Employees in mergers
A few thoughts on competition law and employee retention
“Now, don’t crucify me. It’s not that I’m advocating for job cuts but…”
Mergers and acquisitions are transactions where an acquirer buys a target, to either integrate the target’s business into the acquirer’s business, or to combine the business of both entities into one. For instance, if Blue Ltd buys Yellow Ltd, the resulting entity can either be Blue Ltd or Green Ltd.
It is common for employment considerations to feature heavily in mergers and acquisitions, as the transactions are intended to improve efficiencies and tend to result in more employees than required in the merged entity. This time, we may view competition authorities as knights in shiny armour, defending vulnerable employees from the chopping board of large corporations, who would otherwise subject them to redundancy. For instance, last year, the Competition Authority of Kenya was praised for saving 12,470 jobs from being lost through acquisitions.
A notable transaction in Kenya saw KenolKobil Plc and Gulf Energy Holdings Ltd merge, which would have given full control of the companies to Rubis Energie SAS, a French company and the parent of KenolKobil Plc. While this merger was approved, the Competition Authority of Kenya took public interest factors into account, in particular, they scrutinised the likelihood that the transaction would result in job cuts. As such, its approval of the transaction was contingent on a commitment that the merging entity would not declare a single employee redundant for two years after the implementation of the transaction. Dare I say draconian.
Hold tight. It gets worse.
Well, it depends, as they say one man’s loss is another man’s profit. Coca-Cola Sabco Investment (East Africa) Ltd was only allowed to proceed with its merger with Almasi Beverages Ltd on the condition that they retained 1749 out of 1760 permanent employees (that is 99.4%), for a total period of 3 years after the approval. Yikes.
Now, don’t crucify me. It’s not that I’m advocating for job cuts but…
…from an investor’s or acquirer’s point of view, such conditions and commitments counteract the central purpose of an M&A transaction. In many cases, the reason behind these transactions is to enhance efficiencies that would be enjoyed without duplicate roles in departments; rather than increasing a firms’ operation costs after they have already invested a considerable amount in the transaction.
Private equity firms—which are becoming even bigger players in the continent’s M&A space—are built on this very structure. Acquire a company, make it efficient as fast as possible, improve profitability, and then, exit. This raises a number of important questions: Shouldn’t acquirers be free to determine what employees they choose to retain? What if the employees are incompetent? What if they do not fit into the culture of the new firm? What if they are, dare I say, genuinely redundant? In these cases, like many others, this current practice is not investor friendly.
Needless to say, the time period for the applicability of employee retention is ludicrous. What happens when the time period elapses? It appears that these laws have not explored alternative and more sustainable ways of protecting the rights of employees. A sounder approach would be to establish standards that guide offers that can be made to redundant employees, rather than forcing companies to delay the inevitable. Here, the detriment is delayed, but the ultimate fate is not mitigated.
In the United Kingdom, the Transfer of Undertakings (Protection of Employment) Regulations, 2006 (TUPE) is more pragmatic and provides a good starting point that the Competition Authority of Kenya could adopt. While the TUPE restricts dismissals, it provides exceptions where merging companies are able to justify the legal, economic, and social impact of the merger on employees.
Perhaps Kenya needs a more robust mechanism, like in the UK, that allows for a proper route, through which investors can justify the need to sacrifice employees, rather than succumb to the strict retention rules of the Competition Authority of Kenya as they pursue a merger approval.
Before you go…
…here are some recent developments in the world of competition law:
Cement in Kenya: The Kenyan competition authority has warned the Kenyan government against a move that could favour the Devki Group and hinder competition in the cement market. Devki owns four of the largest cement companies and controls 84% of limestone mining allocation. Limestone is a key component in manufacturing ‘clinker’, a raw material of cement. Devki lobbied the government to raise taxes on importing clinker, because it can be produced locally. However, this Dangote-esque move has led competitors to cry foul, because imported clinker is cheaper than local clinker. The Kenyan competition authority has warned that a tax increase would allow Devki to foreclose competition and bar entry into the market. They caution that their approvals of the acquisitions leading to Devki’s cement empire were only because competitors had access to cheaper clinker. If this changes, they may be forced to break up Devki to protect competition in the cement market.
Merger portal in Nigeria: The Nigerian competition authority launched its online merger notification portal during a stakeholders session. Merging companies can use the portal to submit the full merger review application, the simplified/expedited application, the negative clearance application, and they can book pre-notification consultations. Babatunde Irukera, the head of the authority, was interviewed by CNBC Africa about the portal. Also see this video on how to use the portal.
Facebook in the UK: Facebook has been fined £50.5 million for breaching an order imposed by the UK’s Competition & Markets Authority (CMA) during its investigation into Facebook’s acquisition of Giphy. At the start of the investigation, in June 2020, the CMA issued an order which mandated both companies to continue competing as they would have without the merger. In effect, it prevented the companies from integrating, pending the conclusion of the investigation. And the merging companies must regularly update the CMA on their compliance. However, Facebook did not, and was fined—this was the first time that a company was fined for breaching what is, in effect, a purely procedural and uncontroversial order. The company was also fined £500,000 for changing its Chief Compliance Officer on two separate occasions without seeking consent first. That said, these fines probably represent 0.005% of Facebook’s annual budget for fines.
