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Constitutional Court sets a corporate precedent in Coca-Cola merger retrenchments ruling


Marthinus van Staden is Associate Professor at the Wits University School of Law, where he teaches Jurisprudence and Labour Law. He obtained his doctorate in Labour Law from the University of Pretoria in 2018.

The Constitutional Court’s balancing act between corporate flexibility and job preservation sets a precedent for future mergers, especially in a nation grappling with high unemployment rates.

The Constitutional Court has held that retrenchments carried out by Coca-Cola Beverages Africa (Pty) Ltd (CCBSA) were not in violation of the merger conditions, as they were not directly resultant from the merger, but were due to external economic pressures such as the sugar tax and adverse economic circumstances. Consequently, the Court upheld the original decision of the Competition Tribunal, allowing the retrenchments as compliant with the merger conditions.

Read more in Daily Maverick: ‘Coca-Cola Beverages SA wins Concourt appeal against Competition Commission over retrenchments

CCBSA underwent a merger subject to conditions that prohibited any retrenchments resulting directly from the merger. Following the merger, CCBSA conducted several retrenchments. They attributed the retrenchments to the need to reduce costs due to external economic pressures, including the impact of a sugar tax and adverse macroeconomic circumstances, rather than as a direct result of the merger itself. This position was central to their defence against the allegations that they had breached the merger conditions prohibiting retrenchments as a result of the merger.

The Food and Allied Workers Union (Fawu) raised concerns about these retrenchments, claiming they violated the merger-specific conditions aimed at protecting jobs. Fawu filed a complaint with the Competition Commission, which upon initial review, agreed that the retrenchments might breach the merger conditions.

The Competition Commission issued a notice of apparent breach to CCBSA. In response, CCBSA sought a review of this notice by the Competition Tribunal, arguing that the retrenchments were not a result of the merger but were necessitated by external economic factors. 

The tribunal initially sided with CCBSA, finding that the company had substantially complied with the merger conditions and that the retrenchments were not directly related to the merger.

Appealed, overturned, further review

Dissatisfied with this outcome, the Competition Commission appealed the tribunal’s decision to the Competition Appeal Court. The Competition Appeal Court overturned the Tribunal’s decision, ruling that the retrenchments were indeed merger-specific, contradicting the conditions of the merger.

This led CCBSA to escalate the matter to the Constitutional Court of South Africa, seeking further review and clarification on the application of the legal standards and the interpretation of the merger conditions related to employment.

The Constitutional Court held that the appropriate test for causation in deciding whether retrenchments were merger-specific should be determined — there is a need for a direct and substantial link between the merger and any adverse employment effects.

First, a causation analysis should start with the “but-for” causation test, which asks whether the retrenchments would have occurred if the merger had not happened. This is a factual determination meant to establish a logical connection between the merger and the retrenchments.

Following the establishment of factual causation, it should be considered whether the merger was the legal or proximate cause of the retrenchments. This involves evaluating whether the merger was a dominant or significant factor leading to the employment changes, rather than merely a background condition.

Merely showing some relationship between the merger and the retrenchments (a minimal nexus) was insufficient. Instead, there needed to be a direct and substantial link to deem the retrenchments as merger-specific. This approach guards against attributing changes in employment to a merger when they are actually driven by external economic factors or other operational requirements unrelated to the merger.

Economic downturn and sugar tax

The Constitutional Court agreed that the primary drivers cited by CCBSA (economic downturn and sugar tax) were significant and substantial enough to be considered the true causes of the retrenchments, thus breaking the causal chain that would link the retrenchments directly to the merger. The Competition Tribunal was correct in its application of causation, determining that the retrenchments were not a result of the merger, but due to external economic pressures.

Mergers often aim to create more efficient and competitive entities. However, if a company cannot adjust its workforce in response to changing market conditions, economic downturns, or technological advancements, it may struggle to remain competitive. This inflexibility can lead to inefficiencies, reduced productivity and ultimately, diminished competitiveness on both a national and international scale.

Maintaining a larger workforce than necessary can impose significant financial burdens on a company, especially if the merger was partly aimed at achieving economies of scale.

These additional costs might include not just salaries, but also benefits, training and other employment-related expenses, potentially leading to financial instability or reduced capacity to invest in other critical areas like research and development or infrastructure improvements.

Although the protection of jobs is an important goal, in cases where a company is prohibited from making necessary adjustments to its workforce post-merger, there might be a higher risk of the entire business becoming unsustainable.

If economic conditions worsen or if the company needs to shift its business model significantly (as often happens in tech-driven industries), being stuck with an outdated or oversized workforce could lead to business failure. This may ultimately lead to more job losses.

Effect of mergers under SA law

The Constitutional Court recognised that the effects of mergers on employment are significant considerations under South African law, particularly in the context of high unemployment rates in the country. The merger conditions, including those prohibiting retrenchments directly resulting from the merger, reflect a legislative intent to protect jobs and mitigate the negative impacts of corporate restructuring on employment.

The Constitutional Court therefore acknowledged the broader economic and social implications of job losses and emphasised the need for careful consideration of public interest in merger evaluations. This reflects an understanding of the delicate balance that must be maintained between allowing businesses the flexibility to operate efficiently and protecting employment, which is often a key concern in merger regulations.

Read more in Daily Maverick: SA’s future sugar tax plans could potentially be penned by its dominant sugar industry

Thus, while the court ultimately found that the retrenchments in question were not merger-specific and allowed CCBSA to proceed with them, it did so within a framework that seriously considers the importance of job preservation in merger conditions.

By examining the causal relationship between corporate actions and external economic pressures, the court has provided clarity on the interpretation and application of merger conditions. While upholding the flexibility for companies to adapt to market dynamics, the court also underscores the importance of safeguarding employment opportunities, particularly in a nation confronted with substantial unemployment challenges.

This decision underscores the delicate balance between corporate efficiency and social responsibility, serving as a guiding light for future merger evaluations and affirming the judiciary’s commitment to upholding the public interest in economic matters. DM


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