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A skilled workforce can be a major attraction for dealmakers but labour laws can also cause legal headaches.

Labour and employment law issues are a significant factor for cross-border deals, according to Herbert Smith Freehills’ new M&A report Beyond Borders. The report highlights the importance of addressing key issues early in defining the success or failure of M&A transactions.

There is a significant risk of failure when labour and employment law issues are not identified and addressed early in corporate transactions, for example employee representative related obligations, multi-claimant litigation risk and liability for third party supplied services. This is underscored by the findings of the survey.

When asked what attracted them to a particular country, 37% of respondents cited a skilled workforce – with 4% of those stating that it was the most important factor. When it comes to those companies that have done deals in the past year, the presence of a skilled labour force caught the attention of significant numbers of buyers in Central and Eastern Europe (23%) and South Asia (19%).

However, labour and employment laws are also seen as a major challenge to deals, both past and future. 57% of respondents cited these regulations as one of the reasons why a deal had failed to complete. Of these, 21% believed that employment laws were the most important factor. Those doing deals in the EMEA region were most concerned by labour and employment laws - more than a third (36%) of whom blamed it for their failed deal, making it the single biggest issue for acquirers. One respondent commented that they had "constant problems from the labour unions" and that they "couldn’t cope … with the regulations".

In terms of future deals, labour and employment regulation is a concern for 28% of acquirers looking for targets in Africa and 25% seeking to acquire in both Western Europe and Central and Eastern Europe. The highly regulated labour markets of the European Union, several of which are regularly criticised as being particularly inflexible, are clearly a factor for many would-be acquirers.

Andrew Taggart, EMEA head of employment at Herbert Smith Freehills in London says: "Major deals have fallen over or been delayed purely on the basis of labour law-related issues. The stakes are high in cross-border M&A deals where different legal and regulatory frameworks add complexity and risk. Careful analysis and early identification and resolution of labour law-related issues are key to avoiding such risks and ensuring the deal delivers the desired outcome."

Frédéric Bouvet, M&A partner at Herbert Smith Freehills in Paris, says that acquirers in Europe simply have to plan ahead on this issue, building the time that they need into their deal timelines. “In France, if your deal is above a certain threshold, you cannot have a binding agreement until you’ve at least received some input from the works council in a company, if there is one,” he says.

“That can take several months, which can be a frustration for buyer and seller alike – and while new legislation is supposed to provide for a maximum timeframe of four months, it is early days on how that will be applied.”

Visit the Beyond Borders website for more articles like this.