As the economy begins to improve, dealerships that have weathered the last few years of pretty rough waters-and let's face it, they have been rough-may be looking to expand their companies through mergers or acquisitions.
Mergers and acquisitions require legal counsel-and not just from your golf buddy who happens to be a lawyer. Rule No. 1: Obtain expert legal counsel!
This two-part article will review three important human resource (HR) aspects of an acquisition by outlining the information your management team should obtain from a dealership you are considering purchasing. These three aspects are:
* The corporate and human resource information that needs to be acquired for your knowledge and review.
* The human resource issues and decisions that need to be contemplated before a purchase.
* The cultural questions and issues that need to be observed and considered.
Your lawyer should be able to provide you with the lists for items one and two above, but in this column I'll try to assist your due diligence efforts by ensuring that the necessary HR information is gathered and considered.
Item three above is rarely discussed-or considered on sources such as the Internet. But in my experience, the cultural issues are of critical importance to the potential success of an acquisition.
In this column we'll discuss pulling together a checklist of corporate data. Your lawyer should have a due dilligence checklist that is used for mergers and acquisitions. However, some lists are more complete than others, and when you are considering an acquisition, it is better to err on the side of being overly thorough.
This list, compiled from multiple lawyers' lists and the Internet, will give you a sanity check comparison against any list provided by your lawyer.
When compiling information about a potential acquisition, you must first ascertain the ``corporate status'' of the business. In order to do that, obtain a list of all states in which the dealership, its subsidiaries or affiliates have offices or have W-2 employees.
Once you do that, consider the following checklist items you'll need in making a decision whether to purchase a business:
* Organizational chart depicting the relationship between the dealership and each subsidiary or other affiliate thereof.
* Management organization chart.
* A list of current members of the board of directors and officers of the dealership and each subsidiary.
* All documents relating to any merger with any other entity in the last five years.
*Contracts, agreements and commitments under which the company or any subsidiary is currently obligated or of which they are significant beneficiaries.
* Any contracts/agreements that are contingent upon any entity or individual continuing to be affiliated; with agents or other representatives.
*All documents related to any reorganization or restructuring involving the dealership, any subsidiary or any of their respective affiliates in the last five years.
* All consulting, non-competition and confidentiality agreements.
* All insurance policies and other service agreements to which the company or any subsidiary is a party or by which the company or any subsidiary is affected-including materials relating to workers' compensation and unemployment compensation coverage.
*Payroll and other tax reports relating to employees (such as Forms 940 and 941 under federal U.S. law) or the latest closed tax period and all open tax periods.
* Schedule of employees and independent sales representatives, if any, indicating the type of work performed, compensation and length of service.
* Company policies concerning hiring, compensation, advancement and termination.
*Collective bargaining agreements (whether or not currently in effect) affecting any employees; information and materials regarding any union organizational efforts in the last five years; correspondence, memoranda or notes concerning pending or threatened labor stoppage.
* Employee handbooks and/or human resource policy manuals.
* A list and description of all pending labor grievances or arbitration proceedings-including any U.S. Department of Labor OFCCP (Office of Federal Contract Compliance) issues resulting from Equal Employment Opportunity (EEO) audits under federal U.S. law and any issues under any similar local, municipal, state, provincial, national or federal law or regulation of any other jurisdiction.
Additionally, when doing due diligence obtain each of the following-which the company maintains or contributes to-together with filings with the Internal Revenue Service, Pension Benefit Guaranty Corporation (PBGC) Securities and Exchange Commission and Department of Labor, including without limitation Forms 5500 and 5*10, summary plan descriptions, summary annual reports, IRS determination letters for qualified plans, and PBGC reportable events:
*Union-sponsored multi-employer plans.
* Defined benefit plans, copies of latest actuarial reports.
*Defined contribution plans, including money purchase pension plans, profit-sharing plans, stock bonus plans, employee stock ownership plans and savings or thrift plans.
*Health and welfare plans, including all health care plans or insurance programs, short/long term disability or personal time off (PTO) plans, life/accident insurance, severance plans, vacation benefit plans.
* All qualified and non-qualified deferred compensation arrangements.
* Incentive or bonus plans, including stock option/bonus/purchase plans, and cash bonus or incentive plans.
* Descriptions of any unwritten benefit or compensation plans.
* Schedule of stock options issued to employees or directors pursuant to any stock option plan, indicating the grant date, grant price, total number of options granted on each grant date, options vested (prior to application of any change of control provisions that may be contained in the applicable stock option plan) exercise date and exercise plan.
Indicate in each case whether option is a nonqualified option (NQO) or an incentive stock option (ISO). Include copies of all employee and director stock option plans.
* Audit reports covering plans for the last five fiscal years.
Make sure you ask whether there are any ERISA (Employee Retirement Income Security Act) liabilities that may become an issue during the transaction or within the next three years.
* A list of all ``reportable events,'' ``compliance withdrawals'' and ``partial withdrawals'' (as those terms are known under U.S. law) with respect to all plans.
* Filings or correspondence with governmental entities relating to the plans, including reports on Form 11-K and determination letters under federal law and any other reports under similar local, municipal, state, provincial, national or federal law or regulation of any other jurisdiction.
* Employment agreements (including any corresponding amendments) with all executive officers, key employees and sales representatives, including agreements that have terminated but under which the company is obligated to make payments to the former employee.
*A list of key management employees, indicating position, length of service, annual compensation rate (showing any bonus separately), company vehicle and deferred compensation for the last fiscal year and at present.
* The names, positions and reason for leaving of any officers or key employees who have left the dealership in the last five years.
* A list of all life insurance coverage for each policy: name of insurer and insured, types of risks covered, policy date, term and premium.
* A description of workers' compensation and unemployment compensation experience, including rating, history of claims within the last five years, and pending or threatened claims.
No one likes receiving a letter in the mail with three attorneys' names in the return address slot. Trust me, it is even worse when you get one of those letters, open it up, review the allegations and realize you do not know anything about the people or situation in the lawsuit because it took place with the company you just acquired.
It is daunting to provide a plausible defense to an allegation when the records could be buried in the proverbial backroom. Ask for the following:
* A list of all litigation or judicial, administrative or regulatory proceedings which are pending or threatened, including date filed, relief sought and form in which it was brought and status of the matter.
* A list of all litigation or judicial, administrative or regulatory proceedings brought or threatened in the last five years, including the date filed, relief sought and form in which it was brought.
* Orders, judgments or decrees of courts, governmental authorities or arbitral tribunals.
* Documents relating to employment, working conditions or labor relations claims within the last five years.
* Counsel letters to auditors in response to inquiries as to litigation and pending claims for the last five fiscal years.
* Claims' history over the last five years under the company's insurance policies.
* A list of all settlement agreements entered into in the last five years and all settlement agreements entered into that contain continuing obligations, whether or not entered into in the last five years.
Although this checklist may look extensive-well, OK, it is extensive-it is necessary to be complete during this process. In my next column we'll discuss what to do with this information, the important decisions that need to be made regarding employees and the cultural issues that can ``make or break an acquisition.''
Mary Miles can be reached via e-mail at [email protected]