How do current and potential labor lawsuits affect company valuation?

1. Introduction: Labor Disputes Reveal Hidden Costs

Due diligence in transactions such as mergers, acquisitions, transfers of ownership, or strategic investments should focus not only on balance sheets and income statements but also on ongoing and potential labor disputes.

Because lawsuits filed or at risk of being filed regarding employee claims are among the factors that directly affect a company's valuation. This situation is not only a financial risk; it also reveals the company's corporate governance approach, human resources policy, and reputation.

---

2. The Impact of Labor Cases on Valuation: Theoretical Framework

2.1. Interaction of Valuation Factors with Legal Risks

A company's value is determined not only by the sum of its assets or profitability indicators, but also by the potential liabilities it faces. This is where..

• Ongoing employment lawsuits,

• Potential labor claims,

• Social Security Institution (SGK) disputes,

• collective bargaining agreement breaches
  can lead to significant erosion of value for a company in terms of future cash flow and legal risk profile.

2.2. Legal Risks Not Reflected in Financial Statements

Many small and medium-sized businesses do not set aside a provision for ongoing or potential employee lawsuits. Therefore:

• Compensation not reflected in the balance sheet,

• Unopened but pending lawsuits,

• Social Security and tax penalties
  create unexpected liabilities for investors.

---

3. Existing Labor Cases: Matters to be Examined During the Due Diligence Process

3.1. Subject Matter of the Case and Number of Defendants

Labor lawsuits in which the company is a party should be examined under the following headings:

• Claims for severance and notice pay

• Overtime and holiday pay

• They will take annual leave

• Compensation for workplace bullying and malicious intent

• Reinstatement lawsuits

• Lawsuits for the annulment of termination due to union membership

Each case provides insight into the company's employee relations management policies.

3.2. Litigation Phase and Risk Assessment

For each case in which he was a defendant:

• Stage of the case (first instance, appeal, cassation)

• Estimated compensation amount

• Possibility of compromise

• Legal opinions
  should be analyzed in detail.

3.3. How Case Records Are Stored

The orderly and transparent storage of all documents related to lawsuits demonstrates the company's level of organization regarding legal compliance. Incomplete records are considered a violation of the principle of transparency from the investor's perspective.

---

4. Potential (Unfiled) Labor Lawsuits: The Silent Threat

4.1. Legal Basis

According to the Labor Law and Supreme Court precedents, an employee can file a claim for unpaid wages within 5 years of leaving their job. Therefore, the company's risk of losing employees it has dismissed or terminated in the last 5 years remains current.

4.2. Risk Indicators

• Irregular termination records

• Social Security Institution (SGK) underreporting of premiums

• Inconsistencies in employment start/end dates

• Written complaints from employees

• Notary notices or mediation applications

This is an indicator of these risks.

4.3. Reinstatement and Union Rights

In workplaces with more than 30 employees, terminations that are not based on a valid reason carry the risk of reinstatement. Similarly, discriminatory practices due to union membership carry the risk of both compensation claims and administrative sanctions.

---

5. Reflecting Compensation Risks in Company Valuation

5.1. Calculation of Reserves

In pre-investment valuation reports, it is possible to set aside provisions for ongoing lawsuits within the framework of the Turkish Commercial Code and the Tax Procedure Code. However, this practice is often neglected. Valuation experts and lawyers should work together to:

• A different risk ratio for each case,

• Estimated payment time,

• The total risk burden should be determined, including items such as interest, attorney fees, and court costs
  

5.2. Sample Calculation Table

This risk should be deducted directly from the valuation amount.

---

6. How Important Are Dispute Statistics?

6.1. Occupational Safety and Health and Labor Ministry Statistics

The Labor Court Statistics published annually in Türkiye reveal sector-based compensation risks. For example:

• In the construction, mining, and transportation sectors, there are a significant number of compensation lawsuits filed due to workplace accidents.

• Workplace bullying and excessive overtime demands are prominent issues in the service sector.

These statistics are valuable for estimating the average risk profile of the sector in which the investment is made.

6.2. Internal Company Dispute Rate

The number of lawsuits filed relative to the total number of employees can be interpreted as an "internal peace index." For example;

• If a company with 100 employees has 20 lawsuits, that's an indicator of high risk.

• If a company with 500 employees has only 3 lawsuits, this rate is manageable.

---

7. Protective Provisions to be Included in Investment Agreements

7.1. Security and Indemnity Provisions

• The risks arising from the current lawsuits will be borne jointly by the transferee

• The warranty period against potential lawsuits,

• In cases where the company fails to provide documentation related to court cases, provisions for serious breach of contract
  should be added to the contracts to protect the investor.

---

8. Conclusion: Planning for the future requires confronting the past

Existing and potential labor disputes pose not only legal but also financial, strategic, and reputational risks for investors.

Therefore, the due diligence process should include an assessment specific to labor law, evaluating not only "currently pending cases" but also potential disputes through a comprehensive analysis.

It should be remembered that a hidden lawsuit risk can turn into an overt investment failure.

Gamze Akbulut, Law Faculty Student