The issue of retrenchments following a company merger came under scrutiny in South Africa’s highest court recently.
The Constitutional Court handed down a judgment in favour of Coca-Cola Beverages South Africa on 17 April this year, which clarified the nature and standard of the Competition Tribunal’s powers of review and, importantly, set the standard for determining whether retrenchments are merger-specific.
Alchemy Law Partner, Leana Engelbrecht, says the Constitutional Court’s ruling is welcome news for businesses that may have to retrench staff after a merger. She adds that it has long been standard practice for the competition authorities to bar merging parties from retrenching employees during and pursuant to mergers and often these restrictions are imposed where planned or anticipated retrenchments are not patently specific to the merger (for example, a post-merger rationalisation of a workforce to address role duplication) and may be necessary and appropriate for operational reasons unrelated to the merger in question. The Constitutional Court’s judgment now sets a clear standard for an ex-post facto assessment of merger specificity and provides useful insights that may well influence the way the competition authorities undertake the forward-looking assessment of proposed mergers where the specific impact a merger may have on competition and public interest must be assessed.
The Constitutional Court’s judgment dealt with an application for leave to appeal against the order and judgement of the Competition Appeal Court.
The dispute follows the Competition Commission’s approval of the merger of four separate bottling companies in 2016, which created Coca-Cola Beverages South Africa (Pty) Ltd.
The approval was subject to conditions, including that the company was to maintain aggregate employee numbers, that the retrenchment of employees in certain collective bargaining units as a result of the merger was prohibited and that retrenchments outside of the bargaining units were allowed only under certain conditions.
However, the conditions did allow for necessary retrenchments unrelated to the merger, such as those required by operational requirements in the ordinary course of business.
A further merger at holding company level took place during 2017 and the conditions imposed by the Competition Commission remained in place for Coca-Cola.
After the merger, Coca-Cola battled tough economic conditions, faced the introduction of a sugar tax in April 2018, significantly increased input costs and resultant drops in sales volumes.
Ultimately, the company initiated retrenchments, which sparked a complaint by the Food and Allied Workers Union to the Competition Commission.
Coca-Cola tried to persuade the Competition Commission that the retrenchments were not in breach of the merger conditions, but the Commission issued a Notice of Apparent Breach under rule 39(1) of the Commission’s Rules.
In May 2020, Coca-Cola approached the Competition Tribunal to review the notice of the apparent breach saying that it had substantially complied with its obligations under the merger conditions.
The Tribunal focused on determining whether Coca-Cola’s retrenchments resulted from the merger or economic circumstances. It assessed the evidence and determined the probabilities of whether the retrenchments were aimed at removing duplicate roles due to the merger or whether they were due to other factors, such as the impact of the sugar tax and rising input prices. The Tribunal concluded that the retrenchments were not merger-specific and ruled that Coca-Cola had substantially complied with the merger conditions and set aside the Notice of Apparent Breach.
Dissatisfied with the outcome, the Competition Commission appealed to the Competition Appeal Court, where the main issues were (i) the nature of the process to review the Commission’s decision to issue a Notice of Apparent Breach of merger conditions (in terms of Commission Rule 39 (1) and (2)); and (ii) the correct test for determining if the retrenchments were merger-specific.
The Competition Appeal Court overturned the Tribunal’s decision with reference to the test for merger specificity. The Competition Appeal Court stated that there should be some nexus between the incentives and the new controlling shareholder to determine whether the retrenchments were merger-specific. Its view was that this nexus is more easily established where firms have overlapping activities because duplication provides an incentive for retrenchment. The Competition Appeal Court adopted a broad approach to establishing this nexus that effectively lowers the evidentiary bar the Commission must reach to prove merger specificity.
Coca-Cola then launched an application for leave to appeal to the Constitutional Court on the basis that critical legal questions about the nature and standard of review had been raised. The case also involved a “sensitive interplay” between labour law and competition law jurisprudence according to Coca-Cola. The Constitutional Court found that this specific procedural issue constitutes a constitutional matter that can be adjudicated by the Constitution Court as it speaks directly to the constitutionally entrenched right to administrative justice. Importantly the Constitutional Court confirmed that a firm can only be found to be in breach of merger conditions if objectively viewed there was an actual breach of those conditions and not only an apparent breach. In other words, the Commission must be able to empirically show that a firm actually breached a condition which, in respect of the retrenchment moratorium condition, requires proof of merger specificity.
Arguing its application for leave to appeal to the Constitutional Court, Coca-Cola said the Competition Appeal Court should have assessed the factual and legal cause of the retrenchments to determine if they were due to the merger rather than other factors. The Commission, on the other hand, argued that the four bottling plants that merged in 2016 conducted overlapping activities and, as such, duplication of roles was to be expected and informs a merger specific incentive to retrench staff.
In a unanimous judgment by Dodson AJ, the Constitutional Court upheld Coca-Cola’s application and granted it leave to appeal in the interests of justice.
According to the judgment, the test for causation to determine whether retrenchments are merger specific is of general public importance. The Constitutional Court rejected the broad nexus approach adopted by the Competition Appeal Court, finding that the causal analysis must include a proper consideration of other more immediate or dominant reasons informing the retrenchments decision – as it is in the very nature of mergers that there will be some connection between the merger and the post-merger decisions made by the merged entity.
The Constitutional Court found that a legal causation enquiry must be undertaken with the necessary rigor and fairness. In this specific case, the decisions and conduct of Coca-Cola did not support a conclusion that its actions were merger specific, but rather informed by other operational requirements.