DealMakers - Q2 2021 (August 2021)
Burger King decision raises public interest debate
by Shawn van der Meulen, Robert Wilson and Daryl Dingley
The recent prohibition by the Competition Commission of Grand Parade Investments (GPI) Limited’s proposed sale of its investment in Burger King (South Africa) to a US private equity firm, ECP Africa, on the grounds of “public interest”, has sparked lengthy debate within South Africa’s business community.
This was the first time that the Commission's focus was on a single public interest factor, which motivated the prohibition of the deal.
In the proposed Burger King merger, the Competition Commission was primarily concerned with the effect of the deal on reducing the shareholding of historically-disadvantaged persons (HDPs) in the target firm to zero from over 68%. The parties had proposed conditions such as investing at least R500m to establish new Burger King stores in South Africa, thereby increasing the number of permanent staff employed by no fewer than 1 250 HDPs. But the Competition Commissioner described these proposals as “too little, too late”.
In terms of the Competition Act, when the Commission assesses proposed mergers, besides considering the impact of the transaction on competition, it must also consider whether a merger "promotes a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons in firms".
The immediate impact of this decision was felt by GPI, whose share price dropped sharply on the announcement. The decision is also concerning for other HDP shareholders in South African companies.
In a previous ruling by the Competition Tribunal, in Shell SA/Tepco Petroleum, the Tribunal said that constraining the options of firms owned by HDPs could condemn these firms and HDPs to the margins of the economy. Limiting exiting HDP shareholders to a smaller group of potential purchasers and potentially discounted prices could make them less competitive over time, because they would not be able to realise the maximum value of their investments.
Beyond the immediate consequences, however, there exists a broader and longer-term public interest – that of the South African economy, which needs to encourage investment to stimulate recovery and growth. The Commission’s decision may create uncertainty which could have a potentially chilling effect on merger activity, including foreign direct investment. The unintended consequences of the decision could outweigh the benefits. Merger parties need certainty on deal making, and the authorities should not harm the very interests they are required to protect and arguably promote.
Shawn van der Meulen
At this point, there has been no guidance from the regulator on the absolute black ownership levels it is targeting, i.e. whether empowerment has to be maintained after the transaction at the same level as before.
There is no doubt that South Africa is characterised by high levels of economic concentration and skewed ownership. But Competition Law may not be the appropriate instrument to advance transformation. Its focus should be on economic concentration, specifically market power and vertical integration that creates barriers to entry and deters the participation of smaller and HDP-owned businesses. Greater certainty would be created if issues of B-BEEE ownership were left to other regulators.
We hope that a reconsideration application will be filed at the Tribunal, and that the Tribunal will provide guidance on how the competition authorities should pursue their public interest mandate.
In the meantime, we advise merger parties to start thinking about potential public interest conditions while negotiating any transaction, and be proactive in discussing this with the regulators. If the parties to the Burger King transaction had discussed alternatives with the Commission, such as an equity-equivalent programme, it might have saved the deal. Case law from the Competition Appeal Court shows that public interest considerations need to be looked at holistically. A reduction in ownership could be offset by committing to establish other structures, such as Employee Share Ownership Plans (ESOPs), ESOP representation on the Board/Executive, local procurement and keeping the Head Offices of merged entities in South Africa.
Across the African continent, public interest is becoming a more prominent factor in merger approvals, particularly the effect of a proposed merger on employment and small and medium firms in the market. Potential investors must understand the varying ’on-the-ground‘ issues in different jurisdictions and be prepared to potentially contribute to national policy priorities such as job creation and infrastructure development.
Merger parties must be alive to market dynamics – in no overlap, uncomplicated mergers, engagement might not be necessary. However, in larger, high profile deals, or where there are issues affecting HDP ownership, other smaller market participants or employment issues, strategising early on how to address such issues will ultimately allow for a smoother and quicker merger approval process. At the same time, competition authorities also have a responsibility to keep their guidelines updated and make detailed merger reports and decisions publicly available.
Van der Meulen, Wilson and Dingley are Partners in the competition practice at Webber Wentzel.