M&A deal teams should take note of heightened scrutiny of HR and employment practices by antitrust enforcers in the US and Europe.
No-poach, non-solicitation, and wage-fixing agreements — arrangements between companies seeking to agree wages, or prevent or limit the hiring of each other’s employees that are not ancillary and narrowly-tailored to a legitimate transaction such as an M&A deal or joint venture — can lead to significant fines and even criminal sanctions, as well as private damages litigation. Parental liability for European antitrust failings by a group company can arise even in the case of a minority stake, and even if the parent company had no involvement in or awareness of the wrongdoing.
A Hot Topic for US Enforcement and Litigation
The US has led the way in aggressively investigating and prosecuting no-poach agreements that limit workforce mobility and/or depress wages, and increasing political sentiment against such agreements means enforcement will continue. The US DOJ has ramped up its prosecution efforts, saying it will now “proceed criminally against naked wage-fixing or no-poaching agreements”. Before, the DOJ treated no-poach agreements as civil violations, most notably prosecuting Silicon Valley companies for “no cold call” arrangements that restrained recruitment of high-tech employees. In addition to employees litigating for damages, companies can now also face fines of up to US$100 million, and individuals up to US$1 million and 10 years in prison. No-poach agreements are a “high priority” for the DOJ and US state enforcers, and many criminal no-poach investigations are underway.
European Enforcers Are Taking Note
In our view, European regulators are observing US developments and are taking an increasingly stronger line against no-poach and wage-fixing agreements. In 2016, Italy’s national competition authority fined eight modelling agencies €4.5 million for wage-fixing agreements. In 2017, three French flooring companies were fined a total of €302 million for entering into an informal agreement not to poach. In 2018, the Central Bank of Ireland launched an investigation into an alleged no-poach agreement between Italian-headquartered asset management firms. No-poach and wage-fixing agreements can be prosecuted criminally in the UK and involved directors can be disqualified from boards, posing a real risk to directors sitting on subsidiary company boards. Actions for damages have also become a favoured tool of private enforcement in Europe.
What Should M&A Deal Teams Do to Assess and Manage Risk?
Enforcement actions focus on agreements or understandings between companies, formal or informal, to limit competition between themselves in employee hiring or terms of employment. While no-poach agreements are generally prohibited, companies can still impose carefully drafted post-termination non-solicitation covenants on employees to prevent poaching for a specified period. Non-solicit provisions remain useful for company owners, but their enforceability is subject to limitations and they should be narrowly drawn in terms of scope, duration, and geographical reach; for example in the UK, they are often limited to employees with influence over clients and customers.
Thorough antitrust due diligence, potentially including interviews with senior staff responsible for HR, should be conducted on target businesses. DOJ no-poach cases have arisen out of merger reviews, with evidence emerging from documents provided in connection with mandatory clearance. Parties should remain alert to the risk of no-poach agreements coming to light, particularly as both US and European merger control regulators are making increasingly full and burdensome document disclosure requests.
M&A deal teams should be aware that overly restrictive interim covenants on employee movement prior to merger control clearance can be viewed as a gun-jumping offence, if introduced at the buyer’s request or if to the buyer’s benefit. Protections and actions between signing and closing should be carefully considered.
Post-completion non-solicitation covenants that are imposed by buyers on selling shareholders under an SPA (for example by seeking to restrict the enticing away of employees of the acquired business) are also still acceptable, subject to the usual requirements to be reasonable in terms of scope, duration, and geographical reach.