the immigration implications of a corporate transaction – Free Movement

While not natural bedfellows, business immigration lawyers are finding themselves increasingly immersed in the world of corporate transactions, thanks to the rise in the number of businesses holding sponsor licences.

An important principle of sponsorship is that a sponsor licence is not transferable. This means that it is given to a particular company with a set hierarchy of ownership, so if that company undergoes a change in their structure, for instance they merge or are acquired by another business, the licence cannot be carried into that new structure.

When a corporate transaction takes place, the Home Office requires specific actions to be taken in respect of the sponsor licence, within set timeframes, or else the status of sponsored workers could be put a risk. This article aims to shed some light on what this is all about.

Key definitions

First of all let’s try and clarify some of the jargon. Mergers and acquisitions are terms generally used to describe the process of combining companies through some form of corporate transaction. A merger is where two separate companies agree to join together to form one new entity.  In comparison, an acquisition can take two forms, for instance one company can purchase another company outright or one company can acquire some or all of another company’s assets. 

Let’s look at this in more detail.

Share Sale

The most common corporate transaction is the share sale. Simply put, a share sale describes the situation where one company acquires some or all the of shares in another company. If this is a ‘controlling’ interest i.e. 51% or more of the shareholding, they will acquire ownership of the company, so that all assets, liabilities and obligations pass to the buyer. The company then becomes a ‘subsidiary’ of the buyer.

As this creates a degree of risk for a buyer,  a process called ‘due diligence’ will need to be carried out as part of the corporate transaction. This involves a buyer carrying out an investigation or audit of the business they are seeking to buy to confirm the accuracy of the information and value that the seller has provided.

A buyer will then often seek some form of contractual protection as part of the purchase, in the form of warranties and indemnities, which are generally negotiated after due diligence is carried out.   More on an immigration lawyer’s role in the due diligence process shortly.

For the workers, as the business is bought in its entirety, there is little disruption to their employment relationship as the employer and the terms of their employment usually remain the same.

Asset Sale

In an asset sale, the seller retains ownership of the company but a buyer acquires some or all of the seller’s business and assets. This could include equipment, land, goodwill and/or stock, together with any liabilities that it chooses. The buyer can effectively ‘cherry pick’ the assets and liabilities that it wants to acquire rather than buying the business outright. As each asset and liability is identified and separately transferred, the due diligence process is much less onerous as there is much more clarity on what is actually being sold.

The impact on workers of an asset sale is much more complex as it will often involve a change in employer. The sale will engage the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) to enable the transfer of employees from the seller to the buyer.

For instance, if a buyer decides to purchase a chain of pubs as an asset, the pub sites, infrastructure and equipment and stock will transfer to them. TUPE ensures that the employees who work at the pubs are protected, as their contracts of employment transfer to the purchaser as well.

As a sponsor licence is not transferable, a share sale in a company which holds a licence is likely to impact the validity of their sponsor licence and necessitate some actions to be taken.

Firstly, sponsors are under a general duty to report changes of circumstances involving their business to the Home Office. This ensures transparency and limits the risk of bad actors getting access to a licence, beyond Home Office scrutiny.

A change in the direct ownership structure of a sponsorship must be reported to the Home Office via the sponsor management system. The guidance for sponsors makes clear at paragraph C4.1 that a report is necessary where there has been;

  • a change in direct ownership 
  • sale of all or part of, or the controlling number of shares in, your organisation 
  • partly or wholly taken over by another organisation 
  • splitting out to form new organisations

As with all changes to a sponsor, this will need to be reported on the sponsor management system within 20 working days of the change having taken place. 

Where a controlling interest in a business has been transferred

This is where it starts to gets more involved. If a share sale results in the transfer of 51% or more of a shareholding in a company who holds a sponsor licence, further action needs to be taken in addition to the reports on the sponsor management system. Even though the employer remains the same, the Home Office’s guidance makes clear that a company will need to apply for a new sponsor licence within 20 working days of the sale.

To be clear, this is an entirely new application, with new supporting documents and a form that needs filling out. The fee will have to be paid and the sponsor should indicate on the form that they currently hold a licence and the reference number. It would be wise to put in details of the sale in the application along with details of the sponsored workers.

Reports will need to made for the sponsored workers who are affected by notifying the Home Office of the change in circumstance. Fortunately, they do not need to make a visa application at this point. They will be moved to the new licence by the Home Office.

Their details won’t actually transfer on the sponsor management system – this is step too far for the outdated system – but a sponsor will be able to make subsequent reports for the worker on the old licence which will be made dormant. When the worker comes to extend their visa, a new certificate of sponsorship will be issued on the new licence.

Where there is a change higher up the hierarchy of ownership 

A sponsor licence holder (company A) may be directly owned by another company (company B) who are themselves owned by another company (the ultimate parent company). If there is a change of ownership to the ultimate parent company, company A will not be required to apply for a new sponsor licence as there has not be a change to their direct owner. They will, however, still need to report this change via the sponsor management system.

The impact of an asset sale on sponsored employees and a sponsorship licence

As discussed above, in an asset sale if any employees transfer via TUPE, their employment contract will transfer to a new employer.  In this case, the following steps will need to be taken following section C.4.6 of the Home Office’s guidance.

  • The seller will need to report the transfer of the workers to the buyer on the sponsor management system within 20 working days of the transfer taking place.
  • If the buyer has their own sponsor licence, then they must report on their licence within 20 working days that they are taking full responsibility for the sponsored workers and provide evidence of the change in employment. 
  • If the buyer does not have their own licence, they have 20 working days from the transfer within which it must apply for a licence.
  • If the seller is no longer using their licence, it will be made dormant. The buyer will still be able to have access to it to make any necessary reports for the workers until they transfer onto the buyer’s licence when they next come to make an extension application. 

As with a share sale, the workers do not immediately have to make a change of employment application to transfer to the new licence. This will be carried out by the Home Office albeit without them appearing on the sponsor management system on the new licence.

If a merger has resulted in a new entity being formed, if one or all of the entities merging holds a sponsor licence, a new licence will be needed as their old licences cannot be transferred. The steps described above in respect of obtaining a new licence and transferring sponsored workers will, in all likelihood, need to be followed.

In short, they are serious. If a sponsor fails to report these changes or transfers within the set timeframe or apply for a new licence, then the Home Office can take action to revoke or even suspend a sponsor licence. This would mean that the sponsored workers within a company could have their visas curtailed and the company concerned could be prevented from applying for another licence for 12 months.

Companies may be tempted to ignore these requirements as they may not want to go to the fuss of making a new sponsor licence application, particularly when, as in a share sale, the employer has remained the same. Failure to take the requisite action can come back to haunt a company, even years down the line.

The Home Office can carry out general company health checks on sponsors at any point and can come across changes in ownership that have not been reported. Hopefully, this only leads to a sponsor getting a letter out of the blue from the Home Office wrapping them on the knuckles and urging them to apply for a new sponsor licence asap. But this is not a risk worth taking.

Prevention of illegal working and TUPE

One further point to keep in mind when dealing with TUPE transfers. The employer’s guide on right to work checks provides that right to work checks carried out by the seller transfer as well to the buyer. This means that the buyer inherits the benefit of any statutory excuse from a possible civil penalty established by the seller if they carried out the right to work check correctly.

This cuts both ways. If the seller did not carry out the right to work check or did not carry it out correctly or not at all, the buyer would be liable for a penalty if an employee, who commenced work on or after 29 February 2008, is later found to be working illegally. 

For this reason, the Home Office guidance encourages employers to carry out fresh right to work checks of the employees they receive via TUPE. The Home Office gives employers a 60 day grace period to carry out these checks which runs from the date of the TUPE transfer. 

An immigration lawyer’s role in the due diligence process

Due diligence is an investigation process carried out before any corporate transaction is completed. Evidently, it is in the buyer’s interests to ensure that this process is carried out thoroughly, so they may seek the input of an immigration lawyer on a particular transaction.  This is particularly important if the company being sold has a sponsor licence.

During due diligence, a buyer gets the opportunity to ask a series of questions of a seller to get a true sense of the business. Some of the key issues an immigration lawyer will want to obtain information about could be the following;

  • Whether a company has a sponsor licence?
  • How many sponsored workers they have?
  • Is the company adhering to their sponsorship duties?
  • Does the company have evidence of right to work checks having been carried out?
  • Has the company ever received a civil penalty for illegal working?

Following receipt of the responses from the seller, the legal team will prepare a report for the buyer, highlighting any areas of risk, such as problems with their right to work checks or the fact that sponsored workers will need to transfer onto a new licence. The reality is though that a seller can place restrictions on the amount of questions asked and will often be quite evasive in their responses.

If you are involved in due diligence, you will need to have a clear sense of how ‘material’ immigration issues are to the purchase to gauge how much you can push back if the responses you receive are not sufficient to report on the risks. As important as we consider immigration to be, in the white heat of a corporate transaction, immigration issues are likely to be pushed to the side to get a deal over the line.

Remember – you can suggest warranties and/or indemnities to protect the buyer in respect of any risks. Warranties are assurances or promises that can be placed in a contract of sale which if breached gives rise to a right to sue for damages for breach of contract. A warranty could be included to provide assurance to a buyer that the seller has carried out right to work checks for their employees correctly if they were not checked during due diligence.

In comparison, indemnities are an express obligation to compensate the beneficiary of the indemnity for some defined loss or damage arising from a particular cause, by making a monetary payment to the beneficiary.  Indemnities can be used to address specific, identified areas of risk that are particular concern to the buyer.

For example, if the due diligence uncovers evidence of right to work checks not being carried out, the seller could be asked to indemnify the buyer in respect of all losses suffered or incurred rising out of or in connection with the failure to carry out such checks (e.g. any civil penalty that might be imposed by the Home Office at some point in the future in relation to a worker who has transferred to the buyer).

Some final thoughts…

Once the terminology becomes familiar, the basic actions that need to be taken for a sponsor licence when a corporate transaction takes place are pretty straightforward. Provided the correct action is taken, in the timeframes set out, there should not be much adverse effect on the business or the sponsored workers.

If you have a particular thorny or complex transaction, Annex C4 of the Sponsorship Guidance sets out a number of examples which can help illustrate the actions that need to be taken.  It is also worthwhile seeking input from the Home Office if you can, as the sponsor licence team can sometimes have a common sense, if a little inconsistent, view on what needs to be done.

The main challenge in this area is simply awareness that this is a problem at all. Often our clients simply do not tell us that a corporate transaction is underway, or immigration issues are not on the radar of the parties to the sale or the legal teams involved. Our role is to then to educate our clients and corporate colleagues as much as possible to limit problems later down the line.

This article was written with the assistance of Michelle Jones, partner at DAC Beachcroft LLP.

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