There are several circumstances, both before and after a share sale to which TUPE can apply. For example, on an asset transfer which precedes a share sale, or when businesses are integrated following a share purchase.
incorporated Fencourt’s business into its own (in line with the strategy which was communicated to employees prior to the Share Sale). Factors which pointed towards McCorquodale controlling Fencourt’s business after the Share Sale included McCorquodale:
n paying the wages of Fencourt’s employees; n managing the contributory pension scheme for employees at Fencourt;
n handling a significant element of Fencourt’s day- to-day management, setting its actions apart from those of a mere shareholder;
n making key decisions and handling 50% of Fencourt’s workload;
n attempting to bring about contractual changes and taking the decision to put Fencourt into administration;
n transferring a sales representative to handle the sales function of Fencourt.
The Court of Appeal acknowledged that the fact that two companies are part of the same group, or that one company is a parent of the other will not mean that one company controls the business of another. When companies reorganise, there will often be some loss of independence between a parent and subsidiary, and the mere fact that one entity has greater control will not trigger TUPE. Moreover, the mere fact of control alone will not be sufficient to establish the transfer of a business from subsidiary to parent: businesses can remain distinct even where one entity assumes control over the other, providing both management and supervisory staff. For an employee to successfully claim TUPE employment protection, they must be able to demonstrate that the business in which they are employed has been transferred from one company to the other. To differentiate between these two scenarios can be tricky, particularly when there is an intra-group transfer but Lord Justice Moses put it rather well when he said:
“There will often be little to distinguish between the case of transfer of control on acquisition by a new parent and transfer of the business to a new parent.
Faced with such difficulties, the Employment Tribunal is not entitled to indulge in the industrial equivalent of a Gallic shrug.”
How the Courts will interpret the contractual arrangements There is nothing to stop the parties from deliberately structuring a transfer as a share sale to avoid the effect of TUPE3
. Parties are free to organise their
affairs as they wish. This differs from situations where TUPE applies, and the parties take steps to evade the legislation, in which case courts and tribunals may “pierce the corporate veil” and take judicial steps to establish the true legal position. Case law has established that in order to pierce the corporate veil, courts may only look behind the legal form of the transaction if they find that certain activities are carried out by one entity, and, for policy reasons, they should be attributed to another4
. The Court of
Appeal did not consider it necessary to “pierce the corporate veil” on this occasion, because it found as a matter of fact that McCorquodale was operating the business of Fencourt and so there was no judicial requirement to render McCorquodale liable for the activities of Fencourt. The Court of Appeal agreed with the Tribunal that it was McCorquodale which was operating Fencourt’s business in the first place.
What steps should I take?
The Millam case demonstrates that it is worthwhile doing your homework before entering into a share sale, looking backwards at the target’s previous asset transfers as well as considering how it its business might be organised in the future. Share sale agreements and employee communications may give a superficial impression that TUPE does not apply, but if the facts suggest otherwise, employees may have better employment protection than anticipated. This may mean that planned restructuring or efficiencies are not possible, which could affect the potential return on investment for the PE fund. Irrespective of the structure of the transaction, it is certainly worthwhile keeping abreast of management strategies to ensure that you are cognisant of the potential employment law implications. n
Team Profile
“KPMG has a specialist client facing legal team which is expanding to meet demand for legal services within the practice and its client base. The work is mainly focused around company law, contracts and employment law with underlying in-depth tax and commercial awareness. The team provides legal support to tax and advisory teams to meet existing client demand and help develop new client offerings and service lines.
The legal team currently has approximately 30 qualified but non practising lawyers based across the UK.”
Footnotes
1. The Transfer of Undertakings (Protection of Employment) Regulations 2006
2. Millam v The Print Factory (London) 1991 Limited [2007] EWCA Civ 332
3. Brookes v Borough Care Services and CLS Care Services [1998] IRLR 636
4. In order to establish a business transfer and the application of TUPE.
Risk and Insurance in Private Equity and M&A 2012/13
Author Viewpoint 57
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76