Non-Competes and Confidentiality Agreements & What to Consider When Closing a Merger or Acquisition

Hello and thank you for joining our special joint webinar with Ramone and CAC Specialty. I am Barbara DiMatteo. I'm the Human Capital Business Advisor at Ramone. Ramone is a tech-enabled, highly selective global law firm known for excellence, innovation, and teamwork across 50 offices in 11 countries. Our Human Capital Business Advisors partner with employment law attorneys to help management create policies and procedures that ensure compliance and consistent handling of employment matters. This collaboration, supported by comprehensive training programs, protects organizations from legal risk, promotes fair treatment, and supports efficient business operations. Today we are fortunate to discuss two topics. The first is noncompetes and confidentiality agreements done wrong: the cost of DIY. I will be joined by Christopher Kelly, an employment attorney who is licensed in New York, New Jersey, Pennsylvania, and California, and he is a partner at Ramone. Our second topic is what human resources and C-suite leaders should consider before and after closing a merger or acquisition. This is presented by Ralph Sepe, Executive Vice President at CAC Specialty, and Brian Clay, Executive Vice President and Practice Leader at CAC Specialty. New to our program is the opportunity to earn SHRM and HRCI professional development credit for attending. The SHRM and HRCI activity ID codes will be provided to participants at the conclusion of the program. We are confident that today's information will provide valuable insight into the ways we all support our clients. Before we begin, it's just important to note that this webinar does not constitute legal advice nor establish an attorney-client relationship. Past outcomes do not guarantee future results. With all of that said, let's start with our first topic about employment agreements. So allow me to start with a scenario. An employee resigns, and suddenly HR is put on the spot to make sure that person doesn't walk away with the company secrets. It's not enough to see what's in an employee's briefcase or cardboard box of personal items on the last day of employment. The information is likely already gone. Remember, we're in a digital world. And now the concern escalates quickly, especially when the word spreads that the departing employee is joining a competitor. So how does HR and the company usually determine that there is a concern? Well, often it's through customers, clients, or vendors who reach out after noticing a change in contact information because the employee has a new email address and phone number. And sometimes it starts to happen even before the employee has left. This raises red flags, and HR is thrust into the role of a detective, piecing together what happened and figuring out how to protect the company assets. Unfortunately, by that point, it's often too late. The information is already gone. Consider the fact that the employee has already had weeks, maybe months, to quietly gather information, which includes lists of employees, contact information of customers and clients, details about vendors, pricing, revenue, and documents. IT may uncover that company documents were emailed to a personal account or copied onto a flash drive, and by the time anyone realizes it, the data, the company's special sauce, is already out the door. The attorney is consulted and the employee handbook policy is reviewed, as well as any confidentiality statement or policy or document the employee signed or did not sign. The attorney sends a departing employee a cease and desist letter, which is a formal notice taken when a company discovers that a former employee may have taken some confidential information, violated a restrictive covenant, or engaged in competitive activity that breaches their obligations to the company. This fact-based letter directs the former employee to immediately stop certain activities, which can include using or sharing confidential or proprietary information, soliciting clients, vendors, or employees, or disparaging the company or misrepresenting their role post-employment, retaining company property, records, or data. The letter also serves as written documentation that the company is taking steps to, to protect its proprietary information and business interests. A letter may also be sent to senior leadership of the company the employee is now working for. Well, Chris Kelly will tell us that a cease and desist letter doesn't guarantee recovery of what's been lost. However, it is an important tool in showing that the company takes data protection seriously and will act quickly and swiftly to defend its interests. I want to ask Chris Kelly, what are some definitions of different types of restrictive covenants?

Thank you, Barbara. So restrictive covenants are an umbrella term in the law for any kind of agreement that restricts someone's ability to do something, generally an employee. And the types of restrictive covenants that we see most frequently in the employment context are non-competes, where you're limiting an employee's ability to compete with you after they leave the company. Non-solicits of customers, which can be as narrow as restricting the employee's ability to solicit for business customers that they worked with while they're there. All the way to the other end where they're soliciting, restricting their ability to solicit customers of the company entirely, or sometimes even prospective customers. Some companies will try to use non-solicits of customers as a way to avoid the restrictions on non-competes. The courts are reluctant to enforce non-competes. Unfortunately, that doesn't work. If it smells like a non-compete, courts will treat it as a non-compete and subject it to the same restrictive standards that most, but not all courts will apply to non-compete agreements. So it's important to have your agreement thoroughly vetted to ensure that it's enforceable and not go off of these rules of thumb, like non-solicits are more easily enforced. There are also non-solicits agreements for employees. So you can say that once a departing employee leaves, they can't solicit your other employees, their coworkers. And this is important because sometimes an employee leaves and they'll try and solicit an entire department, taking away all of the revenue associated with those employees, but leaving the company with the costs. Those are things you want to protect against, but you also have to balance that because you can't unnecessarily restrict employee mobility. So employees are always free to apply to open job postings, even though another employee may have left to go to that company. but you can restrict the departing employee from wholesale soliciting your employees. Another type of information that we very commonly see, agreement that we very commonly see, is confidential information and trade secret restrictions, so a nondisclosure agreement. And that limits what an employee can do with the confidential information that you often necessarily have to provide them to do their jobs. Employees who are involved in sales, for example, will need to see your current customer list, lists of prospective customers. They'll need to see the pricing information that you use. And all of that information can be very proprietary, very confidential, and could essentially provide a roadmap for the employee to compete with you. So it's very common for employers to try and restrict the use of that information and say that it can't be used once the employee leaves. Some employers think that trade secrets are automatically protected, but this is where it's important to limit that information. You can define up front so the employee knows what is restricted and not. Another important thing to keep in mind here is that not all agreements are just automatically enforceable because the employer and the employee agree to it. You need to have some legitimate protectable interest. At play before a court will enforce that. Generally, that's trade secrets or confidential information. It's important here to tie the length of the non-compete to the information and how long it's valuable. So, for example, many employers think that in a particular state, 2-year non-compete agreements are routinely enforced, and the courts have contributed to this conception because many court opinions will say New York courts, for example, routinely enforce non-competes that can last 2 years. That's true. That does not necessarily mean that a court will enforce your 2-year non-compete agreement if it isn't tied to something related to this employee. So, for example, if your customer contracts are 6 months in length, you might want to think about having a non-compete that lasts for 9 months because that will give you time after the contract expires to recapture those customers before an employee can use your information against you, a departing employee. You also want to think about, again, how long that information is valuable. If someone is leaving with trade secret information or confidential information, pricing, vendor lists, how long will that employee— that information be valuable for? And you want to take a little bit more than that, maybe not too much more, because many courts will be very hesitant to enforce an agreement that is overbroad. New York in particular is concerned about overreaching. And while New York courts will do what is called blue penciling, which is modifying an overbroad agreement to make it compliant. And so say a court thinks that you're, you know, 12 months is too long for a non-compete. They might give you 10 months if they thought that was reasonable. New York courts will allow that. Some states will allow that, but in New York in particular, if you're going too far, so if they think 10 months is reasonable and you're asking for 2 years or 3 years, they may not enforce the agreement entirely. They are very concerned about the chilling impact this could have on an employee's ability to seek future employment. And so again, you want to be very conscious here of the balancing impact. And as you know, the title of this webinar implied, DIY can have serious costs. You could lose the entire enforceability of your agreement.

So, Chris, when does protecting company information actually start?

It has to begin on day one, Barbara, with strong confidentiality policies, clear access controls, meaning limiting access to information to those who have a need to know it, ongoing employee education about information security, and robust agreements— confidentiality agreements, non-compete agreements if appropriate. One of the things I see far too often, particularly with startups, is everyone at the company having access to all of the company's information. That's a red flag and not a good practice to have. This is a conversation that you should have with IT and your employment attorney to try and make sure everything is restricted to only those who need to access it. Very often leadership can't even believe that an employee would ever do something like steal their and share their company secrets. When it happens, it's a reality check. But courts won't protect you if you don't protect yourself. And that means having these robust internal protections in place, whether that's agreements, policies, technological restrictions. You know, in the past, we used to talk about locking file cabinets, making sure people didn't have access to the files. The same is true in the digital world. And so all of that is very important that you take steps up front to protect yourself, because then the courts will work to protect you as well. Some employers think that they're going to be protected without an agreement. I alluded to this before. For true trade secrets, those are protected by law, and you will be protected regardless of whether you have an agreement in place. But not being proactive has costs. You're going to have a much harder case because you're going to have to prove that the information is truly a trade secret and that the employee is misappropriating it in a way that's protected by law. Conversely, if you have an agreement that says a particular piece of information is confidential and they can't share it with anyone else and they can't use it for their own benefit, that's your case right there. If you can show that they've done those things, that's all you'll need to prove for a court to enforce it. So it's important to define these things. Both for enforceability and also so the employee knows what is expected of them. Because some employees do these things unintentionally. They don't realize that this information should not be taken with them. And so it's important to communicate that clear message. It's also important to remember that state law will vary on trade secrets. New York is an outlier in that customer lists by themselves are generally not considered trade secrets. So if an employee leaves with your customer list, and starts going down line by line calling every customer and trying to solicit them, that wouldn't necessarily be something you could restrict in New York without an agreement, without something else involved. And the customer, the employee can always go in and say, I'm going to offer you just less than what your price is right now if they know that. Now, the pricing information may add that extra oomph, but maybe it won't. So the best defense here is to— is not to react after the fact. It's about building a culture and a system that keeps the company's most valuable assets safe long before an employee is ever even thinking about leaving, let alone decides to leave. There needs to be clear and ongoing communication from each employee's manager and clear and robust safeguards put in place. Now, Barbara, My role in this is typically on a larger scale, providing advice or getting involved when there's an incident. Can you tell me a little bit about what HR's role is in this?

Sure. And thank you for all those details. What an eye-opener, Chris. Well, it's HR's job to maintain professionalism, to remain factual and non-emotional because emotions run very high. This clearly involves conversations across managers because side comments that can be overheard can really create some problems. It's also so important that all managers are communicating the same message about the concern or the issue about the employee who left. Let's talk a little bit about the challenges of employees who work remotely that you mentioned before, Chris. In many industries and companies, this is the way of the new world. It's harder to know how well an employee is trusted to keep their work materials and the company's information confidential. It's one thing when the employee works in the office and we have those locked file cabinets. It's another thing when the employee works remotely. If the remote employee works on a paperless basis, it's a lot easier to protect your information. But because paper is still a reality, there are fewer controls about how company information is viewed, copied, maintained, shared, and destroyed. It's a reality that employees perform work on their kitchen tables in full view of family and visitors. So here, working with IT and leadership to establish and reinforce daily procedures to protect company information is key. Many firms do not allow employees to use flash drives to either copy or download information. So, Chris, I'm going to come back to you. What should HR do to protect the company?

So first and foremost, you don't want to use boilerplate agreements that were drafted a long time ago or found on the web. Even worse is using a document generated by AI that may not take into account the nuances of the law, or where in the state where your particular employee is working, or necessarily won't take into account your company, how it operates, what's important to you. One-size-fits-all restrictive covenants are just not recommended ever. They have to be tailored to protect the particular legitimate protectable interest you're going for, whether that be goodwill, customer relationships, employee relationships, confidential information, trade secrets. And you want to ensure that there's a strong confidentiality policy in your employee handbook to go along with that, that each employee signs an acknowledgment of receipt for that policy so that you can demonstrate that you've been taking those proactive steps that we talked about earlier. Again, courts won't protect you if you don't protect yourself. You want to work with IT and leadership to review offboarding procedures to tighten controls. You want to work with counsel to make sure the confidentiality agreement is robust and enforceable. You want to make sure IT is developing procedures to flag attempts to remove information. Current technologies allow them to do that where they'll be notified if an employee is trying to use a flash drive, trying to email themselves things to their personal email so that you can take proactive steps when you see this happening. Sometimes employees will do this months before they leave. They start slowly transferring information. And if IT is able to catch that earlier, you'll be in a better position to protect the company. You want to work with counsel to develop a non-compete agreement. A single line in an employee agreement saying that the employee can't compete for 2 years after their, their end of their employment is unlikely to be enforceable anywhere. Again, there's very specific requirements you have to meet. Courts are adverse to enforcing these agreements. So as the employer, it is your responsibility to make sure you met every one of those requirements, and you can go into a court and say, judge, here is the reasons why you should enforce my agreement. And then hopefully the court will protect you. You want to consider the different types of agreements and who actually needs to sign them. So if every employee signs an agreement, particularly the exact same agreement, that's a red flag. You want to be focused on what level the employee is at, what access to information they have, I frequently see this come up in litigations where the attorney defending the person accused of taking information will say, they're not really protecting the information. They're asking every employee to sign the same boilerplate agreement. They're not looking at anything. They're not taking the steps they need to do to enforce this. And sometimes that argument is successful. You also want to consider very carefully what information you want to restrict and what you need to restrict. You need to discuss that with counsel to determine what you can do under applicable law. Some states like California are very hostile to restrictive covenants. Other states like Florida are very favorable. Florida just passed a statute making it very easy to enforce non-compete agreements with certain provisions. If you meet their requirements, they will enforce them. The courts are required to issue an injunction blocking that employee from competing. There are also restrictions on particular industries. So for example, attorneys can't be subject to non-compete agreements. Doctors can be, but there's a very heavy thumb on the scale in favor of allowing patient choice of their doctor. So you can't unduly restrict them. The same restrictions apply in many industries, or, and in many different states have different requirements. So you have to look at all those very carefully. You also want to define the steps to be taken when an employee is not complying with your processes. So for example, they won't sign the employee agreement, They won't agree to a non-solicit agreement or a non-compete agreement, won't sign acknowledgments. All of that is important. You need to have a plan in place so you're not scrambling to figure out what to do when that happens on the spot. Now, Barbara, can you tell me a little bit more about what HR's role is when an incident happens?

Sure, because there's a lot at play, and when an incident occurs, it's all about calming the waters. Managing the gossip mill because the employee is likely contacting existing staff for scoop or potentially poaching your staff. Human Resources should factually inform employees that the individual is no longer working for the company and all work-related questions are to be directed to defined individuals. Employees can be told not to take or respond to any phone calls from the former employee and especially not to engage in any electronic communication via text or email. Any report of contact from the former employee should be reported to HR. It's also a good idea to add a statement to the termination letter reminding the employee about the date and the title of the agreement that the employee signed when they were hired and when these agreements were put into play. Now, Chris, I'm going to turn it back to you to talk about what's the potential risk and liability for the company.

This is bet the company kind of stuff, Barbara. You could have a key employee steal the company's secret sauce or their customer list and pricing information and walk out the door and compete. They could go to a competitor who's existing. They could open their own business. Either way, if you haven't properly prepared for that situation, a court may be unwilling to help you stop what they're doing. The worst-case scenario would be the business could go under. Even if it's not that severe, however, you could have significant loss in revenue and market share. And, you know, you have to really focus on getting these protective steps in place upfront, having a tailored approach that balances the restrictions you're placing on employees with the company's legitimate needs, and getting ahead of that. If you don't, the consequences could be dire. If you're going to negotiate the restrictions an employee is subject to, you want to make sure that's done when the employee starts before they have access to information. You also need to think about consideration if you're going to sign an employee non-compete agreement or other restrictive covenant after hire. Sometimes some point into the company's tenure, you'll try and change the agreement, or you may be having the first agreement with employees for these types of restrictions, confidential information restrictions. Many, but not all states, don't consider continued employment to be sufficient consideration to support that agreement. And so you may need to give them something else, maybe a bonus, maybe something else, but it's something you need to consider here so that you don't, again, have an unenforceable agreement. You want to also consider that what state law you're going to apply here to this agreement. It could be the law where the company is, it could be the law where the employee is located, and that's something you should do in consultation with counsel because again, choosing the wrong state law could have severe consequences for the company. You could wind up, you know, having California's law apply where your agreement may be completely unenforceable, whereas it might have been had you chosen to apply the law of the state where you are. And again, that depends. Some states will allow you to choose another state's law. Some states won't. It's a very complicated issue that you need to discuss. And here, as with many other things, an ounce of prevention is worth a pound of cure.

Thank you, Chris. Such valuable insight and information and such an important topic to take care of a company's secret sauce and keep it secret. That's what keeps us successful. Now I'd like to change the topic to what human resources and C-suite leaders should consider before and after closing a merger or acquisition. It is my privilege to introduce a longtime strategic alliance. Please meet Ralph Sepe, Executive Vice President at CAC Specialty.

Thank you, Barbara. That was a wonderful presentation from you and Chris. Very relevant topic, especially with all the individual states having different rules and regulations. And I think it relates very much to the discussion we're going to have today about mergers and acquisition activity. Brian and I are very excited to join our friends at Ramon today for our second webinar event in this series and to talk about what we think is an equally important topic which gains relevance every day in the business world. And that's basically mergers and acquisition activity and the implications on C-suite, private equity sponsors, and specifically for today, the human resource community. That topic, as Barbara said, in mergers and acquisitions, specifically what to do considering throughout these particular situations. But before I get started, let me just spend a minute elaborating a little more on what Barbara mentioned earlier about Brian, myself, and CAC. CAC is a nationally recognized insurance consulting and brokerage firm with 600 employees and offices located throughout the United States. Collectively, Brian and I are leaders in the human capital risk practice as well as influencers throughout the employee benefits and brokerage consulting operations here at the organization. Brian heads up CAC's human capital risk practice, and I lead the business development and growth strategy initiatives. Basically, Brian and I work closely with C-suite executives, human resource professionals, owners, and sponsors to evaluate, redesign, and implement the most competitive and cost-effective benefit and retirement plans possible, particularly when you're considering these mergers and acquisitions that happen throughout an organization. So with that, on to the presentation. Last time we got together, On our previous webinar, we spoke about how AI technology influences human capital resources and mergers and acquisition strategies. Today, we're going to speak about the intricacies and the impact of M&A activity on human capital and the cost throughout the organization associated with the employees. I think there's great information in today's call for all types of individuals from the HR team to C-suite to private equity sponsors. Ultimately today, what we're trying to get to is isolating 3 elements responsible and really relevant in the mergers and acquisition activity. One is isolating any of the liabilities that may come over from a potential firm as part of this mergers and acquisition activity. The second is the morale and the impact on the employees. And thirdly, very importantly, is value creation, which leads to lower expenses throughout the organization and obviously improved profits. So these three insights are what we hope to focus on today and leave you with some great ideas on. So let's segue into the specific topics that we're going to talk about. One is why the right partners lead to better results. The second is the most common errors and misconceptions in M&A activity across the board from all individuals and professionals. And then third, really the crux of our presentation today is breaking down the segments of mergers and acquisition activity specifically into two segments, one that we call pre-closing diligence, and then the other is post-closing harmonization And we'll spend some time talking about each of those. And then finally, we'll wrap up with value creation, which again is very important. And then some of the timing around mergers and acquisitions and making sure you have enough time to be able to deliver on these results. So let's first start by discussing why, you know, the HR team specifically needs a team of trusted partners. So as I said, in many specific deals, the deal team is focused largely on making the deal happen. And there's a lot of things that go into that, from finances to tax implications to various legal matters. Generally, we see there's not a lot of focus on that deal team, that primary team focusing on human capital. Employees, employee morale, the benefit programs, the retirement programs, all of those things which post-closing dramatically impact the success of the acquisition. So typically the CEO or the person leading that deal is relying heavily on the HR team to be able to deliver the important things that they need to know prior to closing the acquisition. So that's why it's very important that the HR team have a great team of individuals who they partner with— vendors, consultants, technology experts— that help them get through this deal and provide the necessary information up to the C-suite, and particularly the CEO and the deal team, to make this deal happen. In a very efficient way. Some of those experts that the HR team typically wants to have in place, for example, attorneys specifically focusing on the employee benefits or the human capital matters that perhaps the primary deal team doesn't have the focus or the expertise on. So for example, you know, there are ERISA attorneys out there and ERISA are basically the tax code and the rules that govern employee benefits. Generally speaking, the deal team doesn't have an ERISA attorney on staff or involved in that acquisition. So there's little focus on the things that matter to identify compliance issues that are related to the employee benefits program, for example. Another key variable would be the technology side of the house, right? All of the benefit administration, the payroll, all of those kinds of services that, generally speaking, the deal team is not focusing on. But you have to make sure you're prepared post-closing to be able to address those things, that the payroll system is set up appropriately, can handle the transaction, the ben administration system is appropriate for the new organization, maybe the size of it, or the fact that it's now national as opposed to regional. So, these are the reasons why it's important for the deal team on the HR side to really have a good source of representatives. Let me switch to some of the most common errors. HR is not engaged generally until it's too late. That's the first issue. Lots of times we see HR teams, HR professionals get the call maybe from the CEO that, you know, deal's closing in 2 weeks and, you know, let's get to it. Obviously, it's very late in the game at that point. So timing is super important. Getting in there as early as possible is really something that will lead to better results and success. Not having enough time is a common error that happens. A second most common error is that the HR team maybe doesn't have the right vendors or consultants or partners engaged. So for example, I mentioned consulting on the employee benefits side of the house originally. Perhaps you're working with a consultant or a broker that isn't national in scope. They're regional, and this transaction is going to make the organization more national in scope. So not having the right vendor in place can significantly prevent you from having all the necessary resources and the skills and the guidance to be prepared for now a new organization going forward, as opposed to a very local or regional organization you may have had before. And that's true across the board through the technology, through the payroll systems. And sometimes you're going to have individuals who may be a little bit, you know, biased in protecting their ability to continue to work with you as an organization, and even though they may not be the right choice going forward. So, um, the, the other most common error is, uh, typically, um, not looking at value creation. And we'll talk a little bit about that as I bring in Brian Flagg in a few moments. Uh, value creation is important because you're looking at ways to improve the organization as a result of this, you know, this activity. Maybe that's lowering costs, maybe it's expanding benefits, whatever it may be. That's a common misconception or error that we see on the HR team. So with that said, let me begin to transition over to Brian. Brian has mentioned that the onset is the head of our Human Capital Risk practice. I work closely with Brian, and Brian will be able to talk a little bit more about those differences I mentioned before in terms of pre-closing diligence and post-closing harmonization. And we'll start off with pre-closing diligence. So Brian Botham, can you talk a little bit about those differences and specifically starting with the pre-closing diligence side?

Yeah, absolutely. Thanks, Ralph, and thanks everybody for their time today. Yeah, as we look at, as Ralph mentioned, as we look at transactions, you know, pre-closing, post-closing. Pre-closing, you know, from our perspective, along with counsel and tax advisors, we are, you know, we are looking at effectively a due diligence or a GAAP analysis study of the asset. You know, pre-closing. So what does that really mean? Making sure that, you know, things from an HR, human resources, benefits perspective are in a position to close. Our workstream in the benefits world is often tied to other workstreams within a transaction. So reps and warranty, tax and legal counsel, things of that nature. So making sure that our workstream in the diligence process is aligned and helping the company prepare for close. Mainly in the HR and benefits world, it's really focused around compliance items, you know, things of that nature, you know, ERISA compliance, ACA compliance. So those are the main areas where we're digging in from a diligence perspective. Post-closing, which we'll go into in a little bit more detail here, is really ticking off those items items that were not immediately necessarily necessary pre-close, but also looking at a solid 100-day plan post-close, looking at what the new organization looks like and how we execute on value creation opportunities and things of that nature. So again, we really break it down pre-close and post-close from a transaction perspective.

Great. So let's talk in detail about the pre-closing side of the house and some of the things that, you know, we as an organization focus on on behalf of our clients. Yeah.

So again, pre-closing, you know, looking at due diligence or gap analysis, we are doing an inventory of the entire program, benefits, HR-related, and really understanding what the existing program looks like. And what that program might look like on a go-forward basis once a transaction is consummated. Again, red flagging compliance, looking at compliance to make sure that things that should have been done have been done. So a couple examples of that, Affordable Care Act, ACA, you know, there are certain testing requirements, affordability testing. So our employees paying too much for their coverage, or is the program disproportionately benefiting highly compensated employees, things of that nature. Minimal essential coverage. There are minimum requirements of coverage within the ACA. So do the plans meet those requirements? Minimum value. Do the plans meet the minimum actuarial value requirements under ACA? Plan documents, ERISA plan documents are another common item that we see in the diligence phase that are either outdated or, you know, not in existence. So summary plan descriptions, Section 125 plan documents, required notices, that's a big one that we see. Employers are required to notify employees of certain provisions, certain regulatory and legal provisions. And if those notices haven't occurred, that's flagged in the diligence process. Also required filings, 5500 filings, something commonly we see that have not occurred that are required. Medicare Part D filings, Section 105(h) testing, again, back to discrimination. So that is a test that looking at the plan ensures that it the plan is not disproportionately benefiting highly compensated employees. Also 1094 and 1095, these, these are filing requirements as part of the ACA. So have those been done adequately? So compliance is definitely the big, the biggest ticket that we see when we're going through diligence, but also validating financial representation. So look, looking at the cost of the program, looking at the rates, the premiums and the structure, and A, you know, validating that what we're seeing is actually in place, that accruals are happening. So we call it incurred but not reported claims. Is the company accruing adequate reserves for those claims which post-transaction may hit the plan? So validating the financials, and then there's also, and we'll talk on this a little bit more when we get into post-close harmonization, but there's also a view of, you know, the existing financial picture. What does that look like, you know, post-close in the new organization? So really digging into that. And then the final piece or item is change in control provisions. That's a blanket term, but oftentimes when there is a change in control, employment agreements, large claim valuations, bonus payments, workers' compensation subrogation, and again, accrued reserves for IBNR, you know, with a change in control can be impacted by that. So taking a look at that. So Ralph, you know, that's high-level pre-closing. I want to hand it back to you and talk about some of the post-closing items that we typically see.

Great.

Thank you, Brian. And just a couple of comments on the pre-closing side of the house. I mean, Brian mentioned a couple of key points about compliance, for example, ACA compliance, nondiscrimination testing filings. One would think that, you know, okay, those are matters that, you know, we can deal with post-closing or what have you. A lot of these come with significant penalties if they're not done. I know Brian and I have been through hundreds of transactions and You know, I've seen in some instances penalties into the millions for not having this stuff done appropriately and adjudicated properly and filed correctly. So it's very important to identify these kinds of elements prior to closing because in some instances they can transfer to you as the new owner. So, so that's why this is really important on the pre-closing side. On the post-closing side, what we call post-closing harmonization, this category is all about company cultural integration, impact on morale and talent, the ability to retain and attract new employees, and two incredibly important factors, which are cost and value creation. So I'm going to spend a moment on value creation and cost. Are there ways to streamline services, change vendors, products, do things better for the employees? That is what the CEO or the private equity sponsor is looking for after this acquisition closes. Ways to lower costs, improve benefits, impact morale in a positive way, and increase profits, and do that without impacting the employees in in a negative way. That's the trick. And that's where, you know, again, the C-suite is looking for the HR team specifically to take the lead on that. You know, just a couple of ideas on that. So, for example, combining services under one service provider, right? You've got two companies now that have come together. And how do you harmonize all the technology and vendors that, you know, you're working with? For economies of scale pricing. For example, you've got all these insurance products that you make available to your employees to be an attractive employer in the space. And maybe there are ways to streamline that while improving employee benefits, maybe getting leverage, economies of scale leveraging in the pricing and the underwriting. Maybe considering different ways of funding the benefits. Now, perhaps you're a larger organization or you're a national organization. So there are ways to better do that. All of those things add up to generally better benefits for employees and lower costs as the employer, which ultimately leads to higher profits. And that's what value creation is. And so that's the strategic part of the human resources side. So very important to be able to consider those things and to focus on that from the HR perspective. The other is employee morale. And, you know, there are ways to kind of understand that in, you know, that you've got a new group of individuals that maybe are now part of your organization that you really don't know much about. Right? They just joined. You don't have any perspective on how they feel about the previous employer or about the acquisition. One thing you know is they're apprehensive and concerned because this has happened. So basically, two things we focus on here are benchmarking data. That helps a lot to focus on what your employees have available to them versus what the new employees have available available to them. It's super important to understand that. And then the second component is utilizing various tools, particularly on the artificial intelligence side, AI, that help you understand the position that the employees previously had at the previous employer. So, for example, you know, we use AI technology to aggregate information among multiple websites that employees post post information on, like Glassdoor and LinkedIn and Reddit. Employees generally go to these sites and say, you know, I don't believe in the leadership of our organization, or my employee benefits are not that good, or my compensation is not that good. And you have no perspective on that. But using some of the tools available today through AI, you can gain access to that and then have some understanding as to how the new workforce feels prior to you having the ability to really interact with them. And then finally, from a harmonization perspective, that's really what Brian mentioned before, the gap analysis. You know, that's taking all the pieces that you've learned through the pre-closing diligence and putting something in place that now works hopefully for the entire organization. And so that employees one population, maybe the old population versus the new population, doesn't feel as though one has something more than the other. And it doesn't necessarily mean that everybody has to be on the same platforms or same benefits, but it means that there has to be a fairness to it and a reason for it. And it has to be communicated in a transparent way. So those are things that we think about in terms of the harmonization, the post-closing harmonization and the things that are important. The last thing on that topic I'll make note of is change management. Negative changes can fuel the perception that the M&A transactions are all about cutting costs. People have that perception and that generally is not what you're trying to achieve. Of course, on its own, you're trying to use your leverage now as a new organization to understand where you can make things better and improve costs without impacting the employee population in a negative way. And there are a few ways to do that. Number 1 is communicate often and clearly with everybody along the way so that everyone understands what it is that's being done and why it's being done. You could use facts like benchmarking data, which I mentioned before. You can use some of the AI technology initiatives we mentioned before. But fact-based communication that's clear, concise, and timely is really the best way to avoid a lot of the confusion from an employee's perspective. So with that, I'm going to turn it back to Brian with a question about, are all deals the same? So for example, all of these mergers and acquisition deals, are they all based on the same premise from a legal perspective? And if not, what is that legal perspective in terms of the impact and how it changes all the diligence and post-closing harmonization that an organization may need to do.

Yeah, thanks, Ralph. And to that question, you know, typically there are two types of transactions, a stock transaction and an asset transaction that we're looking at. And there's some fundamental differences between the two. You know, from a benefits and HR perspective, we rely heavily on legal counsel and tax counsel for, for the nuances around these transactions. But generally speaking, a stock transaction is where a buyer is purchasing stocks of the company. An asset transaction is where the buyer is buying particular assets of the seller's company. And really the main difference there, and this is generally speaking, every deal is different, but the main difference there is with an asset transaction, a lot of times the liability will be severed because the buyer is only buying a portion of the company. So what that translates to from a benefits perspective or a human resources perspective is in some instances the plan may stay behind with the seller. And with that, the liability of the plan. With a stock purchase, typically any human capital programs are typically being assumed or being transferred to the buyer. So those are really two distinct, two key distinctions when we're looking at a transaction. And again, here, you know, it's a team effort with legal, with tax counsel, and there's all— every deal is different. There are always nuances to it. But those are, you know, general swim lanes in terms of different types of transactions.

Great.

Thanks, Brian. So let me close things up here with a final topic. Which is really timing. We've spoken a little bit about this throughout the presentation, but specific timing is imperative. And I mentioned at the onset that getting involved as quickly as possible is a key factor in the success of the harmonization and obviously closing the deal successfully. So a couple of timing metrics just to kind of keep in mind here. Typically speaking, you want to allow at least 60 to 90 days prior to the closing to start the process on the pre-closing side. And then, of course, taking that information and completing the post-closing or the harmonization side. Those are general guidelines. It depends a lot on some of the variables of the acquisition. For example, number of employees. Is it is a key factor. If it's 20 employees, it's obviously going to be a little bit easier than if it's 250 employees. The number of locations also, meaning, you know, how many locations in terms of where the employees are, is key as well because more locations adds complexity, particularly as it relates to the employee benefit programs. You need to make sure that whatever you do have in place can handle employees from multiple parts of the country. Sometimes healthcare from an insurance company perspective is regionalized. Maybe they don't have proper networks across, you know, different parts of the country. So, you know, the number of employees and where they're located are particularly important in terms of the timing. As Brian talked about, asset or stock purchase is a key driver as well. The stock purchase certainly requires more time because there is the potential for any compliance issues or anything not being done appropriately to transfer over to the new ownership. So an asset— excuse me, stock purchase is significantly more driven in terms of the timing you need to do the diligence prior to the closing. The other is the advisors and partners, you know, letting them know as soon as you can within reason, because there's a lot to do from their perspective as well in preparing for the new employees, for example, or changes to the employee benefits program and all the other various changes that need to happen. What I do recommend in every instance is if you don't have an NDA in place already with your partners and consultants, to definitely put that in place because you're sharing very sensitive information about an upcoming transaction, a purchase, a merger, that you don't want information disclosed to anyone or outside the organization that could impact that in some ways. And I've seen that happen, unfortunately, and it never ends well. The employees find out beforehand and so forth and so on. And you want to control the narrative from an employee communication standpoint. And you could lose that if the right confidentiality metrics are not kept in place. Finally, determine the best time to advise the employees. There is no right time. It just— you need to consider the entire plan and how it's going to impact the employees. Some organizations wait until the day of the closing, after the closing, for example. Some do before. It just depends on what's right for the organization and a little bit about the deal itself plays in on that factor as well. So these are kind of the timing guidelines and impact to the timing that we would say you should spend some time focusing on. So, so with that, that concludes our portion of the presentation today. It's been great for Brian and I to participate in, in this presentation and to share in the day today with the folks and our friends at Ramon. So Barbara, I'll turn it back to you to close things up.

Thank you, Ralph, and many thanks to Christopher Kelly, Ralph Zepi, and Brian Clay for generously sharing your insights today. Those of you who are looking to earn the SHRM and HRCI professional development credit are to look at the chat where the activity ID codes will be posted. These will also be emailed to each and every one of you. Thank you all for attending today. Each of you will also receive a link to the presentation via email along with the email addresses of today's presenters. The link will also be posted on our website, RamonLaw.com, as well as on the CAC website, cacgroup.com. We plan to continue this webinar series in 2026, so be on the lookout for the announcement Until then, we all wish you all a happy holiday season. Thank you.