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Issues Relating to Occupational Health in M&A Transactions By David Wang Jingan (April) Yan 2019-08-07

 

For manufacturing enterprises, HSE (health, safety and environmental protection) issues are the focus of daily operation and management, and also areas that have been subjected to more emphasis and stricter regulation by government legislation in recent years. In fact, in the United States, HSE due diligence arose in the early 1980s, which initially focused on environmental protection issues.  Later, the society gradually realized the risks posed by chemicals to human health (especially in industries such as petrochemical, coal mines, steel smelting, rubber and etc.).  In China practice, compared with safety and environmental protection issues, employees' occupational health is relatively easier to be ignored. Below, we would like to share some of our relevant practical experience.

 

 

I.Key Issues for the General Due Diligence

 

The obligations regarding the prevention and control of occupational diseases of enterprises are scattered in various laws and regulations, such as Law of People's Republic of China on the Prevention and Control of Occupational Diseases, Provisions on the Supervision and Administration of Occupational Health in the Workplace, Measures for the Supervision and Administration of “Three Simultaneities” of Facilities regarding the Prevention and Control of Occupational Diseases of Construction Projects, Measures for the Declaration of Projects with Occupational Hazards and Measures for the Supervision and Administration of Employers' Occupational Health Surveillance. The laws and regulations mainly stipulate the preliminary prevention, the protection and control in the course of work, the diagnosis of occupational diseases, the protection for the occupational disease patients, and so on. 
 

In due diligence practice, in order to determine whether an enterprise is in compliance with laws and regulations regarding occupational disease protection, we usually need to pay attention to the following issues:

 

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1.Check Positions that May Be Exposed to Hazardous Factors for Occupational Diseases

 

We can determine this issue from the following aspects: 

 

(1) the clues as to whether the production process of an enterprise produces hazardous factors for occupational diseases may be found in the description of the raw materials, process flow, products and production facilities of the project in the materials and documents regarding the environmental protection measures of an enterprise (such as environmental impact assessment report, examination and approval document, etc.).  For example, in some provinces, the standard environmental impact declaration (registration) form for construction projects requires that if the production process produces noise, radiation, etc., such events shall be specified in detail in the form. 

 

(2) in the process of on-site due diligence, interviewing the relevant management personnel to confirm whether the dust, noise, radioactive substances or other toxic and harmful factors are produced in the production process of the enterprise, requiring them to disclose such events truthfully, and have an onsite confirmation.

 

(3) if the above two methods are unable to make final determination, or if certain employees complain about the working environment, a third-party professional testing agency may be engaged to test the hazardous factors for occupational diseases in the workplace, with a view to determining whether the hazardous factors in the production process exceed the exposure limits set by laws, regulations and industrial standards.

 

2.Check Whether Evaluation and Acceptance Check Have Been Conducted in Accordance with Relevant Laws and Regulations

 

For the construction projects that have or produce occupational disease hazardous factors listed in the catalogue of occupational disease hazardous factors, the Measures for the Supervision and Administration of “Three Simultaneities” of Facilities Regarding the Prevention and Control of Occupational Diseases of Construction Projects provides the corresponding assessment and acceptance check obligations for the construction entities at various stages of the project.  A construction entity that violates specific obligations (such as the absence of pre-evaluation and evaluation of controlling effects, or the facilities for prevention and control of occupational diseases (“Prevention Facilities”) fail to pass the acceptance check) and fails to correct it within specified time limit may be imposed a fine, or be ordered to cease the operation that produces occupational disease hazardous factors, or even be ordered to cease construction and close down.

 

The responsibilities of construction entities at various stages of the project

The degree of occupational disease hazards and the corresponding review and acceptance check

Written report

Feasibility study

 

Prepare the preliminary evaluation report of occupational disease hazards

With ordinary or relatively serious occupational disease hazards:

The principal person in charge of the construction entity or the designated person in charge shall organize personnel with relevant qualification (“professional occupational health technicians”) to review the report on the preliminary evaluation of occupational disease hazards /  report on the evaluation of the design of Prevention Facilities / controlling effects of occupational disease hazards, and conduct the acceptance check against Prevention Facilities, as well as  formulate review opinions and acceptance check opinions.

With serious occupational disease hazards:

The principal person in charge of the construction entity or the designated person in charge shall organize external professional occupational health technicians to participate in the review, and thus formulate review opinions.

1. The construction entity shall form a written report on the process of preliminary evaluation/design of Prevention Facilities / evaluation of control effects of occupational disease hazards/ the acceptance check of Prevention Facilities for future examination.

2. The construction entity shall, 20 days before the acceptance check of Prevention Facilities, submit a written report regarding the acceptance check plan to the work safety administration with jurisdiction over such construction project.

3. For a construction project with serious occupational disease hazards, the construction entity shall, within 20 days after the completion of acceptance check, submit a written report regarding the working process of evaluation of control effects of occupational disease hazards / the acceptance check of Prevention Facilities to the work safety administration having jurisdiction over such construction project.

Before construction

Design Prevention Facilities

Before a construction project is checked for acceptance/ during the period of trial operation

Form the report on   the evaluation of controlling effects of occupational disease hazards

Before the acceptance check of Prevention Facilities

Make the plan for   acceptance check

 

3.Check Whether Occupational Health Examinations Have Been Conducted Regularly

 

In accordance with Article 35 of the Law of People's Republic of China on the Prevention & Control of Occupational Diseases and the provisions of the Measures for the Administration of Occupational Health Examination, the employer shall organize occupational health examinations before hiring, during the employment term and before termination of employment, and shall inform the workers in writing of the results of the examination. In addition, the cost of such occupational health examination shall be borne by the employer. And the items and cycles of such occupational health examination shall also be determined in accordance with the hazardous factors for occupational diseases, and shall be specifically carried out in accordance with the Technical Specification for Occupational Health Surveillance (GBZ 188).  In the due diligence process, the proof of regular medical examination of occupational diseases shall be provided by the employer.

 

It should also be noted that, if the employees engaged in operations exposed to occupational disease hazards have not undergone occupational health examinations before termination of their employment, the employer shall not terminate their labor contracts based on the reasons set forth in Article 40 of the Labor Contract Law (i.e. the expiration of medical treatment period for the employee who suffers from an illness or a non-work-related injury, incompetence and significant changes of objective circumstances) and Article 41 (i.e. layoffs due to economic reasons).  Therefore, lawyers shall, during the due diligence stage, check whether occupational health examinations have been conducted for the employees who ever worked in positions exposed to occupational disease hazards, but have left the employer in recent time.

 

4.Check Whether the Diagnostic Results Constitute any Circumstance that Shall be Treated Specially

 

In accordance with Article 17 of the Measures for the Supervision and Administration of Employers' Occupational Health Surveillance, the employer shall, depending on the occupational health examination reports, take following measures respectively:

 

(1) transfer or temporarily transfer employees with occupational contraindications from their original positions;

 

(2) make appropriate arrangement for employees whose health injuries may be related to their jobs;

 

(3) with regard to the employees who require re-examinations, arrange for re-examinations and medical observations in accordance with the time requested by occupational health examination institutions;

 

(4) with regard to the patients suspected of having occupational diseases, arrange medical observations or diagnosis for occupational disease in accordance with the suggestions provided by occupational health examination institutions.

 

If an employee is identified as suffering from occupational disease, the employer shall, in accordance with relevant laws and regulations, bear the following responsibilities:

 

(1) timely report it to local competent administrative department in charge of health and local competent administrative department in charge of safe production supervision;

 

(2) transfer any occupational disease patient that is no longer fit for the original job away from the original position and arrange him/her properly;

 

(3) apply for appraisal of work-related injury to the relevant social insurance administration authority within 30 days as of the date when the employee is diagnosed as suffering from occupational disease. 

 

In the due diligence process, attention should be paid to the occupational disease examination report. Lawyers need to check if the employer has taken lawful and appropriate countermeasures in accordance with the corresponding diagnostic results.

 

5.Check Whether Position Allowance Has Been Granted in Accordance with Local Regulations

 

In accordance with the Law of People's Republic of China on the Prevention and Control of Occupational Diseases, the Employer shall grant appropriate position allowances for employees engaged in operations exposed to occupational disease hazards.  Though there is no national standard for position allowance, some provinces (Shanghai, Shaanxi and so on) have set local standards.  For example, in Shanghai, with regard to the healthcare food fee for employees exposed to toxic and harmful hazards, the standard for Class A is 3.50 yuan/day, for Class B is 3.00 yuan/day and for Class C is 2.50 yuan/day.  However, we have also seen a retrial case heard by a high people's court, in which the judge held that the appropriate position allowance stipulated in the Law of People's Republic of China on the Prevention and Control of Occupational Diseases is only a guiding opinion rather than a mandatory remuneration. Therefore, with regard to the payment of position allowance, we should analyze and determine the risks according to local regulations, rules and judicial practice.

 

II.Analysis on M&A Cases

 

1.Setting of Observation Period

 

Generally, the liabilities for the operation of the target company are transferred upon the signing of the share transfer agreement or closing of the transaction. That is to say, when the seller controls the company, the liabilities arising from the production and operation are borne by the seller, while after the signing of share transfer agreement or closing of the transaction, the liabilities shall be borne by the buyer. Due to the incubation period of occupational health problems, the historic liability of the seller may easily cause disputes. 

 

For example, in a share transfer dispute heard by the Chengdu Intermediate People's Court of Sichuan Province ((2017) Chuan 01, Civil, Final, No. 11517), the employee concerned  worked in a coal mine from 2007 to December 2009 and moved to the ground after December 2009.  On July 18, 2011, Entity A signed a Contract for Transfer of Property Rights with Company B, transferring 100% of the property rights of the target company held by Entity A to Company B.  On April 15, 2013, the employee concerned was identified as having an occupational disease of pneumoconiosis and such disease was subsequently appraised as a work-related injury.  As a result, the target company paid the employee more than RMB130,000 as disability subsidy and some other compensation.  The buyer and the seller thus had dispute over which party shall bear such subsidy and compensation.  Company B held that such amount should be borne by Entity A as that employee actually got the illness in December 2009 when he was in the disease-causing environment (i.e. coal mine).  However, the court ruled that the employee was diagnosed with an occupational disease on 15 April 2013, when the target company was controlled by Company B.  In addition, the Contract for the Transfer of Property Rights signed by both parties stipulated that "as of the Base Date (i.e. June 30, 2010), all the credits and debts of the target company in this transaction are 0 yuan. Credits or debts arising between the Base Date and the effective date of this contract (i.e. July 18, 2011) shall be enjoyed or borne by Entity A". Therefore, the court held that the liabilities arising from the diagnosis of occupational diseases on April 15, 2013 should not be borne by Entity A. 

 

As a lesson from the above case, if the target company is a large-scale manufacturing company with a large number of employees (including those who have left their positions) and the production of which contains relatively substantial occupational disease hazards, lawyers at the buyer side should pay much attention to identify the risks due to potential occupational diseases prior to the signing of the share transfer agreement, and set an appropriate observation period (for example, five years) for this potential risk in the share transfer agreement, and request the seller to bear the corresponding liabilities arising during the observation period.

 

 

2.Case related to Compensation of Position Allowance in a M&A Transaction

 

This is a real case we have dealt with.  Company C used to be a large manufacturing enterprise, the production process of which involved noise, dust, sulfides and other toxic and harmful substances. The shareholders of this company intended to transfer 100% of its equity to Company D which engages in non-manufacturing business. As Company C would change its main business after the share transfer, hundreds of employees in the production line would lose their jobs.  When negotiating the compensation for the termination of labor contracts, some employees proposed that they had worked in their positions which were exposed to toxic and harmful substances for a long time, and thus the risks that they would be diagnosed with occupational diseases after leaving the company were very high. Therefore, these employees claimed for additional financial compensation for their termination. Furthermore, Company C failed to grant appropriate position allowances for employees engaged in operations exposed to occupational disease hazards in accordance with Article 56 of the Law of People's Republic of China on the Prevention and Control of Occupational Diseases.  As a result, the employees concerned further claimed that Company C shall make up those position allowances to them before the completion of share transfer. Subsequently, the office employees who used to work in the production line also proposed that their original positions were exposed to toxic and harmful substances, and thus they were also entitled to get additional compensation for the potential occupational health hazards. In the end, a large sum of compensation was paid by the seller before the proceeding of the transaction.

 

While the treatment of employees who are exposed to occupational health hazards is a matter of routine issue in the daily operation of an enterprise, it will also affect the calculation of the transfer price, the representations and warranties, the allocation of potential risks in a M&A transaction.  Therefore, the issue of occupational health hazard deserves high attention and thorough consideration during a transaction.

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