Competition Commission prohibits merger on new public interest ground
On 1 June 2021, the Competition Commission released a media statement indicating that it had, on public interest grounds, prohibited a proposed transaction whereby a private equity firm, ECP Africa, intended to acquire Burger King (South Africa) and Grand Foods Meat Plant from Grand Parade Investments.
Although the Commission found that the proposed transaction would be unlikely to result in harm to competition in any markets, it nevertheless prohibited the transaction on the grounds that, as a result of the proposed merger, the merged entity would have no ownership by historically disadvantaged persons (“HDPs”) and workers.
When analysing a merger, the Competition Act, 1998 requires the competition authorities to assess whether a merger can or cannot be justified on various substantial public interest grounds. In July 2019, a new public interest ground was introduced, such that the competition authorities must also now 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 in firms by HDPs and workers in the market.
While the Commission has historically considered the overall impact of transactions across all public interest considerations, it appears that the Commission is now considering the impact of a merger more narrowly on individual public interest grounds.
In this respect, the Commission found that the proposed merger would lead to a significant reduction in the shareholding of HDPs in the target firms, from more than 68% to 0%. The target firms are ultimately controlled by an empowerment entity wherein HDPs hold an ownership stake of more than 68% (that is, certain of the sellers are HDPs). As the acquiring group has no ownership by HDPs and workers, the Commission found that the proposed merger would have a substantial negative effect on the promotion of a greater spread of ownership by HDPs, and prohibited the proposed transaction.
The Commission’s decision could be motivated by the broadly criticised slow pace of transformation in South Africa and any reduction in HDP ownership of businesses through proposed mergers will further frustrate the objective of transforming ownership of corporates in South Africa to be more representative of the country’s demographics.
The decision is also aligned with Minister Patel’s recent statements that the B-BBEE regulatory environment should also promote the active participation of Black workers in businesses and their management.
Although the reasons for the decision are not yet available, it will be interesting to see how the Commission dealt with the ability of the existing shareholders to realise the value of their investment (if at all). An approach by the authorities that limits the ability of shareholders to sell their shares could potentially have unintended consequences and arguably undermines the broad objectives of the Competition Act.
This is the first transaction that has been prohibited on grounds that it harms the promotion of a greater spread of ownership. However, having regard to this decision and recent policy statements by the Department of Trade, Industry and Competition around this policy objective, it seems that this transaction is unlikely to be the last where a promotion of a greater spread of ownership by HDPs and workers becomes a deciding factor in the approval of a merger.
For further information, please contact our Competition/Anti-trust team.