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21 August 2019
Mergers are one way in which companies can increase their revenue and expand their business. However, along with these benefits, there are a number of risks associated with the merger of two or more businesses, including:
Further, during a merger, employees may be poached by competitors due to uncertainty surrounding their role and benefits. Mergers have also failed because of various HR issues, such as:
These risks are real and should be taken seriously. This article discusses the challenges and practical realities of managing employees during a merger.
Section 92(1)(a) of the Federal Competition and Consumer Protection Act 2018 (FCCPA) defines a 'merger' as a transaction in which one or more undertakings directly or indirectly acquire or establish direct or indirect control over all or part of the business of another undertaking. The FCCPA establishes the Federal Competition and Consumer Protection Commission (FCCPC), which is expected to make rules and regulations regarding merger regulation in Nigeria. Currently, Section 94(4) of the FCCPA contains the act's sole reference to labour, stating as follows:
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 national industries to compete in international markets; and (d) the ability of small and medium scale enterprises to become competitive.
Despite this section, it is unclear what the FCCPC looks for when considering whether a merger's effects on employees can be justified based on public interest.
The FCCPA's predecessor, the Investment and Securities Act 2007 (ISA), established the Nigerian Securities and Exchange Commission, which issued rules and regulations to further explain the ISA's merger provisions. Under the Nigerian Securities and Exchange Rules 2013, in an intermediate or large merger,(1) 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 or representatives of the employees concerned, if there are no such registered trade unions.
The rationale behind this rule may be to ensure that employees are notified of merging companies' intentions regarding their employees and force such companies to consider their workforce when implementing the merger. However, there are no known instances of the above situation occurring in practice and the rules do not require merging entities to prove compliance with this rule to the Nigerian Securities and Exchange Commission.
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.
As mentioned above, a potential consequence of a merger is that the employees of the merging entities may have mixed feelings about their future, which may be uncertain under the new combined entity. How a company deals with these mixed feelings before, during and after a merger will affect its success. Some challenges that exist in this regard include:
Clashing HR policies
The parties to a merger may have different cultures and HR policies. For example, Company A (the target and the weaker bargaining power in the merger) may have an employment policy provides that male staff with three months' paid paternity leave. Meanwhile, Company B (the stronger party looking to merge with Company A), would have no provision for paternity leave in its employment policies. In this example, both Company A and Company B may need to consider whether the merger would lead to the resignation of key male staff. Another example of how the HR policies of merging companies may clash and affect a merger is if one company has an existing employee share option scheme or its employees have accrued claims. In a merger transaction, shareholders of one merging company usually have a share swap as consideration for giving up their shares during the merger. If the aim of the merger is to retain one company and dissolve the one with the share option scheme, shareholders in the latter company will be given shares in the new company based on the value of said company. Where the employee share option scheme provides that employees will be offered shares in the company if they meet certain key performance indices, the merging companies must consider whether:
These are some of the key questions that merging parties must answer before proceeding with a merger.
Accrued employee claims
Another relevant issue is accrued employee claims. Mergers will often occur when one company is on the verge of liquidation. Such company may have policies that reward employee performance with commission or bonuses, and employees' claims to these benefits may have accrued and remain unpaid if the company is making a loss. In a merger, these claims need to be ascertained, as this may affect the value placed on the company's shares or even halt the transaction if the employees' claims are significant.
Transfer of employment contracts
Another issue to consider is the transfer of employment agreements from one company to another. Depending on the company that emerges from the merger, some employees' contracts will likely need to be amended. This is a problem. Employees may join a company for a number of reasons beyond its remuneration package, including management, reputation and location. Amending an employee's contract may affect the core reasons why they accepted the role. In addition, the employment contracts of key employees often have non-compete clauses and other restrictive covenants. If a merger is horizontal and the employee has a non-compete clause in their letter of employment, this will have to be amended to reflect the new employer.
Collective bargaining (trade unions)
Another main challenge of managing employees in a merger is the role of registered trade unions. Employees may join trade unions for multiple reasons, including:
Under Nigerian law, registered trade unions can request and engage in negotiations with employers on matters affecting their members, including wages, working conditions and other employment benefits. As such, it is not unusual for employees of merging parties to join trade unions in a bid to further their social and economic interests.
During a merger, employees' social and economic interests may be at risk. As retaining employees is of primary importance to merging entities, the relevant trade unions must be duly notified before the merger commences. Section 96(3) of the FCCPA provides that in the case of a large merger, the primary acquiring company and the primary target must each provide a copy of the notice of that merger in the prescribed manner and form to:
Merging entities may also have collective bargaining agreements with registered trade unions regarding the social and economic welfare of their members. These agreements are between the trade union and the employer and usually contain provisions on the calculation of severance payments and other benefits in the event of redundancy, among others. During a merger, questions may arise as to previously negotiated collective bargaining agreements – for example:
Merging entities must renegotiate all prior collective bargaining agreements as, under Nigerian law, registered trade unions can request and engage in negotiations with employers. Where the merging entities fail to renegotiate previous collective bargaining agreements, the relevant unions may exercise their statutory powers by engaging in a peaceful picketing or industrial strike action, which often disrupts the operations of the newly formed entity.
Hence, merging entities must notify the necessary trade unions and renegotiate all existing collective bargaining agreements, which would then be between the trade unions and the new entity.
Despite the challenges that merging entities may face in dealing with their employees, they must work to keep their employees and simultaneously prepare for the loss of key talent. To do so, merging companies should:
This is probably why the Nigerian Securities and Exchange Commission Rules and the FCCPA mandate merging entities to forward the merger notification to employees.
The importance of employees to a company's bottom line cannot be overemphasised and their treatment during a merger can make all the difference to the merged entity's success. Luckily, there are a number of measures that merging entities can take to get the best out of a merger and, at the same time, retain the loyalty of key employees.
For further information on this topic please contact Ebele Ikpeoyi at Bloomfield Law by telephone (+234 1 454 2130) or email (email@example.com). The Bloomfield Law website can be accessed at www.bloomfield-law.com.
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