Navigating confidentiality and consultation in business sales
Business sales, mergers, restructures and other major commercial transactions often require a high degree of confidentiality. Parties may be negotiating terms, conducting due diligence, or assessing strategy, long before there is certainty that a transaction will proceed.
A challenge arises when those same decisions have the potential to affect employees’ ongoing employment. While commercial sensitivities may justify limiting the information that can be disclosed, they do not remove an employer’s obligation to act in good faith.
Employers must therefore carefully balance the need for confidentiality against the obligation to consult with employees.
When are employers required to consult?
An employer proposing to make a decision that will, or is likely to, adversely affect the continuation of an employee’s employment, must provide affected employees with relevant information and an opportunity to comment before that decision is made.
Generally, share sales will not automatically trigger consultation obligations because the employing entity remains the same and will not necessarily affect employees’ ongoing employment. However, consultation may still be required if changes are proposed post-sale.
An asset sale can have more direct employment consequences. The seller may cease operating part or all its business, resulting in roles being disestablished. This may trigger consultation obligations even if employees could ultimately be offered employment by the purchaser.
How early should consultation begin?
Consultation must occur when the employer is “proposing” to make a decision that will or is likely to have an adverse effect on employment. In a business sale or transfer, identifying when consultation obligations arise can be difficult. Expressions of interest may come and go, due diligence issues can emerge, and commercial negotiations can stall or collapse altogether before being finalised, often for reasons beyond the employer’s control.
Recent Employment Court decisions suggest that employers need to think about consultation well before a transaction becomes final.
A cautionary tale for employers is the case of Birthing Centre Limited v Matsas. The Court found that the obligation to consult arose before the relevant transfer arrangements were finalised and publicly announced. The Court observed that a proposal does not need to be finalised or reflected in a contract before consultation obligations are triggered. The employer’s failure to consider ways of engaging with employees while preserving confidentiality contributed to findings of unjustified dismissal.
The same approach can be seen in Kohavy v P & W Coates Limited and Kennett v Polygon GY Developments Limited. In both cases, employers entered into binding sale agreements before consulting affected employees. This was found to be inconsistent with the employer’s good faith obligations.
Can commercially sensitive information be withheld?
The Employment Relations Act 2000 does recognise that there may be good reasons to maintain confidentiality, including avoiding unreasonable prejudice to an employer’s commercial position.
However, it is not enough to simply assert that information relating to a potential business sale is “confidential” or accept another party’s request for secrecy. The employer must also be able to demonstrate that it considered alternative methods of consultation and why those alternatives were not viable.
In Abernethy v Kono NZ LP, an employer successfully relied on the confidentiality exception. The employer had identified specific commercial risks and considered several alternatives, including confidential consultation, limited engagement with union representatives and different transaction structures. The Authority accepted that none of those options was viable in the circumstances. Significantly, the employer documented its decision that it could not consult, and the reasons for it, at the time it was made. This was an important piece of evidence that helped the employer defend the personal grievance claims that employees later raised.
Key takeaways
Employers can expect that commercial transactions that impact on employees will attract increased legal scrutiny from employees and potentially unions. To ensure the employer has a robust legal position, key steps to take include:
- Identify the impact. Consider whether roles may be disestablished, restructured or otherwise affected by a business transfer or sale
- Build consultation into the deal structure. Where possible, consider making the transaction conditional on completing an appropriate employee consultation process.
- Test the need for confidentiality. Identify the information that must remain confidential and the commercial harm that disclosure could cause.
- Keep a clear written record. Document the risks considered, the alternatives assessed and why any proposed consultation option was or was not workable.
- Allow consultation to be meaningful. Employees must have a genuine opportunity to comment before the employer reaches a final decision.
If you are considering a business sale, restructure or other workplace change, contact a member of our employment team to assist managing the process.
Special thanks to Partner Alastair Espie and Solicitor Emma Jenkins for preparing this article.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
