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PROBLEMS OF LABOUR DURING MERGERS & ACQUISITION

“If I take care of my people, they will take care of the customer”

-          Max Turner

    In this era of globalization, liberalization, privatization, technological developments and intensely competitive business environment, merger and acquisition are the big part of corporate finance world which gained momentum in India during 1990s with the open ended policies introduced by the Government of India. They are used for restructuring the business organization. After that the trends of merger and acquisition of changed over the years with diverse affect across various sectors of the Indian economy including labour economics.

     The recent scenario is that merger and acquisition is a marriage not only between business organization but also the culture and most importantly the workforce of two entities. Without safeguarding the interests of the workforce, the prime objective of merger and  acquisition  is to achieve long run success in business can never be achieved.

     In the case of merger, two companies combined in such a way that such one Corporation is completely absorbed by another Corporation. The less important Company looses its identity and becomes part of the more important Corporation, which retains its identity For Example, Merger of Tata Fertilizers Ltd. by Tata Chemicals Ltd. On the other hand, acquisition means an act of effective control and acquiring the target company mutually and willingly by another Company over its assets and management.  However, if an acquisition is forced or unwilling, it is takeover.

    Work Trend, one of the Databases maintained by Kenexa Research Institute in 2008 shows that 13% of the US Workforce went through the Merger and Acquisition process. The experience of USA works very similar to that of the workers from Netherlands, Australia, Germany and Brazil. The highest impact of merger and acquisition suffered by Indian workforce i.e., 19% and least suffered country is Japan i.e., 5%

   The practice of Merger and Acquisition resulted adversely not only to the general employees but also the management at the top level.

IMPACT AT GENERAL EMPLOYEES

  The reason for failure in merger and acquisition is due to the different style of functioning resulted in the downstream of the Company and on the work culture. Secondly, there is difference in organizational structure and so is designation which affects salaries, benefits and passion of employees. Thirdly, during such transition period, it had great impact on the working culture as it disturbs whole organization of the Company.

  Therefore, the effect is that after merger and acquisition, the Company would require less number of people to perform its task and so the Company reduces labour force by retrenchment and lay-off.  Hence,  it would not be wrong to say that the buyer Company plays the role of parent and acquired Company as step child.

IMPACT AT TOP LEVEL

  More often it is seen that the two organisations that are merging are culturally at opposite poles from each other. This gives rise to ego clashes at the top of the management. Under the changed circumstances the manager or other officers of the company may be asked to implement such policies or strategies, which may not be quite approved by him. When such a situation arises the main focus of the company gets diverted and the executives become busy in settling disputes among themselves. This problem is more prominent in cases of mergers between equals.

    Effects on the CEOs of the company is not minute because they are the most creative and talented people within the organization. The resultant loss of control over the affairs of the management devastates these individuals.

PROVISIONS OF INTERNATIONAL LAW FOR SAFEGUARDING INTERSTS OF LABOURS DURING MERGERS AND ACQUISITIONS

  The following provisions of the International Instruments directly or indirectly deals with the protection of labourers such as Article 23 and 25 of the Universal Declaration of Human Rights, 1948; Article 6 and 11 of the International Covenant on Economic, Social and Cultural Rights; Articles 4, 8, 11, 12, 13 and 14 of the ILO Convention on Termination of Employment Convention, 1982.

INDIAN LAW

(I) Provisions of the Industrial Disputes Act, 1947

25FF-  Compensation to workmen in case of transfer of undertakings.

Where the ownership of management of an undertaking is transferred, whether by agreement or by operation of law, from the employer in relation to or that undertaking to a new employer, every workman who has been in continuous service for not less than one year in that undertaking immediately before such transfer shall be entitled to notice and compensation in accordance with the provisions of section 25F, as if the workman had been retrenched:

Provided that nothing in this section shall apply to a workman in any case where there has been a change of employers by reason of the transfer, if-

(a) The service of the workman has not been interrupted by such transfer;

(b) The terms and conditions of service applicable to the workman after such transfer are not in any way less favourable to the workman than those applicable to him immediately before the transfer; and

(c) The new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer.

From the point of view of social security of labours in case of transfer of undertakings by mergers and acquisitions this sector has immense significance. The workmen become entitled to notice and compensation unless and until the transfer is covered by the proviso laid down in the section. The judicial pronouncements make it clear.

In the case of Board of Directors of South Arcot Electricity Distribution Company Ltd. v. Elumalai (1970) 2 SCJ 118, the Company was undertaken by the State. The conditions of service of the workmen were less favourable in the new organisation. So, the workmen claimed compensation from the company. The company pleaded that it is not liable. It was held that the proviso of sec 25FF cannot be invoked by the company for the purpose of defeating the claim of the workmen under the principle clauses of that section, as under sec 25FF, if the right to retrenchment accrues under it, it must be a right to receive compensation from the previous employer who was the owner at the date of transfer.

(II) Indian Constitution

In Indian Constitution, various labour friendly provisions are as follows:-

Article 39(a) which entails that the State shall, in particular, direct its policy towards securing that the citizens, men and women equally, have the right to an adequate means of livelihood.

Article 41 provides that the State shall, within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want.

Article 43 perpetrates that the State shall endeavour to secure, by suitable legislation or economic organisation or in any other way, to all workers, agricultural, industrial or otherwise, work, a living wage, conditions of work ensuring a decent standard of life and full enjoyment of leisure and social and cultural opportunities and, in particular, the State shall endeavour to promote cottage industries on an individual or co-operative basis in rural areas.

Article 43A lays down that the State shall take steps, by suitable legislation or in any other way, to secure the participation of workers in the management of undertakings, establishments or other organisations engaged in any industry.

CASE LAWS

    The above provisions are of no relevance until it has been applied for and when it has been applied, the main function of judiciary comes to protect the interest of workmen. AS, in the case of Bank of Baroda v. Mahindra Ugine Steel Co. Ltd. [(1976) 46 Com Case 227 (Guj)] where the Court held that the employees’ interest of the amalgamating companies must be taken into consideration by the courts and it must that the rights of the workmen are not adversely affected and adequate provisions are made for them.

In Bengal Tea Co. v. Union of India (1988-1989) 93 CWN 542 (Cal),  it was held that the employees do have a right to say “no” to be transferred to the transferee company but they do not have the right to object to the proposed amalgamation as long as they enjoy the same position and status in all respects as that in the transferor company.

In Gurmail Singh v. State of Punjab [(1991) 2 LLJ 76 (SC)] the appellants were in service as tube well operators in the irrigation department of the Public Works Department of the state of Punjab. The State took a decision to transfer all the tube wells to the Punjab tube-well Corporation, wholly owned and managed by the government of Punjab. Consequent to this all the permanent and temporary posts in the tube well circle that existed previously were abolished. When challenged before the Punjab High Court the same was rejected. However the Supreme Court held that the state should act as a model employer and should bear the burden of the extra money that is to be paid by the newly formed Tube-well Corporation having regard to the long length of service of the appellants.

Suggesting suitable measures for protecting the rights of workmen during mergers and acquisitions

Since, judiciary is not only the solution but there must be some practice to be followed that could take care of the organizational structure of the Company as well as the benefits of the workmen. One of the best example in three steps is in the Acquisition Strategy of CISCO –

1) Pre- Acquisition Stage

    Understanding benefit of acquisition as to how the organization will fit into each other or how the employees from acquired organization can fit into the working culture of CISCO.

2) Analyzing how one Organization can fit into another

   CISCO contemplated that it totally against forced acquisition and lay-off. It also guarantees job securities to employee of acquired Corporation.

3) Integration Process

    Where the information is given about future role of the employee of the acquired firm, the employees of the acquired Company is given 30 days orientation training to enable them to fit into the new organization and to assimilate themselves into the new working culture.

Tata tea merger with the Tetly group

The Tata’s acquisition of the Tetly group was one of the rarest examples of an Indian firm acquiring a larger British group. Initially the cultural gap between the companies was a big issue and had to be handled carefully. For example there was complains from the Tata Executives that they were kept waiting for longer hours at Tetly’s head office in Uk, inspite being the senior partners. On the other hand the Tetly people complained about the ignorance of the Tata executives about the western market. However a careful approach both sides helped in the cultural integration of both the companies. Both the sides instead of trying to dominate each other over the cultural issues adopted a focussed approach consisting of a blend of both the cultures. They worked towards adding to each other’s knowledge and skills and tried to create a business with better value prospects. However the best part was that the companies decided to leave behind the separate cultures of the Tata and Tetly and moved towards defining a single company. The key learning points from this merger were firstly to pre estimating the importance of cultural differences, adopting a non-threatening approach and absence of time pressure.

CONCLUSION

   Therefore, one can say that with FDI policies becoming liberalized, mergers and acquisitions are heating up in India as well and are growing with an ever increasing cadence. Though merger and acquisition lessened in 2008, but with the global economic meltdown expected to rebound as the worldwide recession comes to an end, and the Company stock prices rise, the merger and acquisition are expected to reach at their highest.

     Hence, if success is to be achieved in merger and acquisition, cohesive, well-integrated and motivated workforce are required who is willing to take on the challenge that arise in the process of merger and acquisition. So, without safeguarding the issues of employees and cultural integration, no Company can fulfil the objectives inherent in the acquisition scheme.

By-

                                                                       PRABHASH CHAND

                                                                LL.M. –II YEAR

NALSAR UNIVERSITY OF LAW,

                                                         HYDERABAD

PROBLEMS OF LABOUR DURING MERGERS & ACQUISITION

“If I take care of my people, they will take care of the customer”

-          Max Turner

    In this era of globalization, liberalization, privatization, technological developments and intensely competitive business environment, merger and acquisition are the big part of corporate finance world which gained momentum in India during 1990s with the open ended policies introduced by the Government of India. They are used for restructuring the business organization. After that the trends of merger and acquisition of changed over the years with diverse affect across various sectors of the Indian economy including labour economics.

     The recent scenario is that merger and acquisition is a marriage not only between business organization but also the culture and most importantly the workforce of two entities. Without safeguarding the interests of the workforce, the prime objective of merger and  acquisition  is to achieve long run success in business can never be achieved.

     In the case of merger, two companies combined in such a way that such one Corporation is completely absorbed by another Corporation. The less important Company looses its identity and becomes part of the more important Corporation, which retains its identity For Example, Merger of Tata Fertilizers Ltd. by Tata Chemicals Ltd. On the other hand, acquisition means an act of effective control and acquiring the target company mutually and willingly by another Company over its assets and management.  However, if an acquisition is forced or unwilling, it is takeover.

    Work Trend, one of the Databases maintained by Kenexa Research Institute in 2008 shows that 13% of the US Workforce went through the Merger and Acquisition process. The experience of USA works very similar to that of the workers from Netherlands, Australia, Germany and Brazil. The highest impact of merger and acquisition suffered by Indian workforce i.e., 19% and least suffered country is Japan i.e., 5%

   The practice of Merger and Acquisition resulted adversely not only to the general employees but also the management at the top level.

IMPACT AT GENERAL EMPLOYEES

  The reason for failure in merger and acquisition is due to the different style of functioning resulted in the downstream of the Company and on the work culture. Secondly, there is difference in organizational structure and so is designation which affects salaries, benefits and passion of employees. Thirdly, during such transition period, it had great impact on the working culture as it disturbs whole organization of the Company.

  Therefore, the effect is that after merger and acquisition, the Company would require less number of people to perform its task and so the Company reduces labour force by retrenchment and lay-off.  Hence,  it would not be wrong to say that the buyer Company plays the role of parent and acquired Company as step child.

IMPACT AT TOP LEVEL

  More often it is seen that the two organisations that are merging are culturally at opposite poles from each other. This gives rise to ego clashes at the top of the management. Under the changed circumstances the manager or other officers of the company may be asked to implement such policies or strategies, which may not be quite approved by him. When such a situation arises the main focus of the company gets diverted and the executives become busy in settling disputes among themselves. This problem is more prominent in cases of mergers between equals.

    Effects on the CEOs of the company is not minute because they are the most creative and talented people within the organization. The resultant loss of control over the affairs of the management devastates these individuals.

PROVISIONS OF INTERNATIONAL LAW FOR SAFEGUARDING INTERSTS OF LABOURS DURING MERGERS AND ACQUISITIONS

  The following provisions of the International Instruments directly or indirectly deals with the protection of labourers such as Article 23 and 25 of the Universal Declaration of Human Rights, 1948; Article 6 and 11 of the International Covenant on Economic, Social and Cultural Rights; Articles 4, 8, 11, 12, 13 and 14 of the ILO Convention on Termination of Employment Convention, 1982.

INDIAN LAW

(I) Provisions of the Industrial Disputes Act, 1947

25FF-  Compensation to workmen in case of transfer of undertakings.

Where the ownership of management of an undertaking is transferred, whether by agreement or by operation of law, from the employer in relation to or that undertaking to a new employer, every workman who has been in continuous service for not less than one year in that undertaking immediately before such transfer shall be entitled to notice and compensation in accordance with the provisions of section 25F, as if the workman had been retrenched:

Provided that nothing in this section shall apply to a workman in any case where there has been a change of employers by reason of the transfer, if-

(a) The service of the workman has not been interrupted by such transfer;

(b) The terms and conditions of service applicable to the workman after such transfer are not in any way less favourable to the workman than those applicable to him immediately before the transfer; and

(c) The new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer.

From the point of view of social security of labours in case of transfer of undertakings by mergers and acquisitions this sector has immense significance. The workmen become entitled to notice and compensation unless and until the transfer is covered by the proviso laid down in the section. The judicial pronouncements make it clear.

In the case of Board of Directors of South Arcot Electricity Distribution Company Ltd. v. Elumalai (1970) 2 SCJ 118, the Company was undertaken by the State. The conditions of service of the workmen were less favourable in the new organisation. So, the workmen claimed compensation from the company. The company pleaded that it is not liable. It was held that the proviso of sec 25FF cannot be invoked by the company for the purpose of defeating the claim of the workmen under the principle clauses of that section, as under sec 25FF, if the right to retrenchment accrues under it, it must be a right to receive compensation from the previous employer who was the owner at the date of transfer.

(II) Indian Constitution

In Indian Constitution, various labour friendly provisions are as follows:-

Article 39(a) which entails that the State shall, in particular, direct its policy towards securing that the citizens, men and women equally, have the right to an adequate means of livelihood.

Article 41 provides that the State shall, within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want.

Article 43 perpetrates that the State shall endeavour to secure, by suitable legislation or economic organisation or in any other way, to all workers, agricultural, industrial or otherwise, work, a living wage, conditions of work ensuring a decent standard of life and full enjoyment of leisure and social and cultural opportunities and, in particular, the State shall endeavour to promote cottage industries on an individual or co-operative basis in rural areas.

Article 43A lays down that the State shall take steps, by suitable legislation or in any other way, to secure the participation of workers in the management of undertakings, establishments or other organisations engaged in any industry.

CASE LAWS

    The above provisions are of no relevance until it has been applied for and when it has been applied, the main function of judiciary comes to protect the interest of workmen. AS, in the case of Bank of Baroda v. Mahindra Ugine Steel Co. Ltd. [(1976) 46 Com Case 227 (Guj)] where the Court held that the employees’ interest of the amalgamating companies must be taken into consideration by the courts and it must that the rights of the workmen are not adversely affected and adequate provisions are made for them.

In Bengal Tea Co. v. Union of India (1988-1989) 93 CWN 542 (Cal),  it was held that the employees do have a right to say “no” to be transferred to the transferee company but they do not have the right to object to the proposed amalgamation as long as they enjoy the same position and status in all respects as that in the transferor company.

In Gurmail Singh v. State of Punjab [(1991) 2 LLJ 76 (SC)] the appellants were in service as tube well operators in the irrigation department of the Public Works Department of the state of Punjab. The State took a decision to transfer all the tube wells to the Punjab tube-well Corporation, wholly owned and managed by the government of Punjab. Consequent to this all the permanent and temporary posts in the tube well circle that existed previously were abolished. When challenged before the Punjab High Court the same was rejected. However the Supreme Court held that the state should act as a model employer and should bear the burden of the extra money that is to be paid by the newly formed Tube-well Corporation having regard to the long length of service of the appellants.

Suggesting suitable measures for protecting the rights of workmen during mergers and acquisitions

Since, judiciary is not only the solution but there must be some practice to be followed that could take care of the organizational structure of the Company as well as the benefits of the workmen. One of the best example in three steps is in the Acquisition Strategy of CISCO –

1) Pre- Acquisition Stage

    Understanding benefit of acquisition as to how the organization will fit into each other or how the employees from acquired organization can fit into the working culture of CISCO.

2) Analyzing how one Organization can fit into another

   CISCO contemplated that it totally against forced acquisition and lay-off. It also guarantees job securities to employee of acquired Corporation.

3) Integration Process

    Where the information is given about future role of the employee of the acquired firm, the employees of the acquired Company is given 30 days orientation training to enable them to fit into the new organization and to assimilate themselves into the new working culture.

Tata tea merger with the Tetly group

The Tata’s acquisition of the Tetly group was one of the rarest examples of an Indian firm acquiring a larger British group. Initially the cultural gap between the companies was a big issue and had to be handled carefully. For example there was complains from the Tata Executives that they were kept waiting for longer hours at Tetly’s head office in Uk, inspite being the senior partners. On the other hand the Tetly people complained about the ignorance of the Tata executives about the western market. However a careful approach both sides helped in the cultural integration of both the companies. Both the sides instead of trying to dominate each other over the cultural issues adopted a focussed approach consisting of a blend of both the cultures. They worked towards adding to each other’s knowledge and skills and tried to create a business with better value prospects. However the best part was that the companies decided to leave behind the separate cultures of the Tata and Tetly and moved towards defining a single company. The key learning points from this merger were firstly to pre estimating the importance of cultural differences, adopting a non-threatening approach and absence of time pressure.

CONCLUSION

   Therefore, one can say that with FDI policies becoming liberalized, mergers and acquisitions are heating up in India as well and are growing with an ever increasing cadence. Though merger and acquisition lessened in 2008, but with the global economic meltdown expected to rebound as the worldwide recession comes to an end, and the Company stock prices rise, the merger and acquisition are expected to reach at their highest.

     Hence, if success is to be achieved in merger and acquisition, cohesive, well-integrated and motivated workforce are required who is willing to take on the challenge that arise in the process of merger and acquisition. So, without safeguarding the issues of employees and cultural integration, no Company can fulfil the objectives inherent in the acquisition scheme.

By-

                                                                       PRABHASH CHAND

                                                                LL.M. –II YEAR

                                                                                               NALSAR UNIVERSITY OF LAW,

                                                         HYDERABAD