Brief Summary

Competition Law — Merger Approval — Intermediate merger between Aon South Africa (Pty) Ltd and Glenrand MIB Ltd approved by the Competition Tribunal subject to conditions regarding employment — Merging parties initially contested conditions imposed by the Competition Commission, arguing lack of substantial employment concerns — Tribunal found that conditions were justified to protect public interest in employment, particularly in light of potential retrenchments affecting approximately 15% of the combined workforce — Approval granted with conditions limiting retrenchments, reflecting a shift in position by both merging parties and the Commission.

Comprehensive Summary

Summary of Judgment

1. Introduction

This was a consideration application before the Competition Tribunal of South Africa in terms of section 16(1)(a) of the Competition Act 89 of 1998, arising from the Competition Commission’s conditional approval of an intermediate merger.

The applicants were Aon South Africa (Pty) Ltd and Glenrand MIB Ltd (collectively, “the merging parties”). The respondent was the Competition Commission. The merger concerned Aon South Africa (Pty) Ltd as the primary acquiring firm and Glenrand MIB Ltd as the primary target firm, with Aon seeking to acquire the entire issued share capital of Glenrand.

The Commission approved the transaction on 7 April 2011 subject to employment-related public interest conditions. On 21 April 2011, the merging parties filed the present application seeking the Tribunal’s consideration of that decision. The Tribunal heard the matter on 2 August 2011, issued an order on 4 August 2011, and later furnished reasons on 24 November 2011.

The general subject matter was not competition effects (which were common cause to be benign), but the appropriate public interest conditions relating to merger-related retrenchments, including whether a prohibition or limitation on dismissals should be imposed, for how long, and for which categories of employees.

2. Material Facts

It was common cause that the merger was unlikely to substantially prevent or lessen competition in any relevant market. Accordingly, the Commission’s conditions did not address competition concerns and were directed only at public interest, particularly the effect on employment.

In the parties’ original merger filing to the Commission, they indicated that approximately 220 employees might be retrenched following implementation of the merger on a “worst case scenario.” The stated bases for potential redundancies were restructuring to align Glenrand’s models with Aon’s centralised model, duplication at executive and senior management levels, duplication arising from overlapping branches, and staff reductions associated with Glenrand’s delisting from the JSE. At that stage, Glenrand employed approximately 890 employees and Aon approximately 617 in South Africa, making the stated “worst case” estimate around 15% of the combined workforce.

The Commission’s conditional approval prohibited dismissals based on operational requirements resulting from the merger, but excluded “skilled staff” from this protection. “Skilled staff” were defined (on the Commission’s approach) as employees earning above R30 000 per month, a classification derived from a pay-based proxy linked to Aon’s business model.

By the time of the Tribunal hearing, the factual position had evolved in ways material to the outcome. The merging parties had conducted further exercises to refine the expected retrenchment figures, including a Paterson job evaluation and a budget and financial forecast evaluation for business units within the merged entity. On the Tribunal’s record, the budget/forecast exercise identified 137 superfluous positions, but it was reported that 57 employees had applied for voluntary retrenchments and 14 had resigned, leaving 66 employees facing possible retrenchment. Of those 66, 12 were classified as skilled (earning above R30 000 per month), 24 as semi-skilled (earning between R15 000 and R30 000 per month), and 30 as unskilled (earning below R15 000 per month).

A further fact relied upon by the Tribunal was that, following a pre-hearing direction, the proposed conditions were made available to employees for consideration and employees were invited to raise concerns, but none did.

3. Legal Issues

The central legal questions were directed to the Tribunal’s public interest assessment under the Competition Act in the context of merger-related employment effects. The Tribunal had to determine whether the public interest concern in preventing employment loss warranted conditions, and whether the conditions ultimately imposed were adequate and appropriately tailored to address those concerns.

The dispute primarily involved the application of law to fact and an evaluative judgment in shaping appropriate merger conditions. The Tribunal was required to assess, on the evidence before it, whether the merging parties had followed a rational process in determining retrenchments and whether any employment loss was justified by countervailing public interest considerations cognisable under the Act. It also had to assess the appropriateness of the duration and scope of any employment protections, particularly given the Commission’s original condition which the parties contended operated as an indefinite cap.

4. Court’s Reasoning

The Tribunal treated its prior decision in the Momentum merger as setting out the applicable approach to merger-related retrenchments. It summarised the two criteria that must be met once a prima facie case of employment concern is established: first, that a rational process has been followed to determine the number of jobs to be lost and that the reasons for job reduction and the number of jobs proposed to be shed are rationally connected; and second, that the public interest in preventing employment loss must be balanced against an equally weighty countervailing public interest justifying the job loss and cognisable under the Act. The Tribunal further noted examples of such countervailing justifications mentioned in Momentum, including saving a failing firm, the need for cost reductions to remain competitive, or lower prices for consumers dependent on the reduced cost base.

On the procedural posture of the case, the Tribunal held that it was unnecessary to decide the merits of the earlier dispute over the Commission’s initial conditions because both sides had shifted their positions. The merging parties no longer insisted on unconditional approval and tendered revised conditions limiting retrenchments, and the Commission conceded that an indefinite cap was inappropriate and that any restriction should apply for a limited period. The Tribunal therefore confined itself to whether the newly tendered conditions were adequate to protect the public interest in employment.

In assessing the evidence, the Tribunal did not require a definitive finding on whether the merging parties’ original pre-Commission process was adequate, because subsequent steps had been taken that the Tribunal was prepared to consider “for their benefit.” The Tribunal placed weight on the fact that the merging parties had performed multiple exercises using different methodologies to quantify and categorise the potential employment impact, moving from an earlier estimate of 218/220 at-risk employees to a refined figure of 66 possible retrenchments after accounting for voluntary retrenchments and resignations. On this basis, the Tribunal was satisfied that the parties had followed a rational process, even though they did not appear to have had a representative employee body to consult with, because other means were used to consider potential employment loss.

The Tribunal also considered the structure of protection embedded in the proposed conditions. It regarded it as material that far fewer jobs would potentially be lost than initially envisaged, and that the tendered conditions aimed to provide greater protection to unskilled employees, viewed as less likely to obtain re-employment quickly. Conversely, skilled employees were not protected, but evidence suggested they had better job prospects. The Tribunal also relied on the fact that employees were given an opportunity to engage with the conditions prior to the hearing and did not raise concerns.

On justification for retrenchments, the Tribunal accepted evidence that Glenrand had performed poorly in the market and that retrenchments in certain areas were considered necessary to lower operating costs. The Tribunal recorded that it was advised that savings in operating costs would be passed on to some consumers through lower premiums. In evaluating evidentiary weight, the Tribunal observed that justification evidence is most credible when supported by contemporaneous documentation prepared as part of the business rationale for the merger rather than for litigation purposes. It found that while the cost-savings evidence was not supported by contemporaneous documentation and relied on oral evidence, Glenrand’s operational difficulties were supported by contemporaneous documentation, and this was sufficient for the Tribunal’s purposes.

Finally, the Tribunal concluded that the proposed conditions were adequate to remedy the public interest concern regarding employment loss, but indicated that certain reporting obligations required clarification. It therefore expanded aspects of the reporting clause in its order (by adding further sub-clauses) as reflected in its annexure.

5. Outcome and Relief

The Tribunal approved the intermediate merger subject to conditions. The conditions were substantially the same as those tendered by the merging parties immediately prior to the hearing and were directed at limiting merger-related retrenchments for a defined period.

In substance, the Tribunal’s conditions provided that, for a period of two years commencing 7 April 2011, the merged entity would ensure no dismissals (based on operational requirements resulting from the merger) of employees earning less than R15 000 per month, and would cap dismissals of employees earning between R15 000 and R30 000 per month at no more than 24 employees. The conditions clarified exclusions from the meaning of dismissals (including voluntary separation arrangements, voluntary early retirement packages, and unreasonable refusal of redeployment under the Labour Relations Act). They also required circulation of the conditions to employees, provided for employees to approach the Commission with complaints of contravention, and imposed periodic reporting obligations to the Commission (with the Tribunal clarifying aspects of those reporting duties in its final order).

The reasons do not record any costs order, and none is apparent from the decision.

Cases Cited

Metropolitan Holdings Limited and Momentum Group Limited, Case No: 41/LM/Jul10.

Legislation Cited

Competition Act 89 of 1998 (section 16(1)(a)).

Labour Relations Act, 1995 (as amended).

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Tribunal held that, given the revised and refined retrenchment assessments undertaken after the Commission’s decision, the merging parties had demonstrated a sufficiently rational process for determining likely employment effects. It further held that employment-related public interest concerns warranted conditions, but that the appropriate remedy was not an indefinite prohibition; rather, a time-limited and targeted restriction, differentiated by employee earnings categories, together with reporting and enforcement mechanisms, adequately protected the public interest.

The merger was therefore approved subject to conditions that (i) prohibited merger-related operational requirement dismissals for employees below a specified earnings threshold, (ii) limited such dismissals for a middle earnings band, (iii) applied for two years from the Commission’s approval date, and (iv) imposed communication, complaint, and reporting obligations.

LEGAL PRINCIPLES

The decision applied the Tribunal’s approach to merger-related retrenchments articulated in Metropolitan Holdings Limited and Momentum Group Limited, Case No: 41/LM/Jul10, namely that once a prima facie case of employment concern is established, merging parties must show that a rational process was followed to determine job losses, demonstrating a rational connection between the reasons advanced and the number of jobs proposed to be shed.

It further applied the principle that the public interest in preventing employment loss must be balanced against an equally weighty countervailing public interest justifying the job losses, provided that such justification is cognisable under the Competition Act. The judgment recognised, consistently with Momentum, that such countervailing considerations may include the need to address firm distress or to realise efficiencies and cost reductions linked to competitiveness or consumer benefits.

The Tribunal also applied an evaluative principle regarding evidence of justification, stating that justification evidence is more credible when supported by contemporaneous documentation forming part of the merger’s business rationale, while nonetheless accepting that documentation evidencing operational difficulties could suffice to support the justification inquiry in the circumstances of the case.

Aon South Africa (Pty) Ltd and Another v Competition Commission, In re: Aon South Africa (Pty) Ltd v Glenrand MIB Ltd (37/AM/Apr11) [2011] ZACT 100; [2012] 1 CPLR 132 (CT) (24 November 2011)