Labor Due Diligence in M&A Transactions

In merger and acquisition transactions, financial and tax advisory teams work against the clock to identify hidden liabilities, tax contingencies, and regulatory risks — and they tend to overlook an area that systematically receives less attention, yet can yield results representing significant contingencies: Labor.

It is mistakenly asumed that if the target company has no active litigation, there is no significant exposure. That reasoning is incorrect and dangerous.

Undisclosed labor liabilities do not appear in financial statements. They do not trigger an alert in an accounting audit. They hide in poorly structured contracts, informal compensation practices, verbal agreements with key executives, or employment relationships concealed under professional services arrangements. By the time the buyer discovers them, they have usually already signed.

What Labor Due Diligence Should Review

A rigorous process goes beyond verifying whether employment contracts exist. The analysis must cover, at a minimum, the following elements:

• Contractual structure and workforce classification
• Severance liabilities and accrued benefits
• Active, latent, and time-barred labor disputes
• Key executive contracts and change-of-control clauses
• Compliance with social security obligations
• Existence and validity of internal policies and workplace regulations

How Labor Findings Affect Negotiation

When labor due diligence is done properly and on time, the findings are incorporated into the negotiation: purchase price adjustments, escrow for contingencies, specific representations and warranties, or conditions precedent to closing. The buyer knows what they are acquiring.

When it is done late or poorly, the options are far less elegant: last-minute forced renegotiation, loss of trust between the parties, delays in closing, or worse, the post-closing materialization of a liability no one anticipated that the buyer must absorb alone.

In some cases, that liability is enough to destroy the projected return on investment. In others, it kills the deal outright.

Labor Counsel as a Strategic M&A Component

Labor counsel must be involved in defining the scope of the due diligence, in analyzing the data room, and in drafting the representations and warranties in the purchase agreement. This is not a validation step at the end of the process — it is a strategic component from the very first phase.

In transactions involving operations across multiple countries in the region, this means coordinating with local advisors who know not only the law, but the real practice in each jurisdiction. The gap between what the statute says and what happens in the courts can be significant.

Labor Due Diligence as a Risk Management Tool

Labor due diligence is not a formality. It is a risk management tool that, when properly executed, protects the value of the transaction and prevents surprises no buyer should face after closing.

Companies that incorporate it as a natural part of their M&A process do not just close better deals — they close deals that hold.

Regional Legal Support for Sale or Expansion Processes

GLC Legal is a firm with a strong commitment to advising our clients throughout sale or expansion processes in Costa Rica and across the region. As a firm with regional presence, we approach each project in an organized manner and in full compliance with applicable law, in order to deliver the best possible results for our clients.