DealMakers - Q1 2020
COVID-19: South African merger control - employment-related conditions to approval of mergers
by Tamara Dini, Richard Bryce and Bongi Maseko
Early indications are that the COVID-19 pandemic is likely to impact employment, globally, to a high degree. Already, the number of job vacancies posted in several countries reflects a stark decline in recent weeks, and firms across various sectors are experiencing financial difficulties. According to StatsSA, South Africa’s unemployment rate currently sits at 29.1% and it seems inevitable that, at least for some time, fewer new positions will be available and retrenchments will be unavoidable.
In the South African merger control context, employment has been a key consideration since the Competition Act, No. 89 of 1998 (as amended) (Act) came into effect. The Act provides that whenever assessing a proposed merger, the Competition Commission (Commission) or the Competition Tribunal (Tribunal) must consider the effect of the merger on the public interest. Employment has been the most important of the public interest factors set out in the Act, and the South African competition authorities have sought to safeguard employment of ‘unskilled’ or ‘semi-skilled’ employees in particular.
Firms that have submitted merger notifications to the South African competition authorities in recent years would have been asked to confirm that the transaction notified will not have an adverse impact on employment in South Africa. Put differently, as part of the South African merger notification process, merging parties are required to confirm that a transaction will not give rise to ‘merger-specific’ job losses in South Africa. The Tribunal has previously indicated that ‘merger-specific’ means ‘conceptually an outcome that can be shown, as a matter of probability, to have some nexus associated with the incentives of the new controller’. (See BB Investment Company (Pty) Ltd and Adcock Ingram Holdings (Pty) Ltd, Case No. 018713, at para. 56.) If merging parties cannot state definitively at the time of filing that merger-specific job losses will not arise in South Africa, typically a moratorium on merger-specific job losses is imposed (for a period of time) as a condition to the transaction being approved.
The Commission has also published Guidelines on the Assessment of Public Interest Provisions in Merger Regulation under the Competition Act No. 89 of 1998 in 2016 (the Public Interest Guidelines). In terms of the Public Interest Guidelines, where retrenchment proceedings by the merging parties are proposed or initiated in terms of the Labour Relations Act No. 66 of 1995 before the proposed merger is notified, or
during the merger notification process, or are to be proposed or initiated shortly after the merger approval date, the merging parties are required to inform the Commission of such retrenchments irrespective of whether they contend that these are due to the merger (i.e. are merger-specific) or due solely to operational reasons. This corresponds with the requirement in the Act that the competition authorities must assess the impact of a merger on the public interest, rather than the merging parties conducting a ‘self-assessment’ in this regard.
Further, if a firm has confirmed to the Commission that no job losses will arise as a result of a merger, or conditions are imposed precluding retrenchments, then in the event of job losses arising post-closing, the firm concerned will bear the burden of proving that the job losses were unrelated to the transaction in question. Put differently, a firm has to satisfy the Commission or the Tribunal that the job losses would have taken place regardless of the transaction. (See BB Investment Company (Pty) Ltd and Adcock Ingram Holdings (Pty) Ltd, Case No. 018713, at para. 65.)
In this regard, the Competition Appeal Court (CAC) has held that ‘a retrenchment, which takes place shortly before the merger is consummated may raise questions as to whether this decision forms part of the broad merger decision making process and would, accordingly, be sufficiently closely related to the merger in order to demand that the merging parties justify their retrenchment decision.” (See the CAC’s decision in SACCAWU, the Minister of Economic Development, the Minister of Trade and Industry, the Minister of Agriculture, Forestry and Fisheries vs. Wal-Mart Stores Inc. & Massmart Holdings Limited, Case No. 110/CAC/Jun11 and 111/CAC/Jun11 at para. 140.)
As many firms are currently subject to such conditions, and may have to effect retrenchments as a consequence of COVID-19, it will be important for firms to be able to demonstrate the reason for retrenchments, and to be able to prove that the retrenchments are not merger-specific. In many cases, it may be self-evident from a firm’s financial performance in the current climate that decisions had to be taken to effect retrenchments, but the competition authorities will likely be scrutinising firms closely in this regard to ensure that COVID-19 is not put up as the rationale for retrenchments where such retrenchments, on a factual enquiry, may be effected as a consequence of the merger. Where firms are subject to conditions precluding merger-related job losses, it will be important to consider the need for any retrenchments carefully, to have well-substantiated reasons for the need to retrench, and to take appropriate legal advice.
Dini is Co-Head of Competition Practice, Bryce an Associate, and Maseko a Candidate Attorney, Bowmans.