The impact of Public Interest on M&A Transactions in 2022

​​​​​​Over the past few years, the scope of public interest considerations in mergers has expanded more in South Africa than in any other jurisdiction globally. In 2022, dealmakers can expect an extensive and broad range of public interest conditions to be imposed on many mergers.

The South African competition authorities are often praised, but also simultaneously criticised, for actively applying the public interest provisions contained in the Competition Act (89 of 1998). The provisions in the Act require an assessment of the effect a merger may have on a particular industry or on aspects such as employment, the ability of small/black-owned firms to compete, the ability of national industries to compete internationally, and the promotion of a greater spread of ownership. Although there is recognition that public interest has a fundamental role to play in addressing the incomparably high levels of inequality, poverty and unemployment in South Africa, the expanding scope of these provisions has become more difficult to predict, and this uncertainty is proving to be harmful for businesses in South Africa.

For example, in 2021, two ground-breaking cases demonstrated that the competition authorities may apply public interest provisions in a more expansive manner. Firstly, the new public interest provisions of the South African Competition Amendment Act, which focus on B-BBEE ownership, led to the Burger King merger being prohibited solely on the basis of a reduction in historically disadvantaged persons (HDP) ownership. Although this transaction was ultimately approved by the Competition Tribunal, this was the first time in 20 years that a merger was prohibited on public interest grounds alone.

Secondly, the Mediclinic Constitutional Court decision emphasised that competition law must be interpreted and applied with regard to the South African Constitution. In this matter, the Competition Commission (Commission) prohibited the merger between Mediclinic SA and Matlosana Medical Health Services, principally on the basis of public interest issues, and held that the Competition Appeal Court had failed to promote the object of s27 of the Constitution (the right of access to healthcare).

In 2021, numerous other mergers were also approved subject to extensive public interest conditions, which were varied and not uniformly applied. Some examples of the types of such conditions imposed are set out below.

  • Ownership – many merger parties agreed to either enter into transactions with, or sell shares to, B-BBEE shareholders, or to maintain certain levels of HDP ownership, as well as set up employee share ownership schemes. These conditions are motivated by the authorities' continued reliance on certain objectives of the Competition Amendment Act aimed at addressing high levels of economic concentration and the skewed ownership profile of the South African economy.
  • Employment – moratoriums on retrenchments, the creation of new jobs, commitments to maintain aggregate employment levels and training commitments (including setting up learnerships and providing bursaries).
  • Procurement – commitments to procure products from local small, micro and medium-sized enterprises (SMMEs) and HDP suppliers.
  • Investment – commitments to invest in localisation initiatives, programmes to support and develop SMMEs and firms controlled by HDPs, training, the creation of new outlets/facilities, and reskilling.

The Commission also imposed conditions relating to broader issues, which arguably also fall under the public interest purview, such as sustainability. For example, the merger involving the acquisition by Air Liquide of 16 air separation units owned by Sasol was approved subject to a commitment by the parties that they will target a reduction in carbon emissions associated with the target assets by 30% within 10 years.

Given the broad scope of public interest conditions, it is anticipated that public interest conditions will continue to feature prominently in 2022. B-BBEE/HDP ownership is of particular concern to the competition authorities. However, there is very little guidance as to how the Commission will interpret and weigh up the ownership provision in future, particularly whether absolute ownership/empowerment shareholder levels must be maintained.

There will also be a continued focus on how merger parties can contribute to the growth of SME and HDP firms and localisation initiatives. More conditions related to local procurement and supply commitments, the creation of new jobs and development funds can also be expected. These conditions have numerous effects, ranging from the timing of the proposed transaction to the way the business of the merged entity is ultimately conducted.

Amendments to the merger filing forms will also likely be finalised in 2022 – following this, firms will have to provide extensive information about the effect of the merger on all public interest considerations, as well as more detailed information on their proposed transactions. The proposed amendments would require a move away from the current reactive approach of merger parties responding to information requests, to one where parties are more proactive in providing detailed public interest and transaction-related information upfront.

It is likely that as public interest and competition law become more infused, many complicated issues will arise. Although competition authorities, as well as third parties such as trade unions and competitors, may legitimately raise public interest issues, the competition authorities should adopt a cautious approach when applying these provisions to uncontentious mergers with no competition issues, which will have no effect on market participants or the market itself. It will also be very important for merger parties to make the competition authorities alive to the commercial realities and reasonings behind certain transactions; for example, the interests of HDP shareholders wishing to realise a return on their investments. Accordingly, there is a dire need for guidelines to create legal and business certainty, failing which investment in South Africa may potentially be curtailed.

This article was first published in Without Prejudice.


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