How to protect talent and prevent loss of corporate value? The human factor in M&A transactions

When discussing M&A transactions, the focus is usually placed on multiples, EBITDA, due diligence processes or complex corporate structures, and there is a risk of overlooking the fact that a significant portion of a company’s true value lies in the people who make up the business.

From a practical perspective, the greatest risk of failure in a sale transaction arises precisely when the workforce loses confidence, when suppliers no longer feel committed to the project, or when strategic knowledge or key talent walks out of the company on the very day of completion. For this reason, sufficient time should be devoted to understanding the human value of the target companies, identifying their key personnel and determining which business-critical expertise is intrinsically linked to the workforce.

How can strategic talent be retained after the acquisition? M&A and strategic talent retention

In most transactions, one of the most sensitive issues is ensuring that the managing director, chief executive officer or other key personnel remain within the company during the years following the acquisition. In this regard, it should be understood that the purchaser needs to ensure an orderly transition, preserving and safeguarding relationships with strategic clients and suppliers, who will generally have built trust with the personnel with whom they have worked on a day-to-day basis and may not feel comfortable without a properly managed transition.

Moreover, success lies in coordinating all of this without disrupting the internal dynamics that enabled the company to operate effectively prior to the change of control and, ideally, where the transition goes unnoticed outside the CEO’s office walls.

Accordingly, retention clauses assume an absolutely essential role at this stage. In M&A transactions, it is common to encounter retention undertakings lasting between two and five years, frequently linked to financial incentives, performance bonuses or earn-out arrangements, whereby part of the financial consideration is tied to the continuity and future performance of the business.

In this way, not only is the operational stability of the company protected, but the seller’s interests are also aligned with the future success of the company, such that the conflicting interests inherent in the sale process converge towards a shared future benefit.

Non-compete clauses in M&A transactions

In conjunction with the above, it would serve little purpose for the managing director (or key employee) to remain tied to the business without implementing both contractual and post-termination non-compete obligations. It is not sufficient merely to secure the continued involvement of key personnel without addressing the next critical point: ensuring that such personnel do not establish the same business (or a competing one) a few streets away from the company’s offices.

Accordingly, it is necessary to include these types of clauses during negotiations, clearly defining the scope of the competitive activity, its territorial and temporal limitations, and the duration for which the obligation will remain in force following termination of the relationship with the company.

In this respect, whilst at first sight it is clearly advantageous for the purchaser to obtain the longest possible non-compete period from the seller or manager, it should not be overlooked that the longer the restriction, the greater the associated financial cost.

Ultimately, a sufficiently strict and comprehensive non-compete obligation may prevent the seller from carrying on the business activity in which they have built their professional career over many years, usually in the geographical area where they reside or conduct business, and for a reasonably lengthy period during which they may otherwise have no source of income.

M&A and non-solicitation clauses

Alongside this, non-solicitation clauses are of particular importance. Individuals who have led a company for years know precisely where its value lies: clients, suppliers, key employees and know-how. Accordingly, it is always advisable to limit, in a reasonable and proportionate manner, the ability to compete with the business following the sale through the recruitment of employees for new business ventures, the solicitation of suppliers or the diversion of clients. In many cases, such diversion occurs indirectly through related companies or third parties, making it essential for the restrictions to apply both directly and indirectly.

Confidentiality and protection of know-how in M&A

In addition, although it may appear self-evident, well-structured confidentiality clauses may be crucial to safeguarding the target company’s know-how. Ideally, such obligations should not remain in force solely during the months following completion, but should continue to be binding even years after the transaction, particularly where the true value of the acquired company lies in strategic information, internal processes, technical developments, commercial relationships or business models that are difficult to replicate and which are evidently held by the workforce responsible for operating the business up to signing.

In this context, an effective confidentiality clause should not merely define what constitutes confidential information. Particular importance must also be placed on determining the consequences of any breach, as courts are generally reluctant to quantify this type of damage unless supported by a contractually robust penalty clause.

Incentives and phantom shares in M&A transactions

The market is also increasingly witnessing the implementation of incentive mechanisms aimed at strengthening the commitment of strategic talent to the new business project. Among these, phantom share plans for executives and key employees have become particularly prominent, often preferred to stock option plans due to their tax treatment, especially in transactions where the purchaser seeks to ensure medium- or long-term stability and commitment.

The objective of such incentives is to mitigate the risk of talent attrition while ensuring that those who sustain the business on a day-to-day basis remain aligned with its successful future performance and are financially rewarded in the event of future company growth, thereby promoting alignment between the interests of key personnel and the company.

Should the same treatment apply to someone who leaves after successfully completing the project as to someone who leaves while damaging the business? Good leaver and bad leaver provisions in M&A

Not all departures have the same impact and, accordingly, it is difficult to argue that they should carry the same consequences. In many M&A transactions, particularly where founders or executives remain linked to the business following the acquisition, it becomes especially important to distinguish between two scenarios: the good leaver (acting in good faith) and the bad leaver (acting in bad faith).

In this regard, the concept of a good leaver is generally reserved for individuals who leave the company for justified reasons or reasons beyond their control (such as retirement, incapacity, death or even an agreed departure after achieving certain objectives), whereas bad leaver status arises where the separation occurs in breach of essential obligations, including unfair competition, solicitation of clients or employees, breaches of confidentiality obligations or early departures contrary to agreed terms.

Accordingly, M&A agreements typically provide for stricter consequences in bad leaver scenarios, such as making payment of incentives or earn-outs conditional, imposing specific financial penalties, extending the scope of non-compete obligations or even implementing exit mechanisms such as compulsory share buy-backs where the defaulting individual remains a shareholder of the company.

Ultimately, these mechanisms are not intended solely to “punish” certain conduct, but also to protect the real value of the transaction and align interests during a particularly sensitive phase: the post-acquisition transition period.

When is the ideal time to assess the integration strategy? Integration strategy in M&A transactions

One of the most common mistakes in a corporate acquisition is postponing integration planning until after completion. In reality, given the wide range of consequences that may arise, this process should begin much earlier, even during the initial discussions and due diligence analysis.

As mentioned above, the human factor plays a decisive role in anticipating (and even avoiding) potential cultural frictions, operational misalignments or deficiencies within the organisational structure that could jeopardise the success of the transaction. This analysis should be given equal or even greater importance than financial due diligence, since risks often do not lie in the figures themselves, but rather in less visible yet equally decisive factors.

In summary, successful integration does not depend solely on having a sound strategy on paper. Rather, success lies in leadership and competent management, with foresight and sufficient sensitivity to implement change effectively from within the organisation. Without this human component, even the best planning loses effectiveness.

FAQ on M&A transactions

Do you need advice? Access our area related to the human factor in M&A transactions:

Commercial and Corporate Law