This week's article focuses on Mergers and Acquisitions and also highlights the advantages and disadvantages of such a process.
What is a merger?
A merger occurs when one corporation is combined with and disappears into another corporation. A merger is a distinctive, technical term of a particular legal procedure that could or could not happen following an acquisition.
What is an acquisition?
An acquisition is the generic term used to describe a transfer of ownership.
There are three general types transactions in the acquisition of a business:
The purchase of the assets of the business;
The purchase of the stock of the business owning the assets; and
A merger of the buyer with the business.
The new Companies Act, Act 71 of 2008 which is still to come into operation in July 2010, deals with mergers in Chapter 5 under the heading “fundamental transactions, takeovers and offers”.
Section 113 is a completely new development and requires that two or more companies proposing to amalgamate or merge must enter into a written agreement setting out the terms and means of effecting the transaction, meeting fairly extensive prescribed disclosure requirements, as set out in section 113(2).
The matters to be disclosed include, for example, details of the proposed allocation of the assets and liabilities, subsequent management and the estimated cost of the proposed amalgamation or merger.
Section 113(3) provides that the transaction could include the “cancellation or conversion of securities, which will make the use thereof quite flexible.’’
Section 113(4) requires that the board of each company must first consider if the proposed merger will meet the solvency and liquidity tests and if they reasonably believe so, the proposal has to be approved by a special resolution as contemplated in section 115.
Section 114 limits the scheme of arrangement between the company and holders of any class of securities and includes a reorganization in several ways.
Section 114 (2) requires that an independent duly qualified expert must be retained to prepare a report to the board of the proposed arrangements, containing comprehensive information as prescribed in section 114 (3).
Section 115(2) requires that the processes set out in section 112 to 114 must first be approved by a special resolution at a meeting called for that purpose.
If the resolution was opposed by at least 15% of the voting rights that were exercised on that resolution, the company must seek court approval. In this instance the company has to make the application to treat the resolution as a nullity or the court, on application by any person who voted against the resolution, grants that person leave to apply to a court to review the transaction. The court will only grant leave if it is satisfied that the applicant is acting in good faith, appears prepared and able to sustain the proceedings and has alleged facts which would support the court to reach a decision.
The final leg to a merger process is that of section 116, which requires a notice to be given to all known creditors. Any creditor may within 15 days after delivery of such notice approach a court for review, if it will be materially prejudiced by the amalgamation or merger. The notice must contain specifically prescribed information and confirmations that there was compliance with required legislation and must be filed with the commission.
The most important changes to the current takeover provisions is the introduction of an amalgamation and merger mechanism (section 113) and the fact that court approval will only be required when there was a significant minority (at least 15%) opposed to the transactions, or if there was a procedural irregularity or a manifestly unfair result.
Some advantages of a merger include:
1. To acquire a larger share of an existing market.
2. Enter new markets.
3. Eliminate competitors.
4. Acquire expertise or assets.
5. Transfer skills.
6. Save costs.
7. Increase efficiencies or capitalize on synergies.
8. The main reason for companies to enter into such arrangements is to consolidate their power and control over governments and markets.
Some of the difficulties encountered with a merger involve the following:
1. Loss of skilled employees other than employees in leadership positions. This type of loss inevitably involves loss of business know - how that may be difficult to replace or can only be replaced at great cost.
2. Retrenchment of employees causing panic and a loss in motivation, which could in turn also lead to a loss of productivity and a reduction in revenues.
3. Improper or incomplete alignment of employment terms, conditions and benefits leading to anger, resentment and a drop in motivation.
4. Rushed or improper population of new organizational structures.
5. Increase in costs could result if the proper management of change and the implementation of the merger and acquisition transaction are delayed.
6. Unhappy customers and the eventual loss of customers as a result of the market of the targeted company resenting a sudden take over and will consider going to other suppliers for their goods and services.
7. Build up of resistance to any future change initiatives.
8. Incompatibility of people or systems thereby leading to under – capacity and management overloading in the acquiring company.
9. Merging two companies that have been doing similar activities might mean duplication and over – capacity in the company that might require retrenchments.
10. As a result of the takeover, employees of the weaker merging company might require intensive re-skilling.
11. Leave pay out, medical aid, bonuses and other operational issues might mean a need for adjustment where these operational issues will not be carried over to the merged company leading to a loss on the side of worker’s.
Where mergers and acquisitions occur workers become the first victims in terms of retrenchments, compromised industrial relations, changed working culture and conditions of work sometimes to the worst. Although there are many valid reasons for mergers and acquisitions to take place, approaches taken in most cases are always distanced from the industrial relations or social issues. These issues are only considered towards the end of the whole process when there are only few days left to commence with the new merged arrangement.
Mergers and acquisitions in most cases get resisted by workers, directors and shareholders of the targeted company.
It is to the advantage of the merging companies to start engaging representative unions right from the beginning of the discussions on possibilities of merger or acquisition. This will ensure that the problematic areas are addressed when there is still sufficient time than to wait for such problems to arise at the time implementing the new arrangement. If relationship between workers and management is hostile right from the beginning of the new arrangement, nothing could be achieved on identified objectives of the arrangement.
In the case of Vodafone Group Plc v Vodacom Group (Pty) Ltd (2009) ZACT 20, the competition commission issued a merger certificate unconditionally approving the merger between Vodafone Group Plc and Vodacom Group (Pty) Ltd. The acquiring firm was Vodafone Group Plc, a company incorporated in accordance with the laws of England and Wales. Vodafone is a publicly listed company on the London Stock Exchange and Vodacom a depository shares are listed on the New York Stock Exchange. Vodafone is a listed company and it is therefore not controlled directly or indirectly by any third party. The primary firm was the Vodacom Group (Pty) Ltd. The commission analysed the vertical effects of the merger. According to the commission in 2004 Vodafone entered into strategic alliance with Vodacom which gives Vodacom access to Vodafone’s global research and development, buying power, products, services and content, including retail roaming products and branding arrangements. With regard to the aforementioned arrangements the parties submitted that very little is likely to change as a result of the merger as Vodafone will continue to use Vodacom’s network after the merger.
The Vodafone case supra makes an interesting read and readers are urged to read the full judgment of the case regarding mergers and acquisitions.
It might seem that the disadvantages to a merger process outweighs the advantages. The employment relations aspect is most effected by a merger process. Employers should be careful when conducting a merging exercise as this could have detrimental effects on its employees including the targeted business. Companies should also become acquainted with the new law as set out above and set aside funds for legal fees, when the need arises, to fight future battles relating to the merger.