In certain mergers and acquisitions (M&A) transactions, the treatment of employees can be one of the most sensitive and legally complex aspects of the deal. Unlike some jurisdictions that have specific Transfer of Undertakings Protection of Employment (“TUPE”) regulations, Malaysia does not have an equivalent statutory regime.
However, there are legal and practical considerations that parties must take into account when dealing with employee transfers in an M&A transaction.
TUPE refers to laws that protect employees’ rights in situations where the business unit in which the employees are stationed is sold or transferred to a new business owner, including the automatic transfer of employment, dismissal protection, and the transfer of liabilities. These laws ensure that their employment is not terminated unfairly and that their terms and conditions are preserved.
In Malaysia, there is no legal framework comparable to the United Kingdom’s TUPE Regulations or the European Union’s Acquired Rights Directive. This essentially means that employment does not automatically transfer with the business from the seller to the buyer.
Dealing with Employees in a Business Sale and Purchase
In share sale transactions, the legal entity employing the staff remains the same, and no changes to the employment contract are required. Thus, it is almost certain that there is a preservation and continuity of employment, unless the purchaser plans to undertake a post-completion restructuring that may affect some or all of the employees.
On the other hand, in a business sale transaction, the business, or a business unit (collectively referred to as “Business”), is sold by the selling party (“selling employer”) to the purchasing party (“new employer”). In these transactions, the absorption or management of existing employment will be agreed upon in the written agreement, and the parties will fulfil the agreed obligations after the written agreement is executed. These obligations include the selling employer serving a written notice of the proposed business sale to the new employer, which will provide the employees with an opportunity to accept new employment terms offered by the new employer under a new employment contract.
Thus, a business sale transaction with an agreed-upon employee transition will typically involve the termination of the existing employment contract and the re-employment of the employee under a new employment contract, provided that the employee’s consent and acceptance are obtained for re-employment.
In practice, employees usually accept the new employment terms to preserve continuity of their employment. However, employees have the right to refuse the new employment terms, and they are entitled to termination benefits if their existing contract is ended or terminated.
Legal Considerations
When negotiating a transaction involving the absorption or transfer of existing employment, the following are factors to be considered by employees or new employers:
- Was due written notice given to the employees informing them about the proposed sale and transfer of employment?
- Have all employees indicated whether they accept or reject the new employment terms and conditions?
- Have all previous employment contracts been duly terminated as part of the agreed terms and conditions under the written agreement between the selling employer and the new employer?
- Have all accepting employees been provided with a new employment contract under the new employer’s permit or letterhead, and have these contracts been duly signed and executed by the accepting employees?
- What are the new terms and conditions that were offered by the new employer, such as salary, benefits, incentives, recognition of years of service, annual leave, and retirement entitlements?
- What are the termination benefits to which employees who reject re-employment are entitled upon termination or expiration of their employment contracts with the selling employer?
- Does any trade union protect the employees? If so, how would the presence of the trade union affect the new employer during or after the absorption or transfer of employment?
- Did the absorption or transfer of employment in the sale and purchase transaction abide by or adhere to all applicable laws and regulations?
During the negotiation and implementation of an employee transfer, several pitfalls may give rise to claims of wrongful or constructive dismissal. Wrongful dismissal may be alleged if the transferor (selling employer) fails to lawfully terminate existing contracts and pay all statutory and contractual termination benefits, or if employees are deemed to have been automatically transferred without their express consent. Constructive dismissal risks arise when employees are compelled or pressured to accept employment with the transferee (the buying employer) on materially less favourable terms, such as reduced remuneration, loss of seniority, or diminished benefits. Similar risks may also occur where the transfer is effected without proper consultation, adequate notice, or in a manner that undermines trust and confidence in the employment relationship. Disputes may further arise if employees who decline re-employment are denied their lawful termination benefits, or if those who accept re-employment subsequently face sidelining, demotion, or other unreasonable working conditions. Improper handling of the transfer process may therefore expose both the transferor and transferee to litigation, regulatory intervention, and reputational damage.
Conclusion
While Malaysia lacks a protection framework similar to TUPE-like regulations, both buyers and sellers in an M&A deal must tread carefully when handling employment transitions. The absence of automatic transfer means that careful planning, thorough legal documentation, and active employee engagement are crucial to a smooth handover. Properly navigating employee transfers not only mitigates legal risk but also helps preserve morale and continuity in a transitioning business.
Our firm’s Corporate and M&A Team, in conjunction with our Employment and Industrial Relations Team, regularly advises clients on M&A transactions involving the transfer and transition of employment. Our lawyers understand the importance of the business realities along with the protection of all employees’ rights. We ensure that all commercial and employment aspects of any transaction are achieved.
Please do not hesitate to contact us for a complimentary consultation to discuss your M&A transaction.
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