DealMakers - Q1 2022 (released May 2022)
Merger control in South Africa after Burger King
by Daryl Dingley and Elisha Bhugwandeen
At the end of 2021, the South African Competition Commission's (Commission) Burger King merger prohibition set into motion significant changes to competition law in South Africa. This was the first time in 20 years that a merger was prohibited on public interest grounds alone. This was also the first time that the Commission publicly interpreted section 12(3)(e) of the Competition Act (introduced by the Competition Amendment Act 2018). This new provision deals with the promotion of a greater spread of ownership and, in particular, increasing the levels of ownership by historically disadvantaged persons (HDPs) and workers.
The transaction was ultimately approved by the Competition Tribunal (Tribunal), and we hoped that the Tribunal's reasons would provide some guidance on how the competition authorities should pursue their public interest mandate (and particularly the application of s12(3)(e)). However, since the Commission and merger parties reached agreement on all the proposed conditions before the Tribunal’s reconsideration hearing, the Tribunal's recently published decision does not offer any further clarity. The Commission's decision prohibiting the merger (also recently published in Government Gazette No. 46000) does, however, provide some insight into the Commission's approach to s12(3)(e) of the Competition Act.
One of the main reasons that the Commission prohibited the transaction was the considerable negative effect of the merger on the promotion of a greater spread of ownership. Pre-merger, the target firms were ultimately controlled by an entity with a 68.56% HDP shareholding. In contrast, the merged entity would not have any HDP or worker ownership and, therefore, the Commission held the view that the proposed merger could not be justified on substantial public interest grounds.
Some key observations from the Commission's prohibition decision are set out below:
Following amendments to the Competition Act to this effect a few years ago, the Commission reiterated that, even when a merger transaction is not likely to raise competition concerns, competition authorities are obliged to determine whether it can or cannot be justified on substantial public interest grounds. The Commission views the competition assessment and the public interest assessment as co-equal in terms of the Competition Act. It highlighted that the assessment of public interest grounds is not dependent on the outcome of a competitive assessment.
The Commission noted that s12A(3)(e) of the Competition Act imposes an obligation on the competition authorities to consider the effect of a merger transaction on the promotion of a greater spread of ownership. This provision falls under legislative measures contemplated in s9(2) of the Constitution, which states that: "to promote the achievement of equality, legislative and other measures designed to protect or advance persons, or categories of persons, disadvantaged by unfair discrimination may be taken".
While the merger parties argued that empowerment shareholders (in this case, the sellers), were entitled to a return on their investment, in the Commission's view, a return on investment is a private gain to the empowerment shareholders. Although the Commission agrees with the view adopted in established case law such as Metropolitan / Momentum that a balanced approach needs to be taken when assessing public interest factors, it did not consider a gain to shareholders to be a countervailing public interest ground, weighed against the negative effect of the merger on the promotion of a greater spread of ownership.
In its decision, the Tribunal sets out a summary of the proceedings and arguments put forward by the Commission and merger parties but does not refute or expand on any particular issues. Importantly, though, after agreements were reached between the merger parties and Commission, the merger was ultimately approved by the Tribunal, subject to several conditions, despite the reduction in HDP ownership. This indicates that a more holistic approach may be considered by the authorities, and that some degree of flexibility may be possible. For example, if one public interest element is negatively affected, it could be outweighed by other positive public interest outcomes.
In this merger, several extensive conditions were put forward. For instance, the merger parties committed to investments in South Africa of up to R500m, several supply commitments, and the establishment of an employee share ownership programme which will entitle workers to a 5% stake in the merged entity.
Since s(3)(e) was introduced into the Competition Act, and even more so since the Burger King decision, we have observed that the Commission has approved many mergers subject to conditions aimed at promoting the ownership levels of HDPs and workers. Overall, the Commission's approach to the application of this section has been in line with its reasoning in the Burger King prohibition. We recommend that parties involved in transactions in South Africa adopt a proactive approach and make realistic assessments of what type of commitments may be required if potential public interest issues (especially involving a reduction in HDP/B-BEE ownership levels) are anticipated.
Dingley is a Partner and Bhugwandeen a Senior Knowledge Lawyer | Webber Wentzel.