In mergers & acquisitions (M&A), restructuring is inevitable and this typically includes changes in the workplace arrangement. This means that employees would need to brace themselves for such changes and very often, questions relating to employees’ rights and what protection is accorded to the employees may crop up. 

Employment (Amendment) Act 2022

In light of the recent amendments to the Employment Act effective 1 January 2023, we set out some of the highlights relating to employment in an M&A transaction. 

One of the most significant changes after the amendment is that all employees are now covered under the Employment Act. Under the amended Act, all employees are now entitled to minimum statutory rights such as annual leave, sick leave, extended maternity leave, paternity leave (previously not provided for) and flexible working arrangements etc regardless of their salary. 

There are however limited rights for employees earning above RM4,000 per month, because they will not be entitled to certain benefits such as overtime and/or termination benefits under the amended Act. 

Do the companies need to inform or obtain consent from employees prior to the M&A?

Generally, in an M&A involving either share sale or asset sale, the companies do not owe an obligation to inform the employees or obtain consent of the employees before proceeding with the M&A. Employees’ consent is only required where the employees of the target company will be transferred to the acquiring company, as the transfer would mean there is termination of employment with the target company, and re-employment with the acquiring company. It is then up to the employee to decide whether to accept the new offer.

Are employees automatically transferred from the target to the acquirer? 

The answer to this question depends on whether the acquisition is done through a share sale or an asset sale. 

In a share sale, the ownership of shares in the target company (target) changes to that of the acquiring company (acquirer) and the acquirer acquires the target together with its existing customers, liabilities, suppliers, contracts and employees. This means the target remains the same legal entity despite the change of ownership of shares, so employees of the target will remain employed by the same legal entity and there will be no transfer of employees. 

In an asset sale, employees of the target company are not automatically transferred. The acquirer retains the discretion to select the employees from the target company because the acquirer can choose which assets to purchase and which assets to be carved out from the acquisition. They remain employees of the target and where the acquirer does not offer employment to the employees, the target is responsible to decide what to do with them after the acquisition. If the target decides to terminate or retrench employees on the ground of redundancy, the target will be liable to pay out all contractual payments involved in a cessation of employment, including termination benefits in accordance with the Employment (Termination and Lay-Off Benefits) Regulations 1980 or redundancy payments. As all employees are now protected by the Act, all payments (apart from termination benefits) should be made by the last date of employment.

Note however that there is no legal requirement to pay employees earning above RM4,000 per month and who are not involved in manual labour any termination benefits under the Employment Amendment Act 2022 unless contractually provided for.

The notice period given to employees would also need to comply with the minimum length of notice stipulated in the Act. 

Notice Period  Length of Employment on the date notice is given 
4 weeks’ notice  Less than 2 years on the date notice is given 
6 weeks’ notice  2 years or more but less than 5 years 
8 weeks’ notice  5 years or more

What should be the Company’s next steps?

When companies are going through an M&A, it is important for companies to review the terms and conditions in the employment contracts and handbooks to ensure that the employees’ rights are in line with the prescribed rights in the amended Act. 

In a share sale, a company-wide review for the target’s employees’ contracts will be optimal while in an asset sale, the acquirer needs to ensure that the new offer of employment to the employees are drafted in compliance with the recent amendment.  The company should also consider if there are other administrative processes involved, such as notifications to the labour and tax authorities, regarding the cessation of employment.

***

This article was written by Adelyn Fang (Associate) and Tiffany Chin (Pupil in Chambers) from Donovan and Ho. Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021.  We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.

Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysian start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds.  Feel free to contact us if you have any queries.

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