Answer ... There are no specific requirements under the principal labour statutes with regard to employee consultation when entering into M&A transactions. However, the Supreme Court of India ruled in 2011 that workers must not be compelled to work under a different management of a business undertaking if their consent to do so has not been duly obtained. Therefore, the court ruling establishes a requirement for sellers to obtain consent of workers before entering into transactions to transfer control of business undertakings. It further ruled that in such scenarios, workers can essentially walk away from their employment and are entitled to receive severance pay of 15 days of average pay for every completed year of continuous service or any part thereof over six months.
This ruling applies only to ‘workers’, who are statutorily defined as any persons employed to “do any manual, unskilled, skilled technical, sales promotion, operational, clerical or supervisory work or any work for the promotion of sales for hire or reward”, excluding employees who:
- are employed in an administrative or managerial capacity or for supervisory work; and
- earn more than INR 10,000 per month.
Similarly, this jurisprudence may be extended to a court-based merger, as the employment of workers shifts to another entity.
With regard to the acquisition of distressed entities under the Insolvency and Bankruptcy Code, 2016 (IBC), as per a recent ruling of the Supreme Court of India, the requirements relating to notice of a transfer of business undertaking and severance pay do not apply if:
- the employment is not halted by the acquisition;
- the transaction envisages fair treatment (ie, no less favourable than prior to the acquisition) of workers upon the transfer of undertaking; and
- the terms of the acquisition require the buyer to be liable for retrenchment payments as if the employment has not been interrupted on account of the acquisition of the erstwhile employer (please see question 10.2).
In the case at hand, the resolution plan fulfilled the above conditions and thus the requirement relating to notice of a transfer of entity to a new employer did not arise.
As the jurisprudence on this issue largely relates to the transfer of business undertakings and distressed acquisitions under the IBC, the requirement to obtain consent may not apply to share and asset acquisitions. However, it is recommended to err on the side of caution and obtain consent from workers in the event of a change in control or management in the target.
For employees (who are not classified as workers), consent or consultation requirements in the event of a change of control in the target do not apply. However, there may be rare instances, in the case of senior management/C-suite employees, in which consent or consultation requirements have been contractually agreed.