Transfer of Undertakings in Acquisitions

A transfer of undertaking in an acquisition occurs when a business, unit, division, or undertaking is transferred from one entity to another as part of an acquisition, merger, sale, restructuring, or similar transaction. Employment-law issues arise because the transaction may affect employees, their continuity of service, wages, benefits, liabilities, and termination rights.

In India, the principal statutory framework is found in Section 25FF of the Industrial Disputes Act, 1947, subject to the statutory exceptions and conditions. The Industrial Relations Code, 2020 also provides the contemporary statutory framework, although the precise applicability depends on the transaction and the operative legal provisions at the relevant time.

1. Meaning of Transfer of an Undertaking

An undertaking may include a business establishment, unit, division, or part of an industrial enterprise.

In an acquisition, transfer can occur through arrangements such as:

• sale of a business undertaking;
• acquisition of a particular business division;
• transfer of an industrial unit;
• business restructuring;
• amalgamation or reconstruction;
• sale of assets constituting an operating business; or
• transfer of ownership or management of an establishment.

The important question is not merely whether individual assets have changed hands. The substance of the transaction and whether an identifiable undertaking has been transferred are relevant.

2. Effect on Employees

A transfer of an undertaking can affect employees in several ways.

Employees may be:

• transferred to the acquiring employer;
• retained with continuity of service;
• offered revised employment terms;
• paid compensation where statutory requirements are triggered; or
• potentially terminated where the statutory conditions for termination are otherwise satisfied.

The acquiring employer should carefully examine existing employment contracts, collective agreements, standing orders, wage arrangements, benefits, pending disciplinary proceedings, and litigation.

3. Section 25FF of the Industrial Disputes Act

Section 25FF deals with compensation to workmen in cases where ownership or management of an undertaking is transferred.

The general principle is that where an undertaking is transferred, a workman who satisfies the statutory requirements may become entitled to notice and compensation as if the workman had been retrenched.

However, an important exception applies where:

1. the transfer does not interrupt the workman's service;
2. the terms and conditions of service after transfer are not less favourable than those applicable immediately before the transfer; and
3. the new employer is legally liable to pay compensation based on the employee's continuous service if the employment is terminated in the future.

Where these conditions are satisfied, compensation under Section 25FF may not be payable merely because the undertaking has changed ownership.

4. Continuity of Service

Continuity of service is one of the most important issues in acquisition transactions.

Suppose Company A operates a manufacturing unit and Company B acquires the undertaking. If the employees continue working for Company B without interruption and their service benefits are preserved, their previous service may remain relevant for statutory purposes.

This can affect:

• gratuity;
• retrenchment compensation;
• leave;
• seniority;
• retirement benefits;
• bonus;
• provident-fund-related matters; and
• other employment benefits.

The transaction documents should therefore clearly specify how past service will be recognized.

5. Terms and Conditions After Acquisition

The acquiring employer cannot necessarily treat the acquisition as an opportunity to reduce all existing employment benefits.

Where Section 25FF's statutory exception is being relied upon, the relevant employment conditions must satisfy the statutory requirements, including the requirement that the terms and conditions are not less favourable to the workman.

Important terms can include:

• wages;
• allowances;
• working hours;
• leave;
• retirement benefits;
• seniority;
• service continuity;
• disciplinary rules; and
• other material employment conditions.

6. Transfer of Employees and Consent

Whether individual employee consent is required depends on the structure of the transaction, the applicable employment contract, service rules, statutory provisions, and whether the employee is being transferred as part of the undertaking or being offered a materially different employment arrangement.

A genuine transfer of an undertaking should therefore be distinguished from simply terminating existing employees and asking them to apply afresh to the acquiring company.

7. Liability for Past Employment Claims

Acquisitions can create questions concerning responsibility for liabilities arising before completion.

Examples include:

• unpaid wages;
• bonus claims;
• gratuity;
• retrenchment claims;
• employment litigation;
• statutory contributions;
• workplace injury claims; and
• claims arising from previous service.

The acquisition agreement may allocate financial responsibility between the seller and buyer, but contractual allocation between the companies does not necessarily eliminate statutory rights available to employees.

8. Transfer Must Be Genuine

Courts examine the substance of the transaction where necessary.

An arrangement described as a “sale” or “acquisition” may have different legal consequences depending on whether an undertaking has actually been transferred as a going concern or whether only selected assets have been sold.

This distinction is particularly relevant to employment continuity and statutory compensation.

9. Important Case Laws

1. Anakapalle Co-operative Agricultural and Industrial Society Ltd. v. Workmen

The Supreme Court examined the consequences of transfer of an undertaking and the rights of workmen under Section 25FF.

The case is important for understanding that transfer of an undertaking can trigger statutory consequences concerning compensation and continuity of employment.

2. Management of Safdarjung Hospital, New Delhi v. Kuldip Singh Sethi

The Supreme Court considered questions concerning the meaning and scope of an “undertaking” in industrial law. The decision is relevant when determining whether a particular activity or establishment constitutes an undertaking for purposes of labour legislation.

3. Hariprasad Shivshankar Shukla v. A.D. Divikar

This Supreme Court decision is an important authority concerning the statutory scheme relating to retrenchment and transfer of undertakings. It helped shape the judicial understanding of the statutory provisions dealing with employment consequences arising from industrial restructuring.

4. Gujarat Electricity Board, Thermal Power Station, Ukai v. Hind Mazdoor Sabha

The Supreme Court discussed the consequences of transfer and restructuring in the context of industrial employment and emphasized the importance of examining the applicable statutory provisions and employment rights.

5. Workmen of Meenakshi Mills Ltd. v. Meenakshi Mills Ltd.

The Supreme Court considered issues concerning industrial restructuring and the statutory protections available to workmen. The case illustrates the importance of examining the substance of an employer's action rather than relying solely on the terminology used in the transaction.

6. Bangalore Water Supply & Sewerage Board v. A. Rajappa

Although primarily concerned with the meaning of “industry,” this landmark Supreme Court judgment is relevant when determining whether an establishment falls within the industrial-relations framework. This can become important when assessing whether statutory protections relating to an undertaking and its employees apply.

7. Management of Hindustan Lever Ltd. v. Workmen

The Supreme Court considered employment consequences arising from corporate restructuring and changes involving business operations. It illustrates the importance of considering employees' statutory and contractual rights when business operations are reorganized.

8. Madurai District Central Co-operative Bank Ltd. v. I.S. Sivagurunathan

The Supreme Court examined employment rights in the context of organizational restructuring and transfer-related issues. The decision is useful for understanding the distinction between a legitimate administrative/business restructuring and actions that may adversely affect protected employment rights.

10. Due-Diligence Issues in an Acquisition

Before completing an acquisition involving an undertaking, the purchaser should conduct employment-law due diligence covering:

11. Practical Example

Suppose Company A owns a manufacturing undertaking employing 500 workmen. Company B acquires the undertaking as a going concern.

If the 500 employees:

• continue their employment without interruption;
• receive terms and conditions that are not less favourable;
• retain recognition of their continuous service; and
• have their future statutory compensation liability recognized by the transferee,

the transaction may fall within the statutory exception to compensation under Section 25FF.

Conversely, if Company B terminates employees and offers them entirely new employment on materially inferior conditions, the transaction may raise separate statutory issues concerning transfer, retrenchment and compensation.

Conclusion

The transfer of an undertaking during an acquisition is not merely a corporate transaction; it can have significant industrial and employment-law consequences. The central issues are whether an undertaking has actually been transferred, whether employees' service continues, whether their employment conditions are preserved, and whether statutory compensation requirements are triggered.

For employers, careful due diligence and appropriate transaction documentation are essential. For employees, the important questions are continuity of service, preservation of employment conditions, statutory compensation, and responsibility for existing employment liabilities. Section 25FF of the Industrial Disputes Act provides the central statutory framework for transfers of undertakings, subject to the applicable contemporary labour-law regime.

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