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  • Writer's pictureRajvin Singh Gill

Business Acquisition: Rights of Employees

In the context of mergers and acquisitions (M&A), restructuring is unavoidable, often leading to alterations in the organizational setup. Consequently, employees should be prepared for these changes, and more often than not inquiries regarding employee rights and the protections afforded to them commonly arise.

Employment (Amendment) Act 2022 Given the modifications to the Employment Act effective from January 1, 2023, a noteworthy change post-amendment is the extension of Employment Act coverage to all employees. With the amended Act in place, every employee now enjoys fundamental statutory rights, including annual leave, sick leave, extended maternity leave, paternity leave (previously non-existent), and flexible working arrangements, irrespective of their salary. Nonetheless, employees earning above RM4,000 per month have limited entitlements, as they won't receive certain benefits like overtime pay and termination benefits under the revised Act

In there a need to inform or obtain consent from employees prior to an M&A? Typically, in an M&A scenario involving either a share sale or asset sale, there is no obligation for the companies to inform or seek consent from employees before proceeding with the transaction. Employee consent becomes necessary only when there is a transfer of employees from the target company to the acquiring company. In such cases, as the transfer entails the termination of employment with the target company and subsequent re-employment with the acquiring company, it is at the discretion of the individual employee to accept the new offer.

Are employees transferred as of right from the target company to the acquirer? The answer to this question depends on whether the acquisition is done through a share sale or an asset sale. In a share sale, the transfer of ownership involves the acquiring company taking over the shares of the target company along with its existing customers, liabilities, suppliers, contracts, and employees. Despite this change in share ownership, the target company remains the same legal entity. Consequently, employees of the target company continue to be employed by the identical legal entity, and there is no transfer of employees. On the other hand, in an asset sale, the automatic transfer of employees from the target company does not occur. The acquiring company has the discretion to select employees from the target, as they can choose which assets to acquire and which to exclude from the acquisition. These employees remain under the employment of the target company. If the acquiring company does not extend employment offers to these individuals, the target company is responsible for determining their fate post-acquisition. In cases where the target company decides to terminate or lay off employees due to redundancy, the target company is obligated to pay all contractual payments associated with employment cessation, including termination benefits in accordance with the Employment (Termination and Lay-Off Benefits) Regulations 1980 or redundancy payments. It is important to note that, under the Employment Amendment Act 2022, there is no legal requirement to pay termination benefits to employees: (i) earning above RM4,000 per month; and (ii) who are not engaged in manual labor, unless such benefits are contractually stipulated. Additionally, the notice period given to employees must comply with the minimum length specified in the Act. All payments, except termination benefits, should be settled by the last day of employment, as all employees are now protected by the Act.

Notice Period

Period of Employment as of the date Notice if given

4 weeks' notice

less than 2 years on the date notice is given

6 weeks' notice

2 years or more but less than 5 years

8 weeks' notice

5 years

What are the next steps for the acquiring company? During M&A transactions, it is crucial for companies to examine the terms and provisions outlined in employment contracts and handbooks to ensure alignment with the prescribed rights in the amended Act. In the context of a share sale, conducting a comprehensive review of the target company's employees' contracts is advisable. Conversely, in an asset sale, the acquiring company must ensure that any new offers of employment for the employees complies with the amended Act. Additionally, companies should assess whether other administrative procedures are necessary, including notifications to labor and tax authorities, particularly concerning the termination of employment.

If you have any questions or concerns regarding this topic, feel free to contact us. We're happy to chat!


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