Acquisitions, coupled with investment from the acquirer and a clear post-transaction strategy, can be an effective way to turn around a financially distressed firm. Often such a turnaround strategy entails making use of synergies between the merging parties and rationalising the target firm’s staff complement to limit inefficiencies post-merger. Although logical from a business perspective, if the proposed acquisition is notifiable to the competition authorities, such rationalisation may be seen as merger-specific retrenchments that would run contrary to the competition authorities’ mandate to ensure that all transactions are capable of being justified under the public interest grounds contained in section 12A(3) of the Competition Act 89 of 1998 (Act), one of which is the effect that a transaction may have on employment.

Counterfactual analysis: Assessing the impact on employment

When evaluating the effect of a merger involving a financially distressed target on employment as a public interest factor, the competition authorities ordinarily analyse the transaction’s effect by engaging in a counterfactual exercise. This involves asking the critical question: but for the proposed deal, what would the effect be on employment?

If the target is in severe financial distress and there is a lack of potential other purchasers, this analysis might show that if the proposed transaction did not take place, the target firm would face wholesale retrenchments, business rescue or liquidation – all of which could have a considerable negative effect on employment.

This position must then be compared against the likely position that the target would be in if the transaction was approved by the competition authorities and thereafter implemented. Even if the proposed transaction may have a negative effect on employment, it may still be justifiable in terms of the Act if this position would be better than if the proposed transaction was not implemented.

Tolerating justifiable merger-related retrenchments

After conducting the counterfactual analysis, competition authorities may tolerate merger-related retrenchments under certain circumstances. The key consideration being whether the streamlining of the business post-merger results in fewer job losses than if the transaction were not implemented.

If sufficient facts can be presented to the competition authorities to justify that this would likely be the case, and the post-merger picture therefore represents a positive impact on employment, the competition authorities may tolerate a limited number of merger-related retrenchments, provided that these would be limited to the minimum retrenchments necessary to ensure the long-term sustainability of the target.

Conditions imposed by competition authorities

To mitigate the adverse effects on employment, and to ensure that the merging parties conduct themselves in line with any commitments made during the investigation, competition authorities may require conditions to be attached to the approval of the proposed transaction. These conditions are designed to limit the number of retrenchments, ensure no merger-related retrenchments (if applicable) and/or impose re-employment obligations. Examples of such conditions include the following:

• Limit on the number of retrenchments: Competition authorities may cap the number of employees that can be retrenched post-merger, whether they are the result of the merger or otherwise. For example, the merging parties may not retrench more than X number of employees for three years after the merger.
• No merger-related retrenchments: Conditions may stipulate that retrenchments should not be directly attributable to the merger (e.g. as a result of duplicated roles and redundancies). This commitment may be unqualified or it may allow for a certain number of justified merger-related retrenchments, but nothing more. For example, apart from the X number of employees that may be retrenched as a result of the proposed transaction, there may be no merger-related retrenchments for a three-year period.
• Headcount maintenance obligation: Competition authorities may allow for parties to engage in retrenchments provided that they maintain a certain headcount for a defined period. This remedy is only required in exceptional circumstances.
• Re-employment obligations: The competition authorities may require the merging parties to offer re-employment opportunities to retrenched employees if the merged entity hires additional employees in the future. This can include prioritising former employees for new roles within the merged entity.

Conclusion

In the context of merger control, the analogy of a sinking ship being patched up and made operational again is apt. When a target firm is in financial distress, the merger can serve as a lifeline, preserving jobs when viewed holistically and ensuring the continuity of the business. However, the competition authorities must carefully balance the need for business restructuring with the Act’s public interest imperative to safeguard employment. By providing evidence of the financial distress, conducting a thorough counterfactual analysis, justifying operational requirements and preparing conditions that limit any harm to what is necessary, merging parties can navigate the complexities of merger control and achieve a positive outcome for all stakeholders.