The people factor – inform, involve, empower

Managing the changes

How effective you are in preparing employees for a carve-out and communicating with them about the organisational separation will often be critical to the overall success of the project. The goal is to retain core competencies and the ability to conduct business well.

It is commonly accepted that merging two foreign organisational units into one is extremely challenging. It is even more difficult to separate longstanding and closely integrated organisational entities.

Irrespective of the objectives of the carve-out, announcing the decision is bound to cause uncertainty among employees. The process requires strong leadership, especially in the early stages. It is important to provide transparent, comprehensive, and accurate information in order not to jeopardise the trust of employees, and to gain and retain their commitment to the change.

Neglecting this important aspect risks the loss of key employees. Communication – such as a town hall meeting, one-on-one conversation, newsletter, explanatory video, or individual email – must contain clear, consistent messages prepared beforehand and made binding for all. Carve-outs are usually highly complex and often take years to complete. Open, clear communication is essential throughout the entire process. 

The second cornerstone of a successful transformation is around ‘involvement’. Your employees need to feel they are an important element, and beneficiary, of the carve-out, rather than an afterthought or an inconvenience. The potential for this issue to cause significant disruption if not handled well should not be underestimated.

Targeted coaching can help to quickly resolve any possible conflict situations. Differences of opinion, and the significant potential for conflict, can easily slow a project down and have a detrimental effect on the outcome. 

Finally, there must be a pragmatic but professional way to ensure that employees of the newly created organisation can operate quickly and safely in the new environment. They must be provided with the tools and training needed to familiarise themselves with the new structures, processes and systems as early as possible.

“Problems in the automotive industry are still existing due to the Covid-19 crisis. Employees are still in contract/short-term roles and capacities are not fully utilised due to the semiconductor shortage.” - Christian Back, Partner, Mazars

Keeping on the right side of the law

As well as the morale, commitment and engagement of staff, carve-outs also affect the employment status of those in the entity to be spun off. Before plans can be made, therefore, you need to consider the employment law implications, as well as the company’s overall business situation. Key considerations may include:

• Which employees will be assigned to the area to be spun off?
• What about employees who work in central areas (headquarter activities)?
• Do the people assigned to the NewCo constitute a holding or at least a part of the holding, as defined by labour law?
• Will the holding/partial holding resulting from the carve-out belong to a legal entity or does it itself constitute a legal entity?

For carve-outs implemented as part of an asset deal or a conversion process (e.g., a spin-off or split-off), questions relating to the transfer of operations need to be carefully formulated and clarified beforehand, and the legal ramifications assessed. How this is handled depends on whether the affected employees will be automatically transferred to a new legal entity (and thus a new employer) or remain with the old one.

In any transfer, it is important that the employees affected are fully informed in compliance with any legal requirements.

If it’s unclear whether the employees will be transferred automatically, it may require transfer agreements to be arranged with the affected employees. Questions relating to the applicable regulations must also be considered.

If it is a transfer, key questions need to be considered, such as whether the same corporate agreements still apply to the receiving legal entity, or if other agreements apply? Do the applicable collective agreements still apply or do other regulations now apply? And should a comparison be made between the different regulations to determine which are more advantageous to the employees?

The answers to these legal questions can significantly influence the decision of whether a carve-out is a sensible strategic option or not.

This article is part of a series of short articles about managing a successful carve-out. Other articles include:

• Could carve-outs be a strategy for success in the automotive industry?
• IT infrastructure – plan, do, act, check
• Valuations – accounting, taxes, and transaction prices make valuations a key aspect of the carve-out

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