Post-LOI DD - no employment contracts for 5 (all) employees

March 03, 2024

by a searcher in Europe

I'm in my first week of DD after signing an LOI, the company is based in the UK and has 5 full-time employee's and 4 subcontractors.

There are no employment contracts, all have been working with the company for 4-20 years. How big an issue is this?

I plan on putting a condition of closure clause in that all must sign contracts.

Any insights are much appreciated. Thank you

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Reply by a professional
from American University in Irvine, CA, USA

The practical answer is to analyze whether the employees/contractors the company has are sufficient for you to maintain its level of production and revenues post-acquisition, or whether you will need to add people to achieve estimated goals. From a legal point of view, it is recommended that you not only have signed agreements with employees and contractors, but also with anyone who in the past has "touched" any intellectual property developed by the target company. Without that, you run the risk of someone coming back to claim an interest in your IP after the sale closes. The PA should contain specific representations and warranties on this, and to the extent anyone did play a role in IP development, an agreement should be in place regarding their rights and interests, or relinquishment thereof.

Reply by an intermediary
from University of Portland in Hickory, NC, USA

Are you in the UK, or is the business you are acquiring in the UK? Employment contracts are the standard in the UK; they are not in the US, especially for small businesses. In the US, employment law varies state to state, so you will need to understand what the employment laws in the state they work are. "At will" vs "right to work" are some key things to understand. In the UK, it is my understanding you'd likely want employment contracts in place.

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