M&A and human capital

Human capital considerations in cross-border deals in Latin America

In the US and Europe, employees of a target company typically continue as employees under the new ownership, with no break in employment status. In Latin America, however, a deal that is structured as a sale of assets (and not the stock of the company) often requires the seller to terminate all the employees associated with the business to be acquired and to settle whatever financial benefits are due to employees, such as severance. Employers are expected (and often required) to provide a wide variety of benefits. To reinforce these cultural norms, most countries in the region have intricate labor laws and pro-employee courts. For foreign buyers, knowing what to expect and how to navigate the expectations of newly-acquired employees can go a long way to help create productive relationships and avoid expensive missteps.

While human capital considerations should not necessarily drive deal structure, it is important to factor them into the valuation and risk assessment associated with a transaction. In the due diligence phase of a deal in Latin America, for example, the full scope of a potential target’s obligations to employees may not be obvious. The target may face exposure for non-compliance with statutory employee benefits, it may be subject to claims or litigation from employees, or it may have independent contractors that may be deemed to be performing employee functions. Some Latin American companies also maintain unwritten agreements with their employees on matters such as long-term incentive plans—including phantom stock or stock options—which may require settlement upon a change in control. Essentially, buyers need to make sure they understand how the work force is remunerated, as compensation is often structured to reduce corporate and personal income taxes and may be subject to scrutiny by government authorities. This could lead to additional legal and/or tax exposures for the buyer, and potentially incremental costs post-transaction.

Download "human capital considerations in cross-border deals in Latin America" article to learn more about key human capital considerations during the due diligence process, as well as throughout and after the deal, for cross-border Latin America acquisitions.