DealMakers AFRICA Q1 2020
A ‘Dicey’ Matter:
The Fate of Employees in Mergers and Acquisitions
by Jacob Ochieng, Sandra Kavagi and Sheila Nyakundi
There has been a rise in mergers and acquisitions (M&A) transactions in Kenya, even as business entities grapple with tough economic times and the ability to stay afloat in the evolving business market. The recent acquisition of National Bank of Kenya Limited by KCB Bank PLC; the merger of NIC Group PLC and Commercial Bank of Africa Limited; the acquisition of Quick Mart and Tumaini Self Service Supermarkets by Sokoni Retail Kenya, to form a single retail operation; and the proposed acquisition of 100% of the issued share capital of De La Rue Kenya Limited (a subsidiary of De La Rue PLC) by American firm HID Corporation Limited are some of the notable M&A transactions that took place in Kenya in 2019. All these recent deals have brought to the fore, among other issues, the fate of employees in the merging entities. In most instances, a high number of employees are declared redundant, and thereafter have to wait for fresh advertisements of positions by the merged or acquiring entity and apply to be recruited.
Employment and labour law considerations feature highly during M&A transactions. More often than not, such transactions lead to loss of employment due to the restructuring of the target company, or the change in character and identity of the transferring entity. Unlike other contracts involving assets and liabilities of the transferor, contracts of employment are currently not assignable to the acquiring entity under Kenyan law.
Other than setting out the basic conditions of employment and addressing the legal requirements for engagement and termination of employees, both the Employment Act, 2007 and the Labor Relations Act, 2007 are silent on the effect of M&A activity on employees. In practice, the contracts of employment are terminated on account of redundancy, subject to compliance with the conditions as set out under section 40 of the Employment Act.
In some instances, the Competition Authority of Kenya (the Authority), established under the Competition Act, 2010, undertakes a public interest assessment to ascertain the extent to which the M&A transaction will cause a substantial loss of employment, and imposes conditions to mitigate such, as has been the case in the acquisition of National Bank of Kenya Limited by KCB Bank PLC, where the Authority approved the merger on condition that KCB Bank PLC retains 90% of the employees from National Bank of Kenya Limited for a period of at least 18 months. This was also seen in the merger between NIC Group PLC and Commercial Bank of Africa Limited, where the Authority approved the merger on condition that both entities retain all the employees for a period of at least one year.
The Kenya Law Reform Commission, a statutory body established under the Kenya Law Reform Commission Act, 2013 with the mandate to review all the laws of Kenya to ensure that they are modernised, relevant and harmonised with the Constitution of Kenya, 2010, recently prepared a draft Employment (Amendment) Bill, 2019 (the Bill) which, amongst other provisions, proposes to amend the principal Act (being the Employment Act, 2007) by introducing a new section 15A which provides for the transfer of employees during M&A transactions.
The proposed section 15A provides that such transfer of employees shall not operate to terminate or alter the terms and conditions of service as stipulated in the original contracts of the employees. It also creates an obligation on the transferor to notify and consult with the affected employees or their representatives regarding the anticipated transfer, the implications of such transfer and the measures that the transferor envisages will be taken to mitigate such implications. Further, the Bill provides that any dismissal taking place prior or subsequent to the transfer shall amount to summary dismissal if such dismissal is premised on the transfer.
Essentially, the Bill seeks to eliminate the difficulties occasioned during M&A transactions by ensuring that the employees are not left out in the cold when their employer is bought out. It also creates an obligation for the transferor to inform and consult with the employees who will be affected in an M&A transaction. This has been the practice in other jurisdictions such as the United Kingdom and, even closer to home, in neighbouring Uganda.
The Bill borrows heavily from the Transfer of Undertakings (Protection of Employment) Regulations, 2006 (TUPE Regulations) as amended by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations, 2014 applicable in England and Wales. TUPE Regulations are aimed at protecting the rights of employees in M&A transactions in England and Wales by imposing obligations on employers to inform and, in other cases, consult with representatives of affected employees. Failure to comply with these obligations attracts penalties and sanctions to the employer.
While the proposed law could be seen as a relief for employees who are mostly losers in M&A deals, it brings with it several challenges and may potentially make M&A transactions even more complex and strenuous, particularly on the part of the transferee.
Firstly, all the transferor’s rights, powers, duties and liabilities in connection with any employment contract shall be transferred to the transferee. Further, the transferee shall be liable for all the employees’ dues dating back to the commencement of the employment contract. This also means that the transferee shall shoulder all the liabilities that arose from the transferor’s engagements with its employees, including, but not limited to, cases initiated by and against the transferor.
Secondly, the proposed amendment as currently drafted may subject the parties in M&A transactions to unnecessary costs and restrictions. It may not be practical to place the transferee under an obligation to automatically retain all the employees of the transferor without any loss of benefits or contractual dues. Such a provision would defeat the purpose of M&A transactions, as most of them are geared towards restructuring the business for the purpose of reducing operational costs.
With respect to the dismissal of employees immediately prior or subsequent to an M&A transaction, the proposed amendment, as currently framed, might open a ‘Pandora’s box’ as it may operate as a blanket protection to all employees, including those whose contracts may be terminated for valid reasons during the transition period. The proposed amendment, as drafted, protects employees against redundancy processes while creating a higher standard of proof against the transacting parties with regards to any termination disputes arising in the course of an M&A Transaction.
Further, the proposed amendment fails to appreciate the contractual rights and obligations of parties with respect to employment and M&A transactions. There should be provision to allow the transferee to freely negotiate alternative arrangements and contractual obligations with the transferor’s employees, and maybe set the standards that should guide this process. By doing so, the parties would have a better chance to make agreements that are favourable to all.
While the issue of how to deal with employees and employment contracts remains a challenge in M&A transactions in Kenya, the proposed amendments to the Employment Act will no doubt come as a sigh of relief for many employees who have long viewed themselves as collateral damage. However, the proposed amendment is likely to increase the cost of undertaking M&A transactions in Kenya, which may well end up being counterproductive as regards the rationale for which the M&A transaction was carried out in the first place.
Ochieng is a Partner and Kavagi and Nyakundi Associates with Oraro & Company Advocates, Kenya.