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Requirement to be satisfied prior to acquisition of all or part of business of the proper fulfilment of the information and consultation obligation

2016-09-28

Since 1 January 2017, after the new Labour Code enters into force, when acquiring all or part of business it will be mandatory to check whether the seller (company) has properly fulfilled the obligation to hold consultations and inform the employees’ representatives about the contemplated transfer of business.

The new Labour Code sets forth that prior to adopting a decision regarding the reorganization of a company, transfer of all or part of business and other decisions that are likely to have substantial effects on the organisation of work in the company and the legal status of the employees, it is necessary to inform and hold consultations with labour councils. Although this obligation should be fulfilled by the company (employer), however, the acquiring party should ascertain whether the company has properly fulfilled this obligation.

Consequences caused by the breach of this obligation

Upon breach of the obligation to inform and hold consultations with labour councils the representatives of employees would be entitled to initiate a labour dispute, requesting to revoke the employer’s decisions and obligate the employer to restore the legal situation that existed prior to the business transfer. According to Giedrius Abromavičius, Senior Associate of COBALT Law Firm, “although there is no yet any case law regarding the resolution of such disputes, this type of disputes could cause substantial damage to the parties to the transaction by leading to legal uncertainty as to validity of the transaction. In order to reduce such risk, the buyer should ascertain whether the company has properly fulfilled the obligation of information and consultation”. 

The new Labour Code has added a new step to company reorganization and spin-off processes

The present Labour Code sets forth that prior to taking a decision on the reorganisation of the company and other decisions that are likely to have substantial effects on the organisation of work in the company and the legal status of the employees, the employer must inform the employees’ representatives and hold consultations with them about the reasons for such a decision, the legal, economic and social implications for the employees, as well as about any measures envisaged to avoid or mitigate the expected consequences; however, it does not set forth any actual liability for the breach of this obligation. After the new Labour Code enters into force, a breach of the obligation to consult and inform might result in the transfer of all or part of business being held illegal.  

“The amendment to the Labour Code has added a new step to company reorganization and spin-off processes. Furthermore, in future, when conducting legal due diligence of company prior to concluding share and part of business transfer transactions it will be necessary to check whether the new requirements were properly fulfilled during the company’s reorganization and spin-off processes in the past,” says Dr Juozas Rimas, Partner and Head of M&A Practice Group at COBALT Law Firm.