HR Due Diligence in Spain
In merger and acquisition transactions involving companies, the performance of due diligence is an absolute necessity. These kinds of procedures are comprehensive internal audits of the companies targeted by the transactions and should accurately reflect the status of business on both the accounting and legal level, while also looking at other areas, such as environmental or labour issues. The procedures, therefore, are extremely useful and of great interest in the process of negotiating the sale or purchase of companies. If not undertaken, the risk assumed by the buyer is much greater.
From the labour point of view, rigorous due diligence should look at all inherently legal issues and all issues related to staff management.
In terms of legal labour issues, the main purpose of due diligence is to gain a clear understanding of the regulatory framework affecting the company in question (internal labour agreements, collective bargaining agreements, laws and regulations, etc.), as well as to confirm that the framework is correctly implemented.
It is also important to determine the kinds of agreements that the company has put in place with its employees, its compensation policy, and the contingencies that affect these relationships, all of which should help provide an accurate picture of the company.
European regulations on the continuity of the employee’s rights in the event of transfers of companies, business centres or parts of companies or businesses should also be taken into account. In this case, the European directive that applies is Council Directive 2001/23/EC of 12 March 2001 and each member state should have implemented it. In Spain, the reference regulation that has been implemented is the Workers’ Statute.
This regulation aims, on the one hand, to guarantee the individual rights of workers and groups. For example, Article 44.1 of the Workers’ Statute establishes that a change in the ownership of a company, work centre or autonomous production unit does not itself rescind the labour relationship, and the new owner assumes the labour and Social Security rights and obligations of the previous owner, including pension commitments, under the terms set forth in its specific regulations and, in general, any obligations relating to additional social protection that the transferring employee has acquired.
Spanish jurisprudence is clear on this issue: the buyer must continue to provide the same rights to the workers of the company acquired: “After the transfer, the assignee shall maintain the work conditions agreed in a collective bargaining agreement, under the same terms applicable to the assignor, until the termination or expiry date of the collective bargaining agreement, or the entry in force or implementation of another collective bargaining agreement” [STS 22/03/2002].
Furthermore, it is also necessary to take into consideration aspects that go beyond purely legal issues, such as those related to staff management. In international business mergers and acquisitions, the cultural aspect of labour relations is important. The different organizational cultures and the various work approaches may represent a strong barrier and hindrance to the buyer, as many aspects may be overlooked and thus jeopardize the future success of the transaction.
Along these lines, other factors to consider are potential problems with employee motivation, as well as internal communication or power struggles. All of these questions may easily go unnoticed by the buyer beforehand, afterwards leading to serious harm that could spoil what seemed to be a good transaction.
A company may be profitable, but if the future buyer is unaware of the particularities of the labour relations, it may make a hasty decision and unwittingly assume risks. Labour due diligence should address technical legal aspects as well as more human aspects, thus broadening the angle of view to offer greater assurance to both parties in the negotiation process.