Employer Compliance: The Immigration Consequences of Mergers, Acquisitions and Other Coroporate Changes

Generally speaking, how does immigration law factor into a merger, acquisition or other major corporate transaction?

While US immigration laws have been a factor in corporate transactions for decades, a massive increase in the enforcement of immigration laws and the proliferation of new rules should certainly have raised the profile of this subject amongst lawyers handling major corporate transactions. But survey transactional lawyers regarding how many address immigration issues in their due diligence inquiries, including adding immigration provisions in their agreements and dealing with immigration in their due diligence and pre-closing activities and you’re likely to get a very scant response.

Perhaps the lack of attention to immigration issues is the result of so many large law firms and in house legal departments lacking immigration lawyers in their offices to educate them on the immigration issues. It may also be due to the fact that most immigration lawyers, even those at large law firms, focus their practice on filing visa petitions and simply lack a background in corporate law.

In any case, the community of lawyers working on these deals will need to quickly get up to speed and address these issues if they are to avoid an immigration “train wreck.” Inheriting immigration problems is no longer a mere inconvenience for a company. Consider these developments:

• At the federal level, employers are suddenly being aggressively targeted by the Department of Homeland Security for work site raids as well as compliance audits. Both can result in significant fines and even jail time.
• At the state level, new laws allow authorities to revoke business licenses and access to state contracts if employers are found to have immigration law violations.
• Employees on work visas are now suing companies for negligence in handling their immigration matters when actions of the company result in the employees falling out of legal status, having problems pursuing permanent residency and potentially facing bars on coming back to the US.
• Major companies like Wal-Mart are now including strong immigration compliance provisions in their vendor contracts and having a history of immigration law violations can jeopardize doing business with such firms.
• Immigration is a major topic being covered by the media and any companies with immigration law violations risk facing front page coverage.

 
In some cases, companies pick up immigration problems that occurred prior to closing. In other instances, the actual closing of the deal triggers the immigration violations that create exposure. In other words, at the moment the transactional documents are signed, employees may find themselves converted in to an illegal status and subject to deportation. And, unfortunately, these consequences are ticking time bombs that are frequently not discovered until long after the celebration of the closing has occurred and it is too late to reverse the damage.

If these concerns are not enough to convince the corporate attorney of the need to routinely deal with immigration in corporate transactions and warn clients of the immigration consequences perhaps the threat of being found liable for legal malpractice will.

What are the major immigration risks associated with a merger, acquisition or other major corporate transaction?

There are three major immigration risks associated with the closing of a transaction. First, the visas or pending applications of the employees could potentially be affected by the deal. Do petitions need to be transferred prior to closing? Are amendments required? Are any employees no longer eligible in the category under which they were petitioning?

Second, all employers in the US are, of course, barred from hiring unauthorized employees and are required to maintain documentation (the I-9 form and supporting paperwork) demonstrating that each of their employees are legally permitted to work in the US. Companies may also be required to file new paperwork regarding the status of all employees and this paperwork may need to be completed on the actual day of closing or before.

What immigration law concepts come in to play when discussing mergers and acquisitions?

Before assessing the immigration law implications of a transaction, a review of a few basic immigration and corporate law concepts is necessary.

Employees coming to the United States for employment normally hold either non-immigrant or immigrant status. Non-immigrant employees at corporations normally are in the H-1B, L, E and TN visa categories as well as on training tied to J-1 and F-1 visas. Immigrant visas are held by those who have obtained lawful permanent residency. In the corporate transaction context, only non-immigrant visa holders are considered since the transaction will not affect the status of green card holders. However, those in various stages of green card processing short of completion of the process could be impacted.

Employers are also federally mandated to verify the employment eligibility of all of their employees via the I-9 Employment Eligibility Verification Form. The Form I-9 must be completed on the day of hire and employees are required to present documents from a specific official list of documents deemed to demonstrate one’s identity and employment authorization. Some employers also participate in the e-Verify system where an employee’s work authorization is verified electronically by the Department of Homeland Security. Finally, some employers receive “no match” letters from the Social Security Administration when the social security number and employee name to not match. Under a rule set to take effect soon, employers may be deemed to have knowledge that an employer is in the US illegally when they receive such a letter and the name and number do not match.

The most common employment visa, the H-1B, is used for an “alien who is coming to perform services in a specialty occupation” in the United States. L visas are used for intracompany transferees that enter the US to render services “in a capacity that is managerial, executive, or involves specialized knowledge”, while E-1 and E-2 visas are used for “treaty traders and investors” and E-3s are used by Australians working in specialty occupations. The TN category includes “Canadian and Mexican citizens seeking temporary entry to engage in business activities at a professional level” as listed in the North American Free Trade Agreement. F-1 visas are held by students many of whom are entitled to employment authorization for periods up to a year during and after completion of their studies. J-1 visas are held by exchange visitors in many categories including one that permits internship and training opportunities of twelve and eighteen months.

Corporate changes that typically have immigration consequences are stock or asset acquisitions, mergers, consolidations, initial public offerings, spin-offs, corporate name changes, changes in payroll source, and the relocation of an employer or its employees.

Acquisitions involve the purchase of assets or stock. In an asset acquisition, the purchaser may not accept the liabilities of the seller. In a merger, two or more legal entities combine all their assets in what is called the “surviving entity”. Other entities, which are called the “merged entities”, cease to exist. The surviving entity assumes all of their liabilities. In a consolidation, however, two or more legal entities combine all their assets to form a new entity. The new entity assumes their liabilities, and they seize to exist. An initial public offering (IPO) changes the ownership structure of a corporation, similar to an acquisition. A spin-off involves the creation of a new company from a divestiture of shares or assets of an existing company.

There is no “one size fits all” approach to advising clients regarding the effect of a transaction on the immigration consequence of a merger or acquisition. Rather, there are a number of important questions to ask as the due diligence process begins. They include

1. How is the deal to be structured? Is t a merger or spin-off where employees will have a new employer with a different taxpayer identification number? Is it s stock purchase? Is it an asset acquisition where no liabilities are being assumed (or where just immigration liabilities are assumed)? Or a successor in interest where liabilities are to be assumed?
2. What are the timing issues in the case? Is there enough time to file new petitions? Are employees going to suffer adverse consequences as a result of the timing? Is it possible to lease employees to the successor entity until the necessary transfer paperwork can be filed? Can filings be deferred until after the closing without a penalty or risk?
3. For I-9 forms and e-Verify filings, will the documentation of the post-transaction entities survive. And, if so, does the convenience of not being required to have employees prepare new I-9s or have to re-file in e-Verify outweigh the risk of assuming liabilities associated with the old employer’s prior filings?

 
Those questions should initially be addressed in the due diligence request and in early discussions between the lawyers involved in the transaction. In most cases, immigration is not addressed in due diligence and many lawyers may not know where to begin in requesting documentation. A sample immigration due diligence checklist is included at the end of this article.

The impact of a corporate change will vary from employee to employee depending on the type of visa or status they have and what stage they are in their immigration process.

One goal of the due diligence process will be to determine whether the company that is the subject of the due diligence has complied with immigration laws and the scope of any potential liability. Another will be to identify what pre-closing and post-closing activities are required to ensure a smooth transition.

To meet those objectives, the due diligence review will cover the visa history of employees potentially affected by the transaction. The review will also test the I-9 compliance of the company that is the subject of the due diligence. This may take the form of a full review of the I-9s or a sample audit if a full review is not practical. If a sampling determines that there are many problems, a full audit may be warranted.

How are H-1B visas affected by mergers and acquisitions?

In an H-1B visa case, the questions to analyze are whether a corporate change results in a new employer and, if so, to what extent are the interests of the target corporation being assumed.

An H-1B visa requires separate applications to the DOL and the U.S. Citizenship and Naturalization Services (“USCIS”). A petitioner should first obtain an approved Labor Condition Application from the DOL, and then should get its I-129 Petition for a Nonimmigrant Worker approved by the USCIS.

Prior to December 2000, the DOL considered a change in an employer’s Federal Employer Identification Number enough to trigger a need to file a new LCA. Under the rules adopted December 22, 2000, a new LCA will not be required merely because a corporate reorganization results in a change of corporate identity, regardless of whether there is a change in EIN, provided that the successor entity, prior to the continued employment of the H-1B employee, agrees to assume the predecessor’s obligations and liabilities under the LCA with a memorandum to the “public access file” kept for LCA purposes.

Material changes in the employee’s duties and job requirements and the relocation of the employee may also require a new LCA. Therefore, if employees are relocated due to a merger or sale, new LCAs will be required for H-1B employees (DOL uses the Standard Metropolitan Statistical Area, SMSA, as criteria in determining the need for a new LCA or Labor Certification. If the employee is relocated outside the SMSA, then new filing is required). However, a simple name change will not trigger the need for a new LCA.

The rules governing when a new I-129 petition must be filed are similar to the LCA, but not identical. The need to file a new I-129 can be a fairly expensive requirement. For each new employment petition, the employer must pay the American Competitiveness and Workforce Improvement Act fee, which was recently increased to $1500 dollars for companies with more than 25 employees (though it was dropped to $750 from $1000 for smaller companies). Couple this with a new $500 fraud fee, a $320 base filing fee and a $1000 premium processing fee for fast adjudication and you are looking at over $3300 per employee.

The Immigration and Nationality Act contains an exemption from filing a new I-129 in cases of corporate structuring where the new employer is a successor in interest that assumes the interests and the obligations of the prior employer. This is a restatement of the existing USCIS policy stating that if an employer, for H-1B purposes, “assumes the previous owner’s liabilities which include the assertions the prior owner made on the labor condition application” then there is no need for a new or amended petition. If a new or amended petition is not needed, then the employer may wait until filing an extension petition for the employee to notify the USCIS.

One potential pitfall involving H-1B employees relates to the “dependency” provisions in the H-1B statute. Employers with over a certain number or a certain percentage of H-1B employees are considered “H-1B dependent” and such companies face tight restrictions in terms of documenting recruiting efforts and hiring H-1Bs before and after layoffs. The numbers will need to be recalculated for a company after a transaction and this could dramatically affect a company’s bottom line.  Companies that are H-1B dependent should also be a signal for further scrutiny since it may be the result of being found to have had prior H-1B violations and this could mean a company may be inheriting a company with a poor history of compliance.

An issue likely to affect only a small number of employers (particularly in the health care sector) involves loss of eligibility for cap-exempt status. If an employer’s status as exempt from the quota limitations on H-1B visas was the basis for an employee’s H-1B status, the corporate practitioner will want to examine whether cap exempt status is lost after the closing. This may happen, for example, when a non-profit entity is replaced by a for-profit entity as a sponsoring employer. A loss of H-1B cap exempt status could make it impossible for an employee to continue being employed by the succeeding entity as an H-1B status holder.

What impact do mergers, acquisitions and other major corporate transactions have on TN Visas?

Since LCAs are not required for obtaining a TN visa or status for a citizen of Canada or Mexico, a basic successor in interest analysis is required to determine how to proceed here. If the new company succeeds to the interests of the prior company, new petitions are not required. The fact that a company may change nationality won’t matter in these cases because the TN visa is tied to the employee’s nationality, not the company.

How are L-1 Intracompany Transfers affected by mergers, acquisitions and other major corporate transactions?

For an L-1 visa, the law requires a qualifying relationship between the US entity and the foreign entity from which the employee will be transferring. This relationship must be within the definitions of a “parent, branch, affiliate or subsidiary” as defined by the USCIS. Obviously, changes in the ownership structure of either one of the entities, through a corporate change may terminate the qualifying relationship and, consequently, invalidate the underlying L visas. However, if the petitioner, after a corporate change, can document that the qualifying relationship survives, then, only an amended petition will be necessary.

For affiliated companies, if the ownership breakdown of the overseas entity and the US entities changes, the qualifying relationship may no longer be there. Also, if the US company is sold to another international company, the L-1 may survive even if the original foreign entity is no longer part of the corporate family. The key will be whether the company still maintains an overseas office.

Finally, companies will want to look at issues pertaining to the “blanket L”. Blanket L-1s are available to companies who pre-qualify with USCIS and can show they are large multinational operations with a large volume of L-1 filings. A transaction may render a company too small or suddenly large enough to qualify for a blanket L filing. From a strategic point of view, if a company can qualify for a blanket L under a merged entity’s qualification after a transaction, it may be possible to add the new entity and then employees can be covered under the blanket.

How are E Visas affected by mergers, acquisitions or other major corporate transactions?

Under the E-1 and E-2 visas, certain investors and traders may be admitted to the United States and be employed therein, if a “treaty-qualifying” company petitions and obtains status for them. A company is qualified based on its nationality. A corporate change may change a corporation’s nationality, and, therefore, result in the termination of the qualification. USCIS regulations specifically state that prior USCIS approval must be obtained when there has been a “fundamental change” in a company’s characteristics including in the case of a merger, acquisition, or sale.

The new E-3 visas for nationals of Australia is similar in many respects to the H-1B including in the requirement for the filing of a Labor Condition Application. The same considerations applicable to the H-1B apply here. Note that E-3 status is tied to the nationality of the employee, not the company. In that respect, it is similar to the TN visa in not being affected per se by a change of a company’s nationality.

How are permanent residency applications affected by mergers, acquisitions and other major corporate transactions?

A lawful permanent residency (“LPR”) application normally consists of three steps. First, the employer usually must prove that despite reasonable recruitment efforts, it has not been able to find a domestic employee to fill the alien’s position. This is called the labor certification, and is handled through the DOL. Second, it files a Form I-140, Immigrant Petition for Alien Worker, with the USCIS. After the I-140 petition is approved, the employee files a petition for the adjustment of her immigration status to the status of a lawful permanent resident with the USCIS.

The Department of Labor takes a liberal view of when a new labor certification petition must be re-filed. If after an acquisition, a new owner remains the employee’s employer, and has assumed all of the past owner’s obligations, the new owner should qualify as a “successor-in-interest” and a labor certification will survive.

In LPR cases, USCIS traditionally used a stricter version of the successor in interest theory, and permitted an employer to continue with the prior employer’s petition, only if the new employer assumed “all” of the prior employer’s liabilities. Without successorship, a new I-140 petition may be necessary even when an adjustment of status application is already pending.

The LPR process may take several years, and until recently, unless the case did fit under certain exceptions, beneficiaries of immigrant petitions were not able to change employers until the completion of the entire process. Therefore, corporate changes that created a new employer were potentially causing further delays. Legislation now makes it possible in many instances to change employers while an adjustment application is pending. An adjustment application pending six months or more will survive if an employee finds new employment in the same or a very similar occupation. The sponsoring employers may, in some cases, want to consider leasing an employee to the new entity for a period of time in order to ensure that the “portability” rule is available.

Unfortunately, because of long green card backlogs, many applicants are not in a position to file an I-485 adjustment of status application. Hence, the applicant may find that a petition becomes worthless if the original job offer disappears.

Aside from labor certification cases, some employees pursue permanent residency through an intracompany transfer-based I-140 petition. In these cases, a labor certification is not required. In these cases, many of the same issues regarding maintaining a qualifying relationship as apply in an L-1 case will arise. However, if a case has advanced far enough, the “portability” rule noted above may apply as well.

Some permanent residency petitions are based on self-sponsorship by an applicant. These include national interest petitions and EB-1 extraordinary ability cases. These matters are normally not affected by a major transaction except that in some cases, an employment relationship is how an applicant demonstrates that he or she will work in the field upon approval of permanent residency. If the transaction will result in an employee losing the position, this could, in theory, affect qualifying for EB-1 or EB-2 status.

How are Forms I-9 affected by a merger, acquisition or other major corporate transaction?

Finally, a successor also assumes the I-9 liabilities of a corporation. Failure to comply with I-9 requirements may result in serious sanctions running in to the thousands of dollars per employee. Therefore, before a corporate re-structuring, the transition team should examine the I-9 compliance of the entity by either a sample I-9 audit or a review of the alien employees’ I-9s.

If a company does not assume the liabilities of the acquired corporation, I-9s are generally required of all of the employees and in the case of a merged entity which is completely new, I-9s may be needed for all employees of both entities.

The good news here may be that a successor in interest can assume the I-9s in place at the time of closing. But many companies will want to consider as a matter of course requiring all employees of an acquired or merged entity complete new I-9s on the date of closing in order to ensure that past violations are not continued and also to ensure that they have a handle on which employees have a temporary employment authorization document that will require re-verification at a later time. Of course, the employer needs to be careful to require ALL employees to fill out a new I-9 as opposed to singling out some.

What are some general tips from employers going through a merger, acquisition or other major corporate transaction?

1. Ensure visas are transferred to a new employer prior to closing when a closing will affect their validity;
2. File amendments before or shortly after closing (unless regulations specifically require filing before closing);
3. Move employees to new visa categories before the closing when they will no longer be eligible in a particular category post-closing;
4. In cases where a closing will void a visa status, employ an employee in an employee leasing arrangement in order to continue the employer-employee relationship;
5. Start green card processing early in order to minimize the number of non-immigrant visas requiring attention.

 
Immigration queries should be incorporated in to the due diligence inquiry and representations and warranties addressing immigration issues should be incorporated in to the transaction documents.

Immigration Due Diligence and Boilerplate Language

Below is a sample due diligence query that can be included with a request in a merger, acquisition or other major corporate transaction.

1. Provide a list of all employees who are not US lawful permanent residents or citizens. The list should break down employees by visa category, work authorization expiration date, number of years in a particular visa category, the employee’s work site and whether any non-immigrant visa applications or extension petitions or permanent residency petitions are pending or promised. Also note any changes in job duties, location or salary that will occur as a result of the transaction.
2. For all employees listed above, please provide a copy of all documents relating to such employees’ immigration status including, but not limited to:
   1. Non-immigrant visa applications and extension petitions
   2. Employment authorization documents
   3. I-9 forms
   4. Labor certification and immigrant visa applications and supporting documentation
   5. Approval notices and correspondence with any government agencies
   6. I-94 forms and passport visa stamps
   7. Visa documentation for the employees’ spouses and minor children
   8. H-1B public access files
3. Provide copies of all correspondence with the Social Security
4. Administration relating to the “mismatch” of social security numbers for any employees.
5. Provide copies of any correspondence with agencies of the Department of Homeland Security, Labor Department, Justice Department or State Department regarding compliance with the country’s immigration laws.
6. I-9s – [Provide a copy of all I-9s required to be kept by the employer][Provide a list of all employees of the company employed since 1986. Counsel will select ____ employees from the list and request their I-9s be provided]

 

Contract Representation and Warranty

Below is sample language that can be adapted for inclusion in agreement language associated with a merger, acquisition or other major corporate transaction.

Immigration. All necessary visa or work authorization petitions have been timely and properly filed on behalf of any employees requiring a visa stamp, I-94 status document, employment authorization document, or any other immigration document to legally work in the US. All paperwork retention requirements with respect to such applications and petitions have been met. No employees have ever worked without employment authorization from the Department of Homeland Security or any other government agency that must authorize such employment and any employment of foreign nationals has complied with applicable immigration laws. I-9 Forms have been timely and properly completed for all employees hired since the establishment of the company or the effective date of the Immigration Reform and Control Act of 1986, whichever is earlier. I-9 Forms have been lawfully retained and re-verified. There are no claims, lawsuits, actions, arbitrations, administrative or other proceedings, governmental investigations or inquiries pending or threatened against the Company relating to the Company’s compliance with local, state or federal immigration regulations, including, but not limited to, compliance with any immigration laws except for employees named in schedule __.

There have been no letters received from the Social Security Administration (SSA) regarding the failure of an employee’s Social Security number to match their name in the SSA database. There have been no letters or other correspondence received from the Department of Homeland Security or other agencies regarding the employment authorization of any employees. If the Company operates in a state or has contracts with a state of Federal agency that requires or provides a safe harbor if an employer participates in the Department of Homeland Security’s e-Verify electronic employment verification system, the Company has been participating in e-Verify for the entire period such participation has been required or available as a safe harbor or as long as the company has been operating in such state or contracting with such agency.