Merging of economics ministries broadens merger control scope

by Xolani Nyali

Government intervention in mergers on public interest grounds could enter a new phase now that competition and industrial policy are under a single ministry.

The consolidation of two previously separate ministries, Economic Development (EDD) and Trade and Industry (DTI), has significantly broadened the merger control ‘toolkit’ available to the new Trade and Industry Minister, Ebrahim Patel.  

Xolani Nyali

DealMakers - Q2 2019 

Where previously his ability to intervene in mergers was limited to how broadly EDD could interpret the public interest grounds in the Competition Act without reference to the tools available to the DTI, Minister Patel now has the full suite of economic policy under his purview. 

He will probably not shy away from using it.

While still in charge of EDD, whose main focus was competition regulation in South Africa, the Minister was well known for his active participation in competition matters, particularly merger reviews. In the process, he succeeded in extracting some major public interest concessions in mega-transactions involving foreign investors. These concessions were mainly around the preservation of jobs and the development of local supply chains.

At least in theory, he could achieve significantly more with the broadened ‘toolkit’. 

Not only has the Competition Act been amended to strengthen Government’s arm in removing barriers to inclusive economic participation and growth, but the entire machinery of national industrial policy has suddenly become available to the Minister. 

Put them together – as has indeed happened under the new DTI – and the result is a formidable range of tools to deploy in merger reviews. 

Going beyond maintaining the status quo 
This broadened toolkit could be used to extend public interest well beyond its traditional legal base point – imposing conditions so that a merger would at least maintain the status quo and not leave the world worse off than before. With both competition and industrial policy coming together, the new high-watermark could be merger conditions that seek to make the world a better place.

Take the hypothetical case of an investor wanting to acquire a South African business that has a loss-making factory in a rural or peri-urban area. 

In the past, merger approval might have been subject to an undertaking that the investor would not retrench workers or move the factory to another location – perhaps for a defined period. 

Today, with the combined weight of the amended Competition Act and access to industrial policy tools, the investor might be required to keep the factory where it is, increase investment in the area and find ways to absorb new entrants into the job market, and be incentivised to do so under a manufacturing development programme. In other words, the merger of competition regulation with industrial policy under one roof gives the Minister a carrot to dangle and a stick to wield.

It makes sense to put competition and industrial policy under one roof as they complement each other: industrial policy kickstarts new industries and grows existing ones, while competition policy proscribes conduct that keeps the economic pie small and exclusive. 

Seeing the bigger picture
It must also be said that where Minister Patel previously had a relatively small ministry to handle, he is now in charge of a massive slice of Government. Trade and Industry is a huge organisation with a multiplicity of responsibilities, from negotiating bilateral trade agreements to representing South Africa at the World Trade Organization (WTO) and various other global and regional multilateral bodies.

Given these enormous responsibilities, will the Minister be as focused on merger control matters as he was while still at the helm of the erstwhile EDD? That remains to be seen. It would certainly be easier to maintain that focus if his former team at the EDD remains on board and maintains the momentum at the DTI, particularly as the competition authorities, labour, business and lawyers try to navigate the early stages of the expanded public interest assessment of mergers. 

From the point of view of business and investors, it is important to realise that mergers will almost certainly require them to grapple with South African industrial policy sooner rather than later – meaning at the point of acquisition instead of down the line. Companies and their financial and legal advisors would thus be well advised to start looking beyond the traditional confines of competition law in relation to public interest. We may not yet know how the new Trade and Industry Ministry will use its broader merger control toolkit, but it is unlikely to be business as usual.  

Nyali is a Partner with Bowmans.
 

Bowmans 2.jpg