What to look out for when buying a company
With the current level of unemployment hovering around 16%, any planned acquisition of a Polish company should take into account the costs related to the potential restructuring of employment.
Many well-established companies in Poland still use old employment practices, in which a governmental mandate of full employment was the main concern. With the introduction of international management practices, investors typically seek to streamline employment levels. With the pressure to reduce unemployment, however, government regulators will pay special attention to the effect any privatization, merger or acquisition will have on the employees involved. With these tensions, any potential investor should carefully review the terms of the target company's current labor and individual employment contracts, not to mention the applicable government regulations, before signing on the dotted line.
Depending on whether you are planning to acquire a state-owned enterprise through the privatization process or are thinking about acquiring a company already in the private sector, the number of applicable regulations will vary. Nevertheless, these regulations all have one common theme to protect an employee from being unfairly terminated by the new owner. Any restructuring of employment in a company will be subject to the Labor Code and, potentially, to the Act on Detailed Rules of Terminating Employment Contracts with Employees for Reasons Related to the Employer (the "Mass Layoff Law"). Moreover, any acquisition of a state-owned enterprise will require compliance with the Privatization of State Enterprises Act ("Privatization Act"). In any acquisition, the existing employment contracts will play an important role in setting certain boundaries on restructuring. Additionally, if the company is unionized, the new owner will have to honor the existing collective bargaining agreements.
The Labor Code provides all employees with certain fundamental rights. One of the basic rights involves restrictions on the termination of employees hired for an indefinite period of time. Unless an employee's contract specifically states a termination date, the agreement is treated as being for an indefinite period of time. As such, the employer may only fire the employee for cause or in certain other limited circumstances, such as bankruptcy. In the event of wrongful termination, the employer, including the new owner, could be forced to rehire the employee, or at the very least, to pay up to three months' severance pay.
Other protections in the Labor Code provide certain groups of employees, such as those within two years of retirement, with longer severance pay entitlements. The Labor Code contains numerous formulas and regulations for determining how much, and under what circumstances, an employee may be entitled to receive compensation for termination.
To the extent that the restructuring of employment would involve terminating the employment of more than a few individuals, the Mass Layoff Law may come into play. Without going into all the ins and outs of this law, it sets forth a very specific procedure for terminating employment and requires, in general, the payment of three months' severance pay.
The Privatization Act provides an additional layer of protection to employees in state-owned enterprises being privatized. In general, the new owner may not change the terms of the existing employment contracts, nor reduce the amount of compensation, for at least one year following the transfer. Furthermore, certain groups of employees have additional protection, such as those serving on an employee council at a state-owned enterprise.
Depending on the method of privatization utilized, the Privatization Act includes numerous other regulations that could affect the new owner's acquisition of a state-owned enterprise vis-a-vis the employees. As one example, if the privatization involves the issuance of shares in the newly privatized company, 15% of the shares must be set aside free of charge for the employees.
These regulations are only the tip of the iceberg with respect to the rights of employees that a potential investor must take into consideration in determining the feasibility of purchasing an existing Polish company. Additional protections are most assuredly provided for in collective bargaining agreements and individual employment contracts. If the target company has a strong and active trade union, the purchase will invariably involve negotiating with the employees' union or representatives. With respect to the acquisition of a state-owned enterprise, the potential owner will have to negotiate a separate agreement with the existing trade union(s). Usually, the terms of this agreement will provide for an extended period in which the employer may not fire employees. In light of the current unemployment rate, the degree of an investor's commitment not to make the enterprise's employees redundant may play a more important role in influencing the government agency's decision to approve the privatization. Experience shows that it is not unusual for the period of protection against redundancy terminations to be up to five years. Moreover, the sales agreement will usually include some covenant by the new owner to agree up front to increase employee salaries by a certain amount within a specified period of time.
Even if employees are not otherwise covered by a collective bargaining agreement, they will usually have an employment agreement. In many cases, an individual employment agreement provides the employee with more protection than required by law. A potential investor should carefully review each employment agreement prior to entering into a binding purchase agreement. If the purchase agreement is not carefully drafted, the new owner could find him or herself ultimately footing the bill to pay to renegotiate these employment agreements.
This article was prepared by Lejb Fogelman, the managing partner of Hunton & Williams' Warsaw office, with the assistance of Paul Fogo, an associate attorney.
