TUPE on a share sale—time to tread carefully?

What does the decision in Smith v Jackson Lloyd Ltd mean for future share sales? The Employment Appeal Tribunal (EAT) recently held that the Transfer of Undertakings (Protection of Employment) Regulations 2006 applied to a share sale resulting in the employees of the target company transferring to the parent company of the purchaser.

Original news

Smith v Jackson Lloyd Ltd UKEAT/0127/13/LA, [2014] All ER (D) 157 (Apr)

In dismissing the employers' appeal, the EAT held that the employment tribunal had directed itself correctly and applied the correct law in holding that there had been a transfer of undertakings pursuant to the Transfer of Undertakings Protection of Employment Regulations 2006, SI 2006/246, reg 3(1)(a) (TUPE).

How did the issue arise in this case?

In September 2010, Jackson Lloyd Ltd (JL), a repair and maintenance company, was in severe financial difficulties. It was agreed that Mears Ltd (ML), the subsidiary company of Mears Group plc (MG), would purchase the shares in JL.

Upon acquisition, the original JL board resigned with immediate effect and were replaced by MG nominees. MG announced to the JL workforce that MG had acquired JL and that it was embarking on a programme of integration but that there would be no change to the terms and conditions of their employment.

The employees of JL brought a claim for breach of TUPE for failing to consult with and inform the affected employees about the transfer to MG. The Employment Tribunal (ET) found there was a TUPE transfer to MG and made an award in respect of the failure to consult with and inform the employees. The EAT subsequently dismissed an appeal by MG against the decision of the ET.

What are the relevant statutory provisions?

TUPE, reg 3(1):

'These Regulations apply to-

(a) a transfer of an undertaking, business or part of an undertaking or business situated immediately before transfer in the United Kingdom to another person where there is a transfer of an economic entity which retains its identity'

TUPE, reg 3(2):

'In this regulation 'economic entity' means an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary.'

TUPE, reg 3(6):

'A relevant transfer—

(a) may be effected by a series of two or more transactions, and

(b) may take place whether or not any property is transferred to the transferee by the transferor.'

What factors were taken into account?

The EAT found that JL's activities and practical identity were wholly integrated into MG. MG maintained the fiction and appearance that JL was a separate and continuing company for commercial reasons but this was a façade.

However, this was not to say that the acquisition of the JL shares by ML was a sham. The share sale was considered to be genuine by the tribunal and it did not amount in itself to a TUPE transfer to that company. However, the share purchase by ML effectively provided the means by which the parent company MG gained control of JL, so as to trigger TUPE in relation to the employees of JL who transferred to MG following the share sale.

Why is the case important for restructuring and insolvency professionals?

Companies in financial difficulty are commonly purchased by either:

  1. acquiring the shares of the company (the target) that operates the business, or
  2. acquiring the business and assets of the company

On a share sale, the assets continue to be owned by the target and there is no change in employer for the target's employees. The position is different on an asset sale where individual assets and contracts (including employment contracts) will transfer to the buyer. As the employees will have a new employer, the TUPE legislation is designed to give protection to the transferring employees.

It is unusual to see TUPE applying in a share sale and restructuring and insolvency professionals will need to advise their client carefully where it is intended to restructure or integrate the business in the period post acquisition. Clients should be advised to tread carefully when transferring operations out of the target company and into another group company and it would be advisable to continue operating the business through the transfer company in the period post acquisition in order to avoid incurring TUPE related costs.

While the case clearly turned on the behaviour of the parties post-acquisition, lawyers may wish to review their template share sale agreement where it is envisaged that group companies may be involved, for example, in relation to parental guarantees given to the seller.

Further reading

If you are a LexisPSL Subscriber, clink the links below for further information on TUPE:

Employee transfer

Variation of terms and transfers

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Anna Jeffrey, solicitor in the Lexis®PSL Restructuring & Insolvency team.

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