This article was written by Jeremy Pooley, Of Counsel at Norton Rose Fulbright (Middle East) LLP.
The parties to a share or business acquisition need to be alert to the types of employee-related issues that can arise, and structure the acquisition accordingly.
An employment contract will remain in force following a share acquisition and the relevant employee’s service will be considered continuous.
Under the UAE Federal Law No. 8 of 1980 (Labour Law), an employee who completes one year or more of continuous service will at the end of his employment be entitled to an end of service gratuity. The buyer should ensure that the purchase price takes account of any such liabilities that the target has accrued as at the date of acquisition. The end of service gratuity can be as much as two times an employee’s annual salary (depending on length of service), and so the aggregate liability is potentially significant.
In the UK, the Transfer of Undertakings (Protection of Employment Regulations) 2006 regulates the transfer of employees on a business acquisition. In the UAE no such legislation exists.
Therefore in order to transfer an employee from the seller to the buyer on a business acquisition, the employee’s employment contract will need to be terminated and a new employment contract put in place between the employee and the buyer. The transfer will therefore in effect require the consent of the employee.
Under the Labour Law, an employment contract may have a fixed term or an unlimited term. An unlimited term contract can be terminated on a minimum of 30 days’ notice, or such longer period of notice stipulated in the employment contract. If an unlimited term contract is terminated on shorter notice, or if a fixed term contract is terminated prior to the end of its fixed term, an employee will be entitled to compensation. The seller should therefore be careful to structure any termination so as to ensure that no such compensation becomes payable.
As noted above, an employee may become entitled to an end of service gratuity on termination of his employment contract. On a business acquisition this will be the responsibility of the seller, and so the buyer will not need to factor this liability into the purchase price.
Non-UAE nationals will need to re-apply for work and residency permits in order to transfer to the buyer. This may cause delay, and if for any reason the permits are not granted the employee will not be able to transfer.
It should be noted that certain industry sectors in the UAE have quotas for the employment of UAE nationals. Both the seller and the buyer should consider the impact of any employee transfers in this context.