Law Times

PAGE 12 FOCUS JULY 14/21, 2008 / LAW TIMES HR issues becoming a central focus BY JULIUS MELNITZER For Law Times business people. The legal compo- nent of human resources, however, is frequently in the background, al- most an afterthought in big-time, big-paying M&A transactions. But all that's changing. "HR issues are becoming a T central focus in many transactions and demand much more special- ized advice than they have at- tracted in the past," says Stephen Shamie, managing partner of Hicks Morley Hamilton Stewart Storie LLP, Canada's largest labour and employment law boutique. "These issues, especially pension li- abilities, retiree benefits, and long- term incentive compensation, can impact directly on purchase price, so you have to account for them." Concerns about retaining key people in the target com- pany also loom large. he human resources side of a deal has always been a sig- nificant consideration for "Retention issues give acquir- ers a real interest in non-com- petition and non-solicitation clauses, as well as change of con- trol payments," Shamie says. With today's demographics making retention a major is- sue, companies are taking their HR treatment reputation very seriously. "Even the target company has a stake, because it wants to make sure that it doesn't incur a reputation for leaving loyal employees twisting in the wind," says Gregory Winfield of McCarthy Tétrault LLP. Adding to the emphasis on HR due diligence is the emergence of class actions in Canada, includ- ing a spate of employment-related cases, most recently the high-pro- file overtime pay suits against the likes of CIBC and KPMG. All of this means that Cana- dian firms interested in build- ing or maintaining their trans- actional practices, whether in the form of M&A mandates or restructuring mandates, should Ball&Alexander Barristers & Solicitors Excellence in Employment & Labour Law • Counsel in Leading Cases • • Authors of Leading Book • Wrongful Dismissal Labour Relations Employment Law Human Rights Post Employment Competition Civil Litigation Appellate Advocacy Workers' Compensation Employment Standards Administrative Law 82 Scollard Street, Toronto, Canada, M5R 1G2 Phone: (416) 921-7997 Fax: (416) 921-3662 web: www.staceyball.com www.kenalexander.ca be taking a close look at the strength of their human-re- source-related practice areas. "The companies who do acquisitions best are the ones who have teams dedicated to HR issues," says Sandra Cohen of Osler Hoskin & Harcourt LLP's New York office. "Em- ployee issues now arise as early as the term-sheet stage of a deal, so labour, employment, and pensions and benefits lawyers are there from the outset." It's not as if HR issues have suddenly been thrust upon the business community. "It's been more of a gradual transition that's accelerated as pension surpluses turn to deficits in an era of low interest rates and poor equity perfor- mance," Shamie says. For many American buy- ers, the Canadian HR envi- ronment is nothing short of culture shock. "Offshore or cross-border Canada's courts have little tol- erance for elaborate corporate restructurings that undermine collective bargaining rights. Indeed, the need to scrutinize collective agreements and bar- gaining relationships with an ex- pert eye is a key element of HR due diligence. A recent transac- tion in which Fraser Milner was involved failed because the U.S. acquirer, whose secret agenda was to outsource some of the company's Canadian work, was advised that prohibitions against contracting or subcontracting in the existing collective agreement stymied the strategy. Which is not to say that Anneli LeGault says some Americans think Canadians 'are always on vaca- tion, even slackers,' and are 'amazed' at our generous benefits, especially maternity leave. buyers, particularly those who have never operated in Canada, come from a very different regula- tory framework than the one that exists here, and most of them seek Canadian counsel on employment- related issues," Shamie says. "Now- adays they want specialists, whereas they might have left the job to cor- porate lawyers in the past." To be sure, U.S. buyers can come with a definite mindset. "Some Americans go so far as to believe that Canadians are always on vacation, even slackers," says Anneli LeGault of Fraser Milner Casgrain LLP. "They're amazed at the generosity of our benefits, especially maternity leave." Not to mention the other differences. "Canadian and U.S. law di- verge dramatically in many re- spects," LeGault says. "To them, we're reminiscent of Switzerland or Denmark, more like Europeans than we are like them. "They can get upset when we tell them that they have to rec- ognize the union and that the company will stay unionized, and find it offensive that we don't have employment-at-will even for non- unionized employees. They can have trouble getting their heads around severance policies for long-term employees [for which the Canadian rule of thumb is one month's notice or pay for ev- ery year of employment]. They see huge liabilities there to the point where these issues can become a halting point in negotiations. They find it hard to understand that they're buying employees with 20 or 30 years' service if they take over the company." Intensely galling to Americans are the "successor rights" provi- sions found in Canadian labour legislation. These allow a bargain- ing agent to continue representa- tion of unionized employees when a business is sold or otherwise transferred. The existing collective agreement binds the successor, usually a purchaser, who by opera- tion of law takes on the vendor's rights, liabilities, and responsibili- ties under the agreement. And as the recent decision of the Alberta Court of Appeal in International Association of Ma- chinists and Aerospace Workers, Local Lodge No. 99 v. Finning International Inc. demonstrates, problems arising from cul- tural and legal differences are absent for European buyers. "We recently had a transac- tion run out of Germany which turned out to be very difficult," says Lorraine Allard of McCa- rthy Tétrault. "Because there is no compulsory funding of pension funds in Germany, the buyers came with a completely different concept of how to han- dle benefits in general and how to deal with HR risk allocation." Things get even more compli- cated when multinationals want to rationalize the benefits extend- ed to Canadian employees with those available elsewhere. Throw in differences in privacy law, hu- man rights legislation, the rules relating to whistleblowers, and statutory liability for officers and directors, and the complexities can be daunting to the unfamil- iar — especially to buyers who are simply making a one-time pur- chase of a Canadian company. "On the other hand, if you've got a global deal, particularly in the context of a strategic purchase, Canadianizing the deal may affect the purchase price, but it won't be a show-stopper," LeGault says. Still, the due diligence must be done. "Covering all the HR ground can involve a very significant amount of work, especially if there are issues involving pensions and unions," says Jeff Goodman of Heenan Blaikie LLP. Work that's inevitably done by Canadian specialists. "U.S. and U.K. lawyers are intellectual property CONFIDENCE & CARE Discover why many of the world's most original thinkers rely on Bereskin & Parr for IP guidance. One of Canada's leading intellectual property law firms, we combine depth of expertise with a dedication to tailored service that builds lasting trust. increasingly unwilling to dabble in pension due diligence whereas in the past some of them might have treated pension concerns as just another aspect of contract law," says Kathryn Bush of Blake Cassels & Graydon LLP. "But the high degree of regulation and the intervention of actuarial standards has led to increasing involvement of Canadian lawyers." LT DON'T COURT www.bereskinparr.com TORONTO MISSISS A UG A WA TERLOO MONTRÉA L DISASTER Keep up-to-date on the latest judicial developments by reading Law Times CaseLaw on pages 14 -15 Untitled-1 1 www.lawtimesnews.com 7/8/08 3:32:29 PM

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