Employment special report: Takeover troubles

The global credit crunch has left large financial institutions vulnerable to takeover bids on a scale that has never been witnessed before. The structuring of these acquisitions requires a number of considerations, none more so than in relation to employees, says Simeon Spencer


Employment special report: Takeover troublesThe recent bid for HBOS by Lloyds TSB Bank (LTSB) provides an example of the practical issues which must be considered where large numbers of employees transfer in the financial services sector.

Although the HBOS acquisition is intended to be a share for share deal, and so not a business transfer falling within the special regime under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (Tupe), nevertheless there are still significant implications for employees in transactions of this nature.

Employee benefits

LTSB will require a full understanding of all benefits provided to HBOS employees and details of how such benefits are to be treated as a consequence of the takeover.

Stock options

Many HBOS employees will either own HBOS shares directly or will participate in some form of employee share option scheme. Employee shareholders will be treated in the same way as any other shareholder.

Option holders will be entitled to an “appropriate offer”, which will set out what will happen to their options (vested and unvested) as a consequence of the takeover. This will depend on the terms of any relevant HBOS option scheme, and potentially also the terms of any LTSB scheme (e.g. if options are being rolled over).

Bonuses

Certain HBOS employees will be entitled to some level of bonus for 2008. A smaller number may even be entitled to a bonus as a result of the change of control (a takeover will trigger a change of control in a well-drafted plan).

The point here is that despite the recent guidance on bonuses issued by the Financial Services Authority, if they are contractual then there is still a requirement to pay at the appropriate time. LTSB will quickly need to understand the nature of the contractual entitlements as this will impact on how it plans for bonus provision in 2009.

Management cull

Executive level management are unlikely to survive the takeover, with LTSB directors likely to dominate the Board of the enlarged group. There may be members of senior management, however, that LTSB specifically wishes to retain post-transfer.

The best way to do this would be to offer some kind of retention package – ie varying their terms and conditions of employment with their consent in exchange for some financial sweetener, such equity, options, a cash bonus or more lucrative benefits ¬– but ensuring some sort of lock-in, for example by way of a longer notice period or putting them on long fixed-term contracts.

For those senior employees who are leaving HBOS following the takeover, either because they are being required to or because they wish to, LTSB should check their severance terms, as senior headcount reduction may be an expensive exercise. Senior management often have a contractual entitlement to an enhanced severance payment.

Redundancies

There are rumoured to be potentially over 40,000 redundancies post-acquisition, as LTSB seeks to implement cost savings. Legislation requires LTSB to inform and consult with employee representatives of the affected employees. The period of consultation is at least 90 days where there are 100 or more proposed redundancies. Agreements with trade unions may contain further terms imposing consultation requirements, which may impact on the timetable.

Failure to comply with these obligations could lead employee representatives to claim a protective award from the Employment Tribunal on behalf of affected employees. The maximum (and starting point) for the award is 90 days’ (uncapped) pay per affected employee and is a significant risk exposure.

Pensions

HBOS participates in a number of significantly sized final salary pension schemes. In fact, recent reports have suggested that following the recent share price fall of both companies, the pension scheme assets of LTSB and HBOS together are now bigger than the companies sponsoring them. LTSB will need to review the terms of the HBOS schemes to avoid triggering any liability.

For example, there may be “poison pills” in the trust deeds and rules, which the trustees may threaten to use if they feel that aspects of the deal will leave the pension schemes in a worse position, (although there has been no suggestion in the public domain that this will happen). There is also a risk that significant debts could be triggered under section 75 of the Pensions Act 1995 as a result of any consequent group reorganisation.

Trade Unions

HBOS recognises the trade union “Accord” for certain bargaining and representation rights on behalf of its workforce, which it will continue to recognise following the takeover. At the same time, LTSB has its own recognition agreements in place, with Unite Amicus and Lloyds TSB Group Union.

This may make for some interesting industrial relations discussions over the coming months and years. It may be that LTSB will want to try to consolidate its recognition of unions into one union, but this process is particularly complex, unsettling and time-consuming and is not without significant risk.

Harmonisation

It is inevitable that LTSB will consider the pros and cons of whether to harmonise the HBOS employees’ terms and conditions with those of its own workforce. This may be very difficult to achieve in practice (particularly as post-takeover there will be almost 140,000 employees in the enlarged group).

If some measure of consolidation is proposed it will be a time-consuming process and will require extensive consultation and negotiation with all of the relevant trade unions.

Takeover Code

The Takeovers Directive (Interim Implementation) Regulations 2006 will cover the proposed acquisition by LTSB. These regulations essentially give statutory effect to the City Code on Takeovers and Mergers and require both LTSB and HBOS to provide information and documentation about the proposed takeover to employee representatives.

However, critics have suggested that most employers only pay lip service to the regulations in case early disclosure of planned redundancies forces them to follow the collective redundancy procedure at a premature stage.

Controversy

This article outlines the key employment issues that will have to be considered by management and their advisers when structuring the proposed LTSB/HBOS takeover and indeed other transactions of this type. What is clear is that large numbers of employees will be affected by a deal that has already made controversial headlines for a variety reasons.

Simeon Spencer is a partner and heads the employment group at Morgan Lewis.