Company acquisition and restructuring often bring about a change in the acquiree’s business strategy, direction, organisation and personnel structure. These can affect the employment relationship between the acquiree and its employees as well as sometimes the employment affairs of the acquirer. Acquisition can be divided into asset acquisition and equity acquisition. This article analyses how the employment relationship should be handled in these two types of acquisitions, according to the labour and employment legislation of China’s mainland and judicial practice there.
Where an asset acquisition occurs and the assets on which employees rely to perform their routine work are transferred elsewhere, a change to the contracting party and the content of employees’ employment contracts will generally be directly involved. There are no mandatory requirements in the existing law that the acquirer should take over the employees of the acquiree in an asset acquisition. If the acquirer takes over these employees, the employees will be transferred to the acquirer along with the acquired assets and then work for the acquirer. In such a case, the employees should terminate their employment contracts mutually with the acquiree and enter into new employment contracts with the acquirer. Alternatively, the employees, the acquirer and the acquiree can jointly change the contracting party of the employees’ employment contracts without modifying any other content thereof. If the acquirer does not take over such employees, and the assets on which they rely to perform their routine work are transferred elsewhere –making their employment contracts unperformable –the acquiree should reorganise its structure, adjust employment contracts mutually with the employees, or terminate their employment contracts according to the law. Such termination may be mutual termination, the employer’s unilateral termination on the ground of material change of objective circumstances (according to Article 40 Item 3 of the Employment Contract Law of PRC), or layoff (according to Article 41 of the Employment Contract Law).
Mutual termination is not subject to the restrictive or prohibitive provisions of the law regarding unilateral termination of an employment contract. An employer and an employee may terminate their employment contract where they reached a consensus on termination through consultation and entered into an agreement for mutual termination.
Termination on the ground of change of objective circumstances
Article 40 Item 3 of the Employment Contract Law provides that:
‘… if the objective circumstances relied on which the employment contract was concluded have materially changed, making continuous performance of the employment contract no longer possible, and the employer and employee fail to reach agreement on amendment of the employment contract after consultation’,
the employer may unilaterally terminate the employment contract.
According to Article 26 of the Explanations of the Ministry of Labour on Several Provisions of the Labour Law, the circumstance where an enterprise’s assets are transferred elsewhere could be defined as one of the ‘objective circumstances’. Further, if an employer intends unilateral termination of employment contract on the ground of change of objective circumstances, it should not carry out the unliteral termination until after it has communicated with the employee about amendment of employment contract (in terms of position, remuneration, place of work, etc) but no agreement is reached on such amendment.
Article 41 of the Employment Contract Law provides that:
‘… if, in any of the following circumstances, an employer needs to cut employment by 20 employees or more, or by less than 20 employees, which, however, accounts for no less than 10% of the total employees of the employer, the employer may carry out employee layoff after explaining the situation to the trade union or all employees 30 days in advance, listening to opinions from the labour union or employees, and submitting its plan for cutting employment to the labour authority:
3) the employer is undergoing production switch, material technological makeover or adjustment of mode of operation, and still in need of cut of employment after amendment of employment contracts;
4) material change in other objective economic circumstances relied upon which the employment contract was concluded, making the performance thereof no longer possible.’
The acquirer may carry out the layoffs if the above conditions are met. Other than the above substantial conditions, procedural requirements should also be satisfied, which is to explain the situation to the trade union or all employees 30 days in advance and submit the plan for cutting employment to the labour authority.
Article 33 of the Employment Contract Law of PRC provides that ‘the change of employer’s name, legal representative, person in charge or investor(s) etc does not affect the performance of employment contract.’ In an equity acquisition, it is the investor(s) or name of the employer that changes, without involving any change of the contracting party of employment contract or any transfer of employment relationship. Therefore, the existing employment contract remains valid and binding, and the employee has no right to refuse continuous performance of the employment contract by excuse of equity transfer. Nor does the employer have the right to unilaterally modify or terminate the employment contract by reason of equity transfer.
If, after the close of an equity acquisition, the employer’s business strategy, mode of operation or organisation structure changes, the employer may terminate employment contracts with employees on the three allowed grounds as described in the above asset acquisition section.
It should be noted that since an equity acquisition does not bring about transfer of major assets or change of the contracting party of employment contract, in judicial practice, the employer having unilaterally terminated the employment contracts on the ground of change of objective circumstances usually has to bear much heavier burden of proof that it had encountered material change of objective circumstances. Similarly, the employer having unilaterally terminated employment contract on the ground of layoff needs to prove that after the equity acquisition, the employer satisfies one of the substantial conditions for layoff as specified in Article 41 of the Employment Contract Law of PRC.