Experienced international M&A dealers normally pay attention to the requirements of provision to information and consultation with employees before an M&A is agreed under the law applicable to the target company.

 

Chinese law states general provisions regarding the obligations to inform and consult with employees for material issues. Those provisions can be found in the Company Law Article 18, the Labor Contract Law Article 4, the Law of Trade Union Article 38 and the Enterprise Democratic Management Regulations Article 3. A company is required to notify their employees when deciding any material issue directly relating to the interests of the employees

[i]

, by means of public notification such as posting in a public area, delivering in written form, notifying by emails or making publication on internal websites

[ii]

. Also the company should consult those issues with their employees through employee representatives’ congress or other forms

[iii]

. The initiative of this legislation is to encourage employees to participate in the management of the company to a certain extent democratically, harmonize capital-labor relation and avoid employment conflicts. As one of the social responsibilities, the company is obligated to ensure their employees enjoy the right to know and the right to express on those material issues relating to the operation of the company or having direct impact on their own interests

[iv]

.

 

“Material issues” is not clearly defined in Chinese law. In practice, an M&A deal and change of controller will be considered as a kind of “material issue”. A great number of Chinese employees believe corporate culture, management organization, and the remuneration system will be changed during or after the M&A transaction. Inevitably this will have an impact on their interest directly, no matter the sale of shares which will be designed at the company level, or at the parent/holding company level.

 

The law also requires the company to listen to the trade union when discussing material issues regarding their operations, management and development and important matters relating to the immediate interests of employees

[v]

. The trade union shall organize the employees through employees’ congress to participate in decision-making and supervision on material issues. And the employees’ congress has the duty and power to discuss and advice on such matter

[vi]

.

 

Traditionally, Chinese employees may initiate compensation claims due to a n M&A transaction or change of controller of the company. This mainly roots from the custom practice in transfer of stated-owned properties and rights in China. There are requirements to provide information and to consult with employees as well as arrangement of employee placement when a transfer of properties and rights in a stated-owned company, in particular change of controller, occurs

[vii]

.

Looking at current Labor Contract Law of PRC, any change of shareholder or controller will not necessarily lead to a change of employment relationship. No compensation to employees applies compulsorily in this circumstance. The working period of employees will be calculated on a continuous basis. The employees are not qualified to have compensation whether they agree on the change of shareholder or controller or not and whether they quit the job or not. It means the employee does not have the right to choose. But the employer does if it agrees to pay compensation to employees. Unequal right to choose incubates an atmosphere that the employee needs to be respected and comforted.

 

More or less, Chinese employees believe the value of the company partly contains the contribution they created, and the compensation on their past working years for the previous shareholder should be paid before a new shareholder’s takeover. From the buyer’s perspective, since the working periods of these employees are calculated on a continuous basis, if the compensation regarding the employee’s past working period is not settled before the closing, it means the buyer will need to pay for the past compensation in the future which should be burdened by the seller once any termination of employment happens to these employees.

 

In most of the cases we handled before, buyers prefer to take our advice to settle the compensation with employees for three reasons:

(1)

to comfort the employees and avoid any irrational action, strike or shutdown which might affect the timing of the transaction and the operation of the factory so as to secure a smooth closing;

(2)

to cut off any historical liabilities to the employees that should be burdened by seller; 

(3)

to provide equal right to choose each other. The buyer prefers keeping those in line with its corporate culture and spirit.

 

In the UK, the Information and Consultation of Employees Regulations 2004 (SI 3426/2004) and its amendments are a statutory instrument, which implemented the EU Information and Consultation of Employees Directive 2002/14/EC establishing a general framework for informing and consulting employees in the European Community. Under these regulations, employees have the legal right to be informed and consulted about issues at work if the company or organization has 50 or more employees. There are detailed rules on the procedure of information and consultation, the number of representatives to be consulted, the content to be informed, the period of negotiation, the agreement to be reached, the dispute settlement and so on

[viii]

. These regulations are worthy of learning from and reference by our legislators.

Different from the UK law and the EU regime, there is no detailed rule regarding the procedure of information and consultation with employees under Chinese law.

 

No specific minimum period for negotiation but “when making-decision” is mentioned. In our experience, the period for consultation with employees and then finally entering into agreements is typically 30 to 90 days.

 

Provided that there is no lay-off or termination of employment arrangement, no reporting obligation for the company to local labor authorities is required

[ix]

, however, it is advisable to communicate with government or local labor authorities to obtain their understanding and support before informing and consulting with the employees, so as to better react to any unnecessary dispute or irrational claim. Please note that the information of the ultimate actual controller, its contact and the shareholding chart are required to file for registration in the online Integrated Management System governed by the Ministry of Commerce of PRC

[x]

.

 

The person whom the company should consult with should be the representatives of the trade union and the representatives of employees’ congress of the company. Nevertheless, the reality is that many foreign-invested companies do not set up a trade union nor employees’ congress. In that circumstance, the company will have to consult with all employees or assist them to elect representatives. In some cases, the employees will elect representatives in autonomy to initiate negotiation.

 

There is no requirement on the number of employee representatives nor any election process for employee representatives to engage in dialogue with the employer. However, detailed rules of election representatives in the employees’ congress are set as below

[xi]

:

 

The number of employee representatives shall be five percent (5%) of the total number of employees in the company and not less than thirty (30) people. If the number of employee representatives is more than 100, the company and the trade union may determine the number of representatives exceeding 100. The representatives of the employees" congress shall be composed of workers, technicians, managers, business leaders and other employees. Among them, the management personnel and leaders in the middle management level of the company should not exceed twenty percent (20%) of the total number of employee representatives. If there are female employees and labor dispatch workers in the company, the employee representatives should have appropriate proportions for them.

 

All the employees who have entered into labor contracts with the company are entitled to elect or to be elected as representatives of the employees" congress. An employee representative shall be elected directly by the employees on electoral unit basis, such as the team, the section, the workshop or the department. For election or remove of employees" representative, all employees" meeting shall be convened and more than two thirds of the employees shall participate in the meeting. The decision to elect or remove the representative of the employees shall become valid through the majority of employees.

 

If the company does not comply, in the following circumstances, the labor administrative department is entitled to request the company to rectify the issue within a time limit. If the company fails to rectify (the issue) within the time limit, a fine of the amount from three thousand yuan to thirty thousand yuan shall be imposed to the company and meanwhile a fine of the amount from five hundred yuan to two thousand yuan can be imposed to the legal representative, the principal person in charge of the company or other persons who are responsible:

(1)

refusing to hold an employee representatives’ meeting;

(2)

failing to implement the resolutions made by the employees" congress in accordance with the law which shall be implemented;

(3)

obstructing the representatives of the employees" congresses, employee directors and/or employee supervisors to perform their duties according to law

[xii]

.

 

No detailed requirements on the scope of information to be provided are set forth in Chinese law. From our practical experience, any material information concerning employees’ interest, the key points of the transaction plan and the future change of the company are usually in the employees’ highest concern and advisable to provide in true and sincerity.

 

Protective provisions for employee representatives are set forth against retaliation, obstructing of performing duties or injury. Additionally, punishment provisions to those who obstruct or block employee representatives to perform their duty are in place under Chinese law

[xiii]

.

 

For the aspect on keeping transaction information confidential, generally, the labor contracts might have a confidentiality article agreed upon. The confidentiality obligation may be stipulated in the employee handbook or internal regulations of the company as the protection of confidential information. Besides, a violation of the confidentiality obligation set forth in the employee handbook or internal regulations of the company will be considered as a “serious violation of the rules and regulations of the company” which will lead to termination of the labor agreement by the company without paying compensation

[xiv]

. It is also advisable to sign a confidentiality agreement with those representatives with whom the company would be consulting with for this purpose.

 

No agreement is required to be reached expressly under Chinese Law, however, if the employees do not receive any response to their claim or are not satisfied with the proposal concerning their interest in the transaction, or if the employer imposes its own decision, or non-compliance of said obligations, irrational action, strikes or shutdown might possibly happen.

 

We observed many cases that triggered protests due to ignorance of information and consultation in China.

 

On November 19, 2015, ON Semiconductor came into an acquisition agreement with Fairchild Semiconductor, the total amount of which was nearly $2.4 billion. Fairchild Semiconductor has two factories in China, one located in Suzhou which was founded in 2002, and produces power semiconductors. The other located in Wuxi, mainly produces diodes and display devices. The acquisition was expected to complete by the end of June 2015. But on June 1, 2015, conflict broke out between Fairchild semiconductor and thousands of its employees during the process of closing. The reasons for the conflict was that Fairchild semiconductor had never mentioned any employee arrangement nor discussed any compensation with employees. All workers stopped their work and launched a strike to protect their rights for no response to the compensation proposals. An employee was in a coma at the protest site due to psychological tension. Chaos erupted and the local police came to keep order

[xv]

.

 

On November 7, 2016 in Shenzhen, O-Film Tech Co., ltd. announced the acquisition of 100% of the shares of the factory in south China of SONY electronics Co., Ltd. Thereafter, thousands of workers in the factory went on strikes to claim their rights. The employees of SONY electronics believed that there was no advanced notice for the share transfer, nor did the company consult with them. The change of investors will lead to major differences of the company management structure, enterprise culture, salary structure and so on. These would have important impact on the employees’ benefit. Therefore, employees request economic compensation

[xvi]

. In the matter of fact, such an acquisition without advanced notice to employees is in accordance with the law, and will not trigger payment of economic compensation, however, it may cause mass incidents and eventually damage the interests of all parties, and even lead to the result that the equity transfer plan cannot be carried out on time, and the parties may have to spend more money and time to obtain the desired results.

 

Similar mass protests occurred in the strategic cooperation on 24 factories between Mater Kong and Pepsi in 2011

[xvii]

, the acquisition of IBM business in China by Lenovo in 2014

[xviii]

, and the acquisition of Cooper Tire & Rubber by Apollo Tyres in 2013

[xix]

.

 

These cases illustrate the consequence for non-compliance of the information and consultation requirement.

 

In summary, Chinese law does set statutory obligations to provide information and to consult with employees for such material issues, even though there are no detailed rules and procedures available to follow. That is why executing such obligations seems difficult and complex. No punishment or liabilities strictly apply for non-compliance in legislation. However, if the parties of the transaction ignore these obligations, the consequence could be: a mass protest might occur, delay might happen in the closing and more unexpected payment will be required. The reputation of the company might be damaged. The society and the market will punish instead.

[i]

The Labor Contract Law of PRC (1st amendment is implemented on 1st July 2013)

Article 4 (2) The formulations, amendments and decisions made by employers with respect to rules on labor compensation, working hours, leave and rest, occupational safety and hygiene, insurance and welfare, staff training, work discipline or work quota management etc., which have a direct impact on employees" immediate rights and interests, or other material matters, shall be presented to the employee representative congressor all the employees for discussion, and the proposal and advice thereof shall be determined after consultation with the labor union or employee representatives on the basis of equality.

Article 4 (3) During the implementation of a rule or regulation or decision on a material matter, if the labor union or any of the employees deems it inappropriate, they shall be entitled to raise the issue with the employer and have it amended after consultation.

Article 4 (4) The employer shall make rules, regulations and decisions on material matters that have a direct impact on employees" immediate interests and rights, public or communicate the same to the employees.

[ii]

The Labor Contract Regulations of Jiangsu Province (1st amendment is implemented on 1st May 2013)

Article 4(3) Any rules, regulations and material issues directly relating to the interests of the employees, as formulated, changed or decided by the enterprise shall be notified to the employees by means of public notification such as posting in a public area, delivering in written form, notifying by emails or making publication on internal websites.

[iii]

The Company Law of PRC (Third amendment is implemented on 1st March 2014 for amendment),

Article 18(2) The company shall, in accordance with the provisions of the Constitution and relevant laws, exercise democratic management through the employees" congress or other forms.

Article 18(3) When deciding on company restructuring or any material issues relating to its business operations, or formulating any important rule or regulation, a company shall take into account the opinions of its labor union, and the opinions and proposals of its employees through the representatives of employees" congressor other forms.

[iv]

The Enterprise Democratic Management Regulations (National Trade Union Issuance [2012] No. 12) (released on February 13, 2012)

Article 3 (2) The company shall respect and guarantee that an employee shall be entitled to enjoy the right to know, to participate, to express and to supervise and other democratic rights, support them to participate in the enterprise management activities.

[v]

The Trade Union Law of PRC (1st amendment is implemented on 27th October 2001)

Article 6 The trade union shall, in accordance with the law, organize its employees to participate in the democratic decision-making, democratic management and democratic supervision of the company through the employees" congress or other forms.

Article 38 (1) Enterprises andinstitutions shall listen to the opinions of labor union when discussing material issues regarding their operations, management and development, and meetings concerning wages, welfare benefits, employee health and safety, social security and any other matter relating to the immediate interests of employees must be participated in by labor union representatives.

[vi]

Regulations on Enterprise Democracy of Jiangsu Province (implemented on 1st January 2008)

Article 6 The employees" congress shall exercise the following functions and powers:……(3) discussion of the draft rules and regulations related to labor remuneration, working hours, rest and vacation, labor safety and health, insurance and welfare, staff training, labor discipline and labor quota management directly relating to the employees’ vital interests or material matters, make suggestions.

[vii]

Interim Management Measures for the Transfer of State-owned Properties and Rights (effective on 1st February 2004)

Article 11 The state-owned enterprise, when transferring its properties and rights involved in their employees

"

lawful rights and interests, shall listen to the opinions from employees" congress. Any employee replacement proposal should be discussed and approved by the employees" congress.

Article 19 The transfer agreement for state-owned properties and rights shall include the employee placement scheme of the target company;

Article 22 In the circumstance that a transfer of state-owned properties and rights leads to the seller no longer holds the status of state-owned controller, the seller shall, in accordance with the related policies and regulations, deal with and the employee"s labor relations, settle outstanding wages, all kinds of social insurance premium and other related fees in arrears, and continue the relations of their social insurance relations in all kinds.

[viii]

http://www.gov.uk/informing-consulting-employees-law

[ix]

The Labor Contract Law of PRC (1st amendment is implemented on 1st July 2013)

Article 41 If any of the following circumstances makes it necessary to reduce the workforce by 20 persons or more, or less than 20 persons but accounting for 10% or more of the total number of employees, the Employer may only do so after it has explained the situation to the trade union or to all of its employees 30 days in advance, has considered the opinions of the labor union or the employees, and has submitted its workforce layoff plan to the labor administrative department:

1. restructuring pursuant to the 

Enterprise Bankruptcy Law

;

2. serious difficulties in production and/or business operation;

3. due to switching production, introducing significant technological innovation or adjusting its business model, after amending the labor contracts, the company still need to reduce its workforce; or

4. a material change in the objective economic conditions relied upon at the time of conclusion of the labor contracts renders it impossible for the parties to perform.

[x]

Interim Management Measures for the Establishment and Change of Record of the Foreign-invested Enterprises (Ministry of Commerce No. 2 of 2017) (1st amendment implemented on 30 July 2017)

Article 6 The foreign investment enterprises which fall within the scope of the record under this Measures, when the following change items occur, shall appoint representative or agent, within 30 days after the change matters occurring, to complete and submit the online “the changes for the record form of foreign-invested enterprises” (hereinafter referred to as "the change of return") and relevant documents, go through the formalities of the change of the record, through the Integrated Management System:

(a) change in basic information of enterprises with foreign investment, including the name, registered address, enterprise type, operation period, investment, industry, business types, scope of business, whether or not fall within the scope of the provisions of the state imported equipment to duty exemption or reduction, registered capital and total amount of investment, organization, legal representative, the actual control of enterprises with foreign investment information, contact and contact changes;

Article 8 The foreign-invest enterprises or its investors when setting up or changing for the record of the enterprises, is requires through the Integrated Management System to upload and submit the following documents: ……

(7) the final actual controllers of enterprises with foreign investment shareholding chart.

[xi]

Enterprise Democratic Management Regulations (General Trade Union Issuance [2012] no. 12) (released on February 13, 2012)

Article 3 (2) The company shall respect and guarantee that an employee shall be entitled to enjoy the right to know, to participate, to express and to supervise and other democratic rights, support them to participate in the enterprise management activities.

Article 8 (2) The number of employee representatives of the company shall be determined in accordance with the five percent of the total number of employees, not less than 30. The number of representatives of exceeding 100 may be determined by the enterprise and the trade union.

Article 9 The representative ofthe employees" congress shall be composed of workers, technicians, managers, business leaders and other employees. Among them, the management personnel and the leading personnel in the middle level of the enterprise should not exceed 20 percent of the total number of employee representatives. The enterprise that has female employees and labor dispatch workers, employee representative should have appropriate proportion for them.

Article 10 The term of theemployees" congress shall be three to five years. The specific term shall be determined by the employees" congress according to the actual situation of the company.

Article 17. The employees" congress shall be convened at least once a year. The plenary meeting of the employees" congress must be attended by more than two thirds of the employees as a quorum.

Article 20 For the election and voting of the employees" congress, a majority of the representatives of employees shall adopt in accordance with the principle of majority rule. Votingon material matters shall be divided by topic via secret ballot.

Article 23 The employees whoenter into labor contracts with the company and establish labor relations, and employees who are in fact labor relations with the company shall have the right to elect and be elected representatives of the employees" congress.

Article 24 A employee representative shall be elected directly by the employees in the basic electoral units, such as the team, the section, the workshop and the department.

Article 25 For election and remove of employees" representatives all employees" meetings of the election units shall be convened, and more than two thirds of employees shall participate in the meeting. The decision to elect or remove an employee representative shall be valid through the majority of employees.

[xii]

Enterprise Democratic Management Regulations (General Trade Union Issuance [2012] no. 12) (released onFebruary 13, 2012)

Article 28 In case of any of the following circumstances, the labor administrative department shall request the company to make corrections within a time limit. If the company do not make the corrections within the time limit, a fine at the amount from three thousand yuan to thirty thousand yuan will be imposed, and a fine at the amount from five hundred yuan and two thousand yuan can be imposed to the legal representative, the principal person in charge of the company or other person who is responsible for:

(1) refusing to hold an employee representatives’ meeting;

(2) failing to implement there solutions made by the employees" congress in accordance with the law which shall be implemented;

(3) obstructing the employees" representatives, directors and supervisors of the employees" congresses to perform their duties according to law.

[xiii]

Regulations on Enterprise Democracy of Jiangsu Province (implemented on 1st January 2008)

Article 29 In violation of the provisions of these regulations, the company shifts the position or terminate the employment agreement of the representatives of employees’ congress, employee directors, employee supervisors or representatives of trade union who fulfill their duties in accordance with the law, without any justified reason, in order to make retaliation, the labor administrative department shall order the company to rectify. If the above action causes any damage to the employee, the company shall be liable for compensation according to law.

By means of violence or threat to block the employee to exercise democratic management rights thereby causing serious consequences, or to insult, libel, or injure the representatives of employees" congress, employee directors, employee supervisors or representatives of trade union who is performing their duties according to law, the public security authorities shall punish in accordance with the law onpublic security administration punishment law of PRC. Criminal responsibilities shall be prosecuted according to the law in case of a crime is committed.

Article 30 The local federation of trade unions have the right to demand who in violation of this rules and isliable for obstructing or blocking the trade union to perform its duties in the activities of company democratic management for correction. In the case of failure to correct, the trade union shall submit it to the labor administrative department for further treatment.

[xiv]

The Labor contract law of PRC (1st amendment is implemented on 1st July 2013)

Article 23 The employer and the employee may stipulate in the labor contract the business secrets of the employer and the confidential matters related to intellectual property rights.

Article 39 An employer may terminate a labor contract if one of the following situations occurs:

(2) serious violations of the rules and regulations of the company;

(3) serious dereliction of duty or malpractice, causing significant damages to the company.

[xv] 

http://www.360doc.com/content/17/0616/10/3798468_663571887.shtml

[xvi] 

http://507112.kuaizhan.com/68/7/p3872889061a478

[xvii] 

http://money.163.com/11/1119/07/7J75VDTM00253B0H.html#from=keyscan

[xviii] 

http://www.techweb.com.cn/it/2014-03-06/2013827.shtml

[xix] 

http://business.sohu.com/20130717/n381842709.shtml

作者介绍

陈芍开

大成苏州分所 合伙人

e-mail：shaokai.chen@dentons.cn

长按识别下方二维码，关注我们吧

• 一个社会调查者的自白
• 今日观点 | 供给侧改革影响预期
• NASA发射SEIS地震仪到火星，用来研究火星地震波
• 荷兰王后的妹妹：研究自杀的心理学家为何用自杀结束自己的生命？
• 史上最催泪心理研究:戒掉前任像戒掉毒瘾一样痛苦
• 重口味研究:粪菌移植技术可以治疗糖尿病
• 英特尔芯人类研究所空降大中中塔店 国美“百人吃鸡”赛创纪录
• 南工程成立能源研究院校友捐千万
• 研究人员利用改进型Sierpinski三角形打造高性能中红外传感器
• 南京工程学院成立能源研究院