Business transfer: rules and due diligence

What is a business transfer?

A business transfer takes place when a business or part of a business is transferred from one owner to another as a "going concern", that is, so that the activity continues after the transfer. It can happen via:

• An asset deal, where the buyer takes over assets, contracts and possibly employees directly
• A share deal, where the buyer takes over the ownership interests in the company (ApS or A/S)
• A merger, where two companies are combined
• A demerger, where a company is divided into two or more entities

The choice of transfer form has great significance for which rules apply, including the Business Transfer Act.

The Business Transfer Act: employees' rights

The Act on employees' legal position on a business transfer (consolidated Act no. 710 of 20 August 2002, as later amended) implements the EU Business Transfer Directive. The act protects employees who are automatically transferred to the transferee when a business or part of it is transferred.

Automatic transfer of employees

Employees who work in the part of the business being transferred are automatically transferred to the new owner. Neither the seller nor the buyer can unilaterally avoid this.

The new owner takes over:

• The existing employment terms (pay, seniority, holiday)
• The rights and obligations under the employment contract
• The seniority from the original employment

The transferee as a rule also enters into an applicable collective agreement but can, on certain conditions, renounce it with notice.

The duty to inform and consult

The seller and buyer are obliged to inform and consult the affected employees or their representatives before the transfer. The information must as a minimum cover:

• The time and reason for the transfer
• The legal, economic and social consequences for the employees
• The planned measures for the employees

Failure to meet the duty to inform can lead to liability for compensation.

Dismissal in connection with a transfer

It is as a rule unlawful to dismiss employees solely because of the business transfer. A dismissal can, however, take place for:

• Objective reasons not based on the transfer (for example a fall in the order book)
• Economic, technical or organisational reasons that involve changes in the workforce

Due diligence when buying a business

Before a business transfer, the buyer should carry out thorough due diligence, an investigation of the business's legal, financial and operational condition.

Legal due diligence: checklist

Company-law documents:

• Articles of association and incorporation documents
• Shareholders' agreement
• General-meeting minutes
• Signatory rules and powers of attorney

Contracts and agreements:

• Important customer contracts and supplier agreements
• Lease and leasing agreements
• Licence agreements and intellectual property rights
• Employment contracts for key employees

Employment matters:

• The number of employees and employment terms
• Collective-agreement conditions
• Any pending labour cases
• Non-compete clauses and confidentiality agreements

Financial and tax matters:

• Annual reports for the last 3 to 5 years
• Any tax debt and pending tax cases
• Pension obligations

Public-law matters:

• Permits and licences
• Environmental conditions and any orders
• GDPR compliance and data-processing agreements

The structure of a business transfer

1. Initial negotiations and NDA

Before the parties exchange confidential information, a non-disclosure agreement (NDA) should be entered into. This protects the seller if the deal is not completed.

2. Letter of Intent (LOI)

The parties typically issue a letter of intent describing the overall terms: price, structure and timetable. An LOI is as a rule not binding, apart from individual provisions such as confidentiality and exclusivity.

3. Due diligence

The buyer reviews the business on the basis of the information the seller makes available in a data room.

4. Negotiation and draft transfer agreement

Based on the due diligence, the final transfer agreement is negotiated. This sets, among other things:

• The transfer price and payment terms
• Any earn-out clauses (a variable part based on future performance)
• Warranties and representations from the seller
• Indemnity clauses
• Any non-compete for the seller

5. Signing and closing

Signing is the signature of the transfer agreement. Closing is the actual change of ownership, which can happen at the same time as or after signing.

Pricing a business

There are several methods for setting the price:

• EBITDA multiple, where the normalised result is multiplied by a sector-typical multiple
• Discounted cash flow (DCF), a discounting of the future cash flows
• Net asset value, that is, the book equity, possibly adjusted for hidden assets and liabilities

Frequently asked questions

What is the difference between an asset deal and a share deal?

In an asset deal, you buy the business's assets (inventory, contracts, goodwill) directly, and you do not automatically take over the seller's obligations. In a share deal, you buy the ownership interests in the company and thus take over all the company's assets and liabilities, including historical tax cases and warranty claims.

Do employees have the right to refuse to transfer in a business transfer?

An employee can choose not to continue with the new owner. As a rule, this is then regarded as the employee's own resignation. If the transfer involves significant deterioration of the employment terms, the employee can, depending on the circumstances, regard the termination as a dismissal by the employer with the rights that entails.

When does the Business Transfer Act apply?

The act applies to the transfer of a business or part of a business that retains its identity as an economic entity and where the activity continues or is resumed. A pure share deal falls as a rule outside the act, because the company as a legal person does not change owner, only the owners do.

Conclusion

A business transfer is a complex process, where the choice between an asset deal and a share deal has great significance for liability, tax and the employees' legal position. Thorough due diligence and a well-crafted transfer agreement are decisive for avoiding unpleasant surprises. Seek legal and tax advice early in the process.

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The content of this article is for guidance only and does not constitute legal advice. Consult a lawyer for advice on your specific situation.