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Merger approvals face retrenchment hurdle

Tuesday, 21 April 2015   (0 Comments)
Posted by: Authors: Natalia Lopes & Betty Mkatshwa
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Authors: Natalia Lopes & Betty Mkatshwa (ENSafrica)

Reverse onus imposed on merging parties, who now appear to be required to disclose retrenchments which have no link to the merger

The Competition Tribunal recently considered a merger between Bytes People Solutions and Inter-Active Technologies (IAT). While the tribunal found that the merger would have no effect on competition, it was alleged that approximately 43 former employees of IAT were subject to mergerspecific retrenchments, which were effected by IAT in close proximity to its talks with Bytes.

The tribunal was required to consider whether such prior retrenchment constituted mergerspecific retrenchments in terms of the Competition Act or operational requirement retrenchments unrelated to the merger.

IAT had been in financial distress from at least the end of its February 2014 financial year. During June 2014 it considered various merger proposals, including one from Bytes, but it decided not to pursue any of the proposals as it anticipated that it would be able to survive. During October, its funding facility was withdrawn, and it could no longer meet its financial obligations. It recommenced negotiations with Bytes, and the two firms signed an offer letter that same month, which also provided that Bytes would offer IAT a funding facility to allow it to continue to operate until the deal was concluded and approved by the competition authorities.

uring the 2014 year, IAT retrenched about 43 employees. These retrenchments were not disclosed to the Competition Commission, as it was believed they did not arise as a result of the merger and there was thus no statutory obligation to disclose. The merging parties did however disclose potential maximum prospective retrenchments which could arise as a result of the merger.

A few days before the hearing, former employees of IAT contacted the commission informing it that IAT had effected merger- specific retrenchments relating to the 43 employees. The former employees were invited to make oral submissions at the tribunal hearing on 28 January this year.

The former employees of IAT failed to make an appearance, and the tribunal postponed the hearing to 30 January. It further instructed the commission to conduct an investigation in respect of the 43 retrenched employees. In the interim, the merging parties were required to make extensive written submissions to the commission setting out why the retrenchments were not merger-specific.

On 30 January during oral submissions from the former employees of IAT, all of the parties conceded that 28 of the 43 retrenchments were not related to the merger, as they resulted from a direct loss of a call centre operation contract. In respect of the remaining 15 retrenchments, evidence was led by the merging parties to the effect that these retrenchments were contemplated by the board of IAT during approximately August 2014, several months prior to the date on which the parties signed the offered letter. The tribunal accepted that there was insufficient evidence to link the 15 retrenchments to the merger.

Notwithstanding the foregoing, the tribunal held that the merging parties should have disclosed information pertaining to the retrenchments made prior to the proposed transaction to the commission, given that they were effected after the date that the transaction was contemplated.

In the current economic environment, especially in respect of distressed firms, it is not unusual for firms to retrench employees. Another option open to firms in distress is to seek a purchaser who is better able to manage the business and rescue it from financial distress. Such strategies are often implemented in close proximity to one other.

Notwithstanding this, the tribunal’s approach appears to infer a nexus between prior retrenchments by a firm in financial distress and a proposed merger. The tribunal’s approach in requiring that merging parties make this disclosure and provide reasons why such retrenchments are not mergerspecific, appears to impose a reverse onus on merging parties, who now appear to be required to disclose retrenchments which have no link to the merger and justify that such retrenchments are not mergerspecific.

The introduction of a reverse onus may arguably differ from public interest considerations set out in the Competition Act as regards employment. In this regard, only retrenchments which may arise as a result of a merger would be relevant for consideration by the competition authorities.

The tribunal’s approach seems to be the most recent draft Public Interest Guidelines issued by the commission, which provides that in respect of "pre-merger retrenchments” the commission wishes to consider any retrenchments effected from the date of commencement of negotiations up to the date of the merger filing.

It seems that this approach is likely to place an undue burden on merging parties, which must now delve into nonmerger-related retrenchments and justify them as nonmerger-specific. This adds substantially from a transaction cost perspective, but is also burdensome as the period during which retrenchments are required to be disclosed and justified may not always be clear, especially in cases such as the Bytes merger where the parties commenced negotiations and decided not to pursue a merger, and then later recommenced negotiations.

Some guidance in this regard from the competition authorities would be welcomed. In the interim firms that are in the process of retrenching for operational requirements and simultaneously considering a merger should take heed of the competition authorities’ approach on this issue, failing which a merger approval could be delayed at the 11th hour pending an investigation of the mergerspecificity of prior retrenchments.

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