Human Capital Considerations in Divestitures

1. Identify the destination of the divested business.
   Will the business be sold to a strategic buyer, a financial buyer or will it be set up as a standalone entity? If it is sold to a strategic buyer, it will likely be integrated into the buyer’s existing operations. The buyer will have its own HR systems, plans and programs in place, and may not have interest in retaining those of the target business. A financial buyer, on the other hand, may not have an HR infrastructure in place, and thus may look to the seller to provide more human capital support for the divesting business, either through replication of HR plans and programs, the provision of transition services or a combination of both. In the case of setting up a standalone entity, it will need to be furnished with a comprehensive HR support structure, including HR plans, programs, IT systems and staff resources.
2. Identify whether the divestiture will be a stock sale or an asset sale.
   In a stock sale, a buyer will purchase the full, ongoing business operation, including all of the target’s people, HR plans, programs, assets and liabilities. Employees will transfer automatically to the buyer at the time of the share sale. In an asset sale, however, a buyer and seller will negotiate the specific assets, liabilities and people that the buyer will take on. Employees will generally be transferred through an offer/accept process, unless sufficient assets are transferred to meet local requirements for an automatic transfer of employees. Moreover, in an asset transaction, HR plans, programs and IT systems may not transfer with the business. For example, they might be held at the parent level or the buyer may decline to accept them as part of the assets purchased. In this instance, the buyer will have to provide its own HR plans, programs and systems, and may require some transitional support from the seller until that infrastructure can be put in place. Furthermore, if the buyer will not provide employment to all employees of the target business, severance implications and costs must be identified for those employees who will not transfer to the buyer.

Early planning and execution

HR should be part of the deal team from the onset of transaction planning. Participation by HR ensures an integrated deal strategy that maximizes business valuation while treating employees fairly. This is done by linking HR terms and conditions with documents governing the marketing and sale of the divesting business, including the Offering Memorandum, human capital pro forma financials (including business standalone financial statement adjustments), management presentations, the Purchase and Sale Agreement and the Employee Matters Agreement.

HR has a role to play at every step of the deal process. HR transition planning should begin three to six months prior to engaging with potential buyers with an assessment of HR implications of the anticipated transaction. In coordination with the overall deal team, HR should provide inputs and support on the following:

• Impact to HR environment
  Assess the impact of divestiture on the seller’s HR environment (e.g., shared services, HR plans, programs and systems), identify gaps resulting from the proposed sale and devise mitigation strategies.
• Leadership incentives and retention
  Identify leaders critical to the success of the transaction and implement an incentive and retention strategy aligned with transaction objectives.
• Internal due diligence
  Conduct a thorough examination of the divesting business’s human capital environment by country, including an assessment of the employee population, employing legal entities and terms and conditions of employment (e.g., compensation and benefit plans, retirement benefit liabilities, workforce separation risks and obligations, potential curtailment and other charges to a gain/loss sale).
• Offering memo and financial statement
  Include HR terms and conditions in the offering memo and develop pro-forma standalone financial statements reflecting appropriate benefit balance sheet liabilities, expense and cash flow adjustments.
• Due diligence data room
  Collect and populate a data room with documentation on seller’s HR plans, programs and systems (executive compensation, compensation and benefits, payroll and HRIS, labor and employment agreements, workforce demographics, HR litigation and compliance matters, along with any business specific and/or country-specific programs as applicable).
• HR input to deal negotiations
  Develop a strategy for negotiating HR terms and conditions as well as related economic terms, review HR provisions of the initial purchase agreement, including Representations and Warranties Insurance, conduct of business between sign and close, and employee matters provisions (e.g., maintenance of terms and conditions, service credit, treatment of accrued benefits, no-hire/non- solicit protections, transition services including potential employee “lease” arrangements).
• HR operations
  Assess the HR operational implications of the proposed divestiture (e.g., HRIS, payroll, HR functional structure), including timing and impact to resources.
• Communications
  Develop announcement strategy and rollout, consider the need for ongoing employee updates, identify country-specific requirements and implement process for addressing employee questions and concerns.
• Transition planning and separation support
  Identify global HR separation issues (e.g., legal entity setup, compensation and benefit plan disentanglement, labor relations/workforce transfers, HR operations), establish separation strategy and provide support for seamless transition of divesting business, with necessary/ agreed HR setup and/or HR transition service agreements.

Key HR challenges in divestitures

The divestiture process is lengthy – it can take several months and sometimes years from the onset of divestiture planning, through the sale and close of the divestiture and the post-closure transition period. Managing HR through this timeline poses numerous challenges and requires thoughtful planning and decision-making in order to in order to retain maximum value of the divesting business, and minimize disruption and other negative impact to the seller’s operations.

Key HR challenges that may arise:

• Announcement of intent to sell business
  The decision of whether to announce the intention to divest a business publicly typically follows the deal sales strategy (e.g., public auction vs. private negotiation). The benefits of a public announcement include the ability to engage a broader deal team (confidentiality is not an issue), facilitate planning and avoid false deal rumors. The disadvantages include employee and customer uncertainty over a period of months and potential business valuation impairment if the deal does not go forward as announced.
• Regulatory review
  In some instances, a transaction may be subject to anti-trust or other government regulatory review by organizations such as the U.S. Department of Justice, the European Commission and other country-level regulatory authorities. Communication about the deal may be highly restricted during the review process, which can heighten employee and customer concerns in the information vacuum. Uncertainty around status of deal closure may negatively impact business operations, as employees are distracted by concerns about their futures, causing heightened engagement and retention risks.
• Labor relations
  Employee representative groups, including labor unions, trade unions and works councils, may have transaction- related entitlements, requiring that they be informed and/or consulted with regarding the transaction itself, along with any anticipated transaction-related impacts to employees. In some geographies, employee representatives may have to be consulted prior to any decision being made that impacts employees. The employee representative must have the ability to impact the decision process and outcomes. Moreover, if negative consequences to employees are anticipated (e.g., terminations, disadvantageous changes to terms and conditions or location of employment), employees may have entitlements under acquired rights and similar legal doctrines to be “made whole” or to receive severance and other termination entitlements.
• Internal restructuring
  Sometimes, sellers may internally separate the divesting business from the remaining business prior to close. This may be done to facilitate a share sale to a buyer or to restructure the business into a standalone organization. If the existing businesses are integrated in common legal entities, disentanglement may require establishing new legal entities to house the divesting business’s assets, liabilities and employee workforce, a process which can take months in some countries, including the setup of tax identification numbers, bank accounts and requisite government registrations. The transfer of employees to the new legal entities may be done via asset transfers, which could require their own employee representative notification and consultation processes, along with offer/accept processes to effectuate employee transfers.

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Summary