Labour contingencies should not undermine M&A deals in Argentina
January 2017 | EXPERT BRIEFING | MERGERS & ACQUISITIONS
As in every other M&A deal elsewhere in the world, the potential buyer of a company based in Argentina will have to carry out due diligence processes on the target, its business and assets in an interdisciplinary effort. A properly designed and executed due diligence exercise will not only have an impact on the purchase price, but will also be important for purposes of allocating risks in the transaction documents. It is not unusual to see that the initial terms and conditions (economic and legal) of a transaction (including its structure) are modified or redefined upon completion of the due diligence.
In Argentina, irrespective of the identity of the target and its industry, due diligence processes generally end up showing that the most critical contingencies are associated with tax and labour issues. That is why in Argentina they say “nothing is certain but death, taxes and labour contingencies”.
As you may expect, there are exceptions to this rule. There are also different types of challenge that labour contingencies may pose to a deal, depending on the specific way in which the target’s business has been conducted and the industry in question. Additionally, there will be situations in which other contingencies of equal or greater concern may be identified, for example, environmental issues, potential claims or litigation and compliance related issues.
Over the last 15 years, we have seen considerable case law and the passing of labour legislation which, beyond any opinion on their merits, have resulted in more areas of concern within the labour sphere, higher labour and social security costs, and the creation of important barriers to clean-up contingencies in an efficient fashion. Argentina has become an extremely controversial and litigious (and inefficient) jurisdiction from a labour standpoint – one where labour law related sins cannot be washed away; at least, not easily.
Due to these factors, it should be no surprise to hear that in recent years some M&A transactions failed due to labour risks or that they closed at a higher cost for the buyer, the seller, or even for both.
Despite the fact that we advocate for a comprehensive solution to these labour issues – a solution that should be rational, reasonable and take into consideration the need for foreign investments in Argentina – we think it may be useful, from a practical perspective, to go through some of the most common labour contingencies and propose some measures to prevent deals in Argentina from falling apart.
This should be relevant to investors currently looking at opportunities in Argentina, particularly since the new administration led by Mauricio Macri has renewed interest in Argentine assets.
Some typical labour contingences
The first thing that a foreign investor will notice after talking to its labour counsel in Argentina is that the country’s labour laws are intricate. Labour relationships are basically governed by the Labour Contract Act (LCA), other general and specific labour laws and regulations and collective bargaining agreements (CBAs). The parties cannot agree to, either through a CBA or an individual agreement, terms and conditions that are less favourable to the employee than those set forth by the LCA or any other applicable labour law. In other words, the LCA is the Bible.
The second thing that foreign investors will soon notice is that a question related to labour laws may have more than one correct answer. This is because local labour courts work in a way that allows multiple interpretations of the LCA and other labour laws.
Indeed, Argentine labour courts (lower courts and the several chambers of appellate courts) may have different views and interpretations, which may sometimes be contradictory or inconsistent, on labour law standards. While the decision of the lower courts may be revoked or amended by the appellate courts, these appellate courts are composed of several chambers whose decisions may not necessarily coincide (unless the chambers take a plenary decision which only takes place in exceptional circumstances).
This situation not only encourages the promotion of countless and meritless claims, but also make it difficult, in the context of an M&A due diligence process or otherwise, to assess with a reasonable degree of certainty the level of labour law compliance by a local company.
There are some frequently identified labour contingencies companies operating in Argentina use, the first of which is employee benefits. The vast majority of local companies offer their employees work items or benefits (such as cell phone, car, meals service, health insurance, etc.) or pay ‘non-salary’ amounts under applicable CBAs. In practice, it is not unusual for employees to – at some point – claim that these items are actually part of the salary and should be registered as such in the labour books and records of the employer. If a company does so, it will trigger substantial additional costs (including taxes and additional social security contributions). A dispute between the employee and the employer regarding the registration of these items generally leads to a constructive dismissal claim followed by the payment of an aggravated severance and material penalties, which is often more than twice the amount of the mandatory severance, for improper registration of the mentioned items.
A second contingency relates to a failure to apply CBAs. It is common to see companies that do not apply any CBA to their employees even though they are required to do so. In this case, the company would be exposed to potential claims, such as claims for improper registration of employment, from the union, for lack of payment of applicable union contributions, from other entities entitled to received other contributions under applicable BCAs, and so on.
Service providers, too, are a further contingency. On the basis of certain case law, individuals who render services to local companies on a regular basis, and who are not registered as employees, could claim the existence of a disguised employment relationship. A dispute between the service provider and the company generally leads to a claim for severance plus material penalties (twice or more the amount of severance) for improper registration of an employment relationship.
The local ‘Sellers Law’ governs the activity of those who, on a regular and personal basis, carry out sales and collections for their employer. These individuals are generally compensated through a basic salary plus a commission fee based on the sales and collections made. Generally speaking, if a company has employees that carry out some form of sales, upon termination of employment such employees may claim that the Sellers Law applies. Essentially they would claim that they are not ‘regular’ employees. In these cases, in addition to the regular severance and penalties, sellers might also claim additional severance contemplated under the Sellers Law and unpaid commissions based on sales made.
The universe of potential labour contingencies is not limited to the above list, however. Other sources of labour contingencies may lie in certain types of labour agreements, including golden parachutes, for example, as well as labour litigation and ex-officio assessments and inspections conducted by labour regulators. Therefore, acquirers should carry out exhaustive due diligence processes, focused on key areas of concern.
Possible courses of action
Employee benefit contingencies are often treated as a ‘market’ contingency as they are present in the vast majority of local companies. Therefore, potential acquirers are usually willing to assume the risk, at least partially. Sellers are often willing to entertain customary representations and warranties on benefits to employees (ideally, with a list of benefits to each employee or category thereof). The indemnity is usually capped and it covers the applicable statute of limitations.
Contingencies related to failures to apply CBAs, to service providers and to sellers, however, are rather specific. They depend largely on the way the target has conducted its business and its level of labour compliance. Accordingly, the potential acquirer will seek wider contractual protections. Representations and warranties are broader in scope and limits, in particular, in relation to cap and survival, and are subject to negotiation, depending on the specific labour contingency. Indeed, in some cases, a special treatment for each type of labour contingency may help to unlock an otherwise difficult negotiation, for example, by increasing the contractual protection where it is really necessary, without oversizing risks and easing the position on other items.
Furthermore, in some cases, it may also be necessary to have a specific escrow or holdback to secure the funding of the seller’s indemnity obligations or remediation actions – such as the restructuring of the existing labour scheme. Unlike other jurisdictions, escrows or holdbacks do not necessarily account for a small percentage of the purchase price.
Additionally, it is important to analyse whether the magnitude of the contingencies justifies structuring the transaction in a different way to the one originally intended. For example, one may choose to carry out a bulk-transfer of assets to an SPV, in accordance with the Argentine bulk-transfer of assets law, and a subsequent purchase of the SPV shares after the expiration of the applicable waiting periods under local laws. Also, if a contingency is limited to a small number of employees, one could try to solve such a contingency by involving those employees in the solution, to the extent the cost allows it.
M&A deals in Argentina require due diligence procedures that not only identify all labour contingencies but that are also precise in their implications, particularly regarding the potential amounts involved. It should help the potential acquirer to take the most appropriate decisions on the specific contractual protections to be sought. In practice, this implies taking different courses of action which – beyond some risks taken by the parties – will mitigate or eliminate the labour contingencies.
Fernando Zoppi and Enrique Betemps are partners at Perez Alati, Grondona, Benites, Arntsen & Martínez de Hoz. Mr Zoppi can be contacted on +54 (11) 4114 3053 or by email: firstname.lastname@example.org. Mr Betemps can be contacted on +54 (11) 4114 3071 or by email: email@example.com.
© Financier Worldwide
Fernando Zoppi and Enrique Betemps
Perez Alati, Grondona, Benites, Arntsen & Martínez de Hoz