Prepping for Sale: Getting Your Employment and Benefits House in Order

Preparing for the sale of a company can often be overwhelming, leaving sellers and company management scrambling as they approach closing. This post highlights key employment and benefits considerations to address in preparation for a sale, offering practical insights to help sellers and company management navigate the sale with confidence and efficiency. Taking these preliminary steps and anticipating buyer diligence questions can help companies present a well-managed organization, streamline the diligence process, and accelerate deal execution.

A key step in preparing for the company sale is getting ready for the due diligence process. This involves not only gathering relevant employment and benefits documents, but also identifying potential issues that may need to be corrected or explained to a buyer. At a minimum, sellers and company management should be prepared to provide buyers with the following types of documents (and be prepared to address any corresponding key issues):

• Employee Census: An employee census that shows, at minimum, current W-2 employees and their respective title, employment location (including if virtual or hybrid), FLSA exempt status, and base compensation details. This information is key for buyers to assess potential FLSA misclassification issues (e.g., whether appropriately exempt from overtime laws), potential WARN issues, as well as employee benefits requirements based on the size and location of the employer.
• Contractor Data: A list of all independent contractors used by the Company for the past 3 years showing contractor name, description of services performed, dates of engagement, compensation for the past 3 years, and state of service. This information is key for buyers to assess potential contractor misclassification issues.
• Employment Agreements: Copies of employment agreements, offer letters, confidentiality agreements, and other covenant agreements (e.g., non-compete, non-solicit, etc.).
• Compensation Agreements: Copies of any agreements, plans, or arrangements that provide for change in control, retention, severance, bonus, commission, equity, stock option, phantom equity, equity-based, and other similar compensation and benefits. This is to identify (1) any tax compliance issues and (2) any obligations that the buyer may be required to assume (either by operation of law or contract). Buyers often request copies of filed 83(b) elections for grants like profit interests or restricted stock. While companies should ideally have these on file, they can be time-consuming to collect if not historically maintained.
• Employment Policies: Copies of an employee handbook and other material policies. Of particular focus may be policies regarding wage/hour compliance (including break periods, tracking hours, etc.) and leaves of absence.
• Employment Disputes: List of employment or benefit related disputes, litigations, proceedings, investigations, and audits for at least the past 3 years, including any threatened claims. Appropriate disclosures regarding the status of such issues should be prepared, but pay close attention to potential privilege issues when considering these disclosures.
• Collective Bargaining Agreements: Copies of any collective bargaining agreements and descriptions of any labor problems and union activities over the past 5 years.
• 280G: Buyer will request that either a 280G analysis be completed for the transaction or a detailed explanation of why 280G will not apply. For private companies, consideration should be given to whether a 280G shareholder cleansing vote can be obtained (if needed).

*Note: Under Section 280G of the US tax code, when a company undergoes a change of control and certain service providers (e.g., officers, 1% shareholders, and highly compensated employees) receive payments in connection with the change of control that are in excess of 3 times their prior 5-year average taxable compensation, then the service provider may be subject to a 20% excise tax on a portion of their payments. The company/buyer may also lose any associated compensation deduction. For private companies, however, 280G provides the opportunity to approve the 280G payments via a vote of at least 75% of the shareholders entitled to vote which would effectively “cleanse” the payments and any excise tax. In connection with such vote, a disclosure of all material facts regarding the payments must be made to the shareholders.

• Benefit Plan Documents: Buyers will review plan documents and related filings, reporting and disclosures, and government correspondence for all types of programs, including retirement, health and welfare, fringe benefit, and reimbursement programs. Any delinquent filings or plan corrections should be completed well in advance of a sale of the business.

*Note: If the target company does not sponsor its own benefit plans but, rather, participates in the plans sponsored by a controlled group member, or a third party provider such as a professional employer organization, or a sponsor of a multiple employer plan, a pooled plan, or association health plan, the company should confirm how to exit those programs and the related compliance considerations well in advance so that it can address a buyer’s request to terminate or withdraw from such programs prior to a closing of the transaction.

*Note: If the target company sponsors or participates in a defined benefit pension plan or multiemployer pension plan, or has potential liabilities for such plans through an affiliate, additional complexities will need to be considered and addressed in advance of the sale, including funding considerations or withdrawal liability.

• Capitalization Table: A capitalization table that provides all compensatory equity grants showing grantee, type of award, date of grant, vesting schedule, and exercise price or purchase price (if applicable). A buyer will seek to confirm through review of the capitalization table that all compensatory equity awards were duly approved and authorized by the company and granted in a tax compliant manner.

*Note: Sellers should ensure that the capitalization table aligns with all supporting documentation, including board resolutions and written consents approving each equity grant and 409A valuations. Any discrepancies between the capitalization table and supporting documents may raise diligence concerns and delay the transaction.

One key concern for companies when gathering this type of information, however, is maintaining the confidentiality of a potential sale process both inside and outside of the organization. Companies should work with their counsel on approaches to gathering relevant information and documents on a timely basis, while limiting the risk of early disclosure of a potential sale process.

The foregoing is not an exhaustive list of considerations but rather, it is intended to outline some of the key areas of focus that sellers and companies should focus on when preparing for the due diligence process in a sale. Additional complexities will undoubtedly arise, especially if there are multinational jurisdictions involved in the sale. Sellers should review the information that they intend to upload to a data room well in advance and assess where there may be issues that should be addressed or corrected before the diligence phase of a transaction commences.

Mintz’s employment and corporate teams stand by, ready to assist companies navigate these issues in all types of transactions. 

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