Serial article regarding M&A on NNA (vol.93)

Asset transfer, business transfer, stock transfer [ Part 3 ]

In the previous two articles, we have discussed the characteristics of the three options for ‘selling a company’ – asset transfer, business transfer and stock transfer – from the perspective of the party leading the transaction, the seller. In this article, we examine the differences from the perspective of the parties affected by the transaction, the employees and clients of the target company.

1. Employees of the target company

First, an employment contract is concluded between the employee and the target company. This employment contract cannot in principle be unilaterally terminated by the employer against the employee’s will, except in cases where dismissal would be permitted.

On this basis, firstly, in the case of stock transfer, the only change is in the ownership of the target company, which has no effect on the employment contracts between the target company and the employees.

On the other hand, this is different in the case of business transfer. In other words, whether or not to transfer employment contracts with individual employees must all be agreed between the seller which is the target company, and the buyer, and new individual employment contracts must be concluded between the employees to be transferred and the buyer, and the seller. In principle, it is not possible to unilaterally transfer the employees to the buyer against the will of the employees concerned between the seller and the buyer.

For employees, it therefore makes an important difference whether the M&A scheme is stock transfer or business transfer.

However, even in the case of stock transfer, unprofitable businesses may be detached or liquidated as a result of the transfer, and in such cases, redundancies may be made in exchange for a lump sum payment. Even in the case of business transfer, if there is a clause in the employment contract to agree on transfers between group companies, this will be effective and the transfer may be permitted without individual consent at the time of the transfer.

2. Clients of the target company

The same applies to the target company’s clients. In the case of stock transfer, there is in principle no effect on the business relationship with the target company’s clients, as the ownership of the target company only changes.

In the case of business transfer, on the other hand, the existing business relationship does not in principle pass to the buyer unless a new contract is concluded between the clients and the buyer.

However, attention should be paid to restrictive transfer clauses and change-of-control clauses. The former restricts the transfer of a contractual position, while the latter allows the other party the right or status to terminate the contract or make payments immediately due, if there is a material change in one party’s ownership. For example, this is often stipulated in loan agreements with financial institutions and basic transaction agreements. If it applies, the contract may be dissolved even in the case of stock transfer, so as a buyer it is essential to check for these clauses in the main contract when conducting due diligence.

The clients will also check how their position is protected by change of control clauses, etc., along with the M&A scheme.

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