PIMFA
This article was originally published by Farrer & Co click here to read.
Anthony Turner and David Hunt of Farrer & Co discuss the strategic & legal considerations M&A in wealth management.
While M&A activity in the wealth management sector is frequently publicised, team moves – despite their strategic significance – seem to be much less prevalent. This may be because team moves are less commonly reported in the sector, which may seem unusual given the importance of people and client relationships, or because they happen less and/or are not so widely publicised by the parties (given some of the legal risks involved).
A team move is not legally defined but tends to be where two or more employees are moving from one employer (employer A) to another competing employer (employer B), and where there is a degree of coordinated behaviour in relation to that move. No assets or other underlying business formally moves, and the intention is instead that clients will subsequently follow the persons with whom they have a relationship and move their business to the new employer.
In contrast, M&A is usually structured as:
- share sale, where the shares of the target company are sold to a buyer which then owns the target company and its underlying assets (including client contracts), liabilities and employees;or
- asset sale where the target company sells a bundle of assets and liabilities, and employees transfer, which together make up the relevant business. The buyer does not inherit the corporate history of the target company, but it will generally take all of the distinct assets which relate to the business, including clients.
What are the key differences between M&A and a team move?
| M&A | Team move | |
| Price | The buyer pays for the business based on performance of the wider business, such as a percentage of AUM or a multiple of EBITDA.
In addition, the deal may involve wider deal related, and ongoing, incentives for key staff who will not benefit from the sale (unless they happen to be shareholders). |
No price is paid to the existing employer for the business, which can be a significant cost saving.
There will be costs in the form of:
There will also be costs and potential liabilities involved if the team move is handled badly and litigation results. |
| Diligence | The seller is fully engaged with the sale, and the buyer will therefore have access to all documents of the target, and carry out a detailed diligence exercise with seller co-operation.
This will often include access to confidential financial and client information which would not otherwise be available to the buyer. |
Access to information relating to the existing employer, the terms of employment of the team and the underlying assets (including details of the clients) is extremely limited (or else target employees risk breaching their own confidentiality obligations). |
| Contractual protections | Buyer and seller negotiate a sale and purchase agreement with warranties, indemnities and restrictive covenants (so the seller does not compete with the business being sold).
Warranty and indemnity insurance may also be available. |
There is no contract or arrangement between the current/former and new employer (quite the opposite!).
The new employer’s only contractual relationship will be with each member of the team that is moving. |
| Counterparty | Negotiation is direct with the seller, which is supportive of the deal.
In many cases, a seller will restrict buyer access to the key team members until close to, or after, exchange of binding agreements. |
Negotiation is direct with individual team members and should be done on an individual (rather than group) basis.
New employment contracts should not require an employee to encourage or assist in the move of other team members (see below), or else the employee will risk breaching their express and implied duties to their current employer and the new employer will risk being deemed to have induced that breach. Depending on the level of risk of litigation against the departing employees and their commercial bargaining position, it may be necessary to offer contractual indemnities to the individual team members. |
| Employee liability | None | Potentially significant if things go wrong as the current employer may have a claim against the employees if they breach their employment contracts and wider duties and against the new employer if they have induced or have otherwise been involved in such breaches. |
| Scale | The benefit of paying a price is that the buyer will also acquire the wider assets which support the business, such as client contracts, IT, IP, databases and business information. | Targeted on teams/specific employees. |
| Regulatory | FCA change of control consent (share sales). | No direct regulatory consent required.
If employees in regulated roles breach their obligations to their current/former employer there may be a risk of regulatory scrutiny (eg if the current/former employer reports Conduct Rule breaches to the regulator, especially if there are allegations of dishonesty). The new employer will also need to consider any allegations of breach in the context of reaching decisions over whether employees are fit and proper to carry out their roles. |
| Integration and culture | More “administrative” integration required, but with seller support (pre and post-deal if necessary) | Cultural integration likely to be strong because the individual employees will choose to move to employer B and there will need to be a clear discussion about the future and cultural integration as part of the recruitment process.
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| Client consent | Less risky.
On a share sale, clients will remain clients of the target company and the buyer will therefore receive the benefit of client revenue immediately on completion. On asset sales, clients do need to move to the buyer, but, as the seller supports this, it is usually possible to ensure that the majority of clients transfer on completion and the buyer therefore receives the benefit of the business at completion. |
Riskier.
Once the team move has happened, the team will need to begin the process to move clients to the new employer and onboard them afresh with no help from the former employer (and mindful of any confidentiality, non-solicitation or non-deal restrictive covenants the employees may be subject to). In practical terms this takes some time, and there is a significant risk that only a portion of clients move (even if just because of client inertia). The former employer may also work hard to retain clients so they do not transfer. As such, it is likely to be some time until the new employer receives the benefit of new client revenue. |
| Client documents | Provided by the seller at completion and there will be ongoing obligations to deliver information as required by the buyer. | None. |
What are the key points for employees to be aware of in team moves?
Employees will be subject to both express and implied obligations owed to their existing employer. As such, the new employer will need to manage the team move in such a way that does not give rise to breaches of those obligations or claims that the new employer induced such breaches.
Employees’ express and implied obligations (such as the implied duty of fidelity or, in certain cases, more onerous implied fiduciary obligations) will generally mean that:
- they cannot use or disclose confidential information.
- they cannot compete or be involved in any other business whilst they remain employed.
- they should act in the best interests of their current employer (and not, for example, act in concert with others seeking to leave and set up in competition).
- they may be contractually obliged to disclose wrongdoing by others or activity which might damage an employer’s interest (such as the team move).
Increasingly, express obligations in employment contracts of senior employees may require them to disclose to the current employer an offer of employment once accepted (and sometimes even on receipt of an offer) and to provide details of the position offered/accepted.
Furthermore, the employees will normally also be subject to further express restrictive covenants prohibiting them from taking certain steps post-termination. These obligations might apply for up to 12 months following the end of the employment (and potentially longer, if they are, for example, also a shareholder at the current employer). They may then include obligations not to compete, not to solicit or deal with certain clients or prospective clients, not to solicit or entice colleagues to leave and not to interfere with relationships with suppliers or intermediaries
As will be evident, if a team move is not managed appropriately, it is very easy to see how the employees involved could easily breach a number of these different obligations.
What are the key points for a new employer to be aware of in team moves?
The key risk from a hiring employer’s perspective is that it becomes legally liable to the former employer for inducing breach of contract. This will apply where the new employer positively intended that the employees moving breach their contracts but also, importantly, where the new employer is simply indifferent to whether the employees are in breach or not. In certain circumstances, the new employer may also be exposed to a conspiracy claim.
In such circumstances, employer A’s principal remedy will be an application for injunctive relief to enforce the restrictive covenants in the employment contracts and/or to take away any head start gained from the relevant unlawful behaviour. Such proceedings will normally be brought against both the employees and employer B.
In certain cases, employer A may also seek damages for any loss suffered and may also claim for an account of profits if any fiduciary duties have been breached.
Beyond legal liability, employer B should also consider reputational risk, particularly if the team move is perceived as aggressive or unethical within the industry.
Because of these risks, it is important that employer B prepares very carefully for the team move and that it coordinates matters (rather than allowing the employees themselves to do so). They will want to ensure that strict guidelines are complied with by the employees, particularly in relation to them considering any recruitment proposals on an individual basis only and not speaking to others about it. This can be difficult in practice, because parties often want to discuss matters and are unsettled by the thought of having to make the leap into new employment on their own without a wider team.
It is often sensible to ensure that individual team members take independent legal advice on their obligations to the current/former employer to help minimise the risk of legal breaches (inadvertent or otherwise).
What about the clients?
Clients will not move as an integral part of the team move itself and this will therefore generally follow a successful team move in due course, and once employees are free from any client related restrictions. The clients will then be treated as new clients and approached and onboarded on that basis.
This will generally be an involved task and is likely to take some time. There can be no assurance of the number of clients that move, and how long it will take. As such, a team move is not an easy or quick way of bringing in new revenue and there will generally need to be wider reasons for the move. This will often be the recruitment of talent (perhaps with different expertise) and of an existing team that has proved its ability to perform.
What are the regulatory issues?
From a regulatory perspective, there is no formal “change of control” or similar consent, but wider regulation, such as those governing the SMCR and clients (such as Consumer Duty), will continue to apply. The FCA may (and has) taken action in relation to individuals where they are found to have acted “dishonestly” or in a manner lacking integrity as part of such a move.
Employees should also consider that they are likely to need a regulatory reference from their prior employer.
What are the strategies for a successful team move?
Detailed pre-move planning is essential. The new employer should seek legal advice in advance based – both on a target employee’s express obligations and also their implied obligations – and set guidelines for the process, based on that advice. To the extent appropriate, it should then ensure that both employees approached and, for example, any recruitment consultants involved, follow that guidance.
Prepare a detailed operational readiness review. None of the assets of the former employer will move as a consequence of the team move and therefore the new employer will need to have sufficient IT and other structures available so that the teams moving can function.
The pre-planning should include realistic estimates around general client transition (ensuring no confidential information is shared as part of the process) and on other operational issues required to ensure that the team, once in situ, can function. Timings in this regard will tend to depend on whether the recruitment is being conducted on a slower layer-by-layer basis or on a faster timetable (where the risks of parties starting to act in a concerted way may be greater).
A compensation plan will also be needed to ensure that the move is an attractive one and it will be sensible to have a PR strategy in place, to both publicise new hires (with a view to encouraging others to follow) and to deal with any negative reaction by employer A.
All parties concerned will need to be very clear around the risks, rewards and timeframes for a team move. Successfully done, a team move can bring a lot of value, in terms of the recruitment of a new team, new clients and the prospect of building and growing a business without the need for a significant price to be paid to a seller. However, the risks and pitfalls can be significant and therefore need to be carefully navigated.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.