Author: Mary Allison
ABSTRACT
When companies think about buying or merging with other companies, top-of-mind considerations are likely to determine the asset’s value. What is the brand recognition of the assets worth in the marketplace? Is the vendor’s selling price fair enough? Has due diligence been done? Before the dotted lines are signed by the parties, another important issue to be considered is the issue of the employees in the company or division being purchased, as an acquisition can mean assuming the costs of those employees, assessing their value to the business (and whether to keep them); and ensuring that valued employees move over to the acquirer. In this paper, the writer intends to analyze the protection available to employees as well as examine the level of compliance by employers and the appropriate authority as recommended by the ILO and ratified voluntarily by countries.
INTRODUCTION
A growing phenomenon of modern company management is the different types of changes effected in the structure of these companies. These structural changes may take the form of mergers or take-overs, or other forms of combinations. An entity to merger/acquisition has manifold considerations, with the movement of employees and their rights being one of the most important aspects. A change in the ownership or management of a company may result in a significant change in the working conditions of employees. Transfer of employees between different locations of the new entity, changes in work profiles, and execution of fresh or revised employment agreements with the new entity are some of the changes that would arise as a result of a merger/acquisition, takeovers, and business combine. These restructuring modes are provided for and regulated by the Investment and Security Act, 2007, Companies and Allied Matters Acts, 2020, the Rules and Regulation of the Securities and Exchange Commission (SEC)[1] and the Federal Competition and Consumer protection Act, 2018, Company Income Tax Act, and Capital Gains Tax Act.
MERGER
A merger is defined as any amalgamation of the undertakings or any part of the undertakings or interest of two or more companies or the undertakings or part of the undertakings of one or more companies and one or more bodies corporate.[2]
A merger has also been said to occur when one or more undertakings directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another undertaking; it is further stated that a merger contemplated in the above-stated definition may be achieved in any manner, which includes:
1. The purchase or lease of the shares, interest or assets of the other undertaking in question,
2. The amalgamation or other combination with the other undertaking in question, or
3. A joint venture.[3]
A merger typically involves companies of same size, called equals. The stock of both companies in a merger are surrendered, and new equity shares are issued for the combined entity.
TAKE-OVER/ACQUISITION
On the other hand, a Take-over is the acquisition by the company of sufficient shares in another company to give the acquiring company control of that other company.
Any amalgamation of the undertakings of any part of the undertaking or interest of two or more companies or the undertakings of one or more companies and one or more bodies corporate.[4]
Whilst in a merger, the whole undertaking of the acquired company is merged in the acquiring company, in a Take-over, the target company remains separate and distinct but as a subsidiary of the acquiring company. While a scheme of merger of companies contemplates a transfer of properties and liabilities of one or more companies, such transfer does not include rights and obligations which are not transferable such as contract of personal service,[5] as this has to be specifically provided for if desired by the parties.
ACQUISITION
The term ‘Acquisition’ has not been given a specific definition by the Act. However, it has been described as a business combination in which ownership and management of independently operating enterprises are brought under the control of a single management.[6] It is when one company takes over another company, and the acquiring company becomes the owner of the target company. In other words, the acquired company no longer exists following an acquisition since the acquirer has absorbed it.
In this regard, acquisition connotes a take-over. In other words, the acquisition of control over the target company. Thus, in business and commercial terms, the expression acquisition is properly used interchangeably with the term take-over, which differs from a merger.
HOW MERGERS/ACQUISITIONS IMPACT ON EMPLOYEES
Following a merger and Acquisition deal, some employees may be redundant. In the short term, employees for both companies may need to be moved around or laid off. Understandably, the target company’s employees would feel quite anxious. Those who had hired them are likely no longer making critical labour decisions. Beyond the obvious change of being let go or moved around, surviving employees’ continued performance and loyalty depend on the merger and acquisition process’s efficacy.
EFFECT OF MERGER/ACQUISITION ON TARGET COMPANY EMPLOYEES
The merger and acquisition process can immediately impact the stress levels of the employees involved. Many mergers need to be approved by one regulatory authority or the other depending on the jurisdiction, and this can drag on for a long time, sometimes for more than a year. The time it takes to close a merger can be difficult for the employees of both companies. Some of these effects include:
1. Uncertainty/Anxiety
The uncertainty resulting from a merger or acquisition signals risk to target company employees. This uncertainty might manifest in negative ways and it is reasonable to assume that employees who feel threatened or scared might prove less effective than those who feels secure and contented.
2. Job Losses
Historically, mergers and acquisitions result in job losses. Most of this is attributable to redundant operations and efforts to boost efficiency. Most of the threatened jobs include the target company’s CEO and other senior management officers, who are often offered severance allowance and then, let go. Also, the management team of the acquiring company often look for ways of maximizing cost to help finance the acquisition, and this usually leads to job losses for employees in redundant departments.
3. Culture Clash
Target company employees are also expected to understand the new corporate culture, management structure, and operating system. If the new management team finds it difficult to communicate effectively to aid in the transition, discontent may occur among the employees.
BENEFIT TO TARGET COMPANY EMPLOYEES
Even though a merger/acquisition process can impact negatively on the employees of a target company, there are some achievable benefits which include:
1. Retirement benefits
By and large, the target company’s employees do not have to fear their current accumulated retirement benefits. In Nigeria, the Pension Reform Act, 2014 protects post retirement pensions and other benefits. By law, the acquiring company knows that it needs to protect the loyalty and reassure the target company’s employees during and after the deal.
2. Stock Options
Circumstances may provide in some jurisdiction for the employees of the newly created entity to receive new stock options such as an employee stock ownership plan or other benefits as a reward or incentive. Stock options are contract that allows an employee the right to buy stock, at a specific price called strike price at some point in the future.[7] In an employee stock ownership plan, the employees are awarded the option, meaning they don’t have to pay for the stock as would typically be required in the stock market.
3. Stock Price Appreciation
The stock price of the acquired company could rise substantially if the acquirer offered a higher stock price than where the target company’s stock was trading before the deal. As a result, employees might earn capital gains on any share that they own.
EMPLOYEE PROTECTION IN OTHER JURISDICTION
The United Kingdom has legislation protecting and catering the rights of employees in the event of Merger and acquisition. The transfer of undertakings (Protection of Employment) Regulations (TUPE) 2006 is UK law which specifically provides that a business transfer must not result in a dismissal except for economic, technical or organizational reasons and in which case affected employees are entitled to redundancy payment.[8]
Also, in Canada, Whether the deal is a share sale or asset sale, it affects an acquirer’s responsibility towards the employees of the target company. In a share sale where the buyer purchases the shares of the target company and the assets and liabilities that go with it, the target employees remain with the company, although they typically receive formal offers of employment given by the acquirer. In an asset sale, a buyer will purchase certain assets of the company but not the entire company, and non-unionized employees need not be kept on.[9] In other words, employees who belonged to labour unions are better protected in an asset sale deal as it is usually a part of the collective bargaining agreement which forms part of the contract of employment for an acquirer to accept the employees of target companies in case of mergers and acquisitions. However, if the collective bargaining agreement has expired or will soon expire, there are residual rights to negotiate. In case of unionized employees, labour unions may be more inclined to negotiate if there is a long-term relationship with the target company as well as a desire to preserve jobs.
EMPLOYEES PROTECTION IN NIGERIA
Unlike other jurisdictions, there is a dearth of statutory or judicial authorities protecting an employee from dismissal after a deal, and there have been no recent changes to employment law that are relevant to Merger and acquisition, Takeover or business combines. The statute governing employment and employee activities are the Labour Act, the Pension Reform Act and the Personal Income Tax Act, there is however no provision in the major legislation taking care of employees in issues that may arise in a merger, takeover or other similar deals.
Nigeria following the common law tradition largely assesses the employment relationships on a personal basis, that is, Personal Nature Theory that was in force at the beginning of the twentieth century which is based on the personal nature of employment contract, and explains that the employees’ right under contract of employment cannot be transferred or assigned to another employer without the employer’s consent. [10]Therefore, employees’ contract and other rights typically expires once the employer changes. Whilst the surviving entity generally steps into the shoes of the merged entity, by taking over its assets and liabilities; however, the case of staff is usually subject to the need of the surviving entity for such employees. Apparently, there are no Nigerian legal provisions that mandates the surviving entity to assume the merged entity’s erstwhile employer obligation. Thus, the service of the employees cannot be transferred except by mutual or tripartite agreement. It should be noted however, that employee rights under merger and acquisition transactions are largely dependent on the terms of their employment contract, employees are also entitled to their rights under a collective agreement reached by their trade unions where they are unionized. Terms agreed with employees must be in accordance with these agreements.
Anecdotal evidence suggests that the reasons for this underplay is could either be due to the merging firms not really understanding the import of managing employees’ issues or they simply cannot be bothered. Afterall, where the labour market is saturated, they and hire and fire almost at will.
The only known palliatives available to ease the burden of redundancy in Nigeria are as provided by the Labour Act, include:
a) Last in, First out procedure: This principle which bothers on the selection for redundancy, where there is need for an organization to lay-off some workers,[11] models the latin maxim “qui prior est tempore portio est jure” which means that he who is earlier is stronger in law. The principle aims at guiding against any unfairness that may arise from managerial discretion in redundancy and to ensure that those who have rendered their services to the organization for the longest time are not suddenly disposed of.
b) Compensation for redundancy: The Act empowers the minister of labour to make regulations for the compulsory payment of redundancy allowance for the termination of employment on the ground of redundancy.
However, there are yet to be regulations pursuant to the section. Even though the Labour Act further provides that the employer shall use his best endeavours to negotiate redundancy payment, there is still need to have laid-down standards for the payment of redundancy allowance in Nigeria, which automatically extend to issues in mergers and acquisitions.
Before a merger scheme can be sanctioned, the approval of the court is very necessary as the court will order two meetings to be approved by 75% of members at each meeting. The main essence of the court ordered meetings is for the court to be satisfied and be sure that employees’ compensation is adequately taken care of.[12] Also, the Labour Act, 2010, provides that the transfer of any contract from one employer to another shall be subject to the consent of the worker and the endorsement of the transfer of the contract by an authorized labour officer; before endorsing the transfer upon the contract, the officer in question shall ascertain that the worker has freely consented to the transfer and that his consent has not been obtained by coercion or undue influence or as a result of misrepresentation or mistake.[13]
The purport of the above provision is clear as it tries to ensure that both the employer and employee give their consent before a contract of employment can be said to have been entered into. This provision as it is, seems to give hope to the employees of the merging companies on the face of it but the legal implication or a mitigating factor is the fact that the new company is yet to be formed which makes the agreement a pre-incorporation agreement. It should be noted that a company is not bound by its pre-incorporation contract.[14] In relation to employment after the promoters have entered into a contract of transfer of employment, it is still subject to ratification by the new company when it is finally formed. This the company may either choose or decline ratification, being a contracted entered into by parties when it is not in existence.[15]
Apart from the above stated provision of law, other legislatures/ regulating bodies such as the Federal Competition and Consumer Protection Act FCCPA (2018), the Federal Competition and Consumer Protection Commission (FCCPC 2020) which is the regulatory authority responsible for the administration and enforcement of the FCCPA, provides for protection of employees in merger and acquisition in the Merger review guideline; Regulations 8.24- 8.27. These rules and regulations made provisions for the protection of employees in merger/acquisition, take-over or business combines without an elaborate implementation procedure, thereby making it as good as not making any provision for the protection of employees in the first place.
The FCCPA provides for the protection of employees in merger and acquisition as it provides:
In determining whether a merger or a proposed merger can or cannot be justified on public interest, the FCCPA shall consider the effect that the merger or the proposed merger will have on:
(a) a particular industrial sector or region
(b) Employment;
(c) The ability of small and medium scale enterprises to become competitive[16]
It is unclear from the above provisions what the drafters of both legislations look out for when considering whether the effect of merger/acquisitions on employees can be justified by public interest. Public interest means matters concerning the welfare of the people. Public interest is anything that affects the rights, health, or finance of the public at large. Considering any action in public interest means the ultimate aim should be the welfare of the masses, the society[17] and not an individual per se. However, public interest has nothing to do with the effect a merger/acquisition can have on employees as this is a personal issue borne by individual employees involved whether good or bad. Even if in the interest of the society at large, someone has lost his job whether in the interim or not. Hence, for me, the effect should be viewed from the individual’s angle and search for ways of alleviating adverse effects if they cannot be totally eliminated.
Before the FCCPA, 2018 was enacted there had been in existence the ISA, 2007, with sections 118, 119, 120 121 providing for mergers and acquisitions, however the FCCPA, enacted in 2018 has repealed the mentioned provisions of the ISA which is pari-material with provisions to the FCCPA,[18] thereby taking over the regulations of merger and acquisition schemes in Nigeria.
The SEC rules and regulations 2013 provided to guide the process of merger/acquisition provides in similar vein that in an intermediate or large merger in the merging companies must forward the merger notification to any registered trade union that represents a substantial number of its employees; or the employees concerned, if there are no such trade union.[19]
It can be deduced from the above provisions that the rationale may be to ensure that employees are notified of the merging companies’ intentions regarding their employment and force such companies to consider their workforce when implementing the merger. Over the years however, there are no known instances of the above situation in practice and the rules do not require merging companies to prove compliance whether to the NSEC or any other regulating body, except of course, the courts where when approached by aggrieved party may exercise discretion in the interest of justice and equity. Even the courts are barely approached as the employees and the unions have accepted merger/acquisition as fait accompli.
Also, as a post-approval requirement, merged companies must file a report on the arrangements that they have made with regard to the acquired company’s employees. This too is without scrutiny by regulating bodies to ensure that the proper thing is done.
Apart from seeking for ways to ameliorate the hardship on employees in merger and acquisition scheme by pay of compensation, the employees themselves owe a fiduciary duty, that is, a duty of disclosure and prevention of abuses to the merging entities especially the directors as provided for in sections 297 to 300 of CAMA, 2020. This means that the issue of merger and acquisition is a two-way thing. Where the merging entities have the duty to compensate the employees, the employees on the other hand have a duty to avoid abuse and a duty to disclose any activity they are involved in for and on behalf of the company.
The tendency to overlook employees’ issues is probably due to the fact there is no specific statute regulating employee issues during Merger and acquisition as the principal statutes regulating same are silent on the importance of employees’ issues. In reality, this makes the protection of employees’ interest during a merger, acquisition/takeover or business combine in Nigeria a mirage, as transfer of services in deals are not a matter of compulsion unlike some other jurisdiction, because there is generally no statutory obligation to retain all staff of target entity. Even the Labour Act which is the major regulating legislation on employment in Nigeria is silent and does not deal with employees’ issue arising from transfer deals.
LEGAL FRAMEWORK FOR MERGER/ACQUISITION IN GERMANY
There are several legislations governing and regulating merger/acquisition, takeovers and business combines in Germany. The main source of regulation for takeovers in Germany is the Takeover Act, as amended 2016 to implement the EU Takeover Directives, there is also the German Stock Corporation Act, which provides the general framework of the corporate legislation pertaining to Germen stock corporations. The Takeover Act creates a comprehensive legal framework that enables public takeovers be conducted fairly and transparently. The Takeover Act is also designed to protect the financial interest of minority shareholders and employees of target companies among others.[20]
EMPLOYEES PROTECTION IN GERMANY
Being a member of European Union where employees generally have more substantial employment protection rights, especially where the business in which they work changes hand, employees in Germany enjoy a high level of protection when it comes to issues and effect of Merger/Acquisition. These rights are set out in the Acquired Rights Directive 2001/21. Under the Directive, where business assets including intangible assets such as goodwill have been sold, employees have the right to transfer with those assets to the acquirer on the existing terms and conditions of employment. Under the Directive the seller’s employees who transfer to the acquirer are treated as if they had always been employed by the acquirer. By implication the employees don’t go through the anxiety, uncertainty, fear or dismissal as we have it in the case of Nigeria.
The Directive’s specific implementation is left to EU member States in accordance with their own laws, provided the minimum requirements are met. Implementing the Directive in Germany, an agreement lowering the employees’ compensation and benefits after the transfer is permissible unless this ‘lowering’ is prohibited by any collective bargaining.[21]
The above stated provision of the Directive is replicated in S. 613 of German Civil Code (The German TUPE provision):
“Where a business or part of a business is transferred to another owner by means of a legal transaction, the new owner enters into the rights and obligations arising from the employment relationship in existence before the transfer”.[22] This is to the effect that the acquirer assumes the responsibility or obligation carried out by the former owner(s).
The German rules of collective bargaining law must also be considered in mergers and acquisition transactions, as certain collective agreements have been declared generally binding by the Federal Ministry of Labour. Thus, they are applicable to any employment contract concluded prior to the acquisition in the relevant industry irrespective of whether after acquisition the employer is a member of an employer association or if the employee belongs to a union. In other words, the issue of pre-incorporation does not arise where an employment has been entered into before coming into existence of the acquiring entity, unlike the case in Nigeria. There is no requirement for ratification be an employee is absorbed into the new system.
CONCLUSION
Despite the catastrophic effect of mergers and acquisitions on employees in Nigeria in 2005 when the Central Bank of Nigeria mandated banks to re capitalize to the tune of N25Billion minimum capital base from N5billion capital base, unable to meet those target many banks opted for the mergers and acquisition route resulting in the reduction of number of banks and huge lay off of workers. The recognition of this effect has led to the legislature in several other jurisdiction including Germany to introduce legislations that allows for the automatic transfer of the employment relationship from the old employers to the new employer when a change in the structure of the company occurs, and Nigeria that was the reason for the reforms in other jurisdiction is yet to enact a law to properly protect employees in the event of merger/acquisition, takeover or business combines.[23]
Ways of overcoming these challenges is that the Nigerian law has to avoid using the personal nature theory of employment contract as it is presently. There should be a deliberate effort to provide consultation rights of employees in a merger/acquisition and ensure automatic transfer of employment rights and liabilities upon the change of ownership of an undertaking business or part of a business from an old to a new employer.
The collective platform offered by the unions is supposed to present a good avenue for employees to press for, and demand for their rights and adequate protection, but the simple truth is that unions in spite of themselves, have not been able to much. A combination of factors, internal and external, including the conspiratorial indifference has contributed to challenge faced in terms of collective bargaining.
Also, in considering changes in operations (including those resulting from mergers and acquisition, take-overs or transfers of production) which would have major employment effects, multinational enterprises should provide reasonable notice of such changes to the appropriate government authorities and representatives of the workers in their employment and their organizations so that the implications may be examined jointly in order to mitigate adverse effects to the greatest possible extent. This is particularly important in the case of the closure of an entity involving collective lay-offs or dismissals in Nigeria.
BIBLIOGRAPHY
LEGISLATIONS
1. Capital Gains Tax Act
2. Company Income Tax Act.
3. Companies and Allied Matters Act, 2020.
4. Federal Competition and Consumer protection Act, 2018
5. Federal Competition and Consumer protection Commission, 2020.
5. Labour Act
7. Pension Reform Act
8. Securities and Exchange Commission, 2013.
BOOK
1. O. Orojo,’ Company and Practice in Nigeria’, (Nexis lexis butterwort (5th ed. 2008) p. 339
CASE LAWS
1. Re. Bendel Line Co. Ltd (1979) FHCR 19; Doncaster Amalgamated Collieries Ltd (1940) 3 All ER 549
2. Edokpolor & Co. Ltd v. Sem-Edo wire enterprises Ltd & ors (19(1984) 7 S.C, (1989) 4 NWLR part 116 at 473.
JOURNALS/ ONLINE ARTICLES
1. Akamiokor,: Merger and Acquisitions: The Nigerian Experience’ being a paper presented at a seminar on: Perspective and Options in Merger and Acquisitions” on 11th May 1989.
2. A. Baggash : Merger and Acquisition Laws in UK, UAE and Qatar: Tranfering rights and obligation being a thesis for the degree of Doctor of law Brune University School of Law July 2012.
3. B. Damilola, Merger and Acquisition: A study of its impact on employees in Nigeria; July, 2020 <https://www.aaachambers.com>
4. Caroline Canavese, Noel Deans, Manfred Hack and Stephanie Wright Pickett, Employment considerations when Acquiring a business in the European Union Nov. 2008 < https://www.kigates.com>
5. Elizabeth Raymer, Considering employees during mergers and acquisitions (2019) https://www.canadianlawyermag.com
6. Fountain journals of management and social science, 2014: Effect of merger and acquisitions on employee development
7. Germany: Mergers & Acquisition Laws and Regulations 2021; <https://iclg.com>
8. How do mergers and Acquisitions impact the Employees? https://www.investopedia.com ,
19. Private mergers and acquisitions in Germany: Overview <http://content.next.westlaw.com>
[1] Olakunle Orojo,’ Company and Practice in Nigeria’, (Nexis lexis butterwort(5th ed. 2008) p. 339
[2] Investment and Security Act, S. 119, 2007
[3] Federal Competition and Consumer Protection Act, 2018, S. 92(1).
[4] ISA S. 131
[5] Re. Bendel Line Co. Ltd (1979) FHCR 19; Doncaster Amalgamated Collieries Ltd (1940) 3 All ER 549
[6] Akamiokor, ‘Merger and Acquisitions: The Nigerian Experience’ being a paper presented at a seminar on: Perspective and Options in Merger and Acquisitions” on 11th May 1989.
[7] How do mergers and Acquisitions impact the Employees? <https://www.investopedia.com> , Accessed 6th Nov. 2021 @ 12:00pm
[8]Damilola Bamisile, Merger and Acquisition: A study of its impact on employees in Nigeria; July, 2020 <https://www.aaachambers.com> Accessed 6th Nov. 2021 @ 1:30pm
[9] Elizabeth Raymer, Considering employees during mergers and acquisitions (2019) <https://www.canadianlawyermag.com> accessed 6th Nov. 2021 @ 13::45pm
[10] Ammen Baggash : Merger and Acquisition Laws in UK, UAE and Qatar: Tranfering rights and obligation being a thesis for the degree of Doctor of law Brune University School of Law July 2012.
[11] Labour Act, S. 20(1)(b)
[12] Companies and Allied Matters Act, 2004, S. 711..
[13] Labour Act, S 10
[14] CAMA 2020, S 96.
[15] Edokpolor & Co. Ltd v. Sem-Edo wire enterprises Ltd & ors (19(1984) 7 S.C, (1989) 4 NWLR part 116 at 473
[16] FCCPA2018, S. 94(4).
[17] https://blog.forumais.com Accessed 6th Nov. 2021 @ 12:45 pm.
[18] FCCPA 2018, S. 165.
[19] Rule 427 of the Nigerian Securities and Exchange Commission Rules
[20] Private mergers and acquisitions in Germany: Overview <http://content.next.westlaw.com> Accessed 7th Nov @2:00pm
[21] Caroline Canavese, Noel Deans, Manfred Hack and Stephanie Wright Pickett, Employment considerations when Acquiring a business in the European Union Nov. 2008 <https://www.kigates.com> Accessed 6th Nov, 2021.
[22] Germany: Mergers & Acquisition Laws and Regulations 2021; <https://iclg.com> Accessed 6th Nov, 2021
[23] Effect of merger and acquisitions on employee development : Fountain journals of management and social science, 2014;.
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