Understanding legal obligations in an amalgamation

Employers may expose themselves to significant liability

Understanding legal obligations in an amalgamation
Stuart Rudner

by Nadia Zaman

As a business owner, there are a lot of changes that take place during an amalgamation. An amalgamation can also impact the legal relationship with the transferring employees, and when employers overlook that, they expose themselves to significant liability.

An amalgamation is a corporate transaction where two or more corporations (for example, Company A and Company B), known as predecessor corporations or the amalgamating corporations, combine their businesses to form one amalgamated successor corporation (for example, Company C). Company C, by operation of law, acquires all assets, rights and contracts of Company A and Company B, and becomes automatically liable for their debts, liabilities and other obligations. The amalgamating corporations fuse together as Company C. An amalgamation is governed by the incorporating jurisdiction of the amalgamating corporations.

The essence of the impact of an amalgamation on the employment relationship is captured in the following quote from the Alberta Court of Queen's Bench in Patillo v Murphy Canada Exploration Ltd: "The mere amalgamation of a company with another entity does not automatically amount to a termination of that company's employment contracts. The result of an amalgamation is not the death of a company but rather its continuation in a new form".

Thus, in an amalgamation, any transferring employee’s employment would simply continue on with Company C, rather than there being a new employment relationship. The transferring employee is assumed by Company C. 

An amalgamation is distinct from a sale of assets scenario.

Section 9 of the Employment Standards Act, 2000 (the ESA) provides that where a business is sold and the purchaser employs any of the seller's employees, the sale does not result in termination of employment. The employee's period or length of employment with the seller will count as part of their period or length of employment with the purchaser for all purposes under the ESA that depend upon an employee's length of service (meaning entitlements to notice of termination or pay in lieu thereof, severance pay, the entitlement to vacation and entitlements to parental and pregnancy leave). 

The exception in section 9(2) of the ESA states that 9(1) does not apply if the day on which the purchaser hires the employee is more than 13 weeks after the earlier of their last day of employment with the seller and the day of the sale.

In a sale of assets, the purchaser may either a) offer employment to the vendor’s employees, or, b) choose not to offer employment to all or some of the vendor’s employees. In the event that the purchaser does not offer employment to the vendor’s employees, these employees will either a) have their employment terminated by operation of law on closing, or, b) remain employees of the vendor if the vendor continues to operate as a going concern. Where a purchaser employs the seller's employees following a sale of business in accordance with section 9 of the ESA, but later terminates their employment, the purchaser bears the sole responsibility for complying with ESA termination/severance requirements based on length of employment with both the seller and the purchaser

An amalgamation’s impact on the employment relationship is distinct from the impact of an asset purchase transaction. Company C is solely liable for any severance obligations: if a transferring employee has worked with their current employer (meaning Company A or Company B) for 20 years and continues on with the successor entity (meaning Company C) for two more years, then in case of termination of employment, Company C would be liable to provide any termination pay and severance pay that the employee is entitled to based on their 22 years of service.

In addition, the exception in section 9(2) of the ESA is unlikely to apply in the context of an amalgamation, because unlike in an asset purchase scenario, the successor entity formed through an amalgamation (meaning Company C) does not technically “hire” the employees of the amalgamating companies. Instead, the employment would simply continue, rather than there being any new offer of employment, although Company C can choose to enter into new written employment contracts with the transferring employees.

Best practices and tips

Generally, it would be wise for Company C to enter into new written contracts of employment with all of the transferring employees in order to minimize potential liability. New terms of employment, if accepted by the transferring employee in an amalgamation, and provided that the terms are not otherwise in violation of the law, will be binding on the employee. Importantly, the original terms of employment will continue to apply unless amended in the new contract of employment. 

The contracts should properly recognize each transferring employee’s length of service with their current employer (Company A or Company B) for the purpose of entitlement to notice of termination or pay in lieu thereof, severance pay and vacation, pregnancy and parental leave entitlements. In addition, the contracts should contain clear termination clauses to reduce the risk of significant liability in the future. The general principles would apply:

  • The presumption is that common law reasonable notice is applicable unless it is contracted out of by way of an enforceable termination clause.
  • The minimum requirements under the ESA cannot be contracted out of.

The contracts should be carefully drafted. If the transferring employee alleges that there is an amendment to a fundamental term of their employment, then they will have the following options: 

  • Take the position that there has been a repudiation of the employment contract, in which case they would have to make their position clear to the new entity that they were treating the contract as at an end;
  • Allege constructive dismissal and sue for damages; or
  • Make it clear that they do not accept the new terms, continue to perform their job, and insist that the new entity adhere to the terms of the original contract of employment.

To the extent that is possible, fundamental terms of employment should not be amended to provide a lesser benefit to the transferring employees. For example, their salary should not be reduced and their role should not be demoted. Otherwise, it may be open to the transferring employees to allege that a fundamental term of their employment (for example, compensation) has been amended, in which case it will be open to them to elect any one of the three options noted above. 

One way to avoid that from happening is to ensure that each transferring employee is provided with sufficient consideration to enter into the new written contracts, so that the new entity can reject any potential allegations relating to the unenforceability of the contracts by showing that adequate consideration was provided. Fresh consideration should be provided to the transferring employees in exchange for entering into new written contracts of employment, in order to reduce the risk of such contracts being found unenforceable in the future. Some examples of consideration include signing bonus, greater vacation or benefits entitlement, or increased compensation. 

Employers would be wise to understand their legal obligations with respect to the employment relationship, and prepare the necessary and appropriate documentation to avoid liability. 

Nadia Zaman is an associate at Rudner Law in Toronto. She can be reached at (416) 864-8503 or nadia@rudnerlaw.ca.

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