Dealing with job losses: practical tips for merger notifications

The competition authorities are increasingly concerned with public interest effects when considering mergers. One of the most important factors is the effect that a proposed merger may have on employment.The competition authorities are increasingly concerned with public interest effects when considering mergers. One of the most important factors is the effect that a proposed merger may have on employment.

The evaluation of public interest issues was considered by the Competition Tribunal and Competition Appeal Court in the Minister of Economic Development and others/Competition Tribunal and others; South African Commercial, Catering and Allied Workers Union/Walmart Stores Inc and another [2012] 1 CPLR 6 (CAC). This case established the principle that public interest issues can be decisive, although not assessed independently of the effect of competition in the market.

An anti-competitive merger can be saved on public interest grounds and a competitive merger could be prohibited or subjected to conditions due to adverse public interest consequences. This issue has been contentious in a number of subsequent merger cases including AgriGroupe Holdings (Proprietary) Limited/AFGRI Limited [2014] 1 CPLR 52 (CT). Merging parties need to take steps at an early stage of planning their transaction in order to avoid protracted investigations by the Competition Commission and minimise the risk of costly and burdensome conditions.

Recently, the Competition Commission published a background note on its approach to past cases dealing with public interest issues. Guidelines on how the Competition Commission will approach the investigation of these issues are expected to be published soon.

Why are these public interest issues relevant to merger assessment?

The preamble to the Competition Act 89 of 1998 recognises that the South African economy must be open to greater ownership by a greater number of South Africans in an efficient, competitively economic environment that balances the interests of workers, owners and consumers and focuses on development. One of the objectives of the Act listed in the preamble is to regulate the transfer of ownership in keeping with the public interest. Although public interest issues in merger review have received greater attention in recent cases, they have always been recognised.

Section 12A(1) provides that when considering a merger, the competition authorities must not only consider the effect of the merger on competition in the market but must also determine whether it can or cannot be justified on public interest grounds. The competition authorities will consider the effect that the merger will have on:

·       a particular industrial sector or region;

·       employment;

·       the ability of small businesses or firms controlled or owned by historically disadvantaged persons to become competitive; and

·       the ability of national industries to compete in international markets.

What will the Competition Commission investigate?

The Metropolitan Holdings Ltd/Momentum Group Ltd [2010] 2 CPLR 337 (CT) and BB Investment Company (Pty) Ltd/Adcock Ingram Holdings Limited case no. 108713 cases suggest that in assessing the impact of a merger on employment, the Competition Commission will:

·       consider whether there is a prima facie case for job losses;

·       determine whether job losses are specific to the merger;

·       determine whether the effect of job losses is substantial;

·       consider whether there is a rational basis for job losses; and

·       consider whether job losses can be justified by an equal and countervailing public interest.

How to manage the process if employment effects are an issue

If the merger is likely to result in job losses, or even if job losses unrelated to the merger are likely to occur around the same time as the merger, the merging parties should keep the following points in mind:

·       Be open and upfront with the competition authorities

The Competition Commission frequently asks parties to disclose any retrenchments prior to the merger. The Background Note also states that all planned retrenchments must also be disclosed — whether or not they are merger-specific.

That said, only merger-specific job losses can be addressed by the competition authorities when adjudicating a merger.

Be aware that retrenching employees in order to make the company more attractive to a potential buyer can have labour law consequences and may also be addressed by the Competition Commission. In the Walmart case, even though the retrenchments had occurred sometime before the merger, they were still considered to be merger-specific.

If the merging parties do engage in retrenchments which are unrelated to the merger, make sure the reasons are well documented so that it can be proved that they were not merger related.

·       Carefully assess how many jobs are necessary and which positions are affected

Even if the proportion of jobs lost to those retained is small, the competition authorities are still likely to be concerned. In Nedbank Ltd/Imperial Bank Ltd [2009] 2 CPLR 442 (CT), even though less than 1% of the combined workforce would be affected, it still amounted to 464 employees losing their jobs, and the Competition Tribunal held that a percentage-based approach alone was not sufficient.

The competition authorities are generally more concerned with retrenching unskilled or semi-skilled employees, as it is assumed that it will be more difficult for them to find replacement work. If there is very little prospect of employees finding replacement jobs in the region, conditions limiting or even prohibiting the retrenchments may be imposed.

It is useful to research alternative employment opportunities so that (where possible) an argument supporting the fact that employees will find new jobs can be presented to the competition authorities.

·       Ensure job losses are rational and justified

Use and document a rational methodology to determine how many jobs will be lost. Sweeping assumptions, for example about projected cost savings, will not suffice. If the job losses are merger-specific, the merging parties will need to show that the number of people who were or will be made redundant was rationally determined.

The merging parties will also need to show that the retrenchments were justified. To do this the merging parties will need to show that the job losses were needed to achieve a countervailing public interest. Merely benefiting shareholders is not sufficient.

Document the justification at the time of consideration of the transaction. This shows that it was always part of the rationale and not just created to make the redundancies seem more palatable to the competition authorities.

Possible justification could include that:

– the merger and job losses are required to save a failing firm;

– the job losses together with the merger are required to lower costs to enable the merged   firm to compete; or

– the merger will lead to lower costs for consumers and those lower costs require a reduction in the number of employees.

·       Consult with employees

Employees are entitled to a non-confidential copy of the merger filing and have a right to engage with the Competition Commission in the investigation and, in large mergers, to make submissions to the Competition Tribunal. 

It is important to carry out a proper consultation process with the affected employees in order to comply with the Competition Commission’s requirements for purposes of obtaining clearance in terms of the Competition Act and to comply with labour legislation. In the BB Investments case the lack of consultation and a failure to explain the justification to the employees made it difficult for the merging parties to convince the Competition Tribunal of the justification.

·       Consider feasible remedies

Where parties are not able to convince the competition authorities that the job losses are either not merger-specific, or are rational and justified, it may be necessary to agree to conditions to the merger approval, to save it from being prohibited. This is particularly important if a quick clearance is required, for example if the business being sold is insolvent or is no longer profitable.

Consider whether it is possible to agree to no retrenchments for a period of time (generally two or three years) or whether there is scope to set up a fund to up-skill retrenched employees and to facilitate alternative work opportunities for them.

For more information around this issue click here