Merger ap­provals face re­trench­ment hur­dle

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Natalia Lopes & Betty Mkatshwa

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.

Dur­ing 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.

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

Natalia Lopes is a direc­tor and Betty Mkatshwa a can­di­date at­tor­ney in ENSafrica’s com­pe­ti­tion depart­ment.

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