As you evaluate your company’s strategies for growth and diversification, you may be considering a merger, acquisition or divestiture. You wouldn’t be alone. According to the nonprofit Institute of Mergers, Acquisitions and Alliances, we’re seeing a steady stream of transactions globally, and that’s in spite of—or, perhaps, because of—global financial turmoil.
In the U.S. alone, merger and acquisition activity totaled $14.9 trillion in 2016, according to PricewaterhouseCoopers (PwC) using data provided by Thomson Reuters. Further, a 2017 PwC survey shows that 54% of U.S. CEOs stated that a transformational deal was the largest acquisition by the company in the past three years, one that resulted in “acquiring new markets, channels, products, or operations in a way that is transformative to the fully integrated organization.”
If a merger or acquisition is in your future, you may experience challenges in managing your global workforce. Additionally, deals related to new overseas markets are likely to experience employment compliance and payroll issues due to a lack of familiarity with foreign regulations. We’ve outlined a few of the important factors to consider to help minimize complications as you chart your next steps.
Your company likely has a “transaction team” made up of legal, tax and finance experts, to support the myriad challenges of the restructure, including the incorporation of the new entities within each country affected by the transaction.
This generally leaves the human resources team to prepare for business in any new countries after the transaction is completed. The HR team must ensure you’re prepared to pay your new global employees—possibly in countries the HR team has no experience in managing—by the transaction date. Your HR team can avoid costly mistakes by carefully considering the following processes.
In-country legal entity
A legal entity is the business structure that can legally enter a contract with another entity. There may not be a requirement to have a legal entity “in country”—which may be a common scenario with offshore shell corporations. A place of business and in-country employees may or may not be required.
If a legal entity is required in the country where you’re acquiring a workforce, there also may be specific restrictions related to how it can be established. Common types of entities include wholly owned foreign enterprise, joint venture, foreign subsidiary, representative office or limited liability corporation. Requirements for establishing a legal in-country entity vary, but they can include:
- Establishing and registering the articles of incorporation
- Planning for the appointment of officers
- Selecting and validating the company name
- Public notifications
- Appointing a statutory auditor
- Evaluating capital contributions
- Potentially setting up an in-country bank account
The structure of the legal entity can also affect how employees must be contracted. For example, in China, companies defined as “representative offices” have different hiring regulations than wholly owned foreign enterprises.
For companies entering global mergers or acquisitions, it’s strongly advised to include specialized tax and risk advisors in their transaction teams to guide how they structure their legal entities and minimize financial risk. This would include, for example, experts to provide advice creating of a shell structure.
In-country employer setup
Just because you’ve set up a legally registered in-country entity, it doesn’t necessarily mean you can have in-country employees. If you wish to trade and do business in a country, you are likely required to secure a corporate business registration. And depending on the country, may be required to be registered as an in-country employer to take care of employer taxes and social costs.
In Germany, for example, a company needs to register as a legal in-country entity and be registered as an employer to have employees. But this isn’t true everywhere.
In some countries, a company cannot register as an employer until it has at least one employee. In other countries, payroll processing cannot begin until the in-country employer registration is completed. And in some countries, you can only calculate payroll and pay employees when your employer registration is completed.
However, regardless of the local rules, if you don’t comply, your company will likely be hit with hefty penalties.
As you lay the groundwork for your new company, make sure your legal team has a hand in crafting the new structure to ensure the original company remains liable for any outstanding fines or penalties. When your new company is seen as an extension of the original company, it limits the liability of that new entity until the transaction is completed.
After you’ve established your new company as an employer, you must register with the various local tax, social security, workers compensation, insurances and relevant third parties. Depending on the country, this can mean accessing one or multiple offices.
It’s important to remember that payroll processing cannot begin until the employer registrations have been completed; this enables social security and other third-party payments to be submitted without penalty. Additionally, new hires (starters) and terminated employees (leavers) in many countries are required to be registered or de-registered within a specific timeframe (e.g., three to five days prior to start date). Noncompliance could result in penalties, and on-the-job accidents without appropriate registration could result in liability for loss of work payments.
Your legal team should have a role in ensuring you are registered with all the tax, social security and other insurers after the employer registration process. As a part of your deal, document the agreement that the “former” parent company remains liable for any social security or any third-party disputes or penalties until the transaction completion date.
Evaluating options prior to entity setup
As you work through your merger or acquisition, you may determine that certain business units or territories do not fit in with your strategic vision. However, there is a legal obligation to pay any employees retained in the transaction, so it’s important to do a full evaluation before investing in a new territory or region. Exiting a country can turn into a costly and lengthy process. If you don’t already have an existing entity in a country to absorb the employees of your merger or acquisition, you could put your organization at risk of employment noncompliance if you can’t establish an entity before you acquire the in-country employees.
There are solutions for companies looking for an alternative to employing individuals where there’s not currently an in-country legal entity, or where it may take too much time or be too costly to set up an entity.
An international employer of record is one example. Under this solution, the acquired employees are hired through an already-established entity in the country of operation, ensuring that all local employment laws are followed and HR guidance is provided. Above all, an employer of record mitigates your exposure to risk and costly fines related to employment noncompliance. When your new company’s entity is finalized, the employees can simply be transitioned over.
The bigger picture
The considerations we’ve explored are not the only challenges associated with acquiring a workforce as part of a global merger, acquisition or divestiture.
However, they’re a starting point. Other elements to evaluate include in-country banking, data privacy and protection policies, setup and transfer of benefits, and pensions and healthcare contracts. Considering some of the bigger picture factors that can have an impact on your timelines and how much exposure to risk your company can withstand will make your merger, acquisition or divestiture transactions run more smoothly and, ultimately, be more successful.
Learn more about how we can provide local employment and payroll expertise by speaking with a global solutions advisor today.