within the overall purpose of the business and that indicators for a separate operating unit are autonomous management and a self-determined employment of the workforce. In addition, the ECJ’s decision in Klarenberg v Ferrotron Technologies GmbH (ref. no. C-466/07) held that there does not have to be continued organisational independence in the buyer’s structure post-transfer. At the same time, the Federal Employment Court also considered the issue of assignment to an operating unit. Pursuant to the decisions, the employees need to work predominantly for a unit to be allocated to it. Interestingly, if an employee works equally for several units, the employer has the right to decide which unit the employee is allocated to for the purpose of the transfer.

Post-sale transitional services agreements/co-operation contracts

It is not uncommon for the parties to a transaction to agree a transitional services agreement (known in Germany as a co-operation contract), under which, following the sale of assets, the seller continues to work with the transferred assets on behalf of the buyer. Such agreements are often used to accelerate the closing of a deal and to provide a smoother transition from seller to buyer. The Federal Employment Court held in its decision of 27 September 2012 (ref. no. 8 AZR 826/11) that, where a buyer and seller agree a co-operation contract, article 613a will only apply to transfer the employment of affected employees if there is a de facto transfer of the control over the business. Therefore, unless the buyer has operational control under any such co-operation contract there may not be an automatic transfer of employment. In light of the court’s decision, such co-operation contracts maybe a way of avoid or at least delay the application of the provisions of article 613a.

Equal treatment

There have been a number of cases confirming that it is lawful for there to be differences in treatment and pay between existing employees and new joiners who transferred by law under article 613a if there are objective reasons for such differences. In the latest of the cases, the Federal Employment Court has held in its decision of 19 January 2013 (ref. no. 3 ABR 19/08) that a group-wide agreement in relation to a company pension scheme could include provisions limiting eligibility to directly engaged employees (and excluding those acquired under article 613a) as the company is not able to predict the exact terms of the employment contracts of staff acquired under article 613a.

IT services constitute labour-intensive businesses

The labelling of a business as asset-reliant or labour-intensive can impact whether the Directive (as implemented locally) applies to the transfer at all. In an interesting decision of 21 June 2012 (ref. no. 8 AZR 181/11), the Federal Employment Court held that an IT department can be a transferable business unit and IT services are labour-intensive. As a result, whether the employees transfer is a key factor when deciding if there has been a transfer of undertaking under article 613a. Moreover, the court ruled that IT equipment (such as PCs and software licences) only supports the workers and therefore whether or not it transfers is not the decisive criterion. In order to decide what percentage of employees need to transfer for it to constitute a transfer of undertaking, the court assessed the qualifications of the individual employees. In this case, the new IT service provider took over 50 out of 80 employees (62%) and there was a transfer of undertaking. Applying this more widely, we anticipate that a transfer of more than 50% of the workforce will now trigger a transfer under article 613a. The court noted that most IT services require an average IT background but, interestingly, it held that in some cases the transfer of just a few special employees with exceptional know-how may suffice to transfer a business, but the lower the qualifications of the employees the higher the percentage of transferred employees required for a transfer of undertaking.

The UK

On 5 September 2013, the UK government published the response to its consultation regarding changes to TUPE, which are due to come into effect in early 2014. The government’s stated rationale for these changes is to improve TUPE’s effectiveness and flexibility and to align it more closely with the wording of the Directive. However, the government has abandoned its proposal to amend the service provision change rules and settled on a series of more limited changes than many expected. We set out below the legislative changes and briefly comment on their likely impact.

Service provision changes

The UK rules on service provision changes which apply to outsourcings, in-sourcings and re-tenders will remain but the rules will be amended to reflect the case law position that for there to be a TUPE transfer, the activities carried on after the service provision change must be “fundamentally or essentially the same” as those carried on before.


Relocating a workplace following a transfer in the UK will become “an economic, technical or organisational reason entailing a change in the workforce” (ETO reason). Therefore, dismissals resulting from relocations will no longer be automatically unfair.

Changes to collectively agreed terms and conditions

In line with the ECJ decision in Parkwood Leisure Limited v Alemo-Herron C-426/11, the government is proposing a static (as opposed to dynamic) interpretation of collectively agreed terms, meaning such terms will remain as at the date of transfer and transferees will not be bound by subsequent changes to collective agreements over which they have no control. Under the TUPE changes, it will now be possible to vary terms derived from collective agreements from 12 months after the transfer provided the overall change is no less favourable to the employee. This will not equate to a universal power for the employer to vary or harmonise all terms but it will allow such changes agreed with staff (even if partly less favourable) to be valid. We anticipate that there will be significant scope for litigation over whether a change is less favourable overall.

Collective redundancy consultation

For the purposes of a UK employer’s duty to carry out collective redundancy consultation (section 188 Trade Union and Labour Relations (Consolidation) Act 1992), the transferee will be able (with the transferor’s agreement) to begin collective redundancy consultation before the transfer. Pre-transfer consultation will be entirely voluntary, must be meaningful and will not be able to finish before the date of the transfer but we anticipate that this new law could significantly reduce the costs for a transferee where redundancies are inevitable.

Employee liability information

Transferors will have to provide employee liability information 28 days before the transfer date rather than the current 14 days.

Micro businesses

Employers with ten or fewer employees will be allowed to consult directly under TUPE with affected employees if there are no existing employee representatives no an independent trade union.

Changes to the ability to vary terms and conditions and make transfer dismissals

To avoid TUPE being interpreted more widely than required, the current two pronged definition of void contractual changes (regulation 4(4)) and automatically unfair dismissal (regulation 7(1)) will be replaced by a new test, likely limiting prohibited changes/dismissals to those caused by “the transfer itself” and not including reference to “reasons connected with the transfer”. An exception for changes/dismissals caused by a transfer that amounts to an ETO reason will remain. The changes to regulation 4 will also make clear that contractual provisions which would have allowed changes to a contract before a transfer (such as a mobility clause), will continue to be exercisable after a transfer. We expect litigation in relation to the uncertainty as to whether the reason for a change/dismissal is the transfer itself or a connected change.


Cross-border asset deals involve a significant number of moving parts. In this article, we have only considered some of the key latest legislative and case law changes for three jurisdictions. Whilst there is no substitute for local advice, in order to understand how our respective jurisdictions fit together for the project timetable, the structure, the deal documents and the information and consultation exercise, we all need at least an overview of these differences and an understanding of when significant changes impact our advice. As some of those legislative changes bed down (or in the case of the UK are implemented) we are left with the conclusion that whilst we may all derive our business transfer rules from the same source, the implementation of its principles into local law and the interpretation by local courts can have quite different and interesting outcomes. Suzanne Horne, Deborah Sankowicz and Stéphane Henry are partners and Tom Perry is an associate at Paul Hastings (Europe) LLP and Jan-Ove Becker is an associate at Vangard Rechtsanwälte.