The Phantom Menace re-enacted by share transfer & TUPE?
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A transaction based on a share transfer doesn’t generally get caught by transfer of undertakings legislation (“TUPE”). But there is a risk that TUPE may lurk in the shadows. Make sure you don’t get caught out.

For those unfamiliar with TUPE, the simple rule is that, if a company’s shares are sold, the employees of that company are unaffected, because only the ownership of the company (not the company itself) changes. But if the assets or function of a business entity (e.g. a division within a company) are sold as a going concern, then the employees who wholly or mainly work with those assets or within that business entity, transfer with it. The mechanism for this is governed by TUPE. But the default position is that a change of share ownership does not trigger a TUPE transfer.

So here’s the problem: corporate reorganisations happen all the time. They’re often driven by tax advantages, or for organisational convenience. The creation of an OpCo and a PropCo within a group is one example of this in practice. Groups frequently make these changes by swapping or transferring the shares in their subsidiaries. Often the employees know nothing about the changes; although sometimes employees are told on a “morning after” basis that changes have been made, but that nothing else has changed. That’s often as far as it goes in practice.

A recent case should remind everyone who is involved in internal corporate reorganisations of the need to keep a weather eye out for TUPE – even if the initial, or substantive transaction focuses only on shares. The reason is that the consequences of failing to comply with TUPE can result in a liability to pay significant compensation for failure to inform and consult about the changes.

Here’s how the problem arose recently in the case of Jackson Lloyd Ltd and Mears Group plc v. Smith and others, where the responsibility for (not the ownership of) the Jackson Lloyd business had been taken over by Mears Group plc., even though Mears Ltd (its subsidiary) had bought and was the owner of the Jackson Lloyd Ltd shares:

  • Jackson Lloyd Ltd employed almost 450 people. It had a contract to repair and maintain social housing. Although there was an Employee Representative Committee that had been set up to deal with employment issues, it had been dormant for some time (more than a year, in fact). When the company got into financial difficulties, all of its shares were bought by Mears Ltd. If that had been the end of the matter, there would not have been a TUPE transfer, because only the ownership (not the identity) of the employer would have changed. There would have been no need to consider TUPE and the rest would be history.
  • However in parallel with the share purchase, several other things happened: (1) the board of directors of Jackson Lloyd were replaced by people from Mears Group plc, which was the parent of Mears Ltd; (2) the employees were told that Mears Group had bought the company, even though, technically, it had been bought by Mears Ltd; (3) there was an integration plan that would introduce Mears Group methodologies, even though the employees would still work under the Jackson Lloyd brand and wear the Jackson Lloyd uniforms; and (4) crucially, the employees were told they would move over to the Mears Group.
  • The outcome of various claims and appeals was a judgment that, although the shares had transferred from Jackson Lloyd to Mears Ltd., the employees had simultaneously transferred from Jackson Lloyd to Mears Group plc and, because this was a TUPE transfer (i.e. the moving of an organised grouping of resources that amounted to an economic entity) that compensation was payable to them for failure to inform and consult.

Why was this a TUPE transfer? Because TUPE isn’t always triggered by sales or formal transfers; it can be triggered by someone else taking over the reins of responsibility for a business activity.

Could TUPE-related issues and liability have been avoided? Possibly – by the simple expedient of a less heavy-handed and more behind-the-scenes approach by the parent company; and by a more active engagement with an employee representation body for a substantial number of workers.

A future sale of the Jackson Lloyd brand may also have been made more complicated, given that any third party wanting to buy it now, or in future, would want to buy the shares in Mears Ltd, but might also want a pre-sale re-transfer of staff to Mears Ltd., so as to have the comfort of buying the shares in a company that employed the staff working on that brand – otherwise it might be buying a shell and a business, but with no (or not enough) staff to operate it.

The lessons are: don’t assume that internal reorganisations can be done without thinking about TUPE – because TUPE may well be triggered; also, don’t forget that many share purchases are followed by internal reorganisations that are likely to be covered by TUPE and, as such, will require information and consultation on a collective basis, unless they are carried out in a low key way, or with the agreement of employee representatives. That said, the absence of any changes (other than the identity of the employer) may mean that the obligation to consult isn’t triggered anyway, leaving only an obligation to inform – which is considerably easier to do than to consult.

So remember: just as the Sith lurked in the background to threaten the Galactic Republic, so too does TUPE lurk in the background of many commercial share transfers.

Wyn Lewis