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When a buyer wants to acquire an existing business it has two basic options: it can either acquire the shares in the company that operates that business or it can acquire the individual assets that comprise that business directly from the company that currently operates it. In both cases, the commercial effect of the acquisition is similar: the buyer takes over the business and its operation. Legally, however, the two transactions are quite distinct, particularly for any affected employees.

Share sale or asset sale?

On a share sale, it is the ownership of the entity operating the business, rather than the ownership of the business itself, which changes. Assets continue to be owned by the target company, contracts continue in the name of that company and, crucially, there is no change of employer for the target’s employees.

On an asset sale, however, individual assets and contracts, including employment contracts, transfer into the name of the buyer. From completion, therefore, the target’s employees will have a new employer – the buyer. The law has evolved to protect employees in this situation and the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) ensure that the target’s obligations and liabilities in respect of the employment contracts are transferred to the buyer.

Can TUPE apply on a share sale?

In theory, TUPE only applies where there is a transfer of a business, rather than a transfer of shares in a company operating a business. However, a recent case[1] shows that in some circumstances TUPE can apply on a share sale with unfortunate consequences for the companies concerned.

Post-completion integration

In this case, the buyer acquired the shares of a target company and, at completion, the target’s existing directors all resigned and were replaced by nominees of the buyer’s parent company. The target’s workforce was informed that the parent had acquired the target and there would be a programme of integration. A team of integration managers, who reported to the parent’s management team, went on site in order to align the target’s operating methods with those used by the parent.

TUPE applied

The court held that in fact TUPE applied and the target’s employees had actually been transferred to the parent (not the buyer). After completion, “the management facilities amenities and functions all transferred to [the parent]” which led to the target’s “activities and practical identity” being subsumed by the parent. This was a classic “old style TUPE transfer”. As a result, the parent was in breach of the TUPE requirements to consult with and inform the affected employees about the transfer and those employees were entitled to compensation.

A salutary warning

The court didn’t find that the share purchase was a TUPE transfer. It was the steps taken by the buyer and the parent post-completion that resulted in the conclusion that a TUPE transfer had taken place. Buyers need to be aware of this when integrating an acquired business in order to avoid the unintended result of the target’s employees transferring to another group company, where that group company takes over operational and effective control of the target’s activities, and the associated liabilities that this could bring.

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[1] Jackson Lloyd Ltd & Mears Group Plc v Smith & others, UCATT  and Williams & others

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.