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Navigating Merger Transactions in South Africa: A Strategic Approach to Public Interest

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Published Date: June 4, 2024

The South African economy has faced significant headwinds and continues to be constrained by sky-high interest and unemployment rates, power grid constraints and political uncertainty. Despite these and many other challenges, South African businesses find a way to remain competitive internationally, through innovative solutions and in many instances sheer grit and determination. Its ability to do so is testament to South Africa’s world renowned resilience and the ability of its people to overcome adversity.

In advising clients in commercial or litigious matters, attorneys are fortunate to enjoy an across industry bird’s-eye view of what sets apart the good from the great. One such indicator is the ability to respond effectively to policy changes.

Mergers are a key component in a well functioning and free economy. It unlocks opportunities through realising synergies between different entities and acts as an agent of discipline in relation to inefficiently managed businesses and assets. The Competition authorities regulates mergers and have the power to block mergers, or to impose far-reaching conditions on the parties. The authorities consider the impact that a proposed merger will have on the public interest as a factor in deciding whether or not to approve, prohibit or to impose conditions on a transaction. Public interest considerations may include representation of historically disadvantaged persons within ownership or control structures, merger related employment concerns, and the ability of small businesses and firms owned or controlled by historically disadvantaged persons to participate in the local economy. The focus on public interest considerations in mergers have been increased with the partial enactment of the Competition Amendment Act in 2019.

Precisely how the Competition authorities should apply public interest considerations to mergers have been contentious. It is a difficult question because public interest considerations, including those relating to the jobs of employees at the merging companies, often run counter to the competitive efficiencies which act as the drivers of merger transactions and that are supposed to benefit shareholders and consumers. By way of example, where a merger would result in a reduction in production costs through the introduction of technology, some of those potential efficiencies would be eroded by a condition that there may not be any merger specific job losses for a period of time, typically one to three years. In such an instance, the Competition authorities would effectively give up some of the benefit to consumers in exchange for securing a number of jobs for a limited period of time.

The Competition Act also sets out to achieve a greater spread of ownership, particularly by increasing the levels of ownership by historically disadvantaged persons and workers, and increased participation in the market by small and medium sized businesses. These are challenging policy goals which require a careful balancing between the achievement of public interest goals and pro-competitive outcomes.

Recently, the Competition authorities have shown their willingness to even prohibit mergers which do not directly promote certain public interest objectives, even where the transaction would be otherwise pro-competitive. Most notably in the Burger King case whereby in 2021, EPC Africa (a private equity firm) intended to acquire Burger King South Africa. The transaction would result in a decrease in shareholding by historically disadvantaged persons from 68% to 0%. Although the merger raised no competition concerns, it was prohibited on account of public interest concerns regarding the reduction of ownership by historically disadvantaged persons. The matter was settled on the basis that the parties agreed to a number of conditions in respect of public interest factors, and the transaction proceeded. The Burger King acquisition was well publicised, but is also reflective of the Competition authorities’ general approach to mergers where no clear competition concerns arise. In most instances, mergers are time sensitive and parties find themselves under pressure to satisfy the Competition authorities as soon as possible in order for transactions to proceed.

Complying with the Competition authorities’ expectations on advancing public interest adds an additional dimension to formulating transaction considerations – especially when considering the Competition Commission’s 2023 draft Public Interest Guidelines. It requires a collaborative approach. We have in certain instances seen the Commission adopting a pragmatic approach to assessing public interest in merger approvals, resulting in sensible conditions that appropriate balance competition and public interest considerations. In some cases, the Competition Commission’s approach to merger approval applications extends beyond mere ownership. In cases where transactions do not directly benefit historically disadvantaged persons, the Commission has been willing to engage on alternative solutions to balance the public interest. These commitments include support for small businesses through minimum spending, improved racial representation on boards of directors and a commitment to procurement initiatives.

The impact of public interest is not only seen in merger approvals. It has also manifested in the Commission’s assessment of settlement proposals following investigations into alleged prohibited practices, such as market allocation, price fixing and collusive tendering. These negotiated outcomes typically lead to mutually beneficial outcomes, such as paying reduced fines whilst simultaneously contributing positively towards the economy. Examples include offering bursaries to previously disadvantaged persons, committing a certain percentage of spend to support small businesses, establishing skills development funds for employees or committing to employing previously disadvantaged persons through internships.

The emphasis on matters of public interest should therefore not be seen as an existential threat to investment. Although there is still much uncertainty to navigate following the Commission’s public participation process regarding the draft Public Interest Guidelines, we are confident that the Commission will continue to adopt a pragmatic approach when assessing matters of public interest.

The emphasis on public interest factors challenges parties to be creative in their deal structuring, to recognise the sometimes contradicting policy objectives contained in the Competition Act, and to work with the Competition authorities to achieve sound outcomes. Whilst parties must ensure that the competitive process is not undermined by regulatory overreach, there are real benefits from not only recognising the balancing act that the Competition authorities are tasked with, but to embrace the benefits associated with an advancement of the public interest.

Jac Marais
Partner | Litigation Attorney
Mia de Jager
Senior Associate | Litigation Attorney

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