The Effect Of Mergers And Acquisitions On Contracts Of Employment

Ikechukwu Uwanna Esq.


The Central Bank of Nigeria's directive that banks raise their capital base to 25 billion Naira before December 2005 has led to corporate restructuring within the banking industry in Nigeria. Banks are employing several means to remain afloat. Mergers, Acquisitions and the likes seem to be veritable options for survival as they have an element of synergy. According to Weinberg and Blank "synergy" "is the favourable affect on the overall earnings caused by combining the two firms in circumstances which will give rise to saving in cost or increases in revenue or more simply the 2+2=5 effect". 1

This is to evaluate the impact of these corporate restructuring frameworks on the contract of employment. Its remains mind bogging what the fate of thousands of Nigerians in the employ of these banks will be in the face of the current tide of restructuring. In the United States of America the merger of the Chemical Bank and Chase Manhattan in 1995 led to the elimination of 12,000 workers of a total of 75,000.


Mergers and Acquisitions

A merger occurs when two or more companies transfer their business and assets to a new company (or to one of themselves) and in consideration, their members receive shares in the transferee company. Section 590 of the Companies and Allied Matters Act 1990 (hereinafter referred to as CAMA) 2 defines merger as

"any amalgamation of the undertakings or any part of the undertakings or part of the undertakings of one or more companies and one or more bodies corporate".

An underlining string in merger is that shareholders of the merging companies are substantially the shareholders in the offspring of the union.

On the other hand an acquisition occurs when one company acquires sufficient shares in another company so as to give it control of that other company. The shareholders of the acquired company are paid off and the acquirer becomes owner of all or a substantial part of the assets of the acquired company. In a case where the acquired company is a smaller company and becomes a subsidiary of the acquiring company it may be safe to presume that chances are that the contract of employment will not be affected but in the other instance where the acquired company is amalgamated into the acquiring company the effect of this amalgamation may not be different from what the case will be in a merger relationship where a new company is formed.

Where the merger would result in a new company emerging and the old company being dissolved, the theory of corporate personality lays credence to the fact that the employee's contractual relationship does not pass to the new entity as to create a contractual relationship between the employee and the new company. This position was approved by the court in the case of Nokes V Doncaster Amalgamated Collieries Ltd. (1940) A.C. 1014 wherein the courts held that a contract of employment being a contract for personal service, may be brought to an end by the death of the parties. Section 9(7) b of the Labour Act Cap 198 L.F.N. 1990 3 ; which also provides that a contract shall be terminated by the death of the either of the parties to the contract.

Although Section 10 of the Labour Act makes room for the transfer of any contract of employment from one employer to another, the problem in this procedure lies in the fact that the purported agreement to transfer to the "new company" may be an imperfect contract as Section 72 of CAMA provides that;

"Any contract or transaction purporting to be entered into by the company or by any person on behalf of the company prior to its formation may be ratified by the company after its formation and thereupon the company shall become bound by and entitled to the benefit thereof as if it has been in existence at the date of such contract or other transaction and had been a party thereto".

Nnamani, J.S.C. (as he then was) held in Edokpolo & Company Ltd vs. Sem-Edo Wires Enterprises Ltd & Ors (1984)7 S.C. that

"it is now a settled principle of company law that a company is not bound by a pre incorporation contract being a contract entered into by parties when it was not in existence. No one can contract as agent of such a proposed company there being no principal in existence to bind".


Conclusion

Although mergers and acquisition will lead to the company having better access to capital for expansion of operations, it must be emphasized that the fates of employees lie in the hand of the employers. There is a great need that the mergers and acquisition be undertaken with due consideration of how best to manage and reduce loss of employment.


References

1. Weinberg and Blank on Takeovers and Mergers, London, Sweet and Maxwell (1979) p.4

2. Companies and Allied Matters Act 1990 (CAMA) Cap. 59 LFN 1990.

3. Labour Act Cap 198 L.F.N. 1990



Ikechukwu Uwanna Esq. is a Commercial Law Solicitor with Serenity Legal Union & Partners, Port Harcourt.


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Employees protection during Mergers and
Jfadun@yahoo.com posted on 10-22-2005, 03:01:49 AM
Thanks for you write-up in respect of the above subject on the net.

We need more thay think this way, more grease to your elbow.

God bless you.



LAGOS NIGERIA
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