M&A transactions have a significant influence on the employees of target companies. These transactions often result in the potential investors, its target company, and/or related entities implementing employment-related restructuring, which may include changes in the employers hiring these employees, the employees’ remuneration and benefits, also internal labor regulations and agreements that bind them. Before implementing any employment-related restructuring, it is essential to take into account certain legal considerations.

This executive brief will walk the potential investors/buyers through the critical legal labor considerations before pulling the trigger on an M&A process.

Labor contracts

It is vital for the investors to understand the employment situation of the target companies, e.g., number of employees, employees’ remuneration and benefits (especially for senior and management positions), employment term, and the compliance of these employments with Vietnamese labor laws and internal labor regulations of the target company. As such, the investors need to examine the labor contract templates of the target company for each type of employment (definite and indefinite labor contracts), especially the labor contracts for senior and management positions.

When the investors officially become the owners/shareholders of the target company upon completion of the M&A deal, they may want to carry out labor restructuring activities which may result in welcoming and/or laying off some employees. In the latter case, the investors need to consult with the lawyers on legal methods to lawfully lay off the employees and get advice on the legal tactics to protect the rights and interests of the target company, such as know-how and business secrets that the employees might have obtained during their employment with the target company. Additionally, the investors in the target company should note the expired and not extended labor contracts – according to the laws on employment, if the definite labor contracts are not extended within 30 days from the expiry dates and the employees are still working for the company, these labor contracts will become indefinite labor contracts.

Moreover, the laws lay down that definite labor contracts can be extended only once. Therefore, it is important for the investors to know in detail all of the labor contracts and annexes signed with the target company’s employees. Issues related to the types and extensions of labor contracts will have a direct impact on the employment usage of the target company and the investors after completing the M&A transactions.

In addition to the labor contracts, the investors need to consider if the target company has signed any service contracts with individuals as these contracts may be treated as labor contracts under the new labor laws. In these cases, the target company may need to fully comply with obligations of an employer, such as compulsory insurance, termination of the employment relationship under limited legal grounds, etc.

Internal labor regulations and agreements

In case of having ten or more employees, the target company is required to register the Internal Labor Regulations (ILR). The ILR is a legal corridor that provides fundamental regulations to govern the relationship between the target company and its employees, such as working hours, rest breaks, and occupational safety and hygiene in the workplace. The ILR is also the ground for disciplining employees, especially dismissal. It is important that the investors check whether the ILR has been registered with the competent authorities and whether its contents are in line with the laws on employment or not.

If the target company has a collective labor agreement with its employees, the investors also need to examine whether the contents therein adhere to the laws and whether the target company has submitted this agreement to the competent authorities. In addition to the benefits for employees specified in the employment agreements, the ILR, and the collective labor agreement, the investors also need to identify other benefits that the target company offers to its employees, especially for senior positions (such as rewarding policies and tuition support for children) to give the investors a heads-up about its obligations after the completion of the M&A transaction.

Moreover, some companies often have the employee stock ownership plan and have the employee stock option for its employees (e.g., restricted stock unit agreements), so the investors should carefully make sure whether the target company has similar schemes to plan out after the M&A transaction’s completion.

Foreign employees

The investors need to additionally know whether the target company employs any foreigner and whether such a foreigner (if any) possesses a work permit or a document certifying that such a foreign employee is not required to obtain a work permit and whether these documents are still valid. Failure to comply with these requirements may result in severe administrative consequences such as expulsion of the foreign employees and administrative sanctions imposed on the target company. Moreover, in case of disputes with these foreign employees, the validity of the labor contracts may be challenged by the courts if these foreign employees do not have the necessary papers to legally work in Vietnam.

Regulatory compliance

The target company (as an employer) and its employees must follow compulsory insurance contribution obligations, including social insurance, health insurance, unemployment insurance, and insurance for labor accidents and occupational disease, so the investors need to verify whether the target company has fully settled these compulsory insurances. Currently, the Criminal Code has criminalized the act of evading social insurance, health insurance, and unemployment insurance, so the investors need to inspect the target company’s insurance payment carefully.

The final concern is regulatory compliance with the laws on employment, such as the obligation to report to the competent authorities on the employment of foreigners; occupational safety and hygiene activities; and technical inspection of occupational safety. Specifically, if the target company uses dangerous equipment, it needs to ensure regulatory compliance with the conditions of occupational safety and hygiene, such as identification and assessment of hazardous and harmful factors at the workplace; and periodic inspection and maintenance of machines, equipment, factories, and warehouses. As such, the investors need to explore if the target company is subject to such compliance regulations.

If you have any questions or concerns about investing in Vietnam or need our legal assistance for your M&A transactions, our experienced Corporate Counsels lawyers are always available at letran@corporatecounsels.vn