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Revised Public Interest Guidelines relating to Merger Control now in effect
On 20 March 2024, President Cyril Ramaphosa, in his address at the Second Black Industrialists and Exporters Conference, emphasised the vital imperative of rectifying the injustices endured by black South Africans during the apartheid era. This call to action was echoed by the publication of the final version of the Competition Commission of South Africa's (the "Commission") Revised Public Interest Guidelines on Merger Control (the “Guidelines”), which came into effect on the same day. The publication of the now final Guidelines follows a brief public consultation period in October 2023.
The Guidelines outline the Commission's approach to assessing the public interest factors outlined in s12A(3) of the Competition Act, 1998 (as amended) (the “Competition Act”) in mergers.
This involves a cumulative inquiry that includes:
- Evaluating the likely impact of the merger on each public interest ground;
- Determining if such an impact is substantial;
- If so, identifying potential remedies to address the specific impact; and
- On a case-by-case basis, consider whether other equally weighty countervailing public interest factors could mitigate the impact.
A key tenet of the Guidelines is that in the Commission's view, all mergers must promote a greater spread of ownership among workers or Historically Disadvantaged Persons (“HDPs”) which is the central focus of this newsflash.
The draft Guidelines and the Commission's interpretation of s12A(3)(e) of the Competition Act received significant criticism from various stakeholders. Although there have been notable changes to the section on assessing the promotion of a greater spread of ownership, many concerns raised by stakeholders were not addressed by the Commission and are therefore unresolved.
The Guidelines confirm that the Commission’s position is that:
- Mergers involving an acquiring firm and/or a target firm domiciled outside of South Africa and subject to notification in South Africa are nonetheless subject to the provisions of s12A(3)(e) of the Competition Act, and are thus required to promote a greater spread of ownership;
- A merger that fails to promote a greater spread of ownership as outlined in s12A(3)(e) of the Competition Act, may be sufficient enough to render such merger unjustifiable on grounds of public interest; and
- Even if a merger enhances ownership by HDPs, the obligation remains to consider increased ownership by workers (and vice versa).
The Commission will evaluate the impact of mergers on HDP and worker ownership levels by examining various quantitative and qualitative factors, including:
- The quantity and value of shares or interests;
- The rights associated with shares or interests, such as board representation;
- The active or passive nature of assets associated with shares or interests; and
- The control granted by any increase in shares or interests.
In cases where the Commission determines that a merger does not promote a greater spread of ownership, the Commission will, in the first instance, consider ownership remedies, including:
- Establishing an Employment Share Ownership Programme (“ESOP”) representing a broad base of workers holding a minimum equity range of 5% to 10% in either one of the merging entities or the merged entity;
- The sale of a minimum of 5% to 25% of equity to one or more HDPs;
- Implementing "direct share ownership schemes" for workers to acquire shares at no cost for a reasonable period post-merger;
- Facilitating divestiture of a portion of the business or assets to HDP purchasers within a reasonable timeframe after the merger; and
- Community or other investment trusts that hold shareholding in an operational firm, for the benefit of HDP beneficiaries.
Positively, the Guidelines have removed much of the highly prescriptive language regarding the structuring and establishment of any ESOP or the structuring of an HDP transaction. The amount of equity that the Commission will require to be disposed of for an HDP transaction has also been reduced. However, many will argue that the Guidelines still fundamentally misinterpret section 12A(3)(e) and that the Commission is wrong to assert that it is the role of all mergers to promote or increase a greater spread of ownership.
As predicted through our qualitative and quantitative research into mergers since 2019 and outlined in our article titled ‘Revised Public Interest Guidelines, Are They Really in the Public Interest?’, the Commission remains committed to its interventionist approach despite differing opinions on the effects of this on mergers. Merging parties must therefore adapt and innovate to overcome these challenges, possibly making upfront adjustments to their transaction structures.
Until there is a challenge to the Commission’s interpretation in the Tribunal or a higher court that settles the position, a failure to do so will likely result in more protracted and adversarial merger investigations.
Aidan Scallan
Executive | Competition
Macalen Chetty
Candidate Legal Practitioner | Competition