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Seven employee concerns to look out for in African M&A deals

2 October 2017
– 6 Minute Read


Across Africa, employee concerns are looming large as potential deal-breakers in mergers and acquisitions. Investors in Kenya, Nigeria and South Africa would do well to watch out for red flags that could scupper a transaction or leave them holding the bill for unforeseen employee costs.

Here are seven employee-related pointers for investors to look out for.

Different transactions, different impacts

There are three main transaction types that affect employees to varying degrees: a simple purchase of shares, the purchase of a company as a going concern and the purchase of the stripped-out assets of a company.

A purchase of shares usually (but not always) has the fewest employee-related implications. Asset sales can be problematic if there is nothing left behind for the running of the company, raising the likelihood of redundancies. The sale of a going concern raises many employment law issues, especially around employee transfers.

Transfers: automatic or by agreement

Of the three jurisdictions being considered, only in South Africa does the law make provision for employees to be transferred automatically. From the date of transfer, all employees move across to the new entity with their employment conditions and benefits unchanged. Any retrenchment or dismissal caused by the transfer is deemed an automatically unfair dismissal. Employers will then have to reinstate the employees or pay them up to 12 months’ remuneration.

The transfer of employees in Kenya will depend on what the parties agree. The critical point is that transfer agreements must be tripartite: the old employer, new employer and the employee must all sign a transfer agreement for it to be valid. When employees are unionised, the trade union will be engaged and consulted on their behalf.

Nigeria is similar to Kenya in that a tripartite transfer agreement must be signed. However, a fourth party comes into play when employees classified as “workers” under the Labour Act are to be transferred.

Workers are clerical and administrative employees such as receptionists, office assistants and drivers. When this class of employee is affected by a change of business ownership, the consent of each employee must be obtained. In addition, a Labour Officer from Nigeria’s Ministry of Labour must endorse the transfer.  The Labour Officer will confirm that each worker freely consented to the transfer, and that every worker’s old and new employment contracts are at the very least comparable.

Employees may choose not to be transferred

Investors should not assume every employee from the company they are buying will want to go over to the new entity.

In Kenya, there have been several transactions where some employees refused to sign the tripartite transfer agreement, even though the new employer was offering better employment conditions. They wanted their employment to come to an end, with redundancy benefits, even before the transaction was completed. The employers agreed because the situation threatened to become litigious.

Employees in Nigeria also have the right to decide whether they wish to be transferred to the new entity. Depending on the terms of their contracts, those who choose not to be transferred may be entitled to redundancy payments.

A factor to consider in South Africa is that although the transfer occurs by operation of law, if only part of a business is being sold, an employee may want to stay behind in another part of the remaining business. If so, or if the transferring business does not want the employee, the person can stay behind by agreement.

Addressing concerns through the courts

This is a trend that is gaining momentum in Kenya. Even in transactions where the legalities seemed straightforward, as in a transfer of shares, employees or their unions have lodged court challenges, either to obtain better conditions of employment or for fear of being worse off under the new arrangement.

The courts in Kenya have more often than not ruled in favour of the employees, even if there was no legal or contractual basis for their grievance. In some cases, an additional payment was made to employees. In others, the employees successfully prevented the deal from going through.

In Nigeria, while employees could potentially challenge a transaction in court, it is not likely that Nigerian courts will uphold such actions. However, the transaction could be potentially delayed.

Competition authority limits redundancies

In Kenya and South Africa, the competition authorities are taking an increasing interest in the employment implications of M&A transactions. Nigeria has not yet reached this point, although it has other mechanisms (the Labour Officer system) to safeguard jobs.

More and more often, the Competition Authority of Kenya is imposing redundancy-limiting requirements as a precondition for transactions. The trend is to require the parties to give an undertaking not to carry out redundancies affecting a certain percentage of the workforce (for example, not more than 5%) for a specified period.

In South Africa, too, the Competition Commission has invoked public interest considerations when approving transactions. Regularly, a prohibition is placed on retrenchments for a specified period after the transaction.

Employee costs and liabilities

Investors need to be aware of all employee costs and liabilities, and ensure the transaction agreements clearly state who will carry these.

A major potential cost to watch out for in Nigeria is unpaid statutory payments, such as compulsory pension contributions. Similarly, extreme care should be taken when dealing with employee share option, share trust and gratuity schemes. The new owner will have to decide whether to continue with a scheme or terminate it and pay out the benefits. Both options can be problematic, especially when benefits are part of employees’ contracts.

Compliance issues

A critical issue in South Africa is the seller’s compliance with the Employment Equity Act and the Compensation for Occupational Injuries and Diseases Act as the purchaser could be liable for any unpaid fines. Investors should also look out for liabilities such as accrued annual leave and any ongoing litigation. Appropriate warrantees or indemnities become important here.

Nigeria does not have legislation like South Africa’s Employment Equity Act but investors should be mindful of claims for occupational injuries made against employers that have not contributed to the Employees Compensation Fund.

Forewarned is forearmed

Despite the many potential pitfalls that investors can encounter before, during or even after a transaction, these can be dealt with effectively if picked up early. The more thoroughly due diligence is done, the less likely it is that investors will pay later for unforeseen liabilities or lose their appetite altogether.