The target company is entangled in several unresolved labor disputes — dismissal complaints, wage arrears, compensation claims. M&A buyers typically react in one of two extreme ways: either dismissing them (“a few labor cases can’t cost that much”) or wanting to “clean house” by firing all disputing employees right after taking over. Both are wrong, and the second can turn a small risk into a much bigger case.
Share deal: pending disputes remain with the target company
In a share deal, the target company’s legal personality does not change, so the target remains the employer in all existing employment relationships. All pending labor disputes — whether at mediation, arbitration, or court stage — remain with the company as a party; a change of ownership does not make a dispute disappear or transfer it to the buyer personally.
The consequence: the buyer inherits the full financial and legal risk of these disputes — compensation, allowances, court fees, and reputational risk if cases drag on. Economically, this is a “contingent liability” that must be priced into the deal, just like tax debts or bank loans.
A change of ownership alone does not trigger a labor-usage plan obligation
Another common misconception: that any M&A requires building a labor-usage plan. In fact, a mere change of the company’s ownership (share deal) does not by itself trigger the obligation to formulate a labor-usage plan.
The obligation to formulate a labor-usage plan under Articles 43 and 44 of Labor Code 45/2019/QH14 (effective from 01/01/2021) arises only when post-M&A organizational changes such as division, separation, merger, consolidation, or sale of the enterprise affect the employment of many employees. In other words, the labor-usage plan attaches to restructuring that affects employment — not to a name change on the enterprise registration certificate.
Buyers must distinguish two layers: (1) obligations toward existing disputes — inherit and resolve them; (2) labor-usage plan obligations — arising only if post-deal restructuring affects many employees’ jobs.
4 steps to handle pending labor disputes
Step 1 — Map every dispute during due diligence. Build a complete inventory of all pending labor disputes: internal complaints, mediation, court proceedings, enforcement. Each case needs a summary file: the disputing party, claims, procedural stage, counsel in charge.
Step 2 — Quantify the financial risk. For each case, estimate the worst-case scenario for compensation, severance/job-loss allowances, court fees, and legal costs. The aggregate figure is the basis for adjusting the purchase price or designing protection mechanisms.
Step 3 — Build protections into the SPA. As with tax risk: the seller represents the completeness of the disclosed dispute inventory, undertakes to indemnify for obligations arising from pre-closing pending disputes, combined with an escrow holdback of part of the purchase price as a compensation source.
Step 4 — Never unilaterally terminate the contracts of disputing employees. This is the red-line principle: dismissing employees who are in dispute does not erase the case and may create fresh grounds for new complaints (unlawful dismissal), multiplying the risk. Every personnel decision concerning this group requires counsel’s opinion first.
Key takeaways for buyers
- In a share deal, the target remains the employer — all pending labor disputes stay with the company as a party; a change of ownership does not erase them.
- The buyer inherits the full financial and legal risk of pending disputes and should price it into the deal like any contingent liability.
- A mere change of ownership does not trigger the labor-usage plan obligation; it arises only when post-deal division, separation, merger, or sale affects many employees’ jobs (Articles 43–44, Labor Code 2019).
- Handle disputes in four steps: full diligence inventory, financial quantification, SPA protections (representations, indemnity, escrow), and never unilaterally terminate disputing employees’ contracts.
Frequently asked questions
Can the buyer settle disputes after taking over?
Yes, but only through lawful negotiation/mediation with the employees — not by unilateral company decision. Every settlement must be documented in writing.
Can labor disputes kill the deal?
Usually not, if quantified and built into the price/escrow mechanics. The danger lies in hidden disputes, not known ones.
When is a labor-usage plan required after M&A?
When post-deal division, separation, merger, consolidation, or enterprise sale affects many employees’ jobs (Articles 43–44 of Labor Code 2019) — not merely because ownership changed.
Applicable legal sources
- Labor Code No. 45/2019/QH14 — Articles 43, 44 (labor-usage plans), Article 47 — effective from 01/01/2021.
Need a labor-risk review before your M&A deal? Contact FLAT Law Firm for advice.
The legal content of this article was reviewed by FLAT’s AI Legal Council and submitted to the owner for approval; it is not the opinion of a human lawyer and does not replace legal advice for specific cases.
For reference only; not legal advice.
