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The approval of mergers is being significantly delayed by protracted investigations by the Competition Commission into the impact of proposed transactions on employment.
The competition authorities are empowered by section 12A(2) of the Competition Act to consider the impact of a proposed merger on a number of specified public interest factors, which includes the effect on employment. A proposed merger which results in job losses or impacts negatively on employment in a particular region of the country may be prohibited even if it seems unlikely to harm competition - although in practice, our competition authorities have not prohibited any mergers on this basis since the Act came into operation in 1999.
The Commission has generally confined itself to imposing relatively simple, short-term conditions in order to address the effects of mergers on employment. In a number of cases, the Commission required merging parties to pay severance benefits calculated in accordance with the Labour Relations Act, or to place a moratorium on retrenchments for a specified time period after the proposed transaction is implemented (usually 12 months). Parties may also be required to limit the total number of retrenchments. Although fulfilment of such conditions significantly added to the cost of proposed mergers, these requirements were relatively easy for merging parties to comply with and at least the costs were fairly easy to quantify in advance.
Recently, however, job losses have become a more common feature of proposed mergers as a result of the slowing South African economy, and the Commission has adopted a more pro-active stance to crafting conditions. For example, the Commission has obliged merging parties to investigate and inform retrenched employees about alternative employment prospects and to identify opportunities for them to obtain career counselling and training. In a number of recent cases, the Commission has also required merging parties to establish a skills fund which is available to all employees who are retrenched as a result of the merger for at least a year. Purchasers have also been obliged to provide detailed and regular reports to the Commission on their progress with fulfilling these conditions. This obligation may persist long after the deal closes.
Unfortunately, negotiations with trade unions and the Commission about conditions of this nature are increasingly responsible for significantly extending the time period required to gain merger approval. For example, in the recent transaction in which T-Systems South Africa acquired Arivia.com from Eskom and Transnet, the relevant trade union failed to give notice of its intention to participate in the merger proceedings within the five day time period specified in the Act, and only approached the Commission to express concerns about the merger some six weeks after the filing was filed and served on them. The union then proceeded to raise concerns which were completely unrelated to the merger, such as the fact that the union was ideologically opposed to the privatisation of state assets like Arivia, and the fact that two employees had been dismissed following internal disciplinary hearings some months before the merger agreement was signed. The Commission took about twelve weeks to investigate and approve the proposed transaction (although it eventually declined to impose any conditions).
Protracted merger reviews may deter foreign and local investors, and can endanger otherwise pro-competitive and efficient transactions, particularly if companies in financial distress are involved. Broader labour-related concerns are already effectively addressed by a range of institutions and mechanisms, including the CCMA and the Labour Court, collective bargaining on an individual and a sectoral level and government's recently announced skills retraining fund for strategic industries like the textile and motor industries. Accordingly, although it is required to investigate public interest effects in terms of the Act, the Commission should refrain from interfering in employment issues which are not directly related to a proposed merger and must ensure that its investigations are concluded as swiftly as possible.
Where a proposed merger does impact on employment, the conditions proposed should not apply to employees who have to be retrenched because of pre-existing operational requirements in the purchaser's business. In the recent merger between the Imperial and the Midas groups, for example, the Competition Tribunal refused to impose any conditions to ameliorate the loss of up to fifty eight jobs because it recognised that these job losses would inevitably occur because of the worsening economic climate, even if the proposed transaction failed. Moreover, as the Tribunal also pointed out in that case, it will generally not be necessary to apply conditions to assist skilled management level employees who are likely to find alternative employment in the ordinary course.
The Commission is likely to continue to focus on public interest issues and in particular, to propose conditions designed to assist workers. In order to expedite review, merging parties should make it clear in their merger filings precisely what the impact of a proposed transaction on employment is likely to be (and in particular, what the worst case scenario as far as job losses is likely to be). The merger filing should also identify whether the employees likely to be affected by the transaction are unskilled, semi-skilled or skilled. Details regarding measures already put in place to assist employees should be set out in the filing. If urgent clearance is required, merging parties should consider offering at the outset to establish a skills training fund to provide free career counselling and tuition to affected workers in order to enable them to find alternative employment, or to start up their own businesses.
Although it may be costly and troublesome for purchasers to implement measures of this kind, these costs must be weighed against the considerable expense which may be incurred in the event of significant delays resulting from protracted negotiations with the Commission and trade unions.
Written by: Heather Irvine, Director at Deneys Reitz
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