One of the challenges faced by the buyer during the post-M&A deal phase is to integrate the existing workforce of the target structure into the new structure while respecting employees’ rights but ensuring the interests and implementing goals of the target company managed by the buyer.

These structural changes sometimes involve upheaval in the legal relationship between employees and their new employer: the Vietnamese Labor Code anticipates this and lays down a legal framework during the transition.

While employees in transition are first and foremost directly affected by human changes, their entire legal and professional environment is also affected:

  • Team management
  • Resources allocated to internal operations
  • Management of the payroll, etc.

In this case, the legal framework provided by the applicable Labor Code, the labor contract and collective labor agreements previously signed serve as a compass.

In accordance with Vietnamese law, on the date of signature of the M&A deal, the target company ceases to exist in favor of the acquiring company, which inherits all its rights and obligations, in particular the employment contracts existing in the former structure. The operation entails a transition in the rights and obligations associated with the employment contract. This transition is therefore expressly provided for in the Vietnamese Labour Code.[1]

Concretely, three main obligations arise from this regime, and they differ according to the favored outcomes by the employer in the context of a merger or acquisition:

1. The development of a labour utilization plan (LUP)

This obligation is generally the responsibility of the target company (Employer). It means that the implementing entity is the target company, regardless of who owns or controls it. This entity maintains and exists continuously during the M&A process.

The purpose of the LUP is to plan the reorganization of the workforce, including any changes (redundancies, changeover to part-time work, new recruitment), as well as the financial resources and measures required for its implementation. It therefore requires the buyer to intervene or have an impact from the beginning to avoid another strong turmoil after the M&A transaction through a second personnel arrangement.

The LUP must be drawn up based on a dialogue under the grassroots democracy regulations at the target company, and the content of these dialogues must be publicly communicated by the employer within 3 days from the end of the dialogue [2].

2. The implementation of the labour utilization plan

Application of the LUP takes place in a hybrid phase in which this obligation is legally imposed on both the current employer and the future employer [3].

In a merger case, the company in which the target company merged shall continue implementing this LUP. While, in an acquisition, the LUP shall be implemented by the target company with control vested in the buyer.

If, during this period, an employee of the target company is authorized to resign with the new employer[4], job loss allowance will be calculated on the sole basis of the time worked with the current employee, but severance allowance will consider the total period worked with the former employer of the merged entity [5].

The merger or acquisition phase necessarily involves a reorganization leading to the redundancy of certain employees, to optimize financial resources or avoid the duplication of certain positions already filled in the target structure to optimize personnel, ensuring the maintenance of stable development and gradually realizing the buyer’s goals in the post-M&A phase.

When the labor contract is terminated, redundancy payments are calculated based on legal criteria that are binding on the employer [6]. These provisions derive from Vietnamese domestic law, and any employment contract signed by an entity established in Vietnam is subject to these rules.

Over and above the legal framework, this transition period is bringing about a huge number of changes in the lives of employees, whose jobs may or may not be included in the rest of the commercial project. While dialogue remains a legal obligation, it is important to draw up the LUP taking account of the company’s needs and explaining rationally the economic or strategic reasons that are leading to major changes. Over and above these institutional challenges, there are also human challenges for the merging or acquiring structure: adapting to the working culture, relations with the staff, and matching human and economic visions.

[1] Article 43 of Labour Code (2019) – Obligations of the employer in case of full division, partial division, consolidation, merger of the enterprise; sale, lease, conversion of the enterprise; transfer of the right to ownership or right to enjoyment of assets of the enterprise or cooperative

[2] Article 41.1 e/ of Decree no. 145/2020/ND-CP

[3] Article 43.2 of Labor Code (2019)

[4] Article 34.11 of Labor Code (2019)

[5] Article 7.4 c2/ of Decree no. 145/2020/ND-CP

[6] Article 47 of Labor Code (2019)

The article is based on laws applicable at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable laws and the specific cases that the reader may wish to apply may have changed. Therefore, the article is for referencing only.


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