A perspective from private practice — the real cost of doing business in South Africa: Merger Control Disincentivizing Investment into the South African Economy

By Gina Lodolo, Joshua Eveleigh, and Nicola Taljaard

A Look Back:

South Africa has been trying to find the delicate balance between the promotion of public interest initiatives, attracting foreign investment and promoting the competitiveness of South Africa’s markets. In recent years, however, the South African Competition Commission (“Commission”) appears to have taken a more rigid approach towards requiring the promotion of public interest initiatives as an outcome of merger control investigations.  

At the outset, it is important to note that the Competition Act 89 of 1998 (“Act”) allows the Commission to impose conditions on mergers and acquisitions that are deemed to result in a substantial lessening of competition or detrimental to the public interest.

In 2019, the Act also underwent a significant amendment regarding the public interest provisions. In accordance with the transformative values under the Act’s preamble, the amendment aimed to ensure that competition authorities have regard to public interest factors when assessing mergers and acquisitions and, in particular, section 12A(3)(e) makes provision for the promotion of a greater spread of ownership with a view to increasing the levels of ownership by historically disadvantaged persons and employees.

While the Commission was not so emphatic on the promotion of HDP and/or employee ownership immediately after the 2019 amendments, the Commission has been taking an increasingly robust approach to the imposition of these public interest criteria. Most notably, this can be seen from the widely publicised Burger King decision where a merger that raised no competition concerns was prohibited for the first time, based solely on public interest concerns (namely a decreased HDP shareholding from 68% to 0%). While the decision was ultimately settled before being heard on request for consideration before the Tribunal, it certainly indicated the trajectory of the Commission’s approach. Since the Burger King decision, the Commission has increasingly taken a hard-line regarding transactions that are benign both from a competition and public interest perspective.

While the amendments to the Act symbolize a benevolent effort toward the transformative objectives that the competition authorities are mandated to develop, a great deal of uncertainty stemmed as a result. In practice, the Commission’s interpretation of section 12A(3)(e) of the amended Act has been to place a positive obligation on the merging parties, post transaction, to increase the merging parties’ HDP and/or employee shareholding, often times utilising a benchmark of 5%. This is irrespective of whether a transaction is benign from both a competition and public interest perspective.

Merging parties, legal representatives and regulatory authorities have also substantially debated the interpretation and effect of the amended public interest provisions. The primary argument that contrasts the Commission’s interpretation of the amended public interest provisions, however, provides that section 12A(3)(e) is only one factor for consideration in determining whether a transaction that would otherwise have an adverse effect on competition or other public interest grounds, should be allowed. Premised on this interpretation, the Commission would not be authorised to refuse a transaction if it cannot show an adverse effect on competition based on a holistic assessment of the public interest grounds delineated in section 12A(3).

The Commission’s application of the public interest provision has increasingly lacked clarity and predictability, thereby creating uncertainty in the merger review process, and making it challenging for businesses to plan and execute transactions with confidence. This is particularly so when transactions are subject to long-stop dates where protracted engagements and negotiations with the Commission risk the termination of the entire agreement. To circumvent the incurrence of frictional costs and risks of breaching any long-stop dates, private practitioners are experiencing an increased amount of global mergers carving-out (or at least considering to) the South African legs of those transactions.

Firms are often concerned about the potential dilution of existing shareholders’ equity, regardless of the size of the firm. Foreign investors may be concerned about the impact of the allocation of new shares to employees on their current ownership stakes, potentially reducing their control and influence over the merged entity.

Further uncertainty surrounded how the application of what appears to be a 5% public interest divestiture approach will apply in all circumstances. For example, it is unclear whether this would apply to all merging parties even if the two merging entities are wholly owned BBBEE entities. Furthermore, how should firms divest a 5% stake in the merged entity where the underlying transaction involves land and no employees? These are some examples of the difficult questions the Commission has yet to consider if it is to continue with the outright application of its interpretation of the Act.

In addition, by insisting on ownership-related commitments from merging parties, the Commission’s policy undermines the efficacy of the BEE framework, as parties are likely to take the view that any efforts to improve their BEE profiles outside of the ambit of the transaction may, on the Commission’s approach and assessment, carry very little weight. Accordingly, firms may start to favour an approach of decreasing their BEE efforts prior to transactions in preparation of having conditions imposed on them. Firms may also start to undervalue the target to account for additional public interest spend or carve out the South African part of the transaction to circumvent this cumbersome condition.

Over an extended period, the outcome becomes evident for South Africa – increased uncertainty and an impractical application of the Act will result in decreased in investment; potential prohibition of competitively benign mergers and increased transaction costs.

While the Commission’s approach is prima facie laudable, the unintended consequences may result in a counterintuitive outcome and cause greater long-term prejudice to the public interest and growth of the South African economy. This is particularly true in light of the much-needed foreign direct investment South Africa requires following the effects of Covid-19, greylisting and economic instability.

Introduction of Public Interest Guidelines

On 28 September 2023, the Commission released their ‘Draft Amended Public Interest Guidelines relating to Merger Control’ for public comment accessible here (“Public Interest Guidelines”).

On the same day, at the Commission’s 17^th Annual Conference, the Minister of Trade, Industry and Competition (“DTIC”), Minister Ebrahim Patel, lauded the amendments to the Act and stated that the increasing imposition of public interest conditions on mergers has resulted:

• in a contribution of R67 billion towards the local economy;
• the saving of at least 236 000 jobs over a period of five years;
• the creation of at least 22 000 jobs;
• and 143 000 workers now being shareholders in companies.

While there have certainly been commendable strides towards the achievement of promoting the transformation of the local economy, the above statistics do not paint a full picture. While many firms will continue to consent to the public interest commitments suggested by the Commission, for fear of an outright merger prohibition, a number of firms would rather carve-out the South African leg of multi-jurisdictional deals. This, in itself, would stifle economic growth and adversely effect the public interest in the long-term (as consumers do not stand to enjoy the benefits of pro-competitive mergers).

The Public Interest Guidelines are intended to formalise the Commission’s policy approach discussed above when evaluating public interest factors.

We outline the pertinent aspects of the Public Interest Guidelines below:

Commission’s approach to public interest factors in merger control

Section 12A of the Competition Act provides that both the competition and public interest assessments carry equal weight in merger considerations.

Regardless of whether a merger is found to result in a substantial prevention or lessening of competition (“SPLC”), the Public Interest Guidelines provide that the Commission must still determine whether the merger is “justifiable on Public Interest grounds”. In this regard, the Commission will determine the effect of the merger on each of the public interest elements arising from the merger to determine the net effect of the merger on the public interest.

General approach to assessing public interest provisions

The Commission considers that a merger assessment requires a quantitative and qualitative determination into the merger’s likely effect on:

1. a particular industrial sector or region;
2. employment;
3. the ability of small and medium businesses, or firms controlled or owned by historically disadvantaged persons, to effectively enter into, participate in or expand within the market;
4. the ability of national industries to compete in international markets; and
5. the promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers in firms in the market.

Where the Commission concludes that the merger will have a positive effect on one of the above factors, there will be no further assessment into that factor. Where, however, the Commission finds that one of the above factors is substantially negatively impacted by the merger, the Commission will consider remedies to address these adverse impacts.

Importantly, the Public Interest Guidelines provide that where a negative impact on a public interest factor cannot be remedied, the Commission may consider “equally weighty countervailing Public Interest factors that outweigh the negative impact identified” on a case-by-case basis.

Where a merger is found to positively impact a majority of the above public interest factors, these may be outweighed countervailed by a substantial negative effects from a single public interest factor.

Approach to induvial public interest factors

The Public Interest Guidelines provide guidance on how the Commission will assess each of the public interest factors. For purposes of this summary, we focus primarily on “the promotion of a greater spread of ownership…by [HDPs] and workers…” factor which has caused the greatest degree of uncertainty, transaction costs and protracted negotiations with the Commission. This factor stands out from the rest of the public interest factors as the Public Interest Guidelines make it clear that the Commission considers section 12A(3)(e) of the Competition Act to confer a “positive obligation on merging parties to promote or increase a greater spread of ownership, in particular by HDPs and/or Workers in the economy.” In this regard, the Commission regards every merger having an effect in South Africa as having to promote HDP and/or worker ownership and therefore assumes no neutral effect.

In light of the above, where a merger does not promote HDP and/or worker ownership, it will be regarded as having an adverse impact on that particular public interest factor and, if considered substantial enough, may render the merger unjustifiable on public interest grounds.

The Public Interest Guidelines go further so as to state that where a merger promotes HDP ownership, this would not preclude the Commission’s obligation to consider an increase of ownership by workers.

Where the Commission considers there to be a substantial negative effect on the promotion of HDP and/or workers, the following remedies may be imposed:

1. concluding alternative ownership agreements with HDPs/Workers in either the acquiring, target or merged firm; and
2. divestitures to HDP shareholders which would create a greater spread of ownership in another part of the business. Importantly, the Commission will generally require that these HDPs and/or workers are actively involved in the operations (ideally control should be conferred) of the divested business and are not merely passive or financial investors.

Where the Commission proposes that an ESOP be implemented, the following guidance is provided:

1. where a merger results in a dilution of HDP and/or workers, the ESOP should remedy the full extent of the dilution;
2. where the merger does not result in a dilution, the ESOP should “hold no less than 5% of the value/shares of the merged entity but may be required to hold a higher shareholding based on the facts of the case”.

Where the Commission proposed that an HDP transaction be concluded, it provided the following guidance of the principles that ought to apply:

1. the HDP transaction should be no less than 25% +1 share and “should ideally confer control on the HDPs”;
2. the merging parties will have discretion to choose the HDPs; and
3. the merging parties must inform the SACC of the proposed HDP transaction prior to its implementation to assess compliance with imposed conditions.

Importantly, while the Public Interest Guidelines are not binding on the Commission, the Competition Tribunal or the Competition Appeal Court, they provide clarity on how the Commission intends on assessing mergers notified to it.

Despite an increase in certainty, the Public Interest Guidelines remain a cause for concern amongst the local and international private sectors as they have merely confirmed the policy approach that the Commission has increasingly been adopting in practice. In this regard, even where a foreign-to-foreign merger is notified to the Commission, it ought to consider how it can actively promote HDP and/or worker ownership and may become susceptible to ESOPs and/or HDP transactions in achievement of the Competition Act’s transformational objectives.

The Public Interest Guidelines are open for public comment until 28 October 2023 and are likely to be subject to extensive submissions.