12.6 Employee Issues 421expressly forbidden, such as changes to the articles of association or other consti-
tutional documents of the company, and the distribution of assets to shareholders.
The management of the target can object to significant restrictions on manage-
ment discretion. In practice, pre-closing covenants are often diluted. For example,
some actions can be permitted with the acquirer’s consent which may not unrea-
sonably be withheld.
Pre-closing covenants can include undertakings that secure the exclusivity of
the transaction. The enforceability of such covenants depends on their contents
and the governing law (section 12.4.3).
12.6 Employee Issues
Acquisitions raise various employee issues. Employees have individual and col-
lective rights. They are entitled to a pension. They also know everything about the
target’s business and how to compete with the target. Some of them participate in
the acquisition process. This makes it necessary to manage employee issues at
various levels.
Management of information. The management of confidentiality through non-
disclosure and non-competition agreements belongs to the most important compo-
nents of the pre-signing process (section 12.2). As has been explained earlier, non-
disclosure agreements and non-competition clauses do not guarantee sufficient
protection in Europe (Volume I).
Non-solicit/no-hire covenants. If the vendor can hire the core employees of the
target business after closing, the acquirer might not receive the benefit of its bar-
gain. The parties often agree that the vendor may neither solicit nor hire target
employees after the closing of the agreement. Such an obligation can also support
a non-competition covenant (section 16.3).
Payments to the target’s board and executives. After closing, the acquirer will
try to encourage vital target management to stay on. (a) The acquirer will have to
ensure that proper employment contracts are in place. (b) The acquirer can also
use additional incentives. For example, the acquirer may offer to pay a stay-on
bonus to key executives in cash and/or shares. Typically, the bonuses will be paid
over a period of time, but the executive will not be entitled to any unpaid portion
of the stay-on bonus unless he is employed by the firm at the time a payment is to
be made in accordance with the terms of the bonus.
In private-equity acquisitions, key management is frequently asked to invest in
the shares of the acquisition vehicle or the target company. The private-equity
firm may invite management and board members to be co-owners and align their
interests with those of the private-equity firm for two reasons. First, refinancing
after the completion of the acquisition depends on the co-operation of the target’s
board and management. For example, the distribution of funds to shareholders and
the merger of the target with the acquisition vehicle require the consent of the tar-
get’s board. The amount of capital that can be released and distributed to share-
holders depends on the creativity of the target’s management. Second, as the target