Much has been said about the interplay between the need for investment to enhance socio-economic development, and transformation in South Africa. These are both critically important for growth of the South African economy and its stability.
Partners at Webber Wentzel, Candice Meyer, and Clare-Alice Vertue, unpack recent legal developments and possible implications of the amended draft public interest guidelines (Draft Guidelines) relating to merger control. Although the Draft Guidelines are not legally binding, they provide a clear indication of how the Commission intends assess the applications for merger approvals, which will have a marked impact on transformation and foreign investment.
Encouraging investment and an inclusive, competitive market
Investors typically expect commensurate control of the businesses in which they invest, to protect such investment and the anticipated returns.
"Therefore, in practice, depending on the level of investment made, they may want a commensurate level of ownership. That means they will seek to protect their investments by taking up controlling stakes in the business in terms of the number of voting shares they acquire to enable them to maintain a level of control over operations. They may also want to appoint board members so that they have some control over the board’s decision-making processes," says Meyer, who advises on corporate and commercial transactions, and Broad-Based Black Economic Empowerment (BEE).
According to Vertue, who advises investors in respect of merger approvals, this concept of taking a controlling stake in a business is precisely the juncture at which competition law comes into play. In South Africa, as is common in several jurisdictions, competition regulators are tasked with assessing whether the introduction of a new controlling company is going to have an unwarranted impact on the market. What international investors may be less familiar with, are the public interest considerations taken into account by South African Regulators.
Spread and increase of Black ownership
While public interest has been part of South African competition law since its inception, there has been greater emphasis on the effect of mergers on with regard to certain public interest factors since the 2019 amendments to the Competition Act. The main objective of the 2019 amendments is to address elevated levels of concentration and the racially skewed spread of ownership of firms in the South African economy. In particular, 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 ownership in the economy. 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. As part of its assessment, explains Vertue, "the Commission will compare the level of [HDP and worker] ownership prior to the transaction, to the level of ownership after the transaction.”
Even if a company currently has an employee share ownership plan through which Black employees own a certain percentage of the company, the existence of current empowerment may not be accepted as sufficient. To obtain merger clearance, investors should expect to provide both qualitative and quantitative evidence that the pending transaction will have some benefits to Black ownership and/or worker ownership. Vertue reminds investors that on the Commission's current approach "the benefit to public interest has to be one that is related to the transaction and not simply [a benefit of] the company’s empowerment actions prior to the transaction".
Meyer explains that if a target company already has Black owners, the extent of Black ownership in the ensuing transaction would likely need to increase, which means there would be less equity available for a foreign investor. This may deter foreign investment in South Africa, given investors' desire for ownership and control which is commensurate with the investment made.
Limited market for Black-owned equity
Meyer highlights that the intent of existing BEE legislation and public interest considerations in competition law, is, among other things, to enhance the extent of Black ownership in South African businesses. However, Black owners who may wish to dispose of their investments, could be burdened with less liquid shareholding as a merger approval may be made conditional on maintaining, or even increasing, the level of black ownership, making the disposal of shares by Black owners more complex.
Meyer's concerns were raised by South African business in 2021 in the context of the Burger King SA deal. Although that transaction predates the Draft Guidelines, the approach followed by the Commission in that case is largely reflected in the Draft Guidelines. The Competition Commission prohibited ECP Africa’s acquisition of Burger King SA and Grand Foods on public interest grounds alone, because Black owners would dispose of their stake, resulting in the HDP shareholding decreasing to 0%. At the time, a few Black investment fora objected, describing it as a limitation of the ability of black shareholders to manage their investments as they see fit. 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. However, following a reconsideration application, the Competition Tribunal conditionally approved the merger, subject to significant public interest commitments.
Balancing investment and transformation
According to Meyer, public interest considerations may carry with them significant additional cost for transactions, another deterrent to investment.
“The reality is that we still have to balance these costs against the fact that BEE has been in force for about 20 years, and that SA is not yet at the desired stage of transformation within our economy. For that reason, these initiatives to drive transformation through public interest considerations are critically important to ensure access to the economy for Black South Africans. We need to obviously balance this against the dire need for investment and stimulation of the economy and job creation. This is a fine balance indeed, but they are not mutually exclusive,” concludes Meyer.
Listen to Meyer and Vertue unpack the Investment and Transformation insights.