Business take-overs - A good or bad thing???

South African businesses are struggling in today's economic climate. Many businesses are faced with the question - do we liquidate the business or do we sell the business as a going concern?

The worst of the negative effects of business closures is the wholesale loss of the jobs of the employees of the business.

Sometimes the struggling company is taken over instead of being forced to go into liquidation. The advantage of such a takeover is that it can avoid the loss of jobs caused by a liquidation.

However, the Labour Relations Act (LRA) strongly discourages takeovers (albeit unintentionally) by prohibiting dismissals for reasons related to a takeover as a going concern. The effect hereof is that would-be rescue deals usually fails due to the fact that partial retrenchments, resulting from the rationalisation necessitated by takeovers, are prohibited.

Where employees are illegally retrenched for reasons related to takeovers, it is often difficult to establish whether it is the old entity that is at fault or whether the new entity should be taken to task in court.

This is because the date of the takeover is often unclear. If the employee was retrenched before the takeover he/she should logically take the old entity to court, but what happens if the old entity does not have the assets necessary to pay the compensation ordered by the court?

Section 197(2)(c) effectively allows the employee to sue the new employer even if it was the old employer who retrenched the employee unfairly.

If the retrenchment takes place after the transfer, only the new employer can be sued.

However, establishing the date of the transfer for purposes of labour law can be tricky. Is the takeover date: the date on which the new entity began running the business? Or is it the date on which the buyer and seller signed the contract? Or the date that the buyer and seller designated in the contract as the date on which the sale took effect or would take effect?

This key question arose in the case of Business Design Software (Pty) Ltd & Another v Van der Velde (CLL Vol. 18, March 2009).

The employee (Van de Velde) was a general manager of Business Design Software (BDS) when it was bought by a company called AST Group.

Two years later, AST Group decided to sell its BDS division to the MD of BDS, Mr P Smulders.

A few days after this decision was made, Smulders brought his brother into the business at senior level. Smulders then decided that Van der Velde was no longer needed in the business.

A month later, Van der Velde was retrenched after turning down an offer of a post of administration manager.

Three days after the retrenchment, AST signed the agreement of sale of BDS with a company called WGN, the entity through which Smulders bought BDS.

Although the sale agreement was signed on April 3, 2003, the agreement stated that the sale took retrospective effect on January 1, 2003.

Van der Velde took the retrenchment to the Labour Court on the grounds that he had been automatically, unfairly dismissed for a reason related to the takeover of a going concern.

He cited section 187(1)(g) of the LRA that prohibits such a dismissal.

The Labour Court decided that:

• For purposes of labour law, the sale neither took place as at the April date on which the parties signed the sale agreement nor at the January date stipulated in the contract.
• Instead, the court decided that the takeover had taken effect on February 27, 2003, when Smulders began operating the business.
• The dismissal had taken place in March, after Smulders had taken over the business, and BDS, under its new ownership, was the employer at the time of the retrenchment.
• The retrenchment was an automatically unfair dismissal because the dismissal decision stemmed from the takeover of BDS.

BDS took this decision on appeal to the Labour Appeal Court, and the Labour Appeal Court upheld (confirmed) the findings of the Labour Court.

This case reinforces the crucial principles that employers:

• Need to be cautious about buying or otherwise taking over a business or part of a business as a going concern.
• Need to be even more cautious about dismissing any employee for any reason related to such a takeover even if the reason for the dismissal is only indirectly related to the takeover.
• Should neither enter into takeovers nor dismiss any employees before obtaining advice from a reputable labour law expert.