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Business Immigration Zone: Record M&A Year Sheds Light on Employment-Based Immigration Due-Diligence Requirements

February 03, 2016

2015 was a record-setting year for mergers and acquisitions, with $4.304 trillion in M&A activity last year topping the previous record of $4.296 trillion in 2007. M&A activity was encouraged by increased confidence, cheap debt and increasing pressures to compete with consolidating rivals in a slow-growth economy. This trend likely will continue into the foreseeable future so companies should be versed in the immigration consequences that flow from M&A activity.

When companies merge, the transaction normally modifies the employment status of individuals who worked for either the purchased entity or the surviving company. Various levels of due diligence apply to any M&A transaction. However, an often-overlooked issue concerns the liability the successor employer may have with respect to I-9 violations that were committed by the predecessor employer before the merger is consummated. A common question is whether Forms I-9 should be completed for the surviving employees or whether the surviving entity can rely on the predecessor’s Forms I-9 and records.

Here are some practical employment/immigration-related considerations that should be observed as part of due diligence in the context of mergers and acquisitions.

• Merger/acquisition scenarios normally involve a change of employment status for the predecessor’s employees. If an individual is continuing employment with the successor entity after a merger/acquisition and has a reasonable expectation of employment at all times, then new Forms I-9 are not required if the previous employer’s records and Forms I-9 are retained. An employee has a reasonable expectation of continued employment in a merger/acquisition when:

◦ The individual was employed on a regular and substantial basis.
◦ The individual complied with the employer’s established policy regarding any absence.
◦ The employer’s past history of recalling absent employees for employment indicates a likelihood that the individual in question will resume employment within a reasonable time in the future.
◦ The former position held by the individual has not been taken by another worker.
◦ The individual has not sought or obtained benefits during his absence that are inconsistent with an expectation of resuming employment within a reasonable time in the future.
◦ The financial condition of the employer indicates the ability of the employer to permit the individual to resume employment within a reasonable time in the future.
◦ The oral and written communications indicate that the individual will resume employment within a reasonable time in the future.

  • Corporate mergers generally trigger Form I-9 audits as part of the predecessor entity’s efforts to complete the transaction. For example, the entity that is being acquired will likely want to identify any Form I-9 wrinkles and resolve those so the transaction can move forward without interruption. In this scenario, the predecessor entity likely may have an obligation to disclose Form I-9 contingent liabilities to the successor entity. In contrast, the successor entity will normally want to identify Form I-9 contingent liabilities and resolve those issues before consummating the transaction. Alternatively, the successor entity may require a price modification associated with the Form I-9 contingent liabilities.

Successor entities should inspect/audit the predecessor employer’s Forms I-9 as part of due diligence before the transaction is consummated. Potential Form I-9 contingent liability issues should be identified and resolve before the transaction is completed.

  • The successor entity should always inquire about whether the predecessor entity is currently subject to any enforcement action from governmental agencies concerning employment verification obligations. If an audit, investigation or enforcement action is pending during the time of the transaction, the successor entity should determine how that governmental activity impacts the merger/acquisition.
  • A successor employer is liable for a predecessor’s I-9 violations when the transaction is an asset sale and there is an express or implied agreement to assume liability, or when the transaction amounts to a consolidation or merger of the two companies. The successor may also be liable in this scenario when the successor is a mere continuation of the predecessor employer.
  • A successor or reorganized employer may always choose to treat continuing employees as new hires and complete new Forms I-9 for each of them.
  • Form I-9 successor liability issues can and should be addressed in the transactional documents governing due diligence and/or the merger/acquisition transaction.

For more information concerning the Form I-9 due diligence that should be completed in the context of a corporate merger/acquisition, contact Brandon Davis at brandon.davis@phelps.com.