The Competition Commission (Commission) has published Draft Amended Public Interest Guidelines relating to Merger Control (Guidelines). The Guidelines are aimed at providing clarity to businesses and practitioners on the Commission’s approach to the assessment of the public interest factors under the merger control provisions in the Competition Act 89 of 1998 (Competition Act).
Whilst the Guidelines will not have the force of law, they are aimed at articulating the Commission’s approach to the merger control process in South Africa.
The Guidelines primarily flow from the amendments to the Competition Act in 2019 which introduced a specific requirement that the competition regulators consider the effect of a merger on the promotion of a greater spread of ownership with respect to Historically Disadvantaged Persons (HDPs) and workers within markets. The 2019 amendment implicated an important imperative confronting South African society – in circumstances where the economy remains materially unequal and characterised by skewed ownership as a consequence of apartheid legislation which inhibited Black people from participating in the South African economy.
The 2019 amendments to the Competition Act introduced a new aspect to competition law enforcement in South Africa – one which attempts to utilise competition law to deal with the high levels of concentration and skewed spread of ownership in the South African economy.
In circumstances where Government endeavours in the area of other legislative and related interventions have been seen as not sufficiently addressing changes in the nature of ownership and as fostering meaningful empowerment within the South African economy, Government has turned to merger regulation to achieve these outcomes.
There is no question that appropriate measures to address inequality within the South African economy must be strongly supported. However, there are legitimate concerns that the use of merger regulation for this purpose is an inappropriate tool and will not achieve meaningful results. Measures to address the public interest should be undertaken through legislation of true general application (such as through various pieces of empowerment legislation dedicated to achieving this important objective).
Utilising individual mergers on a piecemeal basis to extract empowerment and ownership outcomes which only apply to the merging parties (and not to other participants within the sector) will likely be ineffective and undermine meaningful and economically incentivised investment in the economy (potentially undermining the public interest in the medium to long term) – and materially increase direct or indirect costs, and uncertainty, of doing business in South Africa.
These concerns are exacerbated by the interpretation of the law that the Guidelines appear to support that does not align with a consideration of the public interest as expressed in the Competition Act. The Commission’s approach, reflected in the Guidelines, aggravates the existing uncertainty and is more likely to undermine investment in South Africa, especially if applied in an inflexible manner.
The Guidelines make little effort to engage with the substantive and complex issues that will result from the approach set out in the Guidelines – in order to foster confidence in the integrity of the Commission as an independent regulator and to reflect a meaningful engagement on the issues, including potential unintended consequences that may undermine the public interest.
The Guidelines are intended to apply to all mergers and, as noted above, all mergers are seen as being subject to the requirement that the merger promote a greater spread of ownership. According to the Guidelines, a failure to do so may render the merger unjustifiable on public interest grounds.
This approach, that entails a ‘positive obligation’ on the part of merging parties even where a merger raises no competition or public interest concerns, creates an interpretive challenge that is inconsistent with the Competition Act and which has not been considered by the Competition Tribunal or the courts. The approach deviates from that adopted by the competition authorities in the past and by regulators around the world – in circumstances where merger assessment generally involves considering whether a merger ‘makes things worse’ (as opposed to an obligation on the part of merging parties to ‘make things better’ – especially where such obligations do not apply to other firms within the sector).
The Guidelines are also intended to apply to mergers taking place outside South Africa and with limited South African ‘centricity’ – arguably reinforcing the disincentive to invest in South Africa and contributing to under-investment in South Africa.
Counterintuitively, the Guidelines may also potentially devalue the existing interests held by HDP shareholders especially if, as the Guidelines suggest, such shareholdings may need to be ‘replaced’ on a like for like basis in certain instances. Where such replacements cannot be found, HDP shareholders may not be able to realise the value of their investments.
The Commission’s intended ‘one-size-fits-all’ merger approach is inappropriate and may well have unintended consequences of dis-incentivising investment in South Africa and the related benefits that accompany such investments including potentially undermining both the competition outcomes and the public interest which the competition legislation is intended to promote.
The Commission should be encouraged to engage meaningfully with each merger on a case-by-case basis and in a manner which promotes the South African economy (in particular to support job creation). A rigid approach as contemplated by the Guidelines will undermine the integrity of the Commission and foster perceptions of arbitrariness.
Heightened focus on public interest considerations
In line with the above, the amendments mean that competition and public interest factors in the Competition Act carry equal weight in the merger review process. Where a merger raises no competition issues, the merger may still be prohibited, or conditionally approved, on public interest grounds alone. On the other hand, if a merger is found to be anti-competitive, it can still be approved if the public interest considerations outweigh the anti-competitive effects.
Except for the provision dealing with the effect of a merger on the promotion of a greater spread of ownership, the Guidelines appear to largely align with past approaches and the case law in South Africa insofar as the assessment of the public interest is concerned.
The Guidelines indicate that, when assessing the effect of a merger on public interest, the Commission will first conduct an assessment of each public interest factor and determine whether the merger is likely to have a positive, or negative, effect on each factor.[1] Once the effect has been determined, the Commission will consider whether the effect is merger-specific and, only if so, will it consider whether the effect is substantial. Where a determination is made that a particular public interest factor is positive, merger-specific and substantial the enquiry into that factor ends.
Importantly, however, where a determination is made that a particular public interest factor is negative, merger-specific and substantial, the Commission will:
- require remedies - for example, a negative effect on employment will require a remedy that addresses the employment harm; and
- where the negative effect on that public interest factor cannot be remedied, the Commission may consider ‘equally weighty countervailing public interest factors that outweigh the negative impact identified’.
By way of illustration, the heightened focus on public interest factors in merger control has yielded more conditional approvals in the last two years, than was previously the case:
Year
2016/17
2017/18
2018/19
2019/20
2020/21
2021/22
Total number of notified mergers
418
377
348
302
242
295
Total number of mergers approved subject to public interest conditions
16
32
27
30
34
74
Percentage
4%
8%
8%
10%
14%
25%
The Commission’s proposed approach to section 12A(3)(e) of the Competition Act – to promote a greater spread of ownership
A different approach is contemplated by the Guidelines insofar as the promotion of a greater spread of ownership in terms of section 12A(3)(e) of the Competition Act is concerned – this section is aimed at increasing the levels of ownership in firms by HDPs and workers.
In this regard, the Guidelines adopt the perspective that section 12A(3)(e) ‘confers 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’. The Commission’s point of departure, therefore, is that ‘all mergers are required to promote a greater spread of ownership’ and that ‘[a] finding that a merger does not promote a greater spread of ownership…will inform the Commission’s determination of whether the merger can or cannot be justified’ on substantial public interest grounds.
The approach and expectations of the Commission
The Guidelines provide the following perspectives on the manner in which the Commission will assess the public interest effect of a merger and the Commission’s expectations of merging parties when it is determined that the merger results in an adverse public interest impact:
Section 12A3(e): The promotion of a greater spread of ownership, in particular to increase the levels of ownership by HDPs and workers in firms in the market
The Commission may consider the following remedial actions for mergers which are not seen as promoting a greater spread of ownership by HDPs and/or workers in firms in the market (it being noted that an employee share ownership plan (ESOP) as discussed below is generally seen a promoting such outcomes):
- commitments to concluding alternative ownership agreements with HDPs/workers in the shareholding of the acquiring firm, target firm or merged entity within a reasonable period post-merger
- divestiture to HDP shareholders in another part of the business, after consideration of the following factors:
the historical and projected future performance of the divestiture business;- whether the divestiture business can be a sustainable stand-alone entity / operate in its own right; and
- whether the divestiture business requires initial support from the merged entity and whether such support can be provided without raising competition concerns
Where an ESOP is proposed as a remedy, the following principles are envisaged:
- the ESOP should remedy the full extent of any dilution in the level of ownership by HDPs and/or workers
- for mergers which neither dilute nor promote a greater spread of ownership, the ESOP should hold no less than 5% of the value/shares of the merged entity
- certain design principles are envisaged, including in relation to costs incurred in establishing the ESOP, dividend flow, financing, participation and acquisition costs, for example:
- ordinarily, workers should not be required to pay to participate in the ESOP, and firms should make provision for independent legal, financial and other experts to act on behalf of the workers in the establishment of the ESOP;
- the value of the ESOP will be determined with reference to issued shares and valuation as at the month preceding the establishment and commencement of the ESOP;
- vendor financing, if required, is to be provided by the merged entity, interest-free;
- workers will be entitled to dividends and capital growth based on their participation rights; and
- the dividend policy should provide for a ‘trickle’ dividend in the ratio of at least 35:65
Where a HDP transaction is proposed as a remedy, the following principles are envisaged:
- HDP transactions should be no less than 25% + 1 share and ‘should ideally confer control on the HDPs to ensure that the remedy is responsive to requirement (sic) to promote ownership…’
- The merging parties will have the discretion to choose the HDPs
Where a divestiture is proposed as a remedy, the following principle are envisaged:
- the divestiture should be done in such a way that HDPs and/or workers are involved in the operations of the divestiture business and are not primarily or solely involved as financial or passive investors
The Commission’s proposed approach to the remaining public interest factors
In relation to the other public interest factors, the Guidelines provide the following:
Section 12A(3)(a): A particular industrial sector or region
A merger may have a substantial effect on a particular region or sector where:
- the effect is far-reaching beyond that market sector
- the merger impedes public and industrial policies
- the sector has extensive forward and backward linkages
- the sector employs a large number of low- or semi-skilled workers
- the merger would threaten the livelihood and sustainability of a sector or region
- constitutionally entrenched rights may be impacted
- the effect of the merger is of such magnitude and scale that, if allowed, the effect would be irreversible
The Commission may consider the following remedial actions/commitments to be appropriate if it is found that a merger has a substantial negative effect on a particular region or sector:
- capital expenditure in the operations of the firm in the affected sector or region or within the affected value chain on an incremental basis
- increased localisation
- establishment of a fund or other initiatives to develop local production in the relevant value chain, on an incremental basis
- continuation of local supply obligations
- continuation of local sourcing obligations
Section 12A(3)(b): Employment
The Commission will consider whether a merger would have a substantial effect on employment on a case-by-case basis, taking into account, for example:
- the counterfactual to the merger (i.e. what the position would be absent the merger), including whether an alternative purchaser may have retained all or some of the workers
- the number of workers affected relative to the workforce
- the skills level of the affected workers, their likelihood to find alternative employment in the short-term, and the nature of the sector relevant to the employment effect
- the predominant nature of employment by the acquiring firm, for example, whether the parties employ seasonal or permanent workers or are engaged in businesses involving bidding or contracting
The Commission may find the following remedial actions/commitments to be appropriate if it is found that a merger may have a negative effect on employment:
- requiring a minimum headcount employment number for up to five years post-merger;
- imposing a moratorium on job losses for no less than three years post-implementation;
- capping the number of jobs lost or staggering the number over a period of time;
- providing funding to reskill affected workers;
- requiring re-employment or giving preference to affected workers for new work opportunities
- creating jobs and preferential re-employment for previously retrenched workers
Section 12A(3)(c): Ability of small and medium businesses (SMEs), or firms owned or controlled by HDPs, to effectively enter into, participate in or expand within the market
In analysing this public interest factor, the Commission will consider, for example, whether:
- any impediment arising from the merger limits entry, growth and expansion of SMEs and HDPs, and their participation in the relevant market or adjacent markets
- SMEs or HDPs rely on the target firm for inputs to a significant extent
- the target firm is a significant customer of SMEs or HDPs
- the merger will result in a notable adverse change in terms and conditions of supply between the target firm and SMEs or HDPs
- any effect on SMEs or HDPs has a secondary effect on the other public interest factors
The Commission may find the following remedial actions/commitments to be appropriate when addressing a merger which gives rise to a negative effect on the ability of SMEs and HDPs to be competitive:
- the establishment of an acceptable supplier development fund for technical, financial or other assistance to SMEs and HDPs, designed with the following principles in mind:
- funds must be incremental to any pre-merger support for small firms or suppliers
- funds may be disbursed by way of grants, preferential or low interest loans, or equity
- monitoring and reporting obligations must align with the life of the fund
- if funds are disbursed as loans, the repayment of loans will extend the life of the fund, and monitoring and reporting obligations will similarly be extended until all repaid loans are also fully disbursed
- no administrative, operational or other transaction fees may be subtracted from the fund value
- the support for the sustainable integration of SMEs and HDPs into the value chain of the merging parties
- continued support or procurement of products or services from SME and HDP suppliers
- establishing skills development and training programs and transferring of technology
- obliging parties to continue access and supply on reasonable and non-discriminatory terms and conditions
Section 12A(3)(d): Ability of national industries to compete in international markets
In analysing this factor, the Commission will consider:
- the role and importance of the relevant national industry in South African and international markets
- the structure and size of the national industry or sector by international standards
- the extent of the effect of the sector should there be a hindrance to compete in international markets
- whether the merger impedes the realisation of any related public policy goals and relevant industrial policies in relation to the national industries in question
The Commission may consider the following actions/commitments as appropriately remedying any negative effect caused by a merger on the ability of national industries to compete in international markets:
- obliging the merging parties to abide by finite time periods for investment in business operations
- obligations to create jobs, introduce new technology and products
- obligations to enter export markets or increase exports
- training, re-skilling or skills upliftment programs
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Read the original publication at Bowmans.
