Corporate Obligations and Employee Rights in Mergers & Acquisitions

Mergers and acquisitions (“M&A”) significantly impact corporate obligations and employee rights. Under Indonesian law, companies must notify employees, provide severance packages, and honor collective labor agreements during M&A transactions. Employees, in turn, have the right to information, the right to refuse unfavorable changes, and the right to fair compensation if terminated. By ensuring compliance with the Law Number 40 of 2007 on Limited Liability Companies, as amended by Law Number 6 of 2023 concerning the establishment of Government Regulation in Lieu of Law Number 2 of 2022 on Job Creation (“Company Law”) and Law Number 13 of 2003 on Employment, as amended by Law Number 6 of 2023 concerning the establishment of Government Regulation in Lieu of Law Number 2 of 2022 on Job Creation (“Employment Law”), businesses can mitigate disputes and foster smoother transitions. This article highlights key legal provisions, emphasizing the importance of transparency and fair treatment in corporate restructuring.

When it comes to M&A, companies must navigate a complex legal framework to ensure compliance with the regulations on the rights of all stakeholders, including employees. Indonesian law, specifically Article 126 paragraph (1) of Company Law, mandates that legal actions such as mergers, consolidations, acquisitions, or spin-offs must take into account the interests of the company and other related parties, including its employees.

Furthermore, Employment Law, also clearly outlines employee rights in M&A scenarios.

This article explores the essential corporate obligations and employee rights that arise in such scenarios.

Employee in ma

Corporate Obligations

Notification to Employees
Pursuant to Article 127 paragraph (2) of the Company Law, the Board of Directors of a company involved in a merger, consolidation, acquisition, or spin-off is required to:
- announce a summary of the proposed plan in at least one newspaper.
- notify employees of the company in writing no later than 30 days prior to the convening of the General Meeting of Shareholders (“GMS”).
  This notice period is not merely a formality; it offers employees the opportunity to object to the proposed changes if they feel their rights or job security may be adversely affected. In situations where employees choose not to continue working for the company due to the changes, the company is obligated to address these concerns in accordance with applicable labor laws, including the provision of severance packages if necessary.
Severance Packages
When termination of employment is carried out by a company due to a merger or acquisition, either because employees refuse to continue the employment under the new management or because the new management chooses not to retain existing employees, the company must provide severance packages to the affected employees.

For permanent employees hired under an indefinite-term employment agreement, the severance structure varies based on different grounds for their termination:
- Standard Severance: For employees unwilling to continue the employment with the new management or for employees not accepted by the new management following a merger, consolidation, spin-off, or acquisition, the company must pay a severance amount equivalent to one-time severance pay, long service pay, and compensation rights as regulated under Article 41 and Article 42 paragraph (1) of Government Regulation Number 35 of 2021 (“GR 35/2021”).
- Modified Severance for Changes in Employment Terms: Pursuant to Article 42 paragraph (2) of GR 35/2021, if an acquisition results in unfavorable changes to employees’ rights or obligations, and they choose not to continue their employment, the company may proceed with termination, provided the employees have not resigned voluntarily. In such cases, the company is required to pay half of the the standard severance package, along with one-time long service pay and compensation rights, as regulated under GR 35/2021.
  Meanwhile, in the case of employees hired under a fixed-term employment agreement (“PKWT”), if they choose not to continue the employment with the new management and the company proceeds with termination, or if the new management refuses to continue the employment of these employees, the company must pay compensation to the terminated employees on a pro-rata basis, in accordance with Article 17 of GR 35/2021.
  
  Additionally, the company should also pay attention to Article 62 of the Employment Law, which principally stipulates that if either party terminates the employment relationship before the agreed-upon term expires, the terminating party must pay compensation equal to the employee’s wages for the remaining contract period, unless the termination falls under the conditions specified in Article 61 paragraph (1) of the Employment Law.
Collective Labor Agreements (“CLA”)
In cases where both merging companies have separate CLAs, pursuant to Article 131 paragraph (2) of the Employment Law, the surviving entity must prioritize terms that are more favorable for employees. This means that if there are differences between the two CLAs, such as differences in wages, benefits, or working conditions, the CLA that offers the best terms for employees will take precedence. The principle behind this is to safeguard employee rights and to avoid any reduction in their benefits or working conditions as a result of the merger. This provision helps prevent adverse impacts on employee welfare, ensuring that mergers do not result in a race to the bottom in terms of labor conditions.

For example, if one company’s CLA provides higher severance benefits or more favorable work hours, those terms should be adopted by the surviving company, provided they are more beneficial to the employees. If both agreements are equally favorable, the surviving company can either continue with one or renegotiate a unified CLA that incorporates the best aspects of both CLAs.
Resolution of Employment Disputes
If a company lays off employees as a result of a merger, acquisition, or other corporate restructuring, and the employees do not accept the termination, they retain the right to challenge the decision. Disputes regarding termination of employment under these circumstances are not merely administrative matters; they are legal issues that require formal resolution through established industrial relations dispute resolution mechanisms.

Employee in ma

Employee Rights in M&A

Employees play a critical role in the continuity and success of a company post-M&A. As such, their rights are protected under Indonesian laws and regulations. Key rights include:

Right to Information: Employees have the right to receive timely and accurate information regarding mergers, acquisitions, or other corporate actions affecting their employment, pursuant to Article 127 paragraph (2) of the Company Law.
For example, if Company A merges with Company B, the management of Company A must inform its employees through a written notice detailing the merger plan, its potential impact, and any expected changes in employment terms at least 30 days before the GMS.
Right to Reject Changes: Pursuant to Article 41 and 42 paragraph (2), employees may refuse continued employment under new management or revised employment terms, triggering severance rights due to termination of employment. These provisions safeguard employees from unfavorable employment conditions imposed post-M&A.
For instance, if an employee of Company A is going to be transferred to Company B due to a merger and is asked to relocate to another city or accept a lower salary, the employee has the right to refuse.
Right to Severance Packages: Articles 41 and 42 of GR 35/2021 regulate severance packages for employees terminated due to M&A, ensuring they receive fair compensation. This includes a combination of severance pay, long service pay, and compensation rights based on the circumstances of termination.

Conclusion

Corporate actions, including mergers and acquisitions, often lead to significant changes within a company, impacting employees’ job security and work conditions. Indonesian laws aim to balance corporate interests with the rights of employees, ensuring transparency and fair treatment. By adhering to these legal requirements, companies can foster smoother transitions and maintain trust among their workforce during transformative business events.

This article is for informational purposes only and does not constitute legal advice. For specific legal concerns, please consult with our legal experts at ADCO Law. Our team of experienced legal professionals is well-versed in labor regulations, compliance requirements, and best practices to help businesses navigate complex employment matters. Whether you are an employer seeking to ensure compliance with Indonesian labor laws or an employee requiring legal assistance, we provide tailored solutions to meet your needs.

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