Immigration's Vital Role in M&A Due Diligence

Friday, October 5, 2018 - 09:29

 

Fragomen's Tim Nelson discusses the important and often complicated role employee immigration status can play in M&A and other corporate restructuring deals.

CCBJ: When discussing M&A, immigration law is not necessarily the first issue that comes to mind. What role does immigration law take in M&A, and when is the right time to address those issues? 

Tim Nelson: Immigration law is a key component of the M&A discussion. There may be other components in the structure of the deal, but the immigration aspects of it have to be considered in the due diligence stage in order to ensure continued work authorization for employees who may be impacted by the deal, whether it’s a merger, acquisition, corporate restructuring, divestiture or joint venture. These all have a potential immigration impact, so companies want to make sure they identify the affected employees early. 

The most important issue from an immigration perspective is whether certain visa categories will continue to be available after the corporate change. The visa category with the most exposure is the E-1/E-2. This visa category is designed for U.S. companies with a non-U.S. parent, headquartered in a country that has a qualifying treaty with the U.S. These visas allow these entities to bring employees in a managerial, supervisory, executive or essential skill capacity to the U.S. If the parent headquarters change to the U.S. or a different country as part of the deal, its employees wouldn’t have the ability to maintain that visa status and would have to be switched to another visa category prior to the deal, if another category exists. The L-1 visa category for intracompany transfers may also present issues if the acquiring or new entity no longer has multiple entities outside the U.S. Because the L-1 is a category designed to allow global companies the ability to move specialized knowledge or managerial/executive employees to the U.S., there must be an entity outside the U.S. to which the employee can return at the end of the assignment. These issues can be major considerations, because oftentimes we’re talking about an impact on high-level employees. 

How do you and your firm approach due diligence?  

We like to engage as early as possible with the various stakeholders. Most restructurings, deals, and mergers and acquisitions will have a whole team that’s put together, referred to as the M&A team, and we get the company’s immigration specialist as well as the M&A team together with us to go through what we need and what they should be mindful of. While every deal is unique, we have checklists and a toolkit that we can utilize to assess different needs. 

Much of what we’re seeing nowadays are mergers and acquisitions or divestitures where the complexities of the corporate structures are increasing significantly. There are situations where the way new entities are structured in countries outside of the U.S. may have great tax benefits or limit liability but could have a huge impact on immigration and cost those entities the ability to keep employees long term. It’s important for us to get involved as early as we can, so that there’s an assessment for each employee, depending on the final structure. Unfortunately, much of the time, the final details are not worked out until the very end, or they’re highly confidential. Having more information available upfront allows for a much smoother transition. 

What are some of the key compliance issues that need to be considered? 

From a compliance perspective, it’s very important to look at the I-9 process. There are two options for a company to consider. Say it’s an acquisition situation: They can take over the I-9s from the acquired company and assume the risk of any violations, or they can choose to complete new I-9s for each employee. That’s one of the things they’ll want to look at immediately because, depending on the size of a transaction, that can be quite a large endeavor if we’re talking about 20,000 employees in the U.S. who are switching over. 

They also need to look at H-1B compliance to ensure that public access files are updated to include information about the nature of the corporate change, whether it’s a merger, acquisition, joint venture, restructuring or whatever the case may be, and to ensure that the successor in interest applies. Sometimes there’s an analysis that needs to occur to determine whether the new entity will be subjected to H-1B dependency requirements. If a certain percentage of their employee population is in H-1B or L-1 status, they may be subjected to H-1B dependency rules that they previously did not apply. 

How do these issues differ for divesting and acquiring companies? 

With a divestiture, one of the added complexities is that the overall ownership structure is changing and new entities are usually being created. Say the company has an L-1 blanket program: We have to examine whether the new company is going to be able to qualify for that type of L-1 program. And if it’s becoming a new entity, the best practice, really, is to file H-1B amendments and TN (Treaty NAFTA) amendments if an employee is eligible for TN status as a Canadian or Mexican citizen. There can be a great deal of extra work in a divestiture, and when we start talking about amendments, then we’re dealing with travel restrictions and significantly more money for the company. 

To revisit an earlier point on the due diligence side, it’s important that the immigration strategy is set early, and some of it depends on how much the new entities want to accommodate the employee. From a strictly legal perspective, they might not be required to file an amendment but may choose to do so because they want to make their employees feel as comfortable as possible. Those costs and timing considerations have to be put in place. 

What are some of the employer obligations that may be overlooked in this process? 

Many times, I-9 compliance considerations can be overlooked. Public access files are also oftentimes overlooked. The compliance component and the company’s obligation to update that public access file or make decisions with respect to how they want to handle the I-9s can be missed early on. With respect to the employees themselves, the company needs to decide how they’re going to treat them: Are there going to be changes? Are they going to treat them as new employees? Many times in an acquisition, employees will be required to apply for a position and be hired, rather than just continuing in their existing position, and that can have implications from a compliance perspective, especially on the I-9 front. 

What are some of the key industries impacted by immigration law during divestitures, and what are the key issues in some of those industries? 

Nearly every industry is being impacted. We’re seeing so much activity on the M&A front, or M&A&D, as we’re starting to hear it called now. The global economy is really allowing for movement, particularly in engineering, pharmaceutical, manufacturing, software, IT and finance. Companies are looking for different ways to solidify their brands and grow into new areas – and looking to divest groups that are not working as well within the company’s structure. We’ve truly seen tremendous activity across the board.  


Timothy Nelson is a partner at Fragomen. He supports clients in the engineering, manufacturing, pharmaceutical, chemical and technology industries. Reach him at tnelson@fragomen.com.