The employment dimension is often the most complex factor in an M&A transaction. We analyse how collective redundancy procedures interact with company sale and restructuring processes in Spain.
In every company sale transaction, there is one dimension that, if not managed rigorously, can derail the entire process: the employment dimension. Employees are not just another asset on the balance sheet — they are people with rights, legitimate expectations, and, frequently, union representatives with real influence over the outcome of the transaction.
In our experience with special situations and restructurings, the employment issue is systematically the most complex aspect to manage. Not because of the regulations themselves — which are clear — but because of the intersection of interests, emotions, and timelines that converge in the process.
Article 44 of the Workers’ Statute is the key provision. It transposes the European directive on transfers of undertakings (equivalent to the UK’s TUPE) and establishes a fundamental principle: when a company, a workplace, or an autonomous productive unit is transferred, the new holder is subrogated into the previous holder’s employment rights and obligations.
This means the buyer automatically assumes all existing employment contracts, with their conditions, seniority, applicable collective bargaining agreement, and all outstanding obligations — including salary debts, unpaid contributions, and pension commitments.
Furthermore, seller and buyer are jointly and severally liable for employment obligations arising before the transfer for a period of three years.
The subrogation is automatic and mandatory. It is not negotiable between the parties to the purchase agreement, because it protects the rights of third parties — the employees — who are not party to the deal.
Business transfer rules apply when what is transferred is an economic entity that retains its identity. This includes the sale of shares (always, because the employer entity does not change), the sale of a business as a going concern, the transfer of a workplace, and the sale of a productive unit within insolvency proceedings.
It does not apply — or applies with nuances — when isolated assets are acquired without an organised structure, when there is merely a succession of service contracts without a transfer of significant material resources, or when the activity does not continue.
The distinction is relevant because, where there is no business transfer, the buyer does not assume prior employment obligations. Courts analyse case by case whether there is a transfer of an economic entity that retains its identity, considering factors such as the transfer of material assets, the assumption of the client base, the continuity of the activity, and the incorporation of the previous holder’s employees.
A common practice is for the seller to carry out a collective redundancy (ERE) before the sale to adjust the workforce and present the buyer with a more efficient company. This strategy is legally possible but carries significant risks.
Risk of nullity. If the redundancy does not respond to genuine grounds but is an instrument to facilitate the sale, it may be declared void. Courts are especially rigorous when the redundancy is executed weeks before the closing of a sale that has already been negotiated.
Reputational risk. A large-scale collective redundancy generates media and union attention that can complicate or even torpedo the sale. Potential buyers may withdraw if they perceive that the employment situation is contentious.
Cost and timing. Collective redundancies have a minimum consultation period of 15 or 30 days (depending on company size), plus challenge deadlines. If they overlap with the sale timeline, they can significantly delay closing.
The alternative is for the buyer to carry out the workforce adjustment after the acquisition, bearing the cost but also controlling the process. For the seller, this means the transaction price will be lower — the buyer will deduct the cost of the redundancy in their valuation — but it avoids the risks described above.
The buyer who acquires a company may need to adjust the workforce for economic, technical, organisational, or production reasons. A post-sale collective redundancy is perfectly legal provided there are justified grounds.
However, two scenarios attract special scrutiny:
The immediate redundancy. If the buyer carries out a collective redundancy in the weeks or months following the acquisition, employee representatives may argue that the adjustment was planned before the purchase and that, therefore, the seller should bear its cost (or, at least, that the sale transaction was designed to circumvent negotiation).
The contradictory redundancy. If during due diligence or negotiation the buyer committed to maintaining employment (common in family business acquisitions where the seller cares about their employees), a subsequent redundancy may generate contractual claims in addition to employment claims.
Collective redundancy in insolvency has a special regime under the Insolvency Act. The main differences from ordinary collective redundancy are that the insolvency judge authorises the employment measures, the consultation period is shorter, minimum severance is 20 days per year of service (the same as in ordinary collective redundancy, but without the 12-month cap), and the Wage Guarantee Fund (FOGASA) may cover part of the severance if the company lacks resources.
In the context of a productive unit acquisition in insolvency, the insolvency collective redundancy allows the buyer to take on the workforce needed for business continuity without being obliged to retain positions that are not viable. It is one of the tools that makes investing in distressed companies attractive.
Managing employment aspects in the SPA (share purchase agreement) is crucial. Typical clauses include:
Employment representations and warranties. The seller declares that the company complies with employment law, that there are no pending proceedings, that contributions are up to date, and that there are no hidden commitments (pension plans, special individual agreements).
Employment indemnity. The seller undertakes to indemnify the buyer for employment contingencies prior to the transfer that have not been disclosed or provisioned.
Employment commitments. In many transactions, especially with family sellers, employment maintenance commitments for a specified period are included. These commitments must be drafted with precision to avoid ambiguities.
Cooperation clauses. Both parties commit to cooperating in the management of any employment proceedings affecting the period before and after the transfer.
Beyond regulations, employment management in an M&A transaction has a human dimension that cannot be ignored. Employees experience the process with uncertainty and, frequently, with fear. Transparent communication, respect for legal timelines, and honouring commitments are not just legal obligations — they are the way to preserve the most important asset of any company: its people.
At Blue Mountain, when we evaluate an acquisition, the employment plan is as important as the financial plan. We know that a restructuring that destroys the human fabric of the company also destroys its capacity for recovery. That is why we always seek the balance between economic viability and employment preservation.
Every situation is different, and employment solutions must be tailored. If your company needs advice on the employment implications of a sale or restructuring, let’s talk.
By Blue Mountain Capital
By Dirk Manuel Martens Jiménez
By Dirk Manuel Martens Jiménez
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