MERGERS AND ACQUISITIONS: SOME IMPLICATIONS

When one company merges with another or is acquired by another, several important, and sometimes difficult issues arise in respect of the employees of the company being acquired. Almost invariably, the terms and conditions of employment will differ between the companies, and the greatest practical challenge may arise in re-aligning the terms and conditions of employment of the employees of the company being acquired.
Legislative provisions
In terms of the common law, an employment contract does not survive a change of employer. But section 197 of the Labour Relations Act of 1995 (the LRA) provides for mechanisms to transfer employment contracts from one employer to another. This provision gave rise to a number of complicated legal questions that occupied the Labour Court, the Labour Appeal Court and even the Constitutional Court. Many of the difficulties have now been taken care of in the 2002 amendments to the LRA.
There are now three sections: section 197 relates to transfers of employment contracts, a new section 197A provides for the transfer of employment contracts in the case of the employer’s insolvency, and section 197B contains provisions relating to the disclosure of information in the case of the employer’s insolvency. While the old section 197 may still be of some historical interest, it is important for those involved in transferring employment contracts to ensure that they are referring to the correct legislative provisions. In this editorial, the focus will be only on section 197 itself.
The Labour Court has held that the primary objective of section 197 is to protect the interests of employees in a number of business processes. It must be read within the context of the Constitutional protection of fair labour practices and, clearly, the focus is on ensuring employment security for employees (Schutte & others v Powerplus Performance (Pty) Ltd & another (1999) 8 LC 6.11.3). The Constitutional Court has expressed the purpose of section 197 in the following terms:
“That an important purpose of section 197 is to protect the workers against the loss of employment in the event of a transfer of a business cannot be gainsaid. This conclusion is fortified not only by the effect of the section, but also by the very fact that the section was inserted in a chapter that deals with unfair dismissal. As pointed out earlier, at the core of this chapter is the right of the workers not to be dismissed unfairly. In addition, further support for this view can be found in comparable foreign instruments and foreign case law construing these instruments.” (NEHAWU v University of Cape Town & Others (2002) 11 CC 1.11.3. at paragraph [46] of the judgment).
The essential thought behind section 197 (as it is now) is straightforward: the new employer steps into the shoes of the old employer. In terms of section 197(2) —
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The new employer is automatically substituted in the place of the old employer in respect of employment contracts,
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All rights and obligations applicable between the old employer and its employees continue in force — they therefore also apply between the new employer and its employees.
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Anything done by the old employer (including dismissal, unfair labour practices or unfair discrimination) is considered to have been done by the new employer, and
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The transfer from one employer to another does not interrupt the employee’s continuity of service.
It has been held that section 197 applies also to local government employees. Section 210 of the LRA provides that the LRA supercedes any legislation except the Constitution, and therefore, local government legislation that required employee consent to the transfer did not apply (see IMATU & others v Greater Johannesburg Metropolitan Council & others (2000) 9 LC 1.16.3).
Automatic transfer
In a number of judgments, the Labour Appeal Court had grappled with the meaning of section 197 (as it was before the 2002 amendments) and came to the conclusion that a business can be transferred ‘as a going concern’ only if the employees are also transferred as a part of that business transaction. According to the Labour Appeal Court, the necessary implication of a business transfer is that the employees are part and parcel of the transaction. To say that there can be a transfer of a business as a going concern without the transfer of all (or most) of the employees ‘is to equate a bleached skeleton with a vibrant horse’. It now seems clear that a transfer of a business also entails the transfer of employees. As the Constitutional Court put it:
‘The categories of transfers that were dealt with in section 197(1)(a) and 2(a) are now dealt with in the new section 197. The categories of the transfers that were dealt with in section 197(1)(b) and (2)(b) are now dealt with in section 197A. Although the new section 197 uses different language, its effect is the same as the old section 197. It provides that “the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment”, that the rights and obligations between the old employer and the worker are transferred to the new owner; that the transfer does not interrupt the continuity of employment; and that the employment contract “continues with the new employer as if with the old employer.” In all the circumstances, the recent amendment fortifies the conclusion that upon the transfer of a business contemplated in section 197, workers are transferred to the new owner of the business.’ (paragraph [67] of the judgment).
Collective agreements etc
Security of employment, even though clearly pivotal, is only one of the issues in the case of transfer of employment. In the context of mergers and acquisitions, other issues such as collective agreements, terms and conditions of employment, pension fund and medical aid benefits often present real and sometimes virtually intractable practical problems. The amended section 197 now provides (in subsection (5)) that collective agreements that bound the old employer will also bind the new employment. Any arbitration award made in terms of the Labour Relations Act (or any other arbitration, for that matter) will also bind the new employment just as it bound the old employer.
Generally speaking, the old employer does not need to obtain the consent of the employees before their employment contracts are transferred to the new employer in terms of section 197.
Going concerns
For the purposes of section 197, the term ‘transfer’ means the transfer of a business from the old employer to the new employer ‘as a going concern’. There have been a number of cases (some of them contradictory) as to the meaning of the phrase ‘going concern’.
In Maloba v Minaco Stone Germiston (Pty) Ltd & Another (2000) 9 LC 5.2.17, for example, the Labour Court came to the conclusion that while the old employer’s business remained a company in the eyes of the law, it was certainly not a ‘going concern’. The company’s operating divisions had been closed, its machinery had been sold, some of its premises had been sub-let and, after retrenching most of its employees, retained a mere ‘skeleton’ staff.
The leading case as regards the meaning of ‘going concern’ remains the Constitutional Court’s decision in NEHAWU v University of Cape Town & Others (2002) 11 CC 1.11.3. In this case the Constitutional Court held that the phrase must be understood in its ordinary sense:
“The phrase ‘going concern’ is not defined in the LRA. It must therefore be given its ordinary meaning unless the context indicates otherwise. What is transferred must be a business in operation ‘so that the business remains the same but in different hands.’ Whether that has occurred is a matter of fact which must be determined objectively in the light of the circumstances of each transaction. In deciding whether a business has been transferred as a going concern, regard must be had to the substance and not the form of the transaction. A number of factors will be relevant to the question whether a transfer of a business as a going concern has occurred, such as the transfer or otherwise of assets both tangible and intangible, whether or not workers are taken over by the new employer, whether customers are transferred and whether or not the same business is being carried on by the new employer. What must be stressed is that this list of factors is not exhaustive and that none of them is decisive individually. They must all be considered in the overall assessment and therefore should not be considered in isolation.” (at paragraph [56] of the judgment).
Employee remedies
Apart from changing section 197, the 2002 amendments to the Labour Relations Act also introduced a new section 186(1)(f). In terms of this new provision, it will constitute a ‘dismissal’ if the employee terminates a contract of employment (with or without notice) because the new employer provided the employee with working conditions or circumstances that are substantially less favourable to the employee than the conditions provided by the old employer. This means that if an employee, after the transfer, finds his or her terms and conditions of employment are substantially less favourable than they were with the old employer, the employee can resign but still approach the CCMA on the basis of dismissal. How this section will be applied and interpreted remains to be seen.
Issues arising
Mergers, acquisitions, outsourcings (which may, in effect, be something completely different from a section 197 process) are common processes that present some unique challenges. Almost invariably, the new employer will want to change terms and conditions of employment to ensure that all employees in the consolidated organisation enjoy the same benefits and conditions. This change-process can, in itself, present difficulties if the employees are reluctant to change, and it may entail lengthy collective bargaining processes — with no guarantee of success.
There are other issues that may entail huge financial implications, such as medical aid benefits, pension funds and post-retirement liabilities of the old employer. Section 197(4) now provides that an employee may be transferred to a new or different pension, provident, retirement or similar fund if certain criteria set out in section 14(1)(c) of the Pension Funds Act 24 of 1956 are satisfied.
It should be clear from the above that a merger or the sale and acquisition of a business have profound labour relations and labour law consequences. Managing these and managing the change processes appropriately is one of the greatest challenges for labour relations practitioners.