Competition Tribunal clarifies position on employee notification in merger proceedings

27 May 2015 4 min read Article

On 15 April 2015, the Competition Tribunal approved the acquisition by Deltrade 83 Proprietary Limited (Deltrade), soon to be renamed JHI Retail Proprietary Limited (JHI Retail), to acquire the property management business of Liberty Holdings Limited (LP Manco) and the retail property management business of JHI Properties (JHI Retail Division) on condition that there is a two year moratorium on merger related retrenchments post approval and a limited notification to employees within three months of the approval date.

JHI Retail (originally Deltrade) purchased the businesses of LP Manco and JHI Retail Division as a going concern. Post-merger, both businesses will be transferred to JHI Retail which will manage the retail property businesses of the transferred firms. The Competition Commission found that the proposed transaction is unlikely to substantially prevent or lessen competition in any conceivable market.

On the issue of public interest considerations, the Commission identified a right of first refusal clause in a copy of the Property Management Service Level Agreement (Agreement) permitting LP Manco to refuse to lease any premises to any of its competitors that wish to lease such premises. The Commission and the merging parties engaged in negotiations and the merging parties have since removed the right of first refusal from the Agreement.

On the issue of employment, the Commission found that the proposed transaction will result in potential redundancies, as the merging parties employ a substantial number of employees, many in overlapping jobs. The merging parties were unable to give the necessary comfort to the Commission that the merger will not result in any retrenchments as the due diligence exercise was not completed. The merging parties considered such an exercise to amount to a pre-implementation of the merger which is clearly frowned upon by the competition authorities. Such an exercise will be performed once the merger has been implemented. However, the merging parties were willing to give an undertaking that there will be no merger related retrenchments for a period of two years, post approval of the merger. The Commission recommended that the merger be approved subject to a two year moratorium from the 'effective date' and not the 'approval date'.

There was some uncertainty around the meaning given to 'effective date' and 'approval date' and the implications that each meaning held. According to the Commission, the 'effective date' was a date 12 months after the approval of the merger when the merging parties had finalised the implementation of the transaction. In effect, the Commission was seeking a three year moratorium on merger related retrenchments. According to the merging parties, they were willing to agree to a two year moratorium on retrenchments from the approval date, but not for three years, as there was no basis for the moratorium to run for an additional 12 months. The additional year would be a burden to the merging parties and would result in costs increasing, disproportionately compromising JHI Retail's overall competitiveness. The Tribunal held that the concept of the 'effective date' was confusing and the appropriate date was the 'approval date' which would run from the date that the Tribunal approved the merger.

The remaining issue was whether the period should be for two or three years. According to the Commission, the reason for the departure from the Commission's standard two years recommendation was that the merging parties misrepresented themselves during the Commission's investigation. Through its investigation, the Commission discovered that the merging parties' due diligence report contained evidence that merger related retrenchments had been contemplated but not disclosed. The merging parties denied the allegation, as the due diligence report that the Commission was referring to had been subsequently amended. The Tribunal was satisfied with the explanation and concluded that the merging parties did not misrepresent themselves. Therefore, there was no basis to justify an extended period beyond the two years offered by the merging parties.

On the issue of employee notification, the Commission was of the view that the merging parties failed to properly consult with the employees. LP Manco had informed the employees of the merger but it did not include specific information around the imminent retrenchments. While the merging parties conceded that a thorough consultation process had not been followed, they argued that a more detailed exercise might be construed as pre-implementation of the merger. In support of the Commission's arguments, an employee representative of LP Manco was invited to provide testimony at the merger hearing. The employee representative confirmed that consultations with employees did take place, however, the employees were concerned with the type of employment being guaranteed for a certain period of time and the kind of benefits they would receive from JHI Retail. The Tribunal was of the view that a condition should be imposed on the merging parties to notify the affected employees of the imminent retrenchments post-merger. The merging parties agreed to notify the affected employees within a period of three months from the approval date. The notification would include details as to which divisions are likely to be affected by retrenchments as well as the proposed numbers.

As the merging parties did not consult with the employees pre-merger on the imminent retrenchments because they felt that this might be construed as a pre-implementation of the merger, the Tribunal asked the Commission to clarify its position on this matter. On this point, the Head of Mergers and Acquisitions Division, Mr Hardin Ratshisusu noted that, "we encourage merging parties to consult with the employees to provide the files of these mergers and inform employees on what is going to happen to them after the merger". As a concluding remark, the Tribunal held that "this advice is worth noting for other merging parties".

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