CHAPTER 15 EMPLOYEE CONSIDERATIONS

• Jurisdiction: United States

Oil & Gas Agreements: Purchase & Sale Agreements
(May 2016)
CHAPTER 15
EMPLOYEE CONSIDERATIONS
Jonathan A. Marks
Partner
Davis Graham & Stubbs LLP
Denver, CO
Laura Pflumm Cerezo
Davis Graham & Stubbs LLP
Denver, Colorado

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JONATHAN A. MARKS is a partner in the Finance & Acquisitions Group of Davis Graham & Stubbs LLP in Denver, Colorado. He concentrates his practice on the design and administration of all types of employee benefit plans, executive compensation arrangements, and equity compensation plans, as well as on the employee benefits and executive compensation issues arising out of mergers, acquisitions, and public offerings. Mr. Marks has substantial experience designing, drafting and amending all types of benefit plans and arrangements, including qualified retirement plans (401(k), defined contribution, defined benefit, collectively bargained, and governmental plans), tax-sheltered annuities, health and welfare plans, and other fringe benefit arrangements. He also counsels clients on the day-to-day administrative, fiduciary, and legal compliance issues that arise under their plans and has assisted clients with the preparation and negotiation of voluntary compliance program submissions and other matters pending before the Internal Revenue Service, Department of Labor, and other governmental regulatory agencies. Mr. Marks has assisted clients in the drafting, design, and administration of all forms of cash and equity compensation arrangements, including annual and multiyear cash bonus arrangements as well as time and performance-vested stock options, restricted stock, stock appreciation rights, and partnership equity arrangements. He has significant experience in drafting executive employment agreements, nonqualified deferred compensation plans, and supplemental retirement arrangements, and has assisted clients with the preparation of proxies and other compensation-related securities filings. Mr. Marks is actively involved in the transactional practice of DGS. He has prepared severance, change-in-control and retention plans and agreements, negotiated the benefits provisions in merger and acquisitions agreements, and directed the integration of benefit plans after the closing of transactions. He also has specific expertise in the calculation of golden parachutes and the implementation of strategies to mitigate golden parachute tax issues. Mr. Marks has worked with clients in a number of sectors, including software/high tech/data storage, mining and minerals, oil and gas production and distribution, recreation and leisure, utilities, agriculture and livestock, private equity, and tax-exempt and governmental, among others. Mr. Marks was named a Rising Star by Thomson Reuters from 2010 to 2014 and has been listed in The Best Lawyers in America® for Employee Benefits since 2013. He received his J.D from the University of Colorado, and his B.S.B.A. from Boston University.

§ 1. Introduction

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The sale of oil and gas properties often involves significant employee considerations. This paper will address common methods of dealing with those employee considerations in oil and gas purchase and sale agreements. The paper is divided into two parts. The first part discusses common employment and employee-benefits related representations and warranties in oil and gas purchase and sale agreements. The second part discusses common contractual provisions dealing with the post-closing treatment of employees and employee benefits. Because the legal effect on employment and employee benefits is significantly different between equity deals¹ and asset deals,² each portion of the paper separately addresses common provisions used in each type of transaction. Please note that this paper is focused only on some of the most common employment and employee benefits related provisions and areas of interest, and is in no way intended to be comprehensive.³

§ 2. Common Employee-Related Representations and Warranties

As used herein, representations and warranties in oil and gas purchase and sale agreements refer to contractual statements by the seller that some condition, status or item is true or not true as of a certain date.⁴ Representations and warranties are used by

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purchasers to get assurances as to the condition of the business or assets they are purchasing and are used in both asset and equity deals. Seller's representations and warranties may be made in the purchase and sale agreement itself, or the purchase and sale agreement can require that certain items referenced in the purchase and sale agreement be placed on an accompanying "disclosure schedule" (such as a listing of seller's employees). Breach of a representation or warranty often results in an indemnification obligation on the part of the seller.⁵

[A] Equity Deals.

(i) Overview.

In an equity deal, the purchaser generally assumes by operation of law the employment of all of seller's employees along with all liabilities of the selling entity, including sponsorship of any employee benefit plans maintained by the seller.⁶ For this reason, employment and employee benefits related representations in equity deals are generally fulsome and relatively comprehensive.

(ii) Specific Representation and Warranties.

(1) Compliance with Employment and Labor Law.

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Any seller that has employees is subject to a staggering number of federal and state laws which govern virtually every aspect of the employment relationship.⁷ Accordingly, it is nearly ubiquitous for purchase and sale agreements to contain at least some representations with respect to the seller's compliance with applicable laws governing the employment of its workforce. The exact language of any such representations varies from deal to deal, but generally contains an overriding statement that seller is in material compliance with all laws governing the employment of labor. A common example might read something like:

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"The Company and its Subsidiaries are in compliance with all applicable Law respecting labor, employment, discrimination in employment, terms and conditions of employment, payroll, worker classification, wages, mandatory social security schemes, hours and occupational safety and health and employment practices."⁸

In addition, specific representations may be added for completeness of the representation, to guide the buyer's and the seller's due diligence process, or to address particular areas of non-compliance that may have surfaced in the due diligence process. The most common specific representations tend to include (i) misclassification of employees as independent contractors,⁹ (ii) misclassification of employees as either exempt or non-exempt under the Fair Labor Standards Act,¹⁰ (iii) employment of individuals who are not legally in the United States of America,¹¹ and (iv) the existence of lawsuits, claims or grievances with respect to workplace discrimination or harassment, among many others.

(2) Identification of Employees and Related Information.

In addition to compliance with laws governing employment, many buyers want certainty as to the identity of the seller's employees and the compensation paid to those employees. In certain deals, buyers will therefore require sellers to schedule a list of its current employees, which may include (i) the employee's title, (ii) base salary or wage, (iii) most recent bonus, (iv) leave status (if applicable), and (v) status as exempt or non-exempt under the Fair Labor Standards Act, among other items. Although much of the data included in this type of representation can be discovered in the due diligence process, the requirement to formally schedule this data in the purchase and sale

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agreement is often required in order to give the seller a contractual remedy in the event the seller's workforce or compensation is different than that which seller represented or provided in due diligence. In addition, the scheduling of the seller's workforce and compensation may be used as a cross reference for certain employment related covenants that the buyer may agree to concerning the compensation it will provide to continuing employees post-closing.¹²

(3) No Union Activity.

The workforce of most oil and gas companies is not unionized.¹³ Nonetheless, because union activity or the obligation to engage with a collective bargaining representative can alter significantly the manner in which an employer does business and deals with its workforce,¹⁴ most oil and gas purchase agreements will contain representations regarding the absence of a unionized workforce and union related activities or issues, such as strikes or lockouts. A common example might read something like:

Neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement or other similar agreement with a labor union, labor organization or employee association, works council or similar organization applicable to the employees of the Company or any of its Subsidiaries. (A) To the Knowledge of the Company, there are no union or other labor organizing activities occurring concerning any employees of the Company or any of its Subsidiaries, (B) there are no labor strikes, slowdowns, work

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stoppages or lockouts pending or, to the Knowledge of the Company, threatened, against the Company or any of its Subsidiaries, and (C) there is no unfair labor practice, labor dispute (other than individual grievances) or labor arbitration proceeding pending or, to the Knowledge of the Company, threatened, with respect to employees of the Company or any of its Subsidiaries. ¹⁵

(4) Identification of Plans.

Any seller that has employees very likely also maintains a number of employee benefit or compensation plans, programs, or arrangements on behalf of those employees. In addition, even if the seller does not maintain its own plans, it may still have liability...