CAVENDISH UNIVERSITY FACULTY OF LAW

CRITICAL ANALYSIS OF WHETHER EMPLOYMENY LAWS LEGALLY PROTECT EMPLOYEE’S JOB SECURITY DURING CORPORATE MERGERS AND ACQUISITIONS PARICULRY IN MALAWIAN PERSEPECTIVE.

SUBMITTED BY KENNEDY RANKEN NKHOMA

Project paper submitted to the University of Cavendish (Zambia) in partial fulfillment of the award of a Bachelor of Laws (Honours’) Degree.

i

DECLARATION

I, Kennedy Ranken Nkhoma, declare that the work presented in this dissertation is original. It has never been presented to any other university or institution for an award of any degree whatsoever. Both primary sources and secondary sources used have been duly acknowledged. It is in this regard that I declare that this work is originally mine.

Author’s Signature………………………………………………………………………………

Dated this………………………….Day of………………………………………2019.

This dissertation is submitted to the University of Cavendish (Zambia) in partial fulfillment of the award of a Bachelor of Laws (Honours) Degree with approval of my supervisor.

Supervisor’s Signature……………………………………………………………………………

MR VICTOR MWAPE

Dated this……………………………Day of…………………………………………2019.

ii

DEDICATION

To

My wife YAMIKANI NKHOMA

For taking care of our little children TYRESE NKHOMA AND TYREE NKHOMA whenever I was busy with studies

iii

ACKNOWLEDGEMENTS

First and foremost, I thank God, the Almighty, for the gift of life and good health that has enabled me to reach this far and write this dissertation.

I also wish to acknowledge with thanks and gratitude the guidance and assistance of my supervisor, Mr. Victor Mwape, in the development of this dissertation. His tireless effort and his vast knowledge on the subject tremendously helped to shape this piece of work. I am, however, personally accountable for all shortfalls and mistakes in argument, analysis, presentation and otherwise.

Last, but by no means least, I would like express my profound gratitude to my lovely wife,

Yamikani Nkhoma for his awesome immeasurable love, encouragement and support throughout the ordeal of being student; and my children: Tyrese Nkhoma and Tyree Nkhoma for perseverance and tolerance way beyond their ages.

iv

Contents DECLARATION ...... i DEDICATION ...... iii ACKNOWLEDGEMENTS ...... iv LIST OF CASES...... ix LIST OF STATUTES ...... x LIST OF ABBREVIATIONS ...... xi ABSTRACT ...... xii

CHAPTER ONE INTRODUCTION ...... 1 1.0 BACKGROUND ...... 1 1.1 STATEMENT OF THE PROBLEM ...... 3 1.2 OBJECTIVES ...... 3 1.2.1 Main objective ...... 3 1.2.2 Specific objectives ...... 3 1.3 QUESTIONS ...... 4 1.3.1 Main question ...... 4 1.3.2 Specific questions ...... 4 1.4 HYPOTHESIS...... 4 1.5 SCOPE OF STUDY ...... 4 1.6 SIGNIFICANCE AND JUSTIFICATION OF THE STUDY ...... 4 1.7 LITERATURE REVIEW ...... 5 1.8 METHODOLOGY ...... 8 1.8.1 Methods of research ...... 8 1.8.2. Data collection methods ...... 9 1.8.3. Data analysis ...... 9 1.8.4. Ethical consideration ...... 10 1.8.5. Reliability ...... 10 1.8.6. Limitations ...... 11 1.9 CONCLUSION ...... 11

CHAPTER TWO THE FORMALIZATION OF CORPORATE MERGERS AND ACQUISITIONS: CONCEPTS, FUNDAMENTAL PRINCIPLES AND LEGAL THEORIES ...... 12 v

2.0 INTRODUCTION ...... 12 2.1 CONCEPTS, TYPES OF MERGERS. ACQUITISTIONS AND JOB SECURITY ...... 12 2.1.1 CONCEPTS ...... 12 2.1.2 MERGERS ...... 13 2.1.3 TYPES OF MERGERS ...... 14 1. Horizontal merger ...... 14 2. Vertical merger ...... 15 3. Conglomerate merger ...... 16 2.1.4 ACQUISITIONS ...... 16 2.1.5 TYPES OF ACQUISITIONS ...... 17 1. Asset acquisition ...... 17 2. Stock acquisition ...... 18 2.1.6 DEFINITIONS OF JOB SECURITY ...... 18 2.1.7 TYPES OF JOB SECURITY ...... 19 1. Agreed – Upon Term ...... 19 2. Minimum payout ...... 19 3. Minimum notice ...... 20 4. Continued Perception of Employment ...... 20 2.2 FUNDAMENTAL PRINCIPLES, STEPS OF FORMALISING MERGERS AND ACQUISITIONS AND THE LEGAL THEORIES THAT SUPPORT THE STUDY ...... 20 2.2.1 FUNDAMENTAL PRINCIPLES ...... 20 2.2.2 THE PROCESS OF FORMALISING MEGRERS AND ACQUISITONS ...... 21 1. Business Valuation ...... 21 2. Proposal phase ...... 21 3. Exit plan ...... 21 4. Marketing process ...... 22 5. Binding agreement ...... 22 6. Integration stage ...... 22 2.2.3 LEGAL THEORIES ...... 23 1. Positive legal theory ...... 23 2. Marxist legal theory ...... 24 2.3 CONCLUSION ...... 25

vi

CHAPTER THREE LABOUR LEGISLATIONS IN VERSUS EMPLOYEES’ JOB SECURITY ...... 26 3.0 INTRODUCTION ...... 26 3.1 EMPLOYMENT LAWS IN MALAWI ...... 26 3.1.1 The Constitution ...... 27 3.1.2 The Employment Act (EA) ...... 28 3.1.3 Labour Relations Act (LRA) ...... 31 3.1.4 The Competition and Fair Trading Act (CFTA) ...... 32 3.1.5 Workers Compensation Act (2000) ...... 34 3.1.6 International Labour Organisation (ILO) Convention Number 158 ...... 34 3.2 CONCLUSION ...... 35

CHAPTER FOUR THE REASONS BEHIND MERGERS AND ACQUISITIONS AND HOW THEY AFFECT EMPLOYEES’ JOB SECURITY ...... 37 4.0 INTRODUCTION ...... 37 4.1 REASONS BEHIND MERGERS AND ACQUISITIONS ...... 37 4.1.2 Diversity ...... 39 4.1.3 Cutting costs ...... 39 4.1.4 Synergy ...... 41 4.1.5 Managerialism ...... 42 4.2 THE EFFECTS OF MERGERS AND ACQUISITIONS ON EMPLOYEES’ JOB SECURITY IN MALAWI ...... 43 4.2.1 Restructuring ...... 44 4.2.2 Competitiveness ...... 45 4.2.3 Culture Clash ...... 46 4.3 CONCLUSION ...... 48

CHAPTER FIVE: THE RIGHTS OF EMPLOYEES DURING CORPORATE MERGERS AND ACQUISITIONS 49 5.0 INTRODUCTION ...... 49 5.1 EMPLOYEES RIGHTS ...... 49 5.1.1 Right to be consulted...... 49 5.1.2 Right to contract fulfilment ...... 50 5.1.3 Right to negotiate ...... 52 vii

5.1.4 Right to be paid ...... 52 5.2 CONCLUSION ...... 53

CHAPTER SIX: FINDINGS AND RECOMMENDATIONS ...... 54 6.1 FINDINGS ...... 54 6.2 RECOMMENDATIONS ...... 55 6.2.1 Clarify the existing labour laws ...... 55 6.2.2 Improve the available guidelines on mergers and acquisitions ...... 55 6.2.3 Develop laws on contract transfer under mergers and acquisitions ...... 55 BIBIOGRAPHY ...... Error! Bookmark not defined.

viii

LIST OF CASES

Banda v Dimon (mw) Limited, MLLR, 2005, 92

Chilala and Others v Petroleum Services Malawi Limited, Matter Number 158 (IRC) 2000

Dickiel Kusainda v Petroleum Importers Limited, Matter Number 187 (IRC)2007

Gladys Matiki v Cure International, Matter Number 234 (IRC) 2004

Jawadu v Malawi Revenue Authority, MLR, 2008,397

Kachinjika v Portland Cement Company, MLLR (2008) 161

Kalolo v National Bank of Malawi, MLLR (1997)421

Kettie Mukamba V Malawi Revenue Authority, Matter Number 101(IRC) 2003

Liquidator, Import and Export Malawi Limited v Kankhwangwa and Others, MLLR (2000) 219

Nazombe v Malawi Electoral Commission, MLLR (2008) 460

Nokes v Duncaster Amalgamated Collieries Limited, Appeal Case (1940) 1014

Nsaliwa v PG industries, 1MLR (1995) 172

Ron Manda v Sugar Corporation of Malawi, Civil Cause Number 176, 2003

United States v Northern Securities Company, United States cases number 789 of 1904

ix

LIST OF STATUTES Companies Act

Competition and Fair Trading Act

Constitution of the Republic of Malawi

Employment Act

Labour Relations Act

Workers Compensation Act

x

LIST OF ABBREVIATIONS

CFTA Competition and Fair Trading Act

EA Employment Act

FDH First Discount House

FMB First Merchant Bank

ICB International

ILO International Labour Organisation

LRA Labour Relations Act

NB National Bank

MSB Malawi Savings Bank

RBM Reserve Bank of Malawi

WCA Workers Compensation Act

xi

ABSTRACT Malawi as a developing country and still develops every day. As the country is developing, the economy of the country is also growing and one of the ways in which the economy is growing, is through mergers and acquisitions of cooperate firms. Mergers and acquisitions are increasingly happening in Malawi as they help the firms to grow overnight, however when these mergers and acquisitions take place, employees are involved as a firm cannot operate without employees.

The thesis of this paper is that employees’ job security is not legally protected during the happening of mergers and acquisitions in Malawi. The paper will look into the available labour laws and analyse them to check if they protect the employees’ job security during the time of mergers and acquisitions. The paper will further explore on the importance of mergers and acquisitions in Malawi and how they affect the employees.

It is argued in this paper that employees are at the centre of these mergers and acquisitions hence highly affected by them. The paper will proceed to research the rights which these employees have during the happening of a merger or acquisition.

Furthermore the paper argues that the available labour laws favour the owners of the company

(shareholders) by protecting their rights during mergers and acquisitions.

Finally the paper will state the findings and make recommendations (if any) according to the findings.

xii

CHAPTER ONE INTRODUCTION

1.0 BACKGROUND In the corporate world, an entrepreneur may decide to grow the business either by internal or external expansions. In the case of internal expansion, a firm grows gradually over time in the normal course of business through established lines of new products.1 In external expansion, a firm acquires an already running business and grows overnight through corporate combinations in form of mergers or acquisitions.2 Mergers and acquisitions are seen as an important part of corporate restructuring and the basic concept behind these mergers and acquisitions is that the joint value of two companies is greater than those companies standing as separate entities.3 A merger is when two companies join to form a single entity with the aim of providing growth or positive value.4Acquisition is when one company takes over another and completely establishes itself as the new owner.5 As the world of finance is expanding at a great speed, competition is becoming a challenge for corporate entities in Malawi. Many corporate organisations have recently sought expansion through mergers and acquisitions because mergers and acquisitions are increasingly common place in both developed and developing countries’ economies.6

In Malawi, mergers and acquisitions have clearly developed into a major phenomenon as they seem to be a corporate strategy. For example the recent merger of Malawi Distilleries, Carlsberg

1 Jrisy Motis, Mergers and Acquisitions Motives, Toulouse school of economics, February 2007.Page 3

2 Jan Bena, Corporate Innovations and Mergers and Acquisitions, Journal of Finance, Volume 5, October 2014.P 12

3Ayesha Alam, Strategic Management: Managing Mergers and Acquisitions, International Journal of Business,2014

4 Kal LI, Mergers and Acquisitions, American Finance Association, Volume LXLX, 2014 Page 211

5 Steven j Pillof, Dynamic effects of Monetary Policies, Finance Journal, October 2009, Page 5

6 Donald De Pamphilis, Mergers and Acquisition Basics, The Boulevard, Oxford, 2011, Page 203

1

Malawi and Southern Bottlers and the acquisition of Inde Bank by National Bank of Malawi

(NB) have seen companies grow overnight. Corporate competition is the basic mechanism of the market economy as it encourages companies to improve production and economic efficiency.

The Competition and Fair Trading Act of Malawi (CFTA) of 19987 has been enacted with the purpose of providing a competition law regime that meets and suits the demands of economic change in Malawi as it aims at encouraging competition in the economy.8 Mergers and acquisitions may be seen as having dramatically transformed and redefined the corporate landscape of the economic world.9Corporate control is the main tool through which inefficient and unprofitable companies can be converted10. The Companies Act of Malawi (1984)11 provides for mergers and takeovers if a corporate company cannot stand the pressure of the market competition. The Act also provides for the minority share holder protection during mergers and acquisitions but it is silent on the protection of the employees of the newly formed company after a merger or acquisition. On the other hand, Section 32 of the Employment Act (EA) of Malawi prohibits the transfer of the contract of an employee to another employer without the consent of the employee hence offering the employees job security.

The paper notes that there is a gap in balancing the interests of the shareholders and those of employees during mergers and acquisitions in Malawi as regards to the job security of employees hence the following statement of the problem.

7 Laws of Malawi, Chapter 48:09

8 Preamble of the Competition and Fair Trading Act of Malawi

9 Judy Layne, Forming New Families, Industrial Relations Centre, Kingston, Page 34

10 Kyung Mook Lee, Corporate Mergers and Acquisitions, Wharton School, Stenberg 2000,Page 78

11 Laws of Malawi, Chapter 46:03

2

1.1 STATEMENT OF THE PROBLEM Due to the increasing competition and changes of the market economy in Malawi, Corporate mergers and acquisitions have become popular strategic tools for increasing product portfolio of companies.12 However these mergers and acquisitions come along with workforce restructuring as the integration of employees is one of the most critical issue to handle and the main challenge is to strike a balance between the interests of the company owners and the employees’ job security.13 This leads to the following problem statement:

The legal protection of employees’ job security during mergers and acquisitions in Malawi

1.2 OBJECTIVES

1.2.1 Main objective To analyse Malawi employment laws in regards to legal protection of employees’ jobs during mergers and acquisitions.

1.2.2 Specific objectives a) To investigate the reasons behind mergers and acquisitions.

b) To determine how mergers and acquisitions affect employees’ job security in Malawi.

c) To identify the rights of employees during mergers and acquisitions in Malawi.

12 Reserve Bank of Malawi, Guidelines for Processing Application for Mergers and Acquisitions, article of 2006,P 11

13 Judy Layne, Forming New Families, Industrial Relations Centre,p50

3

1.3 QUESTIONS

1.3.1 MAIN RESERCH QUESTION Whether Malawi employment laws legally protect employees’ job security during corporate mergers and acquisitions in Malawi?

1.3.2 SPECIFIC RESEARCH QUESTION a) What are the reasons behind mergers and acquisitions in Malawi? b) How mergers and acquisitions affect employees’ job security in Malawi? c) What are the rights of employees during mergers and acquisitions in Malawi?

1.4 HYPOTHESIS. This paper proceeds on the fundamental hypothesis that the available employment laws in

Malawi have a loop hole in protecting job security of employees during mergers and acquisitions which needs to be looked at. The presumption of the paper is that the employees’ job security is not legally protected by all the available employment laws during mergers and acquisitions in

Malawi.

1.5 SCOPE OF STUDY The study will focus on the available employment laws and the protection of employees’ job security and the rights of the employees during mergers and acquisitions. The context will be restricted to Malawi.

1.6 SIGNIFICANCE AND JUSTIFICATION OF THE STUDY The importance of this study is to bring to light how the employees’ job security is tackled with the existing employment laws during mergers and acquisitions in Malawi. The study will shade more light on employees’ rights during mergers and acquisitions and also highlight the prospects of having effective laws as it will reveal loop holes available in the existing employment laws.

4

Although mergers and acquisitions are becoming popular in Malawi, there is not much literature on the subject in the Malawian context. This may either mean that the laws guiding mergers and acquisitions in Malawi are perfect or there are some loop holes which are being over looked and need to be scrutinized. This research will make a contribution towards the employment laws in

Malawi in reference to employees’ job security during mergers and acquisitions.

1.7 LITERATURE REVIEW Before looking at the work of other known researchers, the key words in the topic sentence are defined. Donald De Pamphillis14 defined Legal protection as the benefit of safety founded by law which is accorded to someone with the intention of preserving the rights of that someone, but for the purpose of this research I will define legal protection as the safeguards that the law puts on the rights of people. An employee is defined by section 2 of the Labour Relations Act as a person who has agreed by contract to perform specified services for another in exchange for a wage or salary, but I will define an employee simply as a person who works for another for a living.

Kyungniook Lee15 defined Job security as the state of being protected from threat or risk while performing a contract in which one agrees to do for another at a price, but I will define job security as safety which an employee gets on the job while performing his duties. Muhammed

Naveed16 defines a corporate as a legal entity created under the authority of a statute, but I will define a corporate as a company or firm in a legal business. Wolter Kluwer, a scholar, defines mergers as a legal consolidation of two companies into one entity but I will define a merger as

14Author of ;Mergers and Acquisitions Basics, The boulevard, Oxford, 2011,Page 99

15Author of; Mergers and Acquisitions, the Wharton School, Stenberg, 2000, Page 34

16Author of; Impact of Mergers and Acquisitions on Job Security and Motivation, Financial Engineering, volume 12, Singapore

5

the joining together of two or more companies as one company. Ayesha Alam17 defined

Acquisition as when one company takes over another company and completely establishes itself as the new owner. In simple terms, I will define acquisition as the buying out of a company by another company.

Various studies have been conducted on mergers and acquisitions especially by researchers in developed countries like United States of America, United Kingdom and in some European countries. More than 1500 mergers and acquisitions have occurred in the United States economic market from 1986 to 1994.18 However in the context of developing counties like Malawi, very little research work has been done. The wave of mergers and acquisitions in developed countries has risen rapidly unlike in developing countries with or without any reason of economic performance to justify that.19 Some recent mergers and acquisitions in developed countries such as the acquisition of Boalmen’s Ban shares by Nations Bank have shown gains to the shareholders and put the employees at risk.20.One of the global mergers of 2013 is that of

Microsoft Corporation with Nokia Handsets and Services Business. Microsoft purchased Nokia for 7,200,000,000.United States dollars.21 It can be argued that Microsoft was attempting to bail out one of the first makers of smart phones but at the same time, strategists say that it could also be the other way round in the long run.22 According to Nokia’s Chief Executive Officer, Steve

17 Author of; Managing Mergers and Acquisition, ’International Journal of Business Research, Volume 3, 2014

18 Antony Santomero, Value effects of Mergers and Acquisitions, Oxford, October 29, 1996

19 John Melonakos, Effects of Mergers and Acquisitions, Higher Education Commission, Pakistan, 2011

20 Kenneth Cline, American Banker, University of Pennyslavia, September 26,1996

21 Kate Phillips, American Banker, Stem School of Business, New York university, July 2013,Page 46

22 Richard Caves, Effects of Mergers and Acquisitions on the Economy, second edition, 2011 6

Ballmer, Microsoft bought Nokia only in an attempt to strengthen its fight against Apple

Incorporation and Corporation so that it could be able to capture a portion of the lucrative mobile computing market.23In the case of United States v Northern Securities

Company,24mergers and acquisitions were eliminated because they were seen as a total failure.

Mergers and acquisitions are used all over the world as an important strategic tool for survival by many corporate organisations.25 However these mergers and acquisitions have in some cases shown a positive impact on employees’ job security while in some cases negative results have emerged. In Malawi the recent acquisition which happened in 2013, is the acquisition of

International Commercial Bank (ICB) by First Merchant Bank (FMB) which has seen a total number of 49 employees being acquired.26 On the other hand the merger of Malawi distilleries,

Carlsberg and Southern bottlers has seen some employees being laid off. In the article, Mergers and Acquisitions in Malawi by Winston Mponda, he talks about the rights of stakeholders during mergers and acquisitions but the article is silent on the rights of the employees and job security of the employees. The article by Paul Kwengere, Guide Lines of Mergers and Acquisitions in

Malawi, points out that the jobs of employees may be affected by mergers and acquisitions but the article does not go further to explain how mergers and acquisition shake the job security of employees. Maxton Tsoka in the article, Why Competition Law is Necessary in Malawi, talks about the shareholder protection during mergers and acquisitions but the article does not say anything on employees’ rights protection during mergers and acquisitions. In the article Dynamic

23 Kate Phillips, American Banker , Stem School of Business, New York University, July 2013, page 50

24 United States cases, No. 789 of 1904.

25 Richard Caves, Effects of Mergers and Acquisitions on the Economy, second edition, 2011

26 Fair Trade and Competition Commission article,2013, Page 141

7

effects of Monetary Policy Stocks, Harold Ngalawa, argues that acquisitions increase the value of the stock of a company and the stakeholder’s interest but the article does not mention anything about employees’ job security. From the above literature, it can be seen that the discussion on the legal protection of employees’ job security during mergers and acquisitions in Malawian context has been sidelined hence need for further research.

1.8 METHODOLOGY The methodology will discuss the methods for research study to be adopted. The research will look at the data collecting methods, data analysis and reliability of the data, ethical considerations and limitations to the study.

1.8.1 Methods of research As already stated above, the study is the analysis of the legal protection of employees’ job security during corporate mergers and acquisitions in Malawi and in order to make an effective analysis the paper will adopt both doctrinal and social–legal research methods. The doctrinal method will be adopted because the research will conduct an analysis of the existing statutes.

Social legal method will be adopted because the research will investigate the effects of the employment law in action on the society (in this case society shall mean employees). The social legal and doctrinal methods involve a qualitative approach rather than quantitative approach as they are descriptive of the law.27 The qualitative approach is most suited in this research as it helps to understand the social meaning of the detailed data and the study is not aimed at quantifying its results. The study will help in understanding the context underpinning the employees’ job security as it will involve the analytical evaluation of primary as well as

27 R, Clarke, Research Models and Methodology,2005 Page 20

8

secondary sources of data and information. This paper is not concerned with how many employees have been affected by the mergers and acquisitions but rather how the employment laws in Malawi protect the job security of employees during mergers and acquisitions. Data will be collected from different literature relevant to the topic which will be read and analysed.

Diverse sources of data will be chosen in order to ensure credibility of the results and the conclusions of the research.

1.8.2. Data collection methods As highlighted above the way of collecting data for this study will be desk research so a look at statutes, reports, books, articles, cases, journals and news papers will be adopted. For example to answer the main question, data will be collected from the Malawi Constitution, the Employment

Act, Labour Relations Act, Companies Act, Workers Compensation Act, Competition and Fair

Trade Act and the International Labour Organisation (this is not exhaustive). To answer specific question number one and two data will be collected from the Competition and Fair Trading Act, articles, books and just to mention a few. Lastly to answer specific question number three, data will be collected the Constitution, the Employment Act and articles among others.

1.8.3. Data analysis Documentary analysis will be adopted in this study and the reliable data will be analysed according to its relevance as regards to the specific questions the data is answering and to the type of data. The data will be matched against each other to see if it can be integrated and interpreted in order to answer the main research question. The data collected will firstly be scrutinized as to its reliability and usefulness. For instance, data based on emotions of the writer may not be useful for this dissertation. The collected data will be processed only in line with the research questions.

9

1.8.4. Ethical consideration Data collected will be used solely for the purposes of this dissertation and the consent of using information which is not open to the public will be obtained in writing from the required sources

( i.e. key informants) and assurance will be given to them that the information will be used for the required purpose only.

1.8.5. Reliability A study which is reliable should be credible, dependable, confirmable and transferable.28The criterion of credibility suggests whether the findings are accurate and credible from the standpoint of the researcher, the participants, and the reader.29 I will ensure that the research is reliable by making sure that the research design components namely the study’s purpose, conceptual framework, research questions, and methods are interrelated and are helping to prove or disprove the hypothesis. I will make sure that feedback from students, peers, lecturers and professors on whether I am really achieving this, is given and I will embrace all collections to achieve my goal.

Dependability involves questioning whether the findings are consistent with the data collected. I will collect different kinds of data and in order to make sure that the findings correlate with the data, I will record all the data pertaining to the research and in cases of contradicting data I will reconcile the differences and keep a transparent record of why some data was used or not used in a certain way. The concept of conformability corresponds to the notion of objectivity and it implies that the findings are the result of the research, rather than an outcome of the biases and

28 Linda Dale Bloomberg, Completing your dissertation, 2005, Page 68

29 R, Clarke, Research Models and Methodology, 2005, Page 31

10

subjectivity of the researcher.30 I will be transparent in how the data will be collected and used to come up with the findings so as to make the research confirmable. Lecturers’ supervision over the research will also help to keep track of the research so that the findings are a result of the research. Speculations on the likely applicability of findings to other situations under similar, but not identical, conditions are what transferability entails.31

1.8.6. Limitations This study has limitations. Firstly, the analysis of this research will depend on desk research and it will ultimately rests on the thinking and choices of other researchers who have already written on the subject hence a limit to the subjectivity on the study. Secondly there is not much literature written on the topic in Malawian context so the researcher is supposed to do a lot of digging to come up with accurate results.

1.9 CONCLUSION Mergers and acquisitions are becoming an important strategy for survival in today’s corporate world. However it should be noted that when mergers and acquisitions happen, employee’s jobs are affected either positively or negatively in the process of formalisation a merger or acquisition as there are concepts, fundamental principles to be followed during this time hence the following chapter.

30Keith Abbott, Business Law, 8th edition, 2002

31 Linda Dale Bloomberg, Completing your dissertation, 2008, Page 71

11

CHAPTER TWO THE FORMALIZATION OF CORPORATE MERGERS AND ACQUISITIONS: CONCEPTS, FUNDAMENTAL PRINCIPLES AND LEGAL THEORIES

2.0 INTRODUCTION During the formalisation of mergers and acquisition there are concepts and fundamental principles which are supposed to be followed as mergers and acquisitions have recently been a very important market entry as well as an expansion strategy in Malawi.32Mergers and acquisitions have been a very important market entry strategy as well as expansion strategy in

Malawi due to the present era of competition. The fact that competition is increasing in the market economy, many companies are going for mergers and acquisitions to avoid unhealthy competition which may lead to the downfall of the company.33Since the world of finance is expanding at a great speed and competition is becoming a challenge for corporate entities in

Malawi; many corporate oGrganisations have recently sought expansion through mergers and acquisitions.34 This chapter will discuss key concepts, mergers and acquisitions, types of mergers and acquisition, the steps of formalizing mergers and acquisitions, fundamental principles and the legal theories that support mergers and acquisitions in relation to employees’ job security.

2.1 CONCEPTS, TYPES OF MERGERS. ACQUITISTIONS AND JOB SECURITY

2.1.1 CONCEPTS The main concept behind mergers and acquisitions is that the joint value of two companies is greater than those companies standing as separate entities.35 It should be highlighted on the

32 Paul Kwengwere, Guide Lines of Mergers and Acquisitions in Malawi,2012, p10

33 Donald De Pamphilis, Mergers and Acquisition Basics, The Boulevard, Oxford, 2011, p183

34 Paul Kwengwere, Guide Lines of Mergers and Acquisitions in Malawi, 2012, p 16

35 Ayesha Alam, Strategic Management: Managing Mergers and Acquisitions, International Journal of Business 12

outset that mergers and acquisitions are now a normal way of life within the business world. In today's global, competitive environment, mergers are sometimes seen as the only means for long- term survival.36 In today’s world many entrepreneurs no longer build companies for the long- term; they build companies for the short-term, hoping to sell the company for huge profits.37 In her book, The Art of Merger and Acquisition Integration, Alexandra Reed Lajoux puts it best:

Virtually every major company today has experienced or will experience a merger or acquisition at some point in history and at any given time, thousands of these companies are adjusting to post-merger reality. In the decade of the 1990's (through June 1997), 96,020 companies have come under new ownership worldwide in deals worth a total of $ 3.9 trillion - and that's just counting acquisitions valued at $ 5 million and over.38 In addition to this, many smaller companies and nonprofit and governmental entities have also experienced mergers and acquisitions every year. The merger and acquisitions have universally become large economic tools of boosting a company within a short time.39

2.1.2 MERGERS A merger is a combination of two companies where one corporation is completely absorbed by another corporation.40A merger extinguishes the merged corporation as two companies join to corporation assumes all the rights, privileges and liabilities of the merged corporation.41 The

36 Antony Saunders, Effects of Mergers and Acquisitions, Stern School of Business, New York. USA

37 Patrick Gaughen, Concepts of Mergers and Acquisitions, Business Research,2006, p 567

38 Sana Khana, Managing Acquisitions, Stern School of Business, 2000,p 78

39 Donald De Pamphillis, Acquisitions in the United States,HG,2011,p 301

40 Kai LI, Mergers and Acquisitions, American Finance Association, Volume LXLX,2014 , p211

41 Shahid Ali, Impact of Mergers and Acquisitions on Job Security and Motivation, p 59

13

survivor also acquires the assets of the merged corporation. Section 266 (1) (b) of the

Companies Act of Malawi, (new) conquers with this as it defines a merger as the undertaking of property and liabilities of two or more public companies, including the company in respect of which the compromise or arrangement is proposed are to be transferred to a new company, whet her or not a public company. This definition talks about the transferring of property and how the liabilities of creditors are transferred to the newly formed company. It can be seen from the definition that it gives protection to the creditors of the merged companies as the liabilities are well taken care of. Basically a merger involves marriage of two or more entities and the shareholders of each blending entity will become the substantially the shareholders of the entity which is to carry on as the blended entity.42 Section 275 of the new Companies Act also talks about the protection of holders of securities to which special rights are attached during a merger.

However it should be noted that the act is silent on the protection of employees’ job security.

2.1.3 TYPES OF MERGERS There are three types of mergers based on competitive relationships between the merging companies.43 These are;

1. Horizontal merger This is a combination of two businesses which are essentially in the same line of business.44 For example if Ralph and Arnolds legal firm combine with Savjan legal firm, this will be a horizontal merger because they are firms in the same line of business who offer the same services and compete for the same customers. The main purpose of horizontal merger is to obtain

42 Kai Li, Mergers and

43 Sean Becketti, Corporate Mergers and the Business Cycle, Government Printing Office, Chapter 6, 1985

44 Dr. Dimitrios Ptropoulus, Advantages and Disadvantages of Mergers and Acquisitions, p11

14

economy of scale in production by eliminating duplication of facilities, reducing competition, reducing costs and increasing share capital and market segments.45However it should be highlighted on the outset that horizontal mergers raise three basic competitive issues; the elimination of competition between the merging firms, the creation of substantial market power in order to raise prices while at the same time output is reduced and the reduction in the number of businesses on the market.46 An example of a horizontal merger which has happened in Malawi is the merger of Napolo Ukana Breweries and Bowler Beverage where the two companies became one entity.

2. Vertical merger This is a combination of two or more firms involved in different stages of production or distribution of the same product.47 This kind of merger is usually between a company and its supplier or a dealer. For example if Illovo Sugar Corporation and Metro combine to form one company it will be a vertical merger. The main objective of vertical mergers is to increase profitability by the previous distributors.48 The benefits of vertical mergers include internalizing all transactions between the manufacturers and its suppliers or dealers by converting a potentially adversarial relationship into something more like a partnership and giving management more effective ways to monitor and improve performance.49 On the other hand vertical mergers can be

45 Sana Khan, Strategic Management of Mergers and Acquisitions, p 40

46 Jan Bena, Corporate Mergers and Acquisitions, Journal of Finance, 2014, No.6, p15

47 Antony Saunders, Mergers and Acquisitions in Small Business, Stern School of Business, NY 10012, USA

48Sean Becketti, Corporate Mergers and the Business cycle, Government Printing Office, Chapter 6,1985

49 Patrick Gaughan, Mergers and Acquisitions, Fairleigh Dickinson University, p25 15

a disadvantage because they tend to impede new businesses from entering the market because of anti competition due to entrenched market powers.50

3. Conglomerate merger This is an amalgamation of two companies engaged in different line of business with diverse business activities.51For example if Barnet and James legal firm combines with One Stop

Pharmacy, it will be a conglomerate merger. Conglomerate mergers do not ordinarily have a direct effect on the market competition.52Conglomerate mergers can supply a market or demand for firms, thus giving entrepreneurs liquidity at an open market price and helping them to form new enterprises.53 Conglomerate mergers may also help a firm to reduce capital cost. However it should be highlighted that; Conglomerate mergers have some disadvantages like increasing the merged firms’ political power which end up impairing the social and political goal of independent decision making.54

2.1.4 ACQUISITIONS This is the purchase of controlling in the share capital of another existing company by a corporation.55 During an acquisition the stock or assets of a corporation are owned by a purchaser as the purchaser also acquires the ownership of the property.56 The acquirer also

50 Kai Li, Mergers and Acquisitions, volume 6, p13

51 Matt Evans, Mergers and Acquisitions, p 15

52 Jrisy Motis, Mergers and Acquisitions Motives, University of Crete, P 34

53 James Pillet, Corporate Finance and Mergers and Acquisitions, McCarthy, p45

54 Donald De Pamphillis, Mergers and Acquisitions Basics, The Boulevard, Oxford, 2011, p 201

55 Johannes Pennings, Mergers and Acquisitions, University of Pennyslavania, p 105

56 Muhameed Hanif, Impact of Acquisitions, Institute of Management Sciences,Singapore,2011, p 99

16

purchases the controlling interest in the share capital of the acquired company and assumes effective control over assets and management of the company. An acquisition involves the purchase by one company controlling interest in the share capital and the ownership in the property of another existing company.57 The acquisition of International Commercial Bank by

First Merchant Bank saw First Merchant Bank acquiring 100 % shares of International

Commercial Bank in 2013.58

2.1.5 TYPES OF ACQUISITIONS There are two types of acquisitions and these are;

1. Asset acquisition This is when the acquirer company buys the assets of the target company.59The acquirer buys some or all of the target’s assets and also acquires the liabilities of the target company direct from the seller.60 The seller in this case is the corporate entity. The acquirer has a chance to choose specific assets and liabilities it wants to purchase in order to avoid unwanted assets and liabilities for which it does not want to assume responsibility.61 In other words asset acquisition only adds up to the asset and liabilities the buyer is acquiring. If all the assets are acquired, the target company is liquidated. An example of asset acquisition which happened in Malawi is the acquisition of BP Malawi by Puma energy.

57 Dimitros Pertopolus, Advantages of Acquisitions, London SE 19.UK. 2006, p 56

58 Winston Mponda, Mergers and Acquisitions in Malawi

59 Kai LI, Mergers and Acquisition, Finance Association, Volume LXLX, 2011, p 334

60 Justin Pettit, International Mergers and Acquisitions, Booz and Company, United Kingdom,2004

61 Sufian Fadzlan, Effects of Mergers and Acquisitions, volume1,p 29

17

2. Stock acquisition This is where by the acquirer company provides cash stock or a combination of cash and stock in exchange for the stock of the target company.62The acquirer buys the stock of the target company from the selling shareholders.63 Stock purchase adds up to all sellers assets. In other words the buyer gets everything. Stock purchase eliminates the need to transfer title.64This usually occurs when the acquiring company buys a majority of the target company’s shares outstanding directly from the shareholders. An example of stock acquisition which happened in Malawi is the acquisition of Malawi Savings Bank (MSB) by First Discount House Bank (FDH).

2.1.6 DEFINITIONS OF JOB SECURITY Job security is the state of protecting the employee from threat or risk while performing a contract in which one agrees to do for another at a price.65 Job security is the probability that an individual will keep his or her job. Job security is that assurance an employee has on the continuity of a gainful employment.66 The employee has the assurance that he or she will keep his or her job without the risk of losing it and becoming unemployed and has confidence that his or her current job is safe. Section 32 of the Employment Act of Malawi provides that no contract of employment shall be transferred from one employer to another employer without the consent of the employee. This section protects the employee from risk of just being pushed anyhow by the employer. However it should be noted that Part XII of the new Companies Act allows

62 Judy Layne, Forming New Families, Industrial Relations Centre, Kingston, p98

63 Patrick Gaughan, Mergers and Acquisitions, Fairleigh Dickinson University, p37

64 David Perkins, Buying a Business,p4

65 John Melonakos, Effects of Mergers and Acquisitions, Higher Education Commission, Pakistan, 2011

66 Gregory Udell, Mergers and Acquisitions, Wharton School of Business, USA, 1997, p46

18

shareholders to transfer the contract of employees during mergers and acquisition with or without the consent of the employee.

2.1.7 TYPES OF JOB SECURITY There are several types of job security but this study will only focus on the four major ones.

1. Agreed – Upon Term This is the most used form of job security. Agreed –upon term has an end date for the employment, commonly known as; term of employment.67Part V of the Employment Act of

Malawi (2000) outlines the types of contracts which are available in Malawi and gives the guidelines in undertaking these contracts.

2. Minimum payout This kind of job security is where you have no agreed end date for the employment and therefore no guaranteed employment term.68However it should be highlighted that if the employer terminates the employment, the employer is supposed to pay the employee a guaranteed payout.

Section 28 of the Employment Act of Malawi provides that a contract of unspecified period of time may be terminated by either party but it should also be highlighted that when an employer lays off an employee sorely on economical grounds, the employee should be paid severance allowance.

67 Matt Evans, Job security and Mergers, 2000, p 110

68 Jrisy Motis, Mergers Motives, Toulese School of Economics, 2006, P 35

19

3. Minimum notice This is where an employee is assured that he or she will not lose the job without receiving at least a notice.69However it should be noted that an employee can be dismissed without any notice if the employee is engaged in a serious misconduct.70

4. Continued Perception of Employment This is where employers will sometimes agree to give an employee the right to keep their title of office and appearances of being employed.71

2.2 FUNDAMENTAL PRINCIPLES, STEPS OF FORMALISING MERGERS AND ACQUISITIONS AND THE LEGAL THEORIES THAT SUPPORT THE STUDY

2.2.1 FUNDAMENTAL PRINCIPLES The key principle behind mergers or acquisitions is to create shareholder value over and above that of the sum of the two companies if they stand separately as separate entities.72

In case of a merger, two firms together form a new company and become jointly owned and get a new identity. When the two firms get merged, stocks of both companies are surrendered and new stocks in the name of the new merged company are issued.73For example when Malawi

Distilleries, Carlsberg Malawi and Southern Bottlers merged, the companies seized to exist as separate companies and new stock was issued in the name of the new formed company, Southern

Bottlers. In the case of acquisition, one firm takes over another company and establishes its power as a single owner. Here, generally the firm which takes over is bigger and stronger than

69 Jagriti Kumani, Madras School of Economics, 2007, p 98

70 Section 59 of the Employment Act of Malawi(2000)

7171 Johannes Pennings, Job security, University of Pennyslavania, 1996, p 441.

72 Steven Pilloff, Value effects of Bank Mergers and Acquisitions, 1996, p 31

73 John Armour, Corporate Restructuring, University of Cambridge, p 201

20

the acquired company. The smaller company usually losses its existence after the acquisition and the firm which acquires it will run the whole business by its own identity.74 For example when

Airtel acquired Zain, Zain seized to exist and all its former branches were now identified as

Airtel branches.

2.2.2 THE PROCESS OF FORMALISING MEGRERS AND ACQUISITONS The process of formalizing a merger or acquisition can be divided into the following steps;

1. Business Valuation This is the first step of the merger or acquisition where by the market value of the target company is assessed by the acquirer company and the market value is also considered.75 The acquirer company engages itself in a thorough analysis of the target firm’s business, products of the firm, its’ capital requirement, organizational structure and brand value.76

2. Proposal phase After the acquirer company has finished with the business valuation, the proposal for merger and acquisition is given to the target company through the issuing of an offer document.77

3. Exit plan After the target company has agreed to the offer, it has to plan for the right time for exit.

However in dealing with exit planning, the target company has to consider all the alternatives

74 Vivi Jorgensen, Importance of Mergers and Acquisitions, 2010,p15

75 Kai Li, Mergers and Acquisitions, Volume 6, p44

76 Elijah Brewer, Corporate Governance Structure and Mergers, p 33

77 Bruner, H, History of Mergers and Acquisitions ,2004, p95

21

like full sale or partial sale.78The firm should also consider tax planning and evaluation of the options of reinvestment.

4. Marketing process After completing exit planning process, the target firm is now involved in marketing process and tries to achieve the highest price and structuring the business deal.79

5. Binding agreement This process involves the making of a binding purchase agreement in the case of a merger and generation of final agreement papers in cases of a merger.80

6. Integration stage This is the final stage where by the acquirer company and the target company are integrated through a merger or acquisition according to the agreement.81

However it should be highlighted that when these mergers or acquisitions take place, employees’ layoffs are bound to happen. For example in cases where the new formed company is business efficient wise, it would require less number of employees to perform the same tasks which were done by a larger number of employees.82 Under such circumstances, the company ends up downsizing its labour force. On the other hand these laid off employees have to look for re- employment and may have to be satisfied even with much lesser pay package than the previous one just to make ends meet.

78 William Jackson, Mergers and Acquisitions, 2010, p 46

79 Tina Weber, Mergers and Acquisitions, 2000, p 32

80 Joseph Scalive, Small Business lending, Philadephia, USA, p406

81 Richard Caves, Effects of Mergers and Acquisition, Harvard University,p33

82 Ayesha Alam, Managing Mergers and Acquisitions, Business Research, 2014, p 88

22

2.2.3 LEGAL THEORIES There are many legal theories in the world but this paper will only concentrate on the legal theories that support the study. The paper will look at positivist legal theory and Marxist legal theory because they support the study.

1. Positive legal theory Positive legal theory centers on the proposition that a custom is a rule of conduct which the governed observe spontaneously and is set by a political superior with authority.83 Positive law is law formally laid down, posited or affirmed by man.84 The common ground position of positive legal theory is that the validity of any law should be traced to an objectively verifiable source.85

Legal positivist argue that the custom is only transmuted into law when it is adopted as such by court of justice and the decision fashioned upon it are enforced by the power of the state.86

However it should be highlighted that before the courts are clothed with legal sanctions, the custom is a mere rule of positive morality observed by the citizens.87

The law that governs mergers and acquisitions in Malawi is laid down, posited and affirmed by man hence falls under positivist legal theory. For example in Malawi the guidelines of mergers and acquisitions are governed by the Reserve Bank Malawi (RBM) guide, the Companies Act and the Competition and Fair Trading Act which are all manmade laws. These guidelines are

83 John Austin, The province of Jurisprudence determined, Volume 2, 1970

84 Peter Adams, Introduction to Legal Philosophy, 1974, p 23

85 Wacks, Philosophy of law, New York, p14

86 John Austin, The province of Jurisprudence determined, Volume 2, 1970

87 Andrew Altman, Arguing About Law, second edition, Wadsworth Publishing Company

23

customs which have been adopted by the Malawi courts and companies hence breach of such is a crime.

On the other hand the Employment Act of Malawi and the Labour Relations Act which govern the welfare of the employees are also laws laid down, posited and affirmed by man hence also falls under positive legal theory.

2. Marxist legal theory The Marxist theory is grounded on the fact that law arise from the interactions of human beings within social structures.88Marxist theory creates class divisions within societies which cause conflict and disorder and therefore the law comes into existence to deal with such conflicts.89The law on mergers and acquisitions create class division between the shareholders of the company and the employees as it is seen that the shareholders and employees are not at par under the current employment laws during mergers and acquisitions law. For example, the Companies Act under part XII provides for shareholder protection but it is silent on the employees’ protection.

Marxists believe that the transition from capitalism to socialism is an inevitable part of the development of human society.90 It can be argued that Marxists deduce the inevitability of the transformation of capital society into a socialist society from economic law of motion. From this, it can be said that Marxist legal theory favours the rich and disregard the poor. During mergers and acquisitions most of the available employment laws in Malawi favour the shareholders or directors of the companies (the rich) and not the employees (the poor) hence falling under the

Marxist legal theory.

88 Andrew Altman, Arguing About Law, second edition, Wadsworth Publishing Company

89 Mark Tebbit, Philosophy of Law, Second edition, p58

90 Mark Tebbit, Philosophy of Law, second edition,P65

24

2.3 CONCLUSION From the above discussion it can be seen that the two theories properly do support the study as the rich are seen to be favoured as compared to the poor. As already highlighted in chapter one the paper works on the presumption that employees’ job security is not legally protected during mergers and acquisitions and the study will now look at the available employment laws in

Malawi and analyse them to check if they offer employees’ job security during a merger or acquisition and hence the discussion in the next chapter

25

CHAPTER THREE LABOUR LEGISLATIONS IN MALAWI VERSUS EMPLOYEES’ JOB SECURITY

3.0 INTRODUCTION Job security is one of the challenges that employees’ face in today’s corporate world especially during mergers and acquisitions.91 Each and every country has legal measures and a system of laws put in place intended to regulate job security and protect the interests of employees.92 The labour policies that are put in place in Malawi have a key impact on the provision of employees’ job security however the key issues relating to the efficacy of these labour policies is the lack of time and capacity for monitoring and enforcing them.93 There are a number of employment/ labour laws in Malawi that relate to employees’ job security and this chapter will identify these laws and try to check if they do protect the employees’ job security during the time of corporate mergers and acquisitions.

3.1 EMPLOYMENT LAWS IN MALAWI As already highlighted above, there are so many laws that govern the welfare and interests of employees in Malawi and these include the Malawi Constitution, the Employment Act, Labour

Relations Act, Workers Compensation Act, and the International Labour Organization (ILO)

Convention number 158 among others. The main aim of these employment laws is to govern the individuals’ employment contract, flexibility of working conditions and the termination of employment.94However it should be highlighted that these laws will be discussed as regard to offering employees job security.

91 M. Phiri, Employment in Malawi,2000,p20

92 H. Mbekeani, Understanding Job security, 2014, p43

93 I. Nyondo, The Impact of Voluntary CRS Initiatives,2000, p18

94 Martha Phiri, Employment in Malawi, 2010, p18

26

3.1.1 The Constitution The Malawi Constitution95 is the base point for all employment practices in Malawi as it is regarded as the supreme law of the land and it addresses labour issues in several of its sections.

For example under section 31(1) the Constitution affirms workers rights in relation to employment conditions by stating that every person shall have the right to fair and safe labour practices and to fair remuneration. In the case of Liquidator, Import and Export Malawi Limited v Kankhwangwa and others96 it was held that fair labour practices entail reasonable, fair and even handed practices by the employer towards the employee. In Kachinjika v Portland Cement

Company97, it was held that unfair labour practices may include termination of employment without justifiable reason. From the kachinjika case it can be said that protecting employees’ job security is a fair labour practice and failure to do so entails unfair labour practice. In Chilala and others v Petroleum Services Malawi Limited98it was held that the term unfair labour practices may include a wide range of issues such as unfair conduct by an employer relating to promotion, training, and provision of benefits to an employee and termination of employment without any reason. From the above cases it can be concluded that the failure of the Constitution to expressly define fair labour practices or unfair labour practices open a flood gate of different views on what these practices mean in trying to offer employees job security. Section 23(4) affirms protection of children from economic exploitation. This section prohibit employing children in

Malawi but it should be highlighted that although this is prohibited many children are found

95 Chapter 4:0, Laws of Malawi, 1999

96 MLLR(2008) p219

97 MLLR(2008) p161

98 Matter number 158(IRC),2000

27

working in different fields for example tea farms, people’s houses, factories just to mention a few as these children head families due to poverty or orphan hood. Section 29 affirms the right of economic activity by stating that every person shall have the right to freely engage in economic activity, to work and to pursue a livelihood anywhere in Malawi. This section protects the employee from being discriminated by an employer due to race, disability, colour and place of origin just to mention a few as held in the case of Gladys Matiki v Cure International99.

However it should be noted that no section in the Constitution expressly talks about protecting employees’ job security during corporate mergers and acquisitions.

3.1.2 The Employment Act (EA) The Employment Act100 is another piece of legislation which governs most of the employment practices in Malawi. Its main objective is to regulate the minimum standards of employment in

Malawi in order to ensure social justice and social security.101 The Employment Act guides employment relationship between individual employee and employer. The Act aims at establishing, reinforcing and regulating minimum standards of employment with the purpose of ensuring equity necessary for enhancing industrial peace, accelerated economic growth and social justice and matters connected there with and incidental thereto.102 The act also provides benefits and conditions which the employer must give to the employee as it acts at establishing, reasoning and regulating standards of employment.103 An analysis of the act shows that it

99 Matter number 234 (IRC), 2004

100 Act number 6 of 2000

101 Vincent Castel, Employment Education, 2010, p 114

102 Employment Act preamble

103 Martha Phiri, employment in Malawi, 2010, p22

28

provides the employees with job protection in some sections; for example, section 32 says that no employer can transfer a contract of employment of an employee to another employer without the consent of the employee. This section gives the employee some job security as the employer cannot just transfer the employees’ contract of employment without the employees’ consent.

However it should be noted under section 32(2) the act allows an employer to automatically transfer the contract of employment during mergers and acquisitions under the same rights and obligations. This defeats the right of an employee choosing his or her employer. It should also be highlighted that once the employer transfers the undertaking, the employee is deemed dismissed and has the right to accept the new employment or sue for wrongful dismissal as held in Nokes v

Doncaster Amalgamated Collieries Limited.104Section 4(2) of the act says that it is a criminal offence on the part of an emp loyer to impose forced labour on an employee. This section protects the employee in a sense that he or she cannot be forced to do something outside the contract of employment. Section 35 provides for severance allowance if the employer unilaterally terminates the contract of employment. This means an employer can terminate the contract of employment on economical grounds but must pay the employee some severance allowance. The severance allowance goes a long way as the employee may use it in many ways while looking for another job or use it to settle down if he or she is too old to look for another job. Section 46 provides for sick leave of employees, meaning that if an employee is sick he or she cannot be fired sorely because of not reporting to work due to sickness and the employee is assured that he or she still has a job to return to after getting better and this gives the employee some kind of job security. Section 57 states that the employee’s employment cannot be terminated unless there is a valid reason; connected to the employee’s capacity or based on the

104 Appeal Cases(1940)1014

29

operational requirement of the undertaking. It should be noted that though the act gives some kind of job security to employees in different scenarios, only section 32(2) guarantee employees’ job protection during corporate mergers and acquisitions as the contract of employment is automatically transferred to another employer on the same terms. The act also protects the workers / employees through the provision of minimum wage as it gives a guideline to what the minimum wage for an employee should be and providing for equal pay for equal job done as seen in the case of Ron Manda v Sugar Corporation of Malawi105. In terms of dismissal, section

61 of the act put the onus on the employer to show that there was a valid reason to justify dismissal and that where the employer fails to comply; there is conclusive presumption that the dismissal is unfair. This gives the employees some kind of job security as it is entirely for the employer to prove and justify the dismissal and that the employer cannot dismiss an employee anyhow without justifiable reason as held in the case of Kettie Mukamba v Malawi Revenue

Authority106. Section 61(2) of the act also requires the employer to act with justice and equity towards an employee as applied in Jawadu v Malawi Revenue Authority107. Section 63 is another section which provides the employee with job security by allowing the employee who has been unfairly dismissed to be awarded one or more of the following remedies; reinstatement, re- engagement and compensation. Section 5(1) of the act, states that no employee shall be discriminated on any basis of employment relationship as held in the case of Banda v Dimon

(MW) Limited108 .Section 4 prohibits forced labour by providing that no person shall be required

105 Civil Cause number176 of 2003

106 Matter number 101, IRC,2008

107 Malawi Law Reports,(2008), 397

108 MLLR,2008,P92

30

to perform forced labour. This section offers some job security to the employee as he or she may not be forced to perform certain jobs which she or he is not comfortable with which are outside the contact of employment. Section 12 prohibits victimization of an employee by providing that no employer shall inflict a disadvantage on an employee as held in Nazombe v Malawi Electoral

Commission109.It can be argued that a disadvantage on an employee include unfair dismissal hence offering some job security to the employee.

3.1.3 Labour Relations Act (LRA) The Labour Relations Act110 aims at promoting sound relations through the protection and promotion of freedom of association for employees, encouragement of effective collective bargaining and the promotion of orderly and dispute settlement conclusive to social justice and economic developments111 The Act provides for rights of employees to organize and to collective bargaining. It should also to be noted that there is not much litigation based on this Act as compared to the Employment Act and the Constitution.112 According to section 3 of the Act, the Act applies to the private sector and also the Government sector, including any public authority or enterprise. The Labour Relations Act entrenches freedom of association, which is a constitutional right as per section 31(2) of the Constitution. However the Act does not apply to members of the armed forces, the prison service or the police, except those employed in their civilian capacity.113 Section 6(1)(c) affirms protection of employees by stating that no person

109 (2008)MLLR,460

110 Laws of Malawi, Chapter

111 Labour Relations Act preamble

112 M. Kumbukani, Basic Labour Laws, 2000, p63

113 Section 3(2) of the Labour Relations Act

31

shall, in respect of any employee or any person seeking employment dismiss or prejudice such person because of his or her exercise or anticipated exercise of any right relating to employment.

The act allows strikes for registered workers and employees after dispute settlement procedures in collective agreement and conciliation have failed.114 Section 49 of the Labour Relations Act gives protection to employees who undertake a lawful strike by stating that no civil proceedings shall be brought against any employee in respect of a strike.115This gives the employee some job security as he or she is not afraid to participate in a strike and still have a job to return to.

However it should be highlighted that the immunity on strike only applies where the strike is lawful and according to the provision of the act. It should also be stressed that the immunity only applies to civil proceedings and not criminal proceedings. Section 51(1) prohibits an employer to employ temporal employees to do the work of an employee involved in an industrial action like a strike. This section gives the employees on a strike some job security as they are sure that nobody has taken their jobs while they are striking and that after the strike they will go back to their various jobs or positions.

3.1.4 The Competition and Fair Trading Act (CFTA) The Competition and Fair Trading Act (1998) which became operational in 2005 has governed the review and determination on over a dozen corporate mergers and acquisitions and cases of alleged abuse of a dominant position by an enterprise.116The role of the Competition and Fair

Trading Act is to encourage competition in the economy, to regulate and monitor monopolies and concentrations of economic power in order to protect consumer welfare and to ensure the

114 Section 46 of the Labour Relations Act

115 Section 49 of the Labour Relations Act

116 M. Kumbukani, Basic Labour Laws,2000, p91

32

best possible fair market conditions.117The Act seeks to encourage competition in the economy by prohibiting anti-competitive trade practices like predictor behavior towards competitors.118

However it should be highlighted that under section 25 of the Act it provides protection of employees by stating that no action, suit or other proceedings shall be brought or instituted personally against any employee in respect of any act done in good faith in the course of carrying out the provisions if this act. Section 17 of the act also provides that no action, suit or other proceedings shall be brought or instituted personally against any member in respect of any act done in good faith in the course of carrying out the provisions of this act. This section protects the members individually and it can be conclusively said that it does protect the employees’ job security as their jobs are secure because whatever they do in the course of employment will not be taken personally against them. Section 32(1) states that any category of agreements, decisions and concerted practices which are likely to result in prevention, restriction or distortion of competition to an appreciable extent in Malawi are declared anti-competitive trade practices and are prohibited by the act. Enterprises and companies are by section 32 supposed to refrain from any behaviors that will limit access to markets or unduly refrain competition.119 However

Section 3(a) provides statutory exemption from the application of section 32(1) as it says that nothing in the act shall apply to activities of employees for their own reasonable protection as employees. Section 35 of the act provides for control of corporate mergers and acquisitions/takeovers. However the section does not go further to talk about protecting employee’s jobs during the time these mergers and acquisitions happen.

117 Section 8 of the Competition and Fair Trading Act

118 Section 32(2) of the Competition and Fair Trading Act

119 Sonia Gasparikova, Competition in Malawi,2008,p19

33

3.1.5 Workers Compensation Act (2000) The act makes provision for compensation for injuries suffered or diseases contracted by workers in their course of employment or for death resulting from such injuries or diseases; to provide for establishment and administration of a workers’ Compensation Fund; and to provide for matters connected therewith or incidental thereto.120 This works as an employer liability type of scheme as the act places great liability on the employer and not the employee and the act provides for employer’s liability towards the employee in several of its sections. For example section 4 provides for employer’s liability for compensation for death or incapacity due to injury other than the contraction of a scheduled disease. The act goes further to say an injury incurred by a worker in the course of his employment shall be deemed, unless the contrary is proved, to have risen out of employment. This gives the employee some surety as she or he knows that any injury or misfortune which may happen in the course of employment will be well taken care of. Section

16 provides for compensation where incapacity or death due to a scheduled disease. An employer has a common law duty to avoid any foreseeable injury to the employee as held in the case of Kalolo v National Bank of Malawi121. The act goes further to say if the employer is dead, the dependants will receive compensation. However it should be noted that the act is more concerned with compensation rather than the protection of employees’ job security during the time he is health and working and also during corporate mergers and acquisitions..

3.1.6 International Labour Organisation (ILO) Convention Number 158 By virtue of section 211 of the Malawi Constitution, the ILO Convention number 158 form part of Malawi labour/employment laws, as held in the case of Kachinjika v Portland Cement

120 Preamble of Workers Compensation Act

121 (1997) MLLR,421

34

Company122 This convention is concerned of termination of employment at the initiative of the employer. Article 4 of the convention says that the employment of an employee shall not be terminated unless there is a valid reason for such termination connected with the capacity or conduct of the worker or based on the operational requirement of the undertaking, establishment or service. This article gives protection to the jobs of the employees. Article 6 prohibits termination of employment on temporary absence from work because if illness or injury. Article

7 states that employment of a worker shall not be terminated for reasons related to the workers conduct or performance before he is provided an opportunity to be heard on the allegations made against him. Article 11 provides that a worker whose employment is to be terminated shall be entitled to a reasonable period of notice unless he is guilty of serious misconduct as held in

Dickiel Kusainda v Petroleum Importers Limited123. Article 14(1) provides that when an employer contemplates termination for reasons of an economic, technological structural or similar nature, he shall notify, in accordance with natural law and practice, the competent authority thereof as early as possible giving relevant information the number and categories of workers likely to be affected. This was conquered in the case of Nsaliwa v PG Industries124. This gives the employees some job security because they are informed before hand and they can prepare or start looking for another job.

3.2 CONCLUSION From the discussion above, it can be concluded that although in Malawi there are a number of employment legislations, not all of them expressly provide employees job security in times of

122 (2008) MLLR,161

123 Matter number IRC 187 of 2007

124 (1995) 1MLR,172

35

mergers and acquisitions and this may affect the employees job security during a merger or acquisition hence the following chapter.

36

CHAPTER FOUR THE REASONS BEHIND MERGERS AND ACQUISITIONS AND HOW THEY AFFECT EMPLOYEES’ JOB SECURITY

4.0 INTRODUCTION Mergers and acquisitions are important strategic market tools in today’s corporate world as they enable successful companies to grow faster than their competitors by combining the strengths of the companies that have just merged.125In Malawi mergers and acquisitions are happening at a fast rate and have become popular strategic tools for increasing product portfolio in entering new markets.126 Mergers and acquisitions are used as a means whereby companies respond to the ever changing environment which lead to total extinction of the weaker companies by having them acquired by other large and successful companies.127However it should be noted that when mergers or acquisitions take place, employees are involved and they may be affected positively or negatively in the process. This chapter will discuss the reasons behind mergers and acquisitions and further look at how these mergers and acquisitions affect the employees’ job security.

4.1 REASONS BEHIND MERGERS AND ACQUISITIONS Corporate companies use mergers and acquisitions for many reasons; however the following are some of the strategic business reasons:

4.1.1 Survival

125 Shahid Ali, Impact of Mergers and Acquisitions on Job Security, 2008, p11

126 Palle Nierhoff, Mergers and Corporate Control,2003,p78

127 Dr Freeha Zafar,Mergers and Acquisitions, Lahore, Pakistan,2000,p23

37

Survival in the corporate world means the state of continuing to exist and not to fail or be destroyed.128Corporate companies all over the world use mergers and acquisitions to grow and survive a financial crisis on the market. The growth of a company may be achieved either by absorbing a major competitor or by combining departments with another company which will result in increase in revenue and shareholder value.129 Mergers and Acquisitions are becoming a means of survival and are not less than a competitive weapon among business firms in today's world.130 When a company takes over a major competitor it eliminates or reduces competition and thus building up its market power.131 A company may acquire another company in seemingly unrelated industry in order to reduce the impact of a particular industry’s performance on its profitability.132 This enables the company to survive the new market because if two or more firms combine their products or services, they gain a competitive edge over others in the market place. Merged firms have diversified variety of products after the merger and each consumer in both the firms will benefit with the range of products or services to choose from the new merged firm.133This helps the companies to survive in the market because they have now become part of the competitor company.

128 K Abbort, Business Law, second edition

129 Rajinder Kumar, Mergers in Today’s world,1997,P80

130 Linda Holbeche, Reaping the Benefits of Mergers and Acquisitions, 2002,p 88

131 Sana Khan, Managing Mergers and Acquisitions,2000,p11

132 John Wilkinson, Corporate Mergers and Acquisitions, 1990,p 33

133 Christina Tangora, Mergers and Acquisitions Strategies,2002,P22

38

4.1.2 Diversity This is the buying of a firm which is outside the company’s current primary line of business.134 A merger or acquisition between diversified sellers create market power in the individual market in which sellers compete; simply meaning that the market power of a seller in a particular market is increased through its contacts in other market.135Diversification is necessary to smooth out earnings and achieve more consistent long term growth of profitability for companies.

Diversification may reduce cost of capital, allows a firm to shift its core product line into one that which have higher growth prospects.136 It may be necessary to smooth-out earnings and achieve more consistent long-term growth and profitability. This is particularly true for companies in very mature industries where future growth is unlikely. A firm facing slower growth in its current markets may be able to accelerate growth through related diversification by selling its current products in new markets. Diversification stabilizes company’s earnings and boost investors confidence in a very short time .Through diversification the risk of company’s stock is decreased thus to say the company’s stock becomes more attractive to investors who are willing to invest in the company.137 Mergers and acquisitions helps firms to widen its consumer portfolio but it also leads to a more diversified range of services and offer scope economies by optimizing the synergies between the merged activities.1384.1.3 Cutting costs

When two companies have similar products or services, there is always stiff competition and combining these companies creates a large opportunity to reduce operation costs by means of

134 Kyungmook Lee, Mergers and Acquisitions,1996,p 75

135 Christina Tangora, Mergers and Acquisitions Strategies, 2002, p 65

136 Johannes Pennings, Effects of Mergers and Acquisitions, 2011, p23

137 Nicholas Caughey, Understanding Mergers in Today’s World,2003,p30

138 Machiraju H, Mergers and Takeovers, 2007,p23

39

integrating.139When a company is not self sufficient to operate on its own due to insufficient investment capacity or excessive competition, the company may merge with another company to enhance productivity while cutting costs.140 The cost reduction comes from consolidation of operations as well as the elimination of redundant costs, A combined company can usually lower its costs by removing duplicate departments, teams and other operations thus lowering work force hence saving money. Mergers and acquisitions are seen as a fast and less expensive way of acquiring new technology to fill gaps in current product portfolio.141Mergers and acquisitions pave way for entering new markets, adding new product lines, increasing the distribution reach and enhancing shareholder value.142 When a merger or an acquisition happens there is tax saving achieved by these companies because they are now taxed as one company and not separate entities. Domestic mergers cut costs for both the partners whereas for the majority of cases including domestic and cross border mergers and acquisition, the impact on profitability is insignificant but a clear trend to diversify the sources of revenue is apparent.143 In terms of cost efficiency and revenue efficiency it has been noticed that in domestic merger, organisation get the benefit of cost efficiency (reduction in operating cost) and in cross border merger, organisation get the benefit of revenue efficiency (increase in revenue).144

139 Palle Nierhoff, Mergers and Acquisitions,2009,P90

140 Sana Khan, Managing Mergers and Acquisitions,2000,p 89

141 Nicholas Caughey, Understanding Mergers in Today’s World, 2003, p35

142 Sana Khan, Managing Mergers and Acquisitions, 2000, p 9

143 Donald De Pamphilis, Mergers and Acquisitions Basics, 2000,p 44

144 Hubbord, International Mergers and Acquisitions, 2000,p90

40

4.1.4 Synergy Synergy simply means that the value and performance of two or more companies combined together will be greater than the sum of those companies standing as separate individual companies.145This concept assumes that during mergers and acquisitions the collective advantage which is to be gained by joining the companies will be greater than the existence of those companies separately.146Synergy is rather simplistic notion that two or more businesses in combination will create greater shareholder value than the businesses operating separately.147

Synergy takes the form of revenue enhancement cost saving through combinations of companies.

When a new company is formed out of amalgamated expertise of combination of two or more companies, potential is much higher and superior to what the individual companies previously had.148The merged company has hope to benefit from stuff reductions, economies of scale, acquiring new technology and improved markets. Synergy is regarded as a magic force that allows for cost efficiencies of new business and may be measured as the increment cash flow that can be realized through combination in excess of what would be realized if the firms were to remain separate.149 Synergy value can take three forms:

1. Revenues: By combining the two companies, we will realize higher revenues then if the two companies operate separately.

2. Expenses: By combining the two companies, we will realize lower expenses then if the two companies operate separately.

145 Black’s Law Dictionary

146 Mc Cann, Mergers and Acquisitions, 1988,

147 Kyungmook Lee, Mergers and Acquisitions,2000, p 45

148 Jan Bena, Corporate Mergers and Acquisitions,2013,p 21

149 Kyungmook Lee, Mergers and Acquisitions,2000,p50

41

3. Cost of Capital: By combining the two companies, we will experience a lower overall cost of capital

Synergy is the magic force that allows for enhanced cost efficiencies of the new business as it takes the form of revenue enhancement and cost savings.

4.1.5 Managerialism This is the belief in or reliance on the value and use of professional managers in administering or planning activities.150Managerialism is associated with hierarchy, accountability and measurement of an organisation.151A company may need to merge or prefer to be acquired by another company if the current owners cannot identify someone within the company to succeed them in leadership as a manager.152 The owners may also wish to cash out so that they invest in something else or retire. This theory is used mainly by managers who undergo mergers and acquisitions for selfish reasons especially to add to their prestige, build their spheres and for self preservation.153 However it should be noted that acquisitions are mainly applied as a part of a business or corporate strategy. The reasons for making an acquisition are many but generally they can be connected to one of three approaches: Resource-based view, Industrial economics/positioning perspective or managerial perspective.154 Under the resource based view, an acquisition is related to leveraging, developing and increasing the capabilities of the

150 Black’s Law Dictionary

151 Randy Smith ,Management and Managers,2003,p76

152 Kal Li, Innovations of Mergers and Acquisitions,2014,p34

153 Jan Bena, Corporate Mergers and Acquisitions, 2013, p 45

154 Rajinder Kumar, Mergers in Today’s Corporate World,1997,p89

42

organisation.155Under an industrial economy, an acquisition increases market share, decreases costs, decreases risks and take advantages of undervalued opportunities.156 Under managerial prospective an acquisition achieves managerial goals such as growth, power and personal rewards.157Studies have shown that managers whose benefits are connected to the growth of the company are more likely to engage in risk taking mergers or acquisitions as these are used as a fast growth approach.158

4.2 THE EFFECTS OF MERGERS AND ACQUISITIONS ON EMPLOYEES’ JOB SECURITY IN MALAWI While technological change and global competition have contributed to the increasing occurrence of mergers and acquisitions in the sector, these mergers and acquisitions have an effect on employees.159Mergers themselves are an accelerating process of restructuring and technological change, as merged companies seek to capitalise on newly established synergies and strive to reach the cost savings targets set in merger plans for the benefit of their shareholders.160 On the other hand acquisitions are talent and management skills which represent the primary value of the target company to the acquirer especially in high

155 Hubbord, International Mergers and Acquisitions,2000,p 89

156 Palle Nierhoff, Mergers and Corporate Control,2009,p 30

157 Palle Nierhoff, Mergers and Corporate Control, 2009,p 30

158 Linda Holbeche, Reaping the Benefits of Mergers and Acquisitions, 2002,p 78

159 Grinblatt and Titman, New Corporate Families,2002,p 15

160 Judy Layne, Mergers and Acquisitions in the Changing World, 2010, p 33 43

technology and service companies for which assets are largely the embodied knowledge of their employees.161

The following are some of the examples how mergers and acquisitions affect the employees job security.

4.2.1 Restructuring Restructuring is the process of bringing about a drastic or fundamental internal change that alters the relationships between different components or elements of an organisation.162Restructuring mostly happen due to technological changes in a particular company and involves redundancies, retrenchments and demotions. Technological changes have contributed to the increasing occurrence of mergers and acquisitions in the corporate world. On the other hand these mergers and acquisitions have also accelerated the process of restructuring, as merged and acquirer companies seek to capitalise on newly established synergies and strive to reach the cost savings targets set in merger plans for the benefit of their shareholders.163 The restructuring effect is a dynamic effect of mergers and acquisitions due to changes in company’s size, financial condition or competitive position in the market.164 The people who are most affected by the restructuring procedure belong to a whole range of occupation categories and specialisations but clerical workers are the ones who are hit hard.165 Some loss of managers is intentional as part of an effort to eliminate redundancies and overlapping positions, but other managers quit during the

161 Brealey and Meyers, Effects of Mergers and Acquisitions,2003,P 17

162 Machiraju H, Mergers and Takeovers,2007,p 133

163 Rajinder Kumar, Mergers in Today’s Corporate World,1997.p90

164 Sherman Andrew, Mergers and Acquisitions from A to Z,3rd edition,2010

165 Puranam P, Organising for Innovations, 2nd Edition, Harvard, 2000

44

integration turmoil. However it should be noted that even managers are not immune to restructuring. When corporations merge, there are usually instances of redundancies which lead to lay-offs or shifting roles of employees and taking lesser roles in the merged company just to avoid being on the unemployment line.166 Employees have a significant amount of human capital vested in the firm, thus the employee objective function incorporates a part of the gains in firm value and profitability.167Unprofitable firms are more likely to reduce employee compensation and lay off some employees in an attempt to complete a turnaround. Redundancies can have a far reaching effect on the welfare of employees in a sense that employees who lose jobs in this way take time to recover their previous level of earnings and many never do.168 Employees may have specific skills which cannot be readily deployed somewhere; for example an employee who was a manager before a merger or acquisition may end up being a mere clerk after the merger or acquisition because jobs are scarce in Malawi hence not using the specific skills.. Another example is that employees who are old and have just few years before they retire are laid off and are forced to an early retirement as most companies will not be willing to employ them.

4.2.2 Competitiveness When employees are concerned about their own job security they are more likely to become competitive with other employees and this leads to conflicts or even violence. While some competition among employees is good but competition due to fear of losing a job is not good as it creates tension and negative conflict in the organisation. During mergers and acquisitions, employees are affected differently as some are retained and some are laid off. Mergers tend to

166 Machiraju H, Mergers and Takeovers, 2007, p134

167 Linda Holbeche, Reaping the Benefits of Mergers and Acquisitions, 2002, p 77

168 Machiraju, H, Mergers and Takeovers, 2007, p46

45

have a negative impact on how employees view their employers as confidence in the employers is gone and they resort to survival of the fittest theory. The employees lose confidence in the future of their company following a merger or acquisition which may cause some employees to quit. The competition sometimes stretches to stakeholders/ shareholders as during mergers and acquisitions there are conflicts between the employees and the shareholders. The employee- shareholder conflict of interest argument and strong rights argument of target firm employees can cause the bargaining with bidders to be more focused on ensuring the stability of jobs.169

The employees pay more attention on entering deals that benefit the target’s shareholders so that they punish their employers, resulting in a negative effect of strong rights of target employees.

4.2.3 Culture Clash Corporate culture has been varyingly described in the literature as the normative glue that holds an organisation together through traditional ways of fulfilling organisational responsibilities and it is seen as the emergent pattern of beliefs, behaviours, and interaction that uniquely characterises the organisation as it operates within a particular industrial and societal context.170The employees of an organisation have their own culture different from another organisation. Corporate culture shapes management style and employee’s behaviour along with operating philosophies and practices which affects the type of behaviour among employees that is rewarded both tangibly and intangibly in an organisation.171 It should be noted that when organisations merge some employees from the merged organisations are retained and there is a combination of cultures of the employees of the merged organisations and employees do struggle

169 Puranam P, Organising for Innovations, 2nd edition,Harvard,2010,p 98

170 Valerie Garrow, Takeover Benefits, 2007, p 90

171 Mark Herndon, Mergers and Acquisitions Integration, 2010, p 33

46

to fit in the newly cross breed culture. Employees often struggle to fit into a new office culture when companies merge. Mergers and acquisitions result in new way of doing business and sometimes employees are not comfortable with the changes and they do not understand how they fit into the new office culture. Mergers and acquisitions inherently bring together distinct corporate entities, each with their own corporate culture, explicit and implicit behavioural systems and management styles.172 Cultural change is one of the most difficult types of change effort among the employees since culture provides the foundation for employee’s lives and that corporate culture can serve as a constraint to large scale organisational change.173 The degree of decision-making responsibility, along with power and control mechanisms, have been identified as key areas where cultural clashes are apt to occur, especially where a high degree of integration is required to achieve merger and acquisition objectives.174 In merger and acquisition situations, particularly where disparate cultures collide, employees become confused, frustrated, and resistant to change which leads to non performance.175 Culture change, in the context of mergers and acquisitions, is generally recognised as a time-consuming, evolutionary, expensive, and emotionally-intensive process. Despite the importance of cultural considerations, experience shows that merger and acquisition strategies often fail to recognize that not only are two organizations coming together, but two distinct corporate cultures as well and on the other hand employees are affected.176 The challenge of integrating different organizational cultures is one of

172 Susan Jackson, Mergers and Acquisitions, 2001, volume 32, p45

173 Valerie Garrow, Takeover Benefits, 2007, p101

174 Valerie Garrow, Takeover Benefits, 2007, p112

175 Robert Eccles, Consideration for Alternative Energies, 2012,p 96

176 Alexander Roberts, Mergers and Acquisitions, 2010, p20

47

the most demanding and complex aspects of mergers and acquisitions. Senn (1989, 229)177 suggests that two organisations merging on the basis of financial data only is akin to two people marrying based solely on height and weight, and observes that both lead to high divorce rates which leads to the suffering of innocent children. It can be argued that when corporate mergers and acquisitions take place, corporate clash follows and employees suffer a great deal.

4.3 CONCLUSION There are many reasons behind mergers and acquisitions. No matter whatever the reason is; it is the shareholders who benefit a lot from these mergers and acquisitions as they exercise their rights. However on the other hand these mergers and acquisitions affect employees’ job security positively or negatively and the rights of employees are usually over looked. However the employees have rights during these mergers and acquisitions which are going to be discussed in the next chapter.

177 Author of Interbreeding Corporate Cultures article

48

CHAPTER FIVE: THE RIGHTS OF EMPLOYEES DURING CORPORATE MERGERS AND ACQUISITIONS

5.0 INTRODUCTION When a merger or acquisitions happens, a crucial goal for the newly formed company is to integrate the two groups of workers effectively as employees of the previous business owner automatically become employees of the new owner.178 One of the main worries of employees during these mergers and acquisitions is the loss of jobs as separate business functions of two or more companies are now merged.179 However it should be noted that these employees have rights which can be exercised during these mergers or acquisitions and this chapter will discuss some of the specific rights which employees have.

5.1 EMPLOYEES RIGHTS Employees are usually the last to find out about a merger or acquisition transaction and the fact that they have no part in decision making of these mergers and acquisitions they are likely to be affected by them.180 Employees are affected by mergers and acquisitions in different ways because a number of jobs are shifted or eliminated. However every employee in an organisation has rights and the following are some of the rights which the employees have during mergers and acquisitions.

5.1.1 Right to be consulted An employee has the right to be consulted about the possibility of a future merger or acquisition, either individually or through an employee representative.181 This helps the employee to plan

178 Nicholas Caughley, Employees Rights ,2010, p20

179 H, Mbekeani, Understanding Job Security, 2014, p33

180 Shahid Ali, Job Security and Motivation,2000,p45

181 Nicholas Caughley, Employees Rights, 2010,p 20

49

ahead. Consulting employees also helps to achieve a smooth transition and management needs to assure the employees from the acquired company that the benefit continuation will be acceptable.

Communication is critical to continuing benefit plans successfully and sustaining employees’ morale.182 The employer must give the required information to each employee about the merger or acquisition because they will be affected by them. The information should include: telling the employees that a merger or acquisition is about to happen, that the merger or acquisition will transfer employees contracts of employment, when the transfer will take place, the reasons behind the merger or acquisition, implications of the merger or acquisition and the measures the new employer is expected to take.183 The acquiring company should ask the seller to distribute letters of explaining to what will happen to employee’s benefits. If the employees are not represented by a trade union, the employer must inform and consult other appropriate employee representatives and these may be the existing representatives or new ones specially elected.184

However it should be highlighted that an employee is obliged to accept a merger or acquisition and transfer of the employment contract, but if he or she chooses to decline the transfer, the contract will come to an end and he or she will be deemed to have effectively resigned.185

5.1.2 Right to contract fulfilment When employees are transferred to a new employer because of a merger or acquisition, they are supposed to be employed on identical terms as those employed under the previous employer.

During a normal business transfer or take over, the new employer is not supposed to change the

182 Nicholas Caughley, Employees Rights, 2010,p20

183 Alexander Roberts, Mergers and Acquisitions,2010 p34

184 Shahid Ali, Job Security and Motivation,2000,p56

185 Alexander Roberts, Mergers and Acquisitions,2010, p45

50

terms of employment contract of the acquired employee; thus to say the terms and conditions which an employee agreed with the former employer should still suffice.186 The same terms which the employer and employee agreed before the merger or acquisition will apply during a transfer and the former employer cannot change the terms and conditions of the employment so that they can be in line with the employment laws of the new employer.187 However an employer may change employment terms and conditions of the employee for better but he cannot validly impose the new terms and conditions without the consent or agreement of the employee or the employee’s trade union representatives.188 Any changes must be made upon agreement with the employee representatives who are chosen by fellow employees and not the employer and they should be independent in carrying their work as representatives. Employment contracts are supposed to be treated as if they had originally been agreed with the new employer and should be fulfilled. Generally where there is a transfer of employment, service with the old employer counts as service with the new employer and if a business is transferred from one employer to another, the terms and conditions of employment are automatically transferred. Continuity of service is unbroken and employees maintain all the rights and responsibilities stated in the contact of employment with their previous employer. If the new employer does not satisfy the employees’ terms and conditions of employment, then the new employer may be liable for breach of contract. However, nothing in the regulations prohibits dismissal if the employer can justify such dismissal for economic, technical or organisational reasons.

186Lynda Moutly Belcher, Employee Rights, 2014, p 23

187 Nicholas Caughley, Employees Rights, 2010,p23

188 Shahid Ali, Job Security and Motivation, 2000,p33

51

5.1.3 Right to negotiate The merger or takeover of an entity by a new owner or new management often causes loss of jobs and employees are often desperate to stay on with the new employer but on the other hand the new owner has already its own staff and may want to avoid the expense of taking new staff.189 However the employees can negotiate with the old employer on their contact before a merger or acquisition happens. The employee may negotiate a new contract with the old employer before the happening of a merger or acquisition that will make the employee safe during the transferring of contracts to the new employer. This means that employers are supposed to consult with the employees before a merger or takeover takes place. An employee has the right to negotiate with the employer on the terms of employment either individually or jointly as a team with other employees through representatives to maintain the job. It should be highlighted that if an employee is retained after a merger or acquisition, he may also be able to negotiate a new deal on the contact agreement with the employer. The new employer should devise fair and non discriminatory selection criteria and methods so that the old existing workforce is not under any unfair advantage than the newly acquired workforce. The new employer is supposed to take over responsibility for the employment duties owed to the employee but the old employer.

5.1.4 Right to be paid If an employee contract of employment is not transferred to the new employer, the old employer has an obligation to pay the affected employee his or her entitlements such as annual leave and redundancy pay. On the other hand if during a merger or acquisition an employee is laid off on economic grounds by the new employer; he or she has the right to a severance package. The new

189 Shahid Ali, Job Security and Motivation, 2000, p60

52

company which has taken over the business through a merger or acquisition can choose to dismiss staff on economical and technical reasons however they must follow the correct redundancy procedures otherwise it will be breach of contract. If an employee is dismissed after a merger or acquisition without proper procedure, it is automatically unfair dismissal, and in such circumstances an employee can seek legal advice.190

5.2 CONCLUSION

During mergers and acquisitions employees have specific rights and it is the duty of an employee to see that his or her rights are not infringed during the happening of a merger or an acquisition.

If the rights of the employee are infringed, the employee can seek a legal remedy.

190 Alexander Roberts, Mergers and Acquisitions, 2010,p 45

53

CHAPTER SIX: FINDINGS AND RECOMMENDATIONS

6.1 FINDINGS Mergers and acquisitions are becoming a reliable marketing tool in the Malawi economy as a lot of companies are merging everyday to boost their businesses. The ever increasing happening of mergers and acquisitions help to accelerate economic growth and diversification. The

Competition and Fair Trading Commission of Malawi encourage mergers and acquisition so that there is competition on the market and it approves the happening of these mergers and acquisitions. For example in 2013, among others, the commission approved the merger of

International Hotel Licensing Company with the Protea Group of Companies and it also approved Dhinseri Petroleum to acquire Makandi and Kawalazi tea estates which were under

Global Tea and Commodities Limited. In 2014 National Bank of Malawi acquired Inde Bank with the commission’s approval and in 2015 the commission approved First Discount House to acquire Malawi Savings Bank. However mergers and acquisitions have recorded some mixed reactions on the employees because during the happening of these mergers and acquisitions, employees are affected in many ways, most of the times negatively, as they change hands from one employer to the other. For example, some employees are laid off in the process of mergers and acquisitions hence losing their jobs meaning that the job security of employees is at risk during the time of mergers and acquisitions.

The study has shown that the employment laws that are available in Malawi have loop holes in protecting the employees’ job security during mergers and acquisitions. Most of the employees involved in a merger are looked down upon by the employers because the available laws do not expressly protect them.

54

6.2 RECOMMENDATIONS Having discussed the protection of employees’ job security during mergers and acquisitions in

Malawi the study found out that the laws do not hundred percent protect the employees job security and the paper make the following recommendations:

6.2.1 Clarify the existing labour laws The existing labour laws should be clarified as regards to mergers and acquisitions so that there are no loop holes in the Acts. For example have a specific chapter or part in the Acts which will provide for employment issues during a merger or acquisitions so that the employers do not take advantage of the employees during this time.

6.2.2 Improve the available guidelines on mergers and acquisitions The available guidelines for mergers and acquisitions have hiccups and should be improved to fit the interests of both the shareholders and the employees. For example, instead of just listing down what shareholders or employers should do if they to go undergo a merger or acquisition, the same should be done for employees. The employees should be told what to do and how to go about in times of mergers or acquisitions as most of the times they are caught unaware.

6.2.3 Develop laws on contract transfer under mergers and acquisitions Although mergers and acquisitions have been happening for over a decade in Malawi, there are no laws which have been passed as regards to the transfer of contract of the employees which makes employers to look down on employees during this time.

55

BIBLIOGRAPHY

(1995) 1MLR, 172

(1997) MLLR, 421

(2008) MLLR, 161

(2008)MLLR, 460

Act number 6 of 2000

Adams P. Introduction to Legal Philosophy, 1974, p 23

Ali S. Impact of Mergers and Acquisitions on Job Security and Motivation, p 59

Altman A. Arguing about Law, second edition, Wadsworth Publishing Company

Appeal Cases (1940)1014

Armour J. Corporate Restructuring, University of Cambridge, p 201

Austin J. the province of Jurisprudence determined, Volume 2, 1970

Ayesha Alam, Strategic Management: Managing Mergers and Acquisitions, International

Journal of Business, 2014

Ayesha Alam. Managing Mergers and Acquisitions, Business Research, 2014, p 88

Becketti S. Corporate Mergers and the Business Cycle, Government Printing Office, Chapter 6,

Bena J. Corporate Mergers and Acquisitions, Journal of Finance, 2014, No.6, p15

56

Brewer, Corporate Governance Structure and Mergers, p 33

Bruner H. History of Mergers and Acquisitions, 2004, p95

Caves R. Effects of Mergers and Acquisition, Harvard University,p33

Chapter 4:0, Laws of Malawi, 1999

Civil Cause number176 of 2003

Employment Act preamble

Fadzlan S. Effects of Mergers and Acquisitions, volume1,p 29

Gaughan P. Mergers and Acquisitions, Fairleigh Dickinson University, p37

H. Mbekeani, Understanding Job security, 2014, p43

I. Nyondo, The Impact of Voluntary CRS Initiatives, 2000, p18

Jackson W. Mergers and Acquisitions, 2010, p 46

Jan Bena, Corporate Innovations and Mergers and Acquisitions, Journal of Finance, Volume 5,

October 2014.P 12

Jorgensen V. Importance of Mergers and Acquisitions, 2010,p15

Jrisy Motis, Mergers and Acquisitions Motives, Toulouse school of economics, February

2007.Page 3

Judy L and Li K. Mergers and Acquisitions, Volume 6, p44

Judy Layne, Forming New Families, Industrial Relations Centre, Kingston, Page 34 57

Judy Layne, Forming New Families, Industrial Relations Centre,p50 Kenneth Cline, American

Banker, University of Pennyslavia, September 26,1996

Kal LI, Mergers and Acquisitions, American Finance Association, Volume LXLX, 2014 Page

211

Kate Phillips, American Banker , Stem School of Business, New York University, July 2013, page 50

Kate Phillips, American Banker, Stem School of Business, New York university, July 2013,Page

46

Keith Abbott, Business Law, 8th edition, 2002

Khan S. Strategic Management of Mergers and Acquisitions, p 40

Kwengwere P. Guide Lines of Mergers and Acquisitions in Malawi, 2012, p 16

Kyung Mook Lee, Corporate Mergers and Acquisitions, Wharton School, Stenberg 2000,Page

78

Labour Relations Act preamble

Laws of Malawi, Chapter

Laws of Malawi, Chapter 46:03

Laws of Malawi, Chapter 48:09

LI. K. Mergers and Acquisition, Finance Association, Volume LXLX, 2011, p 334

58

Linda Dale Bloomberg, Completing your dissertation, 2005, Page 68

M. Kumbukani, Basic Labour Laws, 2000, p63

M. Kumbukani, Basic Labour Laws, 2000, p91

M. Phiri, Employment in Malawi, 2000, p20

Malawi Law Reports,(2008), 397

Martha Phiri, Employment in Malawi, 2010, p18

Martha Phiri, employment in Malawi, 2010, p22

Matt E. M. Mergers and Acquisitions, p 15

Matter number 101, IRC, 2008

Matter number 158(IRC), 2000

Matter number 234 (IRC), 2004

Matter number IRC 187 of 2007

Melonakos J. Effects of Mergers and Acquisitions, Higher Education Commission, Pakistan

MLLR (2008) p161

MLLR (2008) p219

MLLR (2008) P92

Motis J. Mergers and Acquisitions Motives, University of Crete, P 34

59

Pamphillis D. Mergers and Acquisitions Basics, the Boulevard, Oxford, 2011, p 201

Pennings J. Mergers and Acquisitions, University of Pennyslavania, p 105

Perkins D. Buying a Business, p4

Pettit J. International Mergers and Acquisitions, Booz and Company, United Kingdom,2004

Pillet J, Corporate Finance and Mergers and Acquisitions, McCarthy, p45

Pilloff S, Value effects of Bank Mergers and Acquisitions, 1996, p 31

Preamble of the Competition and Fair Trading Act of Malawi

Preamble of Workers Compensation Act

Ptropoulus D, Dr. Advantages and Disadvantages of Mergers and Acquisitions,p11

R, Clarke, Research Models and Methodology, 2005, Page 31

R, Clarke, Research Models and Methodology,2005 Page 20

Reserve Bank of Malawi, Guidelines for Processing Application for Mergers and Acquisitions, article of 2006, p11

Richard Caves, Effects of Mergers and Acquisitions on the Economy, second edition, 2011

Richard Caves, Effects of Mergers and Acquisitions on the Economy, second edition, 2011

Saunders A. Mergers and Acquisitions in Small Business, Stern School of Business, NY 10012,

Scalive J. Small Business lending, Philadephia, USA, p406

60

Section 3(2) of the Labour Relations Act

Section 32(2) of the Competition and Fair Trading Act

Section 46 of the Labour Relations Act

Section 49 of the Labour Relations Act

Section 8 of the Competition and Fair Trading Act

Sonia Gasparikova, Competition in Malawi,2008,p19

Steven j Pillof, Dynamic effects of Monetary Policies, Finance Journal, October 2009, Page 5

Tebbit M. Philosophy of Law, Second edition, p58

United States cases, No. 789 of 1904.

Vincent Castel, Employment Education, 2010, p 114

Wakes, Philosophy of law, New York, p14

Weber T. Mergers and Acquisitions, 2000

61

61