Top court sets M&A precedent
• Coca-Cola Beverages Africa finally wins on layoffs
In a ruling that is set to echo through the corridors of corporate SA, the Constitutional Court has delivered a verdict with farreaching implications for mergers & acquisitions (M&A).
The apex court has decreed that “substantial compliance” is the benchmark for mergers with attached conditions.
At the heart of the maelstrom is Coca-Cola Beverages Africa (CCBA), which found itself embroiled in controversy after the Competition Commission accused it of sidestepping conditions in a 2016 merger after it retrenched almost 400 employees. The dispute ended up at the Competition Appeal Court, which agreed with the commission.
CCBA had mounted a vigorous defence, arguing that the layoffs were for operational reasons, such as the implementation of a sugar tax and the economic downturn, which hurt its profitability and sustainability.
The company emerged victorious in the legal tussle on Wednesday when the apex court gave its decision to retrench workers in response to the sugar tax levy a stamp of approval. The court said CCBA had “substantively complied” with merger conditions that had been imposed in 2016.
The case sheds light on the threshold of compliance necessary for large mergers. It also establishes the links between such measures and subsequent business manoeuvres, such as retrenchments. It is likely to shape the corporate landscape for years to come.
In 2015, several bottling operators approached the Competition Commission with plans for a large merger, proposing the creation of CCBA. In response to the commission’s concerns about potential job losses, the merging companies agreed to certain limitations on retrenchments, including a three-year freeze on job cuts.
The Competition Tribunal — which has the final say on the commission’s recommendations — also approved the deal on the same conditions.
In 2019 CCBA retrenched some staff, prompting the Food and Allied Workers Union to lodge a complaint with the commission, alleging the retrenchments violated the merger conditions.
CCBA countered by citing financial strain due to a sugar tax levied in 2018, which cost it R2.1bn and led to a R300m decline in gross profit. CCBA maintained that the retrenchments were a consequence of these financial pressures and not directly related to the merger.
Nevertheless, the commission issued a “notice of apparent breach” to CCBA in 2019. On receipt of such a notice, a company has two options: submit a plan to the commission to remedy the breach or request the tribunal to review the notice.
CCBA took the latter route and in 2021 the tribunal ruled that CCBA had “substantially complied” with the merger conditions and was not in violation.
Unconvinced, the commission took the ruling on appeal to the Competition Appeal Court, which agreed with the commission, affirming the legitimacy of the breach notice and exposing CCBA to a potential administrative fine or even the unbundling of the merger.
CCBA escalated the matter to the Constitutional Court, where it argued that “the only question before the tribunal is whether the target firm substantially complied with the merger conditions”.
CCBA also argued that “in a merger such as this one”, there would always be a link to whatever occurs at a later date, including retrenchments.
Writing for a unanimous court, acting Constitutional Court justice Alan Dodson upheld CCBA’s appeal.
The Competition Appeal Court’s “interpretation has potentially grave and unjust consequences for a merged firm”, Dodson wrote. He noted that, if allowed, even notice of an “apparent” breach would leave the company facing enormous costs to remedy the breach or challenge the notice.
Dodson also said CCBA had provided sufficient evidence to show the sugar tax costs as the reason for retrenchments.
“Can it be said that there is a
breach where the principal reason for the firm’s actions had nothing to do with the merger?” Dodson asked. “The answer must surely be ‘no’.”
On almost every front, Dodson found the Competition Appeal Court had “mischaracterised the nature of [the case] and applied the wrong tests”.