What is automatic employee transfer in an asset deal, and what are its consequences for LBOs?
In many jurisdictions, when a business transfers to a new owner in an asset deal, the buyer automatically inherits all employment contracts — including collective-bargaining agreements and pension obligations. (In the EU this is the Acquired Rights Directive; the UK version is TUPE.)
dismissals *because of* the transfer are void; redundancies for other business reasons remain possible. Transferred collective-agreement terms are typically protected from adverse change for a period (often one year) — not a blanket freeze on dismissals. The works council survives, and employees can usually object to the transfer within a set window. Sponsors therefore prefer share deals — in a share deal the legal entity is unchanged and the automatic-transfer rule is not triggered.
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| Aspect | Asset deal | Share deal |
|---|---|---|
| Automatic transfer applies | yes | no |
| Employee transfer | automatic | stay with the same entity |
| PE preference | rare | typical (~70% of deals) |
- all employment contracts (including expensive/unfavorable ones)
- collective-bargaining and works agreements
- pension liabilities: on the balance sheet from Day 1
- the works council and co-determination structure
500 employees transfer automatically to the sponsor's BidCo. Existing collective agreements continue. The sponsor cannot restructure for a protected period without works-council consultation. Pension obligations of $50m are on the balance sheet from Day 1.
- Getting the information duty wrong: extends employees' right to object
- Missing collective agreements in DD: hidden costs in Years 1–2
- After the protected period restructuring is possible, but costs a social plan plus works-council consultation
Question: "When can you restructure?"
Answer: "In a share deal from Day 1; in an asset deal only after the protected period because of automatic transfer. PE plans for carve-outs typically assume a 15–25% headcount reduction over Years 2–4, with works-council consultation and a social plan built in."