Arthur J Gallagher’s $3.25bn+ acquisition of Willis Re has moved a step closer to completion with the news yesterday that the UK’s Competition and Markets Authority (CMA) had cleared the deal.
The green light was expected – the CMA’s investigation into the deal was largely seen as procedural and Gallagher had itself stated that it was a “standard part of the process”.
Now that hurdle is resolved, the two businesses remain focused on a fourth-quarter completion and perhaps as early as 1 December.
But as Willis Re is not a standalone organisation, the industry’s third-largest reinsurance broker will be transferred via a complicated series of deals involving multiple jurisdictions. And in the UK – Willis Re’s largest single unit and its head office location – the business will be sold to Gallagher via a Transfer of Undertakings (Protection of Employment), or TUPE, arrangement.
TUPE is a mechanism used in the UK when a segment of a business has been sold and employees move from one employer to another, and as a result differs from a share purchase or sale when the employer stays the same.
For employees, the TUPE process protects them from receiving less favourable terms from the new employer. Employees can also elect not to accept the transfer – they cannot be forced to move from one company to another – and a TUPE can offer employees the opportunity to walk away from their roles without restrictions.
Gallagher has experience with the TUPE process, having used it successfully to complete the £190mn acquisition of JLT Aerospace in 2019.
But not all stayed – notably, senior aviation executive Marcel Chad left the company at the point of transfer and re-emerged the following month to launch a new global aviation and aerospace (re)insurance intermediary at BGC Insurance (now Ardonagh), called Piiq.
It is a point Mark Kaye, an employment law specialist with BCLP, emphasises. “Employees who wish to extricate themselves from long notice periods have been known to use a TUPE transfer to object and terminate their contract without notice,” he explains.
To do so, he adds, a defecting employee must object to the transfer. The “transferee (buyer) will [then] not be able to enforce the post-termination restrictive covenants in the objecting employee’s contract of employment – this is because the contract of employment will not have transferred”.
Indeed, this publication itself knows of a small number of Willis Re producers who have already received offers with a view to enticing them away from the newly combined Gallagher-Willis Re business during the TUPE process.
Given the prolonged period of uncertainty that has hung over the future of Willis Re since Aon first publicly announced its intention to acquire Willis Towers Watson (WTW) on 9 March 2020, CEO James Kent has done a commendable job in holding the core team together and preventing more defections than have already occurred (see table).
The majority of those who have stayed loyal to date will continue to do so under a new parent, particularly as retention bonuses and other incentives have been built into their contracts.
But for some, the opportunity to become a free agent without spending a prolonged period in the garden, coupled with an attractive offer from one of several growing brokers keen to capitalise on any fallout from the deal, may prove tempting.
After all, a host of independent brokers – including Acrisure Re, Ed, Howden, Lockton Re, McGill and Partners and TigerRisk – are keen to grow their reinsurance footprint, while Guy Carpenter has also enjoyed success in hiring Willis Re talent in the past 18 months.
Under the TUPE process, transferring staff have a limited window – typically little more than a week – to register their objections and exit before being bound again by their employment considerations.
From the perspective of the buyer, there is little legal protection under TUPE. This is why, points out Kaye, in many TUPE processes, buyers often name key employees on which the sale process is conditional.
“If a purchaser is concerned about the flight risk of key in-scope employees, it is not uncommon for the sale contract to be conditional on those identified key employees transferring with the business to the purchaser,” Kaye explains.
Of course, this may be the case for some of Willis Re’s most senior management but it is inconceivable to do it for all of its producers.
However, there are other factors likely to inhibit the exodus risk other than generous incentive packages.
One is professional pride and duties to the client. Will reinsurance staff be willing to leave circa three weeks before 1 January? Many will not.
The second is Willis Re’s esprit de corps. As we note above, the organisation has done a broadly good job in keeping the talent together amidst almost a year and a half of uncertainty. And it was management/staff that then lobbied for the Gallagher deal. This is a deal that is in the interests of employees – or, at least, a lot of influential ones – rather than WTW. This will evidently reduce defections.
Nonetheless, it is near inevitable there will be some departures and perhaps most likely among ambitious producers in their thirties and early forties who may feel their careers have been on pause because of the M&A uncertainty caused by the doomed Aon-WTW deal. If any do decide to make the leap then they could leave the company on the day of the transfer – Gallagher-Willis Re is thought to be targeting 1 December – and they will need to have made their objection to the transfer known in advance.
But as we note above, we anticipate the majority to transfer seamlessly. There will, however, be some continuity in the relationships between Gallagher and Willis Re around co-broking which will require trading on both platforms for a transition period.
And in the agreement unveiled in August the two parties said they would agree to discuss a “mutually acceptable commercial arrangement” around Gallagher’s use of WTW’s information platform and climate resilience hub following completion of the deal.
Ultimately, the coming weeks will likely bring resolution to a prolonged period of uncertainty for Willis Re and its employees. And while a TUPE transfer may create some short-term volatility, it is also the platform for the industry’s new, third-largest reinsurance intermediary to start to fulfil its growth potential under new ownership…
How UK’s TUPE process works…
- TUPE is designed to protect the rights of employees in the context of a transfer of a business or undertaking (or in an outsourcing scenario). This means that employees will never be forced to transfer.
- An in-scope employee is able to object to TUPE transfer. If an objection is made, the impact of it will be that the employment of the employee will automatically terminate as at the point of the TUPE transfer. The employee will not be required to give or be entitled to receive notice of termination of employment. The employee will also not be entitled to redundancy pay.
- Employee who wish to extricate themselves from long notice periods have been known to use a TUPE transfer to object and terminate their contract without notice.
- In addition, where an employee objects to the transfer, the transferee (buyer) will not be able to enforce the post-termination restrictive covenants in the objecting employee’s contract of employment – this is because the contract of employment will not have transferred.
- Even where an employee does not object and actually transfers under TUPE, the post termination restrictive covenants in the transferring employee’s contract of employment may not protect the interest of the transferee because the restrictions will be interpreted by reference to the business of the transferor.
- If a purchaser is concerned about the flight risk of key in-scope employees, it is not uncommon for the sale contract to be conditional on those identified key employees transferring with the business to the purchaser.
Mark Kaye, employment lawyer at BCLP