Jurisdiction - China
Reports and Analysis
China – Importance Of Proactively Addressing Employees’ Concerns – Cooper Case Study.

25 July 2013

 

 

Highlights:

 

Following the PepsiCo-Tianyi transaction, where the acquisition aroused mass protests from workers of PepsiCo bottling factories and ended up with significant unexpected expenses paid to the employees, the Cooper-Apollo transaction is now facing similar challenges. It highlights the importance of addressing employees’ concerns proactively at the early stage, to ensure smooth consummation of an acquisition.

 

Background

 

The ink has not even dried yet on the press release, and the workers at Cooper Chengshan(固铂成山轮胎有限公司), a joint venture in China between Cooper Tire & Rubber Company (USA) (“Cooper Tire”) and Chengshan Group (China), are already on a strike. They are protesting against the acquisition of the company by Apollo Tyres (“Apollo”), an Indian tire manufacturer, as part of Apollo’s USD$2.5 billion leveraged buyout of the USA-based Cooper Tire. The industry describes the Cooper-Apollo deal, declared on June 11, 2013, as a “snake-swallowing-elephant” maneuver. On June 27, 2013, representatives of the trade union of Cooper Chengshan announced that the strike will continue unless the acquisition halts. The trade union expressed their two concerns to the media: (1) Apollo’s over-leveraged debt level at the closing of the deal, which would make the factory financially vulnerable to market demand declines; and (2) difficulties of accommodating a new Indian management style, after the factory has spent years transitioning into an American management style. On July 12, 2013, Cooper Tire publically announced that the acquisition was still moving forward but it is still unknown how the parties will address the employees’ concerns.

 

Similarly, in the strategic alliance between Tingyi Holding Corporation (“Tingyi”), known as the owner of Master Kong brand in China, and PepsiCo Inc.(“PepsiCo”), where Tingyi bought out PepsiCo's joint venture bottling operations, the acquisition aroused mass protests from workers of PepsiCo bottling factories. Even though the strike did not impede the deal, the parties paid significant unexpected expenses.

 

Employee Participation Rights under PRC Laws

 

Under PRC laws, it is explicitly stipulated that the employee’s employment contract is not affected  by the change of the employer’s shareholder.
The employer has no obligation to pay any severance in the context of an equity acquisition (except for the acquisition of an
SOE by a non-SOE).

 

Additionally, in a deal like the Cooper case, target companies have no obligations to obtain the consent of (or even to consult with) labor unions.
PRC laws provide only a general principle that trade union representatives have the right to attend, without the right to vote in, meetings of the board of directors of a Sino-foreign joint venture held to discuss certain significant issues (in particular, the issues relating to employee benefits). The PRC laws are silent on the detailed extent of employee participation in decision-making in the M&A process or integration process of the target company. This means that the burden falls on the buyer and the seller to ensure that the target company’s workforce is retained in a satisfactory manner.

 

The Cooper case and PepsiCo case shall warn international acquirers to pay more attention to the PRC target’s labor conditions/labor relation before entering into a transaction, and the issues will become more relevant where the acquisition contemplates change of control and/or entails culture challenges.

 

Lessons and Recommendations

 

A. Pre-deal planning: International acquirers of Chinese target companies shall recognize, and attempt to deal from the outset with, any integration issues that could complicate or delay the successful implementation of a transaction. Acquirers shall place special emphasis on ensuring the target company’s workforce’s satisfaction and its labor practice/conditions comply with the PRC laws.

 

B. Contractual arrangement: If the acquirer anticipates workforce dissatisfaction, the parties may set out in the acquisition agreement a specific condition that consent from trade union/a majority of employees must be provided before the acquirer has an obligation to consummate the acquisition. If the parties anticipate the retention of employees will incur costs (which may not necessarily be mandatory), a provision of such cost should be made upfront and agreed in the acquisition agreement.

 

C. Culture difference and communication issues: It is difficult to avoid the impact of culture difference during the integration of a cross-border M&A. However, foresight, communication, understanding and proper handling of these differences can reduce the difficulties during the transition period.

 

 

Jun He 5

 

For further information, please contact:

 

Daniel He, Partner, Jun He
hek@junhe.com

 

Yu Cui, Associate, Jun He
cuiyu@junhe.com

 

Justin Xu, Associate, Jun He
Xudl@junhe.com

 

Jun He Corporate/M&A Practice Profile in China

 

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