Companies seeking to complete a business transformation or strategic development such as expansion, industrial chain upgrading or diversification, for example, may do so through a share acquisition. This, however, can expose them to risks caused by improper handling of labour relations.
It is essential that buyers carry out due diligence prior to any share acquisition, which usually includes an investigation of the target company’s shareholding structure, corporate governance, financial and assets conditions, major creditors’ rights and debts, connected transactions, labour and personnel, taxation, and litigation and arbitration status.
The legal entity status of the target company is sustained after the purchase, and the acquirer, after joining as a new shareholder, will continue to enjoy the rights and perform the obligations of the target company.
However, it could face a litany of potential risks such as unpaid wages, bonuses, overtime pay and annual leave pay, or have to pay any social insurance or housing provident fund that has not been paid in full.
When conducting labour and employment due diligence on target companies, buyers should focus not only on the proportion of labour contracts signed by in-service employees, the percentage of employees with paid social insurance and the duration of labour contracts, but also employees’ age and length of service, the time of signing the labour contract, wage structure, wage payment, various welfare...
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