Competition Commission takes ownership of transformation
The Competition Commission's (Commission's) recently published Draft Public Interest Guidelines (Draft Guidelines) indicate the Commission's approach to assessing applications for merger approval that come before it.
While the Draft Guidelines are not legally binding, the Commission has committed to paper its evolving approach to evaluating public interest factors adopted over roughly the last two years.
The public interest ground expanded on most in the Draft Guidelines relates to promoting a greater spread of ownership, particularly to increase the levels of ownership by historically disadvantaged persons (HDPs) and workers.
The introduction of section 12A(3)(e)
This public interest ground was introduced in July 2019 as one of several significant amendments to the Competition Act, 89 of 1998 (Act). When determining whether a merger is justifiable on public interest grounds, section 12A(3)(e) provides that the competition authorities must consider the effect that the merger will have on the promotion of a greater spread of ownership, in particular, to increase the levels of ownership by HDPs and workers. HDPs are defined in the Act as individuals disadvantaged by unfair discrimination based on race before the implementation of the Interim Constitution in 1993.
Since the prohibition of the Burger King transaction in 2021, the Commission's approach to merger assessment has demonstrated a particular focus on section 12A(3)(e). This is evident in a notable increase over the last two years in the number of mergers that were approved subject to conditions requiring an increase in the levels of ownership by HDPs and/or workers. According to the Commission's 2022/23 Annual Report, transacting parties agreed to implement employee share ownership plans in relation to 28% of mergers that raised concerns around this public interest factor over the course of the 2022/23 financial year. Through its conduct in the merger clearance process during this period, the Commission's approach suggests that it regards the imperative to promote a greater spread of ownership by HDPs and workers as conceptually different and existing apart from the other public interest grounds set out in the Act.
Promotion of ownership and remedies
This approach was confirmed in the Draft Guidelines where the Commission explains that, unlike the other public interest grounds, section 12A(3)(e) imposes a positive obligation on parties seeking merger approval for their transactions. This means that the Commission's point of departure will be that all mergers are required to promote a greater spread of ownership by HDPs and workers in the economy. In addition, even if a merger actively promotes ownership by HDPs, this does not discharge the obligation to promote increased ownership by workers and vice versa.
According to the Draft Guidelines, the Commission will determine, on a case-by-case basis, the substantiality of a merger’s effect on each public interest ground and will be subject to a balance of probabilities standard (ie the lower burden of proof applicable to civil rather than criminal matters). Since section 12A(3)(e) is a feature of every merger assessment, the Commission's approach to its application is likely to have a significant impact on the overall public interest assessment conducted by the Commission as part of its merger clearance regime. Notably, the Draft Guidelines indicate that if a merger does not promote a greater spread of ownership, it may be declared unjustifiable on public interest grounds.
In the Draft Guidelines, the Commission proposes potential remedies to ensure the greater spread of ownership. This includes for example, divestitures to HDP shareholders which would create a greater spread of ownership in another part of the business, or commitments to conclude alternative ownership agreements.
The Draft Guidelines also confirm that certain principles apply where an Employee Share Ownership Plan (ESOP) is proposed as a potential remedy. For example, if a merger results in a dilution in the level of ownership by HDPs and/or workers, any proposed ESOP should remedy the full extent of the dilution (in other words, the ESOP shareholding should match the percentage by which the level of HDP/worker ownership is being diluted). A similar approach is not adopted, however, where an HDP transaction is proposed to remedy a dilution of HDP and/or worker ownership. In this case, the Draft Guidelines suggest that HDP transactions should be no less than 25% + 1 share and should ideally confer control on the HDPs to ensure that the remedy responds to the requirement to promote ownership by HDPs in firms in the market.
The Tribunal's view
The Commission's view that section 12A(3)(e) is separate from the other public interest grounds in the Act and, accordingly, warrants differential treatment in the public interest assessment, has yet to be tested before specialist competition law adjudicators in the Competition Tribunal (Tribunal) and Competition Appeal Court. Taking into consideration the existing body of case law in South Africa, however, such an approach appears to be inconsistent with the Tribunal's preference for analysing the various public interest grounds on an equivalent basis. In previous decisions, the Tribunal has clarified that the public interest analysis should be holistic and include weighing the different public interest grounds against each other.
As evidenced recently by the Epirocdecision in April 2023, the Tribunal confirmed that the public interest analysis under section 12A(3) is a holistic one. Each public interest ground must be separately assessed and then, if necessary, weighed against each other to reach a net conclusion on the public interest effects of the merger. The result is that even if a merger would have a substantial negative effect on one of the public interest grounds, that effect might be mitigated or outweighed by positive effects concerning one or more of the other factors listed in section 12A(3).
Although the Draft Guidelines are intended to clarify the Commission's approach to the transformative imperative that underlies section 12A(3)(e), it should guard against substituting a rigorous, case-by-case assessment of the mergers that come before it with a superficial tick box exercise. Failure to do so will have an adverse impact on commercial activity in the Republic and, inadvertently, harm the very interests that the public interest component of the merger clearance process seeks to protect and promote. In an area with limited certainty, however, it is clear that parties seeking to implement acquisitions and disposals in South Africa will have to pay close attention to this particular consideration when planning their transaction strategies.