Are you Diligent With Your Due Diligence? (Part I)


Author:
Chuck Csizmar – CMC Compensation Group

Anyone who has ever been involved in a merger or an acquisition team remembers their first time; how green they were, how much they didn’t know and how much of a challenge it was just getting up to speed.   They didn’t know what they didn’t know.  Most neophytes are shell-shocked by the complexities involved, the myriad moving parts – and when the business target is an international concern, or has a foreign footprint, then it’s often a case of “what do we do now”?

So here’s an HR due diligence checklist for international M&A deals, one that I wish I had when I was thrown to the wolves for my first overseas acquisition.  This is not breakthrough material, and is likely a derivation of thinking that has evolved for years, starting from the first time one company decided to take over another.   If you’re new to the process, it is a reminder of critical research steps, what mustn’t be forgotten.

This particular list comes via my friends at White & Case LLP, who make this information available as a service to the profession.  What follows is the first of a two-part posting.  It is thorough (some might say “exhausting”), and some search elements may not be warranted in every case, but I think you’ll find it excellent preparation material.

  • Compensation & Benefits: Using a separate compensation / benefits checklist, check the seller’s compensation philosophy, compensation / benefits “schemes” or plans, severance plans, retirement plans, bonus plans and perquisites (like meals, housing, country clubs and company cars).  Check individual pension promises, special agreements, grandfather clauses, death / disability benefits, cafeteria plans, service awards, profit sharing, savings plans, employee loans and unusual expense reimbursements.  Check compliance with local laws that mandate extra payments and benefits.  Get an accounting of any transferring plans, and study funding: unfunded, underfunded and “book reserve” plans can cause huge problems.
  • Equity and Loans: Look at seller stock options, employee ownership programs, officer / director stock ownership, and employee ownership in affiliates and entities doing business with the seller.  Also check into loans and guarantees to employees.
  • Employee Insurance Coverage: Look at the employment-related insurance the seller provides, like employee life / health / accident insurance, hazardous duty / kidnap insurance, payments to state-mandated insurance funds (such as workers compensation insurance), expatriate coverage, and “key man” policies naming the employer as beneficiary.
  • Performance Management: Study the seller’s performance management system.  Focusing on key employees, collect data on job evaluations, performance appraisals and problem employees.
  • Labor Organization Relationships: What labor organizations represent workers?  Collect organizational data regarding in-house or company-sponsored labor organizations such as works councils, and “European Works Councils”, company unions, health / safety committees, staff consultation committees and ombudsman.  Collect meeting minutes and records memorializing labor disturbances and days lost to strikes.
  • Collective Agreements: Look at applicable collective agreements and “social plans” with employee groups.  Go beyond trade unions and check agreements with works councils, worker committees and ombudsmen.  Get expired agreements with terms that still apply.  Do any industry (“sectoral”) collective agreements bind the seller as a non-signatory?  Does the seller participate in any multi-employer bargaining associations?
  • Individual Employment Agreements: Look at individual employment contracts with employees, including agreements designated as statement of particulars, non-compete, confidentiality agreement, indemnification agreement, inventions agreement and expatriate arrangements – or at least check these for key executives and look at form / template agreements for rank-and-file employees.  Be sure to look at contracts with contingent workers (service providers like independent contractors, consultants, agents).
  • Employee Consents: Check individual employee consent forms.  In jurisdictions like the UK and Korea, employees may have consented in writing to work overtime.  European employees may have consented to processing sensitive personnel data.  Employees may have acknowledged a code of conduct or work rules in writing.

In Part II of this International Checklist for M&A deals we’ll continue to break down the HR due diligence process and provide more reminders of what you should be looking for – what rocks you should remember to look under.

It’s a minefield out there, but now you have a map.

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3 responses to “Are you Diligent With Your Due Diligence? (Part I)

  1. Pingback: Are you Diligent With Your Due Diligence? (Part I) - International HR Forum - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Thanks for the timely clip as M&A action seems to be on the upswing.

    I have had the opportunity to be on multiple M&A projects and this list is good. The one critical item I would add is to endeavor to make sure that HR is at the table with executive leadership throughout the entire process from due diligence to post-close execution. Multiple studies point out that a majority of the key success factors to any M&A deal is firmly imbedded within HR (talent retention, culture, communications, compensation/benefits cost & risk management, employee on-boarding, etc).

    There is nothing more frustrating (and overwhelming) than going into a meeting to find out that a M&A action has already been agreed upon with no input from HR. The head of HR then had the opportunity to review the ‘finalized’ Purchase and Sale (P&S) agreement and realizes that out of the 600 page legal document, only 5 pages deal with HR and 90% of that focuses on executive severance issues (important, but only a small piece of the whole picture).

    I remember one deal where HR was invited to the table after the deal was announced and I had to laugh (or cry) after reading the P&S for a 6,000 employee division of a company with locations in 30 countries. One directive by the buyer, a private equity firm, directed a major cost-cutting action by mandating that all retirement programs in each country be converted to a Defined Contribution (DC) plan, no exceptions. HR was not consulted beforehand and no HR due diligence was done, so the buyer missed some key facts, such as – there are no DC plans in some countries, some countries prohibit changes in benefits programs in an M&A deal, and that Work Council/Unions in many countries would have to approve both the plan design change and the deal itself.

  3. Totally agree. And I add more, an analysis of team management skills of the company, a study of culture, and to consider development of this team, and even the ability to adapt to the new organization will give us clues to predict the success or failure of the operation.