The current approach to public interest and the changes proposed by the Guidelines
The Competition Commission’s draft Public Interest Guidelines articulate the Commission’s likely approach in imposing public interest considerations in merger approvals.
What is public interest?
While public interest has been part of South African competition law since its inception, there has arguably been a greater emphasis on the effect of mergers on certain public interest factors since the 2019 amendments to the Competition Act. The main objectives of the 2019 amendments were to address elevated levels of concentration and the racially skewed spread of ownership of firms in the South African economy. In particular, the public interest provisions were amended to promote ownership by historically disadvantaged persons (HDPs) and workers in firms, and to support the participation and expansion of small businesses and HDP-owned firms in the economy. The other public interest factors focus on employment, the effect of a merger on a particular region or industry, and the ability of national industries to compete in international markets.
The Draft Guidelines
In the past, public interest conditions featured prominently in high-profile transactions such as Walmart's acquisition of Massmart and ABInBev's acquisition of SAB. For less ground-breaking transactions, public interest scrutiny primarily focused on employment. In recent years, however, firms seeking merger approval in South Africa have encountered a concerted regulatory drive to include a broader range of public interest-related conditions in routine merger approvals.
The Draft Guidelines seek to contextualise and articulate the Competition Commission's likely approach in formulating and imposing these conditions. The Draft Guidelines encapsulate an evolving policy approach that has already enjoyed fairly consistent application for some time.
In motivating the policy approach highlighted in the Draft Guidelines, the Commission cites the transformation imperative enshrined in the Preamble to the Competition Act (and endorsed in the Mediclinic decision of the Constitutional Court). This approach is committed to interpreting the public interest component of merger regulation through a constitutional lens – focusing on the civil liberties enshrined in the Bill of Rights.
The legislative framework of public interest
In the Draft Guidelines, the Commission reiterates a settled principle of merger regulation in South Africa: that the competition law and public interest considerations set out in the Competition Act are equal in status. That means the Commission is required to assess, with the same vigour, the effect of all mergers on both competition and public interest grounds.
Flowing from this is the possibility that a merger can be justified on substantial public interest grounds, even in cases where the Commission finds that a merger may result in a substantial prevention or lessening of competition (SPLC). On the other hand, even if the Commission finds that a merger may not result in a SPLC, it must still determine whether the merger is justifiable on public interest grounds after assessing the impact of the proposed transaction on each public interest element. After this exercise, the Commission will determine the merger's net effect on the public interest.
The Commission's general approach
Merger assessments under the Act involve a determination of the likely effect (positive or negative) on each public interest factor set out in the Act. For purposes of the assessment, parties will be required to provide both qualitative and quantitative evidence for any claims about the effect of a merger on public interest.
The Draft Guidelines explain the Commission's general approach to the public interest assessment as follows. First, establish the likely effect of the merger on each of the five public interest factors listed in the Act. In doing so, each effect must be attributable to the merger (ie merger-specific) and substantial in scope. Second, if the established effect is negative, substantial, and as a result of the merger, can that outcome be remedied – in which case the identified remedy will be imposed as a condition? Third, if the established negative effect cannot be remedied, are there any other positive public interest outcomes attributable to the merger and of sufficient weight to ameliorate and nullify the negative effect?
Notably, the Commission's assessment is cumulative. That means where a merger has a net positive effect on the public interest, the Commission is likely to conclude that the merger is justifiable on substantial public interest grounds. Conversely, where the Commission finds that a merger has a net negative effect on the public interest, it is likely to conclude that the merger is not justifiable on substantial public interest grounds. Such a finding may result in remedies being imposed to address the identified public interest concern(s).
Recent example – Burger King
In June 2021, the Commission prohibited ECP Africa's acquisition of Burger King SA and Grand Foods on public interest grounds alone, given that the HDP shareholding in Burger King SA would decrease from around 68% to 0% due to the merger. According to the Commission, the proposed merger could not be justified on public interest grounds due to its substantial negative effect on the spread of ownership criterion. Following a reconsideration application, the Competition Tribunal conditionally approved the merger, subject to significant public interest commitments. These included commitments by the merger parties to dispose of a meat processing plant to an HDP, expand its South African businesses, increase the number of HDP employees, procure locally, and establish an employee share ownership scheme. Although this outcome predates the Draft Guidelines, the approach followed by the Commission is largely reflected in the Draft Guidelines.
Although the Draft Guidelines are not legally binding, they provide a clear indication of how the Commission intends to assess the applications for merger approval that come before it. Parties' intent on pursuing notifiable mergers in South Africa would do well to take account of the Draft Guidelines when structuring their transactions. As seen in the Burger King case (and several others since), public interest considerations can be determinative in an assessment of whether merger approval is ultimately obtained, and, if so, the nature of remedial conditions imposed.