This article has been written by Dakshita Arora. This article has been edited by Smriti Katiyar (Associate, Lawsikho).
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With the recent rush of mergers and acquisitions (hereinafter referred to as “M&A”), certain issues do not receive adequate attention in the corporate market. One such key issue is the rights of employees and the transition in their employment as a result of restructuring transactions. The employees are drastically affected both during and after the completion of an M&A. However, they are the last ones to find out about these transactions. Through this article, the author analyses this issue, lays down the current law and the provisions of the future law that is yet to be notified.
For centuries, M&A have been a major part of the corporate world and a crucial aspect of the economy. Merger is not specifically defined under the Companies Act, 2013. It is a form of restructuring whereby there is a combination of two or more entities, the transferor entity and the transferee entity, into a single resultant entity. On the contrary, acquisitions are deals where one entity acquires the assets and liabilities of the target entity or purchases controlling shares of the target entity and therefore, becomes the owner of that entity. In the Indian legal framework, mergers are sanctioned by an adjudicating authority after going through an extensive process provided under Section 232 of the Companies Act, 2013. An acquisition, on the contrary, is more of an agreement. Generally, in both the scenarios, the transferor entity ceases to exist and all its assets, liabilities and undertakings are transferred to the resultant entity including the employees.
Amongst the manifold considerations of an M&A transaction, protecting the rights of the employees and smooth transition to the resultant entity is a significant part of the deal. The provisions regarding the same are currently governed by the Industrial Dispute Act, 1947 (hereinafter referred to as the “ID Act”) and will be governed by the Industrial Relations Code, 2019 (hereinafter referred to as the “IR Code”), whenever it’s notified.
Who are workers?
The ‘workers’ in India are defined under Section 2(zr) of the IR Code. The definition, being quite comprehensive, includes persons employed in any manual, unskilled, skilled, technical, operational, clerical, or supervisory work. The definition has been expanded to include working journalists and sales promotion employees as well. However, the following persons are explicitly excluded from the provision:
- Person who is subject to the Air Force Act, 1950, or the Army Act, 1950, or the Navy Act, 1957;
- Person employed in the police service or as an officer or other employee of a prison;
- Person employed mainly in a managerial or administrative capacity;
- Person employed in a supervisory capacity drawing wages exceeding eighteen thousand rupees per month or an amount as may be notified by the Central Government from time to time.
While interpreting the definition of “workman” under the ID Act, the judicial pronouncements have been expanding the scope of the term, considering the facts and circumstances of each case. In the case of T.P. Srivastava v National Tobacco Co. of India Ltd, it was observed that a person performing duties that require an imaginative and creative mind cannot be termed as a “workman”. In another case, the court clarified that if the principal job and the nature of employment is manual, technical or clerical then the person performing the same would be termed as a workman. Recently, the High Court of Calcutta held that the nature of the primary function that the employee performs shall be taken into consideration.
Consent of the workers in an M&A transaction
By virtue of Section 75 of the IR Code, a worker who has been in continuous service for not less than a year is entitled to a notice and compensation, as if he is being retrenched, when an undertaking is being closed down. In an M&A transaction the transferor entity ceases to exist thereby being the “closing entity”. However, this provision excludes certain workers including workers whose services have not been interrupted due to change in employment; workers whose employer is still liable to pay the compensation in the event of his retrenchment; worker provided an alternative employment with the same terms and conditions of service, when a mining operation is being closed down, within a radius of twenty kilometres.
Currently, under the ID Act, Section 25FF deals with similar provisions. It has been amended in the IR Code to exclude the provision stating that if the remuneration and terms and conditions remain the same post transfer, then he shall not be entitled to a notice or a compensation. This is a step towards recognising the rights of the workers. However, the given provisions under the IR Code are still in disparity with the judicial pronouncements. The Supreme Court has held that the employer must take consent of the workman before transferring his employment to a new employer even if the terms and conditions of his service do not change. If the workman does not give his consent for such transfer, he shall be given retrenchment compensation. No such provision has been incorporated under the IR Code.
Notice of change
Pursuant of Section 9A of the ID Act, 1947, a notice of change must be sent to the workman if the conditions of his service change. The notice must be given at least 21 days prior to affecting such change. The similar provision is incorporated under Section 40 of the IR Code. Therefore, if as a result of a merger or acquisition, the employer of the resultant entity decides to change the working conditions of a workman then he must be provided the concerned notice.
Other liabilities towards employees
The apex court held that the transferee entity will be liable for any default on the part of the transferor entity even if there is an agreement to the contrary. Therefore, any liability of the transferor entity towards an employee will be transferred to the transferee entity. This highlights the importance of thorough due diligence on the part of the transferee entity.
An M&A transaction is indeed an external restructuring with numerous concerns from signing an MoA to closing the transaction. However, the human assets of the transferor entity are as valuable as the tangible and intangible assets for the transferee/resultant entity in the long run. Considering the labour law paradigm in India, all the legislations with respect to industries have been pro-employee. The rights of the employees have been undisputedly prioritised in the Indian legal framework. However, there are certain grey areas in both previous and the newly enacted law that will play a crucial role in the infringement of the rights of the employees.
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