EMPLOYEE RETENTION RISK
Pre-Acquisition - Letter of Intent - Due Diligence - Share Purchase / Sale - Asset Purchase / Sale - Merger - Equipment
Contact Neufeld Legal for business mergers and acquisitions at 403-400-4092 or Chris@NeufeldLegal.com
A business acquisition, while aimed at achieving strategic synergy, introduces significant "people risk," the most severe of which is the flight of key talent. Statistics consistently show that up to half of crucial employees, those holding institutional knowledge, critical client relationships, and specialized technical expertise, may depart within the first year following a merger or acquisition. This attrition is not merely a staffing inconvenience; it poses an existential threat to deal value. The financial implications are massive, including soaring replacement and training costs, loss of proprietary knowledge and trade secrets, and operational discontinuity that can impair customer relationships and stall integration efforts.
Beyond purely legal or contractual concerns, key talent often leaves due to what is perceived as the psychological and cultural disruption inherent in business mergers and acquisitions. Employees frequently feel a loss of control, fearing job redundancy, changes to compensation structure, or cultural misalignment with the larger, acquiring entity. An organizational mismatch, particularly the clash between a dynamic, entrepreneurial culture and a more bureaucratic structure, can cause discontent and trigger voluntary departures. To mitigate this, successful acquirers must prioritize transparent and consistent communication, align leadership early, and articulate a clear, shared vision for the combined entity to manage uncertainty and foster psychological commitment among the retained workforce.
For the acquiring company, the challenges posed by assuming the employees of the target company is augmented by the imposition of "successor employer" obligations. In a share purchase, the employer entity technically remains the same, and the employment relationship continues uninterrupted. And although an asset purchase may be viewed under certain common law principles as a termination of employment with the original vendor, meaning the purchaser must offer new contracts; employment standards legislation imposes statutory obligations on the purchaser in relation to rehired employees, such that all prior years of service must be accounted for in calculating statutory minimum entitlements, including vacation pay, seniority, and termination notice/pay. Failure to do so, or substantially changing the terms of employment without proper consideration, can expose the successor employer to claims of constructive dismissal.
Meanwhile, to lock in critical employees, purchasers routinely implement contractual retention strategies, primarily through retention bonuses and restrictive covenants like non-competition clauses. Retention bonuses, often structured as time-based vesting incentives, are generally enforceable in Canadian courts as a means of promoting loyalty, provided the forfeiture terms are clear and do not constitute an illegal penalty or a restraint of trade. In contrast, non-competition clauses in employment agreements face significant judicial skepticism under Canadian common law, which favors an individual’s right to work. They are presumptively void as restraints on trade and are only enforceable if proven to be demonstrably reasonable in scope, duration, and geographic area, and only if a less restrictive measure, such as a non-solicitation clause, would not suffice.
When it comes to the legal component of corporate mergers & acquisitions, that is when our law firm comes into play. Such that when your business is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, we are capable of providing such strategic legal advice and direction. Contact our law firm at Chris@NeufeldLegal.com or 403-400-4092 to schedule a confidential initial consultation for advancing your business' transactional objectives.