Change Of Ownership In Business: Its ImpactOn The Contract of Employment

N SivabalahPartner

Shearn Delamore & Co.

A change of ownership takes place when there is a sale of the actual trappings of the business as a going concern. An actual change of ownership situation would entail more than the mere transfer of the assets.

What is meant by change of ownership in the context of Malaysian employment law?

What must change hands are the components of a business i.e., its physical assets (land, building, plant, equipment, inventory, raw materials, stock-in-trade), intangible assets (e.g. registered trademarks, patents, goodwill), existing contracts, work-in-progress, customers, book debts, rights and liabilities vis-a-vis third parties.

DALLOW INDUSTRIAL PROPERTIES LTD. V. ELSE [1967] 2 All ER

There is a sale of the actual trappings of the business as a going concern.

Under Malaysian employment law, a change of shareholding in a company is not deemed a change in the ownership of the business. In a situation where the transaction is limited to the transfer of shares, the employees continue their employment under the same terms and conditions. The new shareholder(s) is not entitled to unilaterally revise the terms and conditions of employment, as the business is not owned by the shareholders but by the company.

ABDUL AZIZ BIN ATAN & 87 OTHERS v. RENGO MALAY ESTATES SDN BHD [1986] 1 CLJ (REP) 41

Employees are not recognized as chattel of the business, and hence, cannot be “sold” to the new employer as part of the business. The seller does not “sell” its employees together with its business. NOKES V. DONCASTER AMALGATED COLLIERIES LTD. [1940] AC 1014:

“... a contractual right to personal service was a personal right of the employer and was incapable of being transferred by him to anyone else, and that a duty to serve a specific master could not be part of the property or rights of that master capable of becoming, by transfer, a duty to serve someone else".

What are the legal consequences on the employment relationship when such a situation arises?

The consequences for the new owner in such a scenario would be that, whilst it had purchased the business per se, it would not inherit the employees required to run the same – and consequently has no obligations towards them. The Supreme Court in PALMCO HOLDINGS BHD V COMMISSIONER OF LABOUR & ANOR expressly confirmed that, “The person by whom the business is taken over immediately after the change occurs (these words appear in Regulation 8(2)) is not an employer as defined in the Act. The imposition of liability on such person is never envisaged by the parent Act”. ABDUL AZIZ ABDUL MAJID & 141 LAGI -V- KUANTAN BEACH HOTEL SDN BHD & 2 ORS [2012] 1 LNS 1294

Where a change occurs in the ownership of a business for the purposes of which an employee is employed, the employee shall not be entitled to any termination benefits, if: -

within 7 days of the change of the ownership, the acquiring company makes offers of continued employment to the employees of the company to be acquired;

the offers of continued employment are not less favourable than those that the employees were enjoying before the change; and

the employees unreasonably refuse the offers In the event any of the foregoing three conditions are not met, the contract of service will be deemed to be terminated and termination benefits would be payable.

REGULATION 8 EMPLOYMENT (TERMINATION AND LAY-OFF BENEFITS) REGULATIONS 1980

Pursuant to REGULATION 8, the new offer of employment must be made within 7 days from the change of ownership. In the event the offer is made outside the time-frame, the previous owner is liable to pay termination benefits. KUMPULAN KAMUNING SDN. BHD. V. RAJOO THANGAVELOO & ORS [1983] CLJ 207 [1983] 2 CLJ 242

For those outside the provisions the EMPLOYMENT ACT 1955, their employment is terminated by the operation of law. A change of ownership acts as an automatic termination of employment and the employer/previous owner is liable to pay salary in lieu of notice and termination benefits (if such benefits are due under the contract or relevant collective agreement). For employees who are not covered under the EMPLOYMENT ACT 1955, the previous owners would only have to issue termination notices or pay severance benefits in the event the offers of employment from the new owners are rejected.

REGULATION 8 only applies to employees who fall under the scope of the EMPLOYMENT ACT 1955.

The requirement to give notice of termination in line with the foregoing provision is independent of the compliance with REGULATION 8. The Court of appeal in RADTHA A/P RAJU & 358 OTHERS v DUNLOP ESTATES BHD [1996] 1 CLJ 755 held that, the employees were entitled to indemnity in lieu of notice from the previous owners. The fact that the employees were offered continued employment by the new owners was irrelevant. The Court of Appeal in BARAT ESTATES SDN. BHD. & ANOTHER v. PARAWAKAN A/L SUBRAMANIAM & 335 OTHERS [2000] 3 CLJ 625, held that the previous owner had to pay the employees indemnity for failing to give notice of termination pursuant to SECTION 12(3)(F) EMPLOYMENT ACT 1955.

Section 12(3)(f) Employment Act 1955

What happens if notice is given, and thereafter, the change of ownership does not take place. What then is the effect of the notice of termination already given? In the case of RIODAN v. WAR OFFICE [1959] AER 552, it was established that the giving of notice by the employer or employee is a unilateral act. Once either party has given notice, it can only be withdrawn with the agreement of the other. KERISNA GOVINDAMSAMY V. HIGHLANDS & LOWLANDS LADANG BUKIT SELARONG [2003] 4 CLJ 595 The High Court held that the Labour Officer was wrong in deciding that the notice of termination could be revoked on the basis of mistake. The employer could only revoke the same with the consent of the employee.

SECTION 17(1) OF THE INDUSTRIAL RELATIONS ACT 1967 provides that a collective agreement is binding on the successor, assignee or transferee of the collective agreement

Impact of a change of ownership on the Collective Agreement

SIN POH (STAR NEWS) AMALGAMATED MALAYSIA SDN. BHD. (SIN CHEW JIT POH MALAYSIA) & 2 ORS. V. NATIONAL UNION OF JOURNALISTS MALAYSIA [1993] 2 ILR 23 ABDUL AZIZ ABDUL MAJID & 141 LAGI -V- KUANTAN BEACH HOTEL SDN BHD & 2 ORS [2012] 1 LNS 1294

The acquired employees will come under the scope of the Purchaser’s prevailing collective agreement. It is important the terms of the Purchaser’s collective agreement is no less favourable that the terms of employment currently enjoyed. In the event they are not, there is a danger that termination benefits will become payable by the Vendor company.

What happens if the Purchaser already has a collective agreement in force?

The Union can no longer represent the employees who have been employed by the Purchaser company. SECTION 13 INDUSTRIAL RELATIONS ACT 1967 - It is a requirement that the union has to be accorded recognition by the new owners.

The Ramifications on the Union

TOBACCO BLENDERS AND MANUFACTURERS SDN BHD & ANOR v. NATIONAL UNION OF TOBACCO WORKERS [2001] 1 ILR 990 NUTW filed an application under s. 33(1) of the IRA to interpret certain articles in the collective agreement Cognisance No. 13/95 entered into with MTC and MTCM - that NUTW are recognised by BAT and its subsidiaries involved in the manufacture, sale, import and distribution of tobacco product as the collective bargaining body in respect of salaries, wages and other terms and conditions of employment of all its employees covered by this collective agreement except for those employees excluded under art. 7 of the CA.

TOBACCO BLENDERS AND MANUFACTURERS SDN BHD & ANOR v. NATIONAL UNION OF TOBACCO WORKERS [2001] 1 ILR 990 (con’t)

The pertinent facts included:

a) TBM at the material time was never a party to the collective agreement.b) TBM is a subsidiary of BAT.c) CMD was formerly known as MTCM. In November 1999 all the shares in

CMD were acquired by BAT and became a subsidiary of BAT. At the same time it was no longer within the Malayan Tobacco Company Berhad Group of Companies (the parties to the collective agreement).

d) At the material time the BAT employees union (BATEU) that was then known as Rothmans employees union represented the employees of BAT who fell within the scope of their representation.

e) On 21 December 1999 CMD accorded recognition to BATEU pursuant to s. 9(3)(a) of the IRA in respect of the workmen employed by CMD.

TOBACCO BLENDERS AND MANUFACTURERS SDN BHD & ANOR v. NATIONAL UNION OF TOBACCO WORKERS [2001] 1 ILR 990 (con’t)

In upholding the preliminary objection of the companies, the Court confirmed that BAT and its subsidiaries did not accord recognition to the union and that TBM and CMD were not parties to the collective agreement Cognisance No. 277/88.

IN THE EVENT THE EMPLOYEES ARE ACQUIRED BY ANOTHER COMPANY, THE SAID EMPLOYEES CAN NO LONGER BE REPRESENTED BY THE IN-HOUSE UNION OF THE VENDOR COMPANY.

The Ramifications on the In-house Union of the Vendor Company

HARRIS ADVANCED TECHNOLOGY (M) SDN BHD v. KETUA PENGARAH KESATUAN SEKERJA, MALAYSIA & ANOR [1999] 7 CLJ 153

The Court of Appeal had previously ordered reinstatement of some dismissed workers of Harris Solid State (M) Sdn Bhd into Harris Advanced Technology (M) Sdn Bhd. The Court of Appeal had held both companies were 1 entity for purposes of the proceedings under Sec 20 of IRA 1967. This was because the offer of employment of Harris Solid State (M) Sdn Bhd’s workmen by Harris Advanced Technology (M) Sdn Bhd .and the subsequent removal of the remaining workmen by Harris Solid State (M) Sdn Bhd was not done bona fide but for a collateral purpose to get rid of its in-house union, Kesatuan Pekerja-Pekerja Harris Solid State (M) Sdn Bhd.

HARRIS ADVANCED TECHNOLOGY (M) SDN BHD v. KETUA PENGARAH KESATUAN SEKERJA, MALAYSIA & ANOR [1999] 7 CLJ 153 (con’t)

Pursuant thereto, the DGTU had approved the application of Pekerja-Pekerja Harris Advanced Technology (M) Sdn. Bhd. under Sec 34 TUA 1959 for a change of name from Kesatuan Pekerja-Pekerja Harris Solid State (M) Sdn Bhd to Kesatuan Pekerja-Pekerja Harris Advanced Technology (M) Sdn Bhd. The DGTU’s approval was on the ground that the employer’s name had changed from Harris Solid State (M) Sdn Bhd to Harris Advanced Technology (M) Sdn Bhd. This decision was challenged in the current application for judicial review.

HARRIS ADVANCED TECHNOLOGY (M) SDN BHD v. KETUA PENGARAH KESATUAN SEKERJA, MALAYSIA & ANOR [1999] 7 CLJ 153 (cont.)

The High Court allowed the application on the basis that it was never the decision of the Court of Appeal there was a change of name from Harris Solid State (M) Sdn Bhd to Harris Advanced Technology (M) Sdn Bhd. Rule 3(6) of Kesatuan Pekerja-Pekerja Harris Solid State (M) Sdn Bhd clearly stated that the membership of the union ceased upon the member(s) ceasing to be in the employment of HSSM. To have its previous workers who were now in Harris Advanced Technology (M) Sdn Bhd represented by a union, it must go through the process of registering itself as a new in-house union in Harris Advanced Technology (M) Sdn Bhd. It could not exist under the previous registration of Kesatuan Pekerja-Pekerja Harris Solid State (M) Sdn Bhd.

KESATUAN PEGAWAI-PEGAWAI BUMIPUTRA-COMMERCE BANK BHD (KEPAK BUMI-COMMERCE) v. ASSOCIATION OF BANK OFFICERS, PENINSULAR MALAYSIA & ANOTHER APPEAL [2006] 4 CLJ 901

The appellant was an in-house trade union representing all grades from 34 to 39 in BBMB, a bank which subsequently merged with Bank of Commerce Bhd to form BCB. The dispute arose out of an application by the appellant to seek registration by the DGTU to represent the same category of workmen in BCB. The HC quashed the DGTU’s registration.

What if the In-house Union seeks to re-from in the Purchaser Company?

KESATUAN PEGAWAI-PEGAWAI BUMIPUTRA-COMMERCE BANK BHD (KEPAK BUMI-COMMERCE) v. ASSOCIATION OF BANK OFFICERS, PENINSULAR MALAYSIA & ANOTHER APPEAL [2006] 4 CLJ 901

The respondents (ABOM and Kesatuan Kakitangan Eksekutif Bank of Commerce Semenanjung Malaysia), objected to the registration.

The Court of Appeal decided that the registration of the appellant would forward a purpose inconsistent with its objects and rules, because in its application, it had made it clear that it sought to represent persons who fall outside the scope of its authorised representation.

What if the In-house Union seeks to re-from in the Purchaser Company? (con’t)

KESATUAN KEBANGSAAN PEKERJA-PEKERJA BANK (NUBE) v. KETUA PENGARAH KESATUAN SEKERJA (DGTU) & 2 ORS 2006] 1 LNS 289 The DGTU, pursuant to TUA 1959, registered the 3rd respondent as an in-house union of AmFinance Bhd. About 2 weeks after its registration, AmFinance Bhd granted recognition to the 3rd respondent On 1.6.2005, by a court order, AmFinance Berhad took over all the assets, liabilities, rights and obligations of the business of AmBank Berhad and changed its name to AmBank (M) Berhad (2nd respondent). The applicant contended that the 3rd respondent's scope of representation in the 2nd respondent overlaps with that of the applicant.

KESATUAN KEBANGSAAN PEKERJA-PEKERJA BANK (NUBE) v. KETUA PENGARAH KESATUAN SEKERJA (DGTU) & 2 ORS 2006] 1 LNS 289  (con’t)

The HC held that the impediment to register a trade union under Sec 12(2) TUA 1959 would only arise if there is another union representing the employees in a particular establishment, trade, occupation or industry. In this instance, at the time when the 3rd respondent was registered by the 1st respondent, there was no other union representing the employees of AmFinance Berhad. Thus, the issue of multiplicity of unions within the particular establishment, trade, occupation or industry did not arise.

The majority view of the Federal Court in the recent case of AFFIN BANK BHD V MOHD KASIM IBRAHIM [2013] 1 CLJ 465

(where a change of ownership in relation to the business took place by virtue of a vesting order which), confirmed, “.. it means that the change of ownership.. would thus terminate the respondent’s former contract of employment. .. The appellant in our opinion, is not obliged to offer the respondent continuous employment on the same terms and conditions …We agree that the respondent’s employment cannot be transferred to the appellant; his former contract of employment with the transferor company comes to an end”.

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