M&A Diligence: it’s beginning to look a lot like Christmas bonus time
As 31 December fast approaches, many corporate acquirers are desperate to spend the remains of this year’s budget on that one, last strategic target. A… Read more
As 31 December fast approaches, many corporate acquirers are desperate to spend the remains of this year’s budget on that one, last strategic target. A lengthy due diligence exercise is the corner often cut to meet that end of year deadline, but buyers beware! A truncated due diligence exercise, however time-efficient, can lead to unexpected exposure for purchasers.
One (seasonally-relevant) source of liability for purchasers is the Christmas bonus expected by the employees of the target company. Though they may not be expressly entitled to a Christmas bonus in their employment contracts, employees may benefit from an implied contractual right to receive one, due to the target having paid historic bonuses with such regularity that both the employer and employees can be taken to have accepted that the practice has attained contractual status.
To establish whether a Christmas bonus will be due to the target’s employees (and therefore whether this payment needs to be built into the purchaser’s business model for the target going forward), the purchaser should apply the traditional test set out in Devonald v Rosser & Sons  which states that the payment of a bonus would become a contractually implied term if that term is “reasonable, notorious and certain”. A practice spanning a number of years, however, is not enough to imply a contractual term – it must be shown that the parties complied with the practice out of a sense of legal obligation to do so.
Purchasers should, therefore, remember that employees’ written terms and conditions will not necessarily be conclusive when considering their contractual rights. The circumstances of the relationship between the target and its employees should be analysed holistically to understand which terms will transfer across to your group of companies, how much should be provided for in any completion balance sheet for accrued employee bonuses and whether new contracts will be required.