The need for ownership transformation of the South African economy was a theme emerging from the recent Sixteenth Annual Competition Law, Economics & Policy Conference of the Competition Commission of South Africa (Commission).
Ownership as a consideration in the merger review process in South Africa
When assessing a merger, either the Commission or the Competition Tribunal of South Africa (Tribunal) is required, in terms of 12A(1) of the Competition Act, 89 of 1998, as amended (Competition Act), to ‘… initially determine whether or not the merger is likely to substantially prevent or lessen competition…’ (the so-called competition assessment). Importantly, s12A(1A), which was inserted into the Competition Act by the Competition Amendment Act, 18 of 2018 (Amendment Act), directs the Commission or the Tribunal to go further. Despite its determination on the competition assessment, it is also a requirement for the Commission or the Tribunal to ‘…determine whether the merger can or cannot be justified on substantial public interest grounds by assessing the factors set out in subsection (3)’ (the so-called public interest assessment).
In terms of the public interest assessment, the Commission or Tribunal is required to consider the effect of a merger on the following:
• a particular industrial sector or region;
• employment;
• the ability of small and medium businesses, or firms controlled or owned by historically disadvantaged persons1, to effectively enter into, participate in or expand within the market;
• the ability of national industries to compete in international markets; and
• the promotion of a greater spread of ownership2 ; in particular, to increase the levels of ownership by historically disadvantaged persons (HDPs) and workers in firms in the market (ownership consideration). This factor was specifically introduced by the Amendment Act in 2018.
Support for the ownership consideration can be found in the Preamble to the Competition Act. It states that the economy must be open to greater ownership by a greater number of South Africans, to provide all South Africans equal opportunity to participate fairly in the national economy and to regulate the transfer of economic ownership in keeping with the public interest. Further, part of the Competition Act’s purpose is to promote and maintain competition in South Africa, to ‘promote a greater spread of ownership, in particular, to increase the ownership stakes of historically disadvantaged persons…’.
The Commission has typically placed a strong focus on the effect of a merger on employment – and has safeguarded the public interest in this regard by, for example, imposing a two- or three-year moratorium on merger-related job losses. Since the advent of the Amendment Act, the Commission has increasingly begun to focus on the ownership consideration.
During its 2020/2021 financial year, the Commission finalised 225 merger cases.3 In 34 of these cases (approximately 15%), the Commission either recommended conditions to the Tribunal or itself imposed conditions. Most of these addressed a combination of public interest issues, with five addressing the ownership consideration.4 Conditions addressing the ownership consideration have ranged from the establishment of employee share ownership schemes to the maintenance of certain levels of board representation for HDPs.
Areas where greater clarity is needed
In view of the Commission’s increased focus on the ownership consideration, it has become apparent that greater clarity is needed on at least three aspects over which there is some uncertainty.
• The first point is the meaning to be given to ‘promotion’ of a greater spread of ownership.
It is unclear whether, for example, it is appropriate for conditions to be imposed (or even for a prohibition to be issued) in transactions that have a ‘neutral’ or no impact on the ownership consideration.
In the large merger involving K2020704995 (South Africa) (Pty) Ltd’s (Bidco) acquisition of sole control of Comair Ltd (In Business Rescue) (Comair), no post-merger HDP/worker ownership in respect of Bidco was anticipated by the merging parties. The Tribunal’s reasons for its decision5 do not include reference to the pre-merger HDP/worker ownership levels; however, it notes that the Minister of Trade, Industry and Competition, Minister Ebrahim Patel (Minister) ‘was of the view that the proposed transaction appears to be inconsistent with s12A(3)(e) of the Competition Act, that requires an evaluation of whether a merger promotes a greater spread of ownership, in particular to increase the levels of ownership…’ (our emphasis).
Following engagement between the Commission and the merging parties on the concern raised by the Minister, the merged entity committed to securing the participation of an employee share ownership programme (with a broad representation of ‘Black’ participants) with a minimum shareholding of 5%. They also committed to the participation of one or more ‘B-BBEE Purchasers’ who are agreeable to participating in the ownership structure ‘on mutually acceptable terms and who are able to demonstrate an alignment of interests and strategic skills which shall support and advance the medium to long-term business case of Comair’.
• Another area where more clarity is needed is in the method of calculating HDP/worker ownership.
In order to measure the effect of a transaction on the ownership levels of HDPs/workers, and to put in place appropriate commitments/remedies (if warranted), there must be alignment on the methodology applied to calculating HDP/worker ownership.
In the large merger involving the acquisition of Pioneer Food Group Ltd (Pioneer) by Simba (Pty) Ltd, a wholly-owned subsidiary of PepsiCo Inc. (Pepsi),6 the merging parties, the Commission and the Minister each took a different approach to calculating the pre-merger HDP ownership level.
Unlike the merging parties, the Minister and the Commission considered a share buy-back by Pioneer of shares previously held by broad-based black economic empowerment and HDI entities premerger, which occurred shortly before Pepsi’s offer to acquire shares in Pioneer. In addition, the Minister also considered the indirect shareholding in Pioneer (e.g. shareholding held through institutional investors and mandated investments). The Tribunal did not address the differing methodologies.
• Then there is the question of governance rights that attach to shares owned by HDPs/workers.
While, at first glance, the ownership consideration seems to be a numerical exercise, it appears that it may be acceptable for a dilution of HDP/worker shareholdings to occur in circumstances where a transaction results in an ‘improvement’ in the governance participation of HDPs/ workers.
An example was the large merger involving the acquisition of joint control by Pharma-Q Holdings (Pty) Ltd and Imperial Logistics Ltd (collectively, the Acquiring Firms) of Ascendis Pharma (Pty) Ltd, Alliance Pharma (Pty) Ltd, Pharmachem Pharmaceuticals (Pty) Ltd and Medicine Developers International (Pty) Ltd (collectively, the Target Firms)7.
The Commission and the Department of Trade, Industry and Competition (DTIC) raised concerns that the postmerger HDP/worker shareholdings of the Target Firms would be lower than the pre-merger levels. The DTIC, Commission and merging parties then agreed to a ‘Management Control Condition’ to maintain the HDP representation on the board of the Target Firms, such that the Acquiring Firms would have no less than 75% HDP board representation in the Target Firms as long as they held shares in the Target Firms. The Commission was of the view that the dilution of the HDP shareholdings was ‘remedied by the Management Control Condition’.
Increasing involvement of the DTIC and Minister
Notably, the DTIC has become increasingly active in terms of participation in merger proceedings – often inquiring about the effect of a proposed transaction on the ownership consideration.
The Minister, during his keynote address at the Commission’s conference on 31 August 2022, mentioned that draft regulations could be expected in early 2023, which would guide merging parties on the DTIC’s participation in merger proceedings and outline how the DTIC will work with merging parties to formulate meaningful commitments. The publishing of these regulations will be a welcome development.
It will continue to be important for merging parties to proactively, and early on in the transaction timetable, consider the implications of the public interest assessment as it can prolong the review of a transaction notified to the Commission. Where public interest commitments are made or conditions imposed, these can have an impact on deal cost, timing and efficiencies.
It will also be interesting to watch how the Commission’s practice in relation to the application of the public interest assessment, in particular, the ownership consideration, evolves under the new leadership of Commissioner Doris Tshepe. She was part of an expert panel that advised the DTIC on the amendments to the Competition Act, and took office on 1 September 2022.
1 In terms of section 3(2) of the Competition Act, a person is a ‘historically disadvantaged person’ if that person is one of a category of individuals who, before the Constitution of South Africa came into operation, were disadvantaged by unfair discrimination on the basis of race.
2 In terms of section 1 of the Competition Act, ‘workers’ means ‘employees as defined in the Labour Relations Act, 66 of 1995, and in the context of ownership, refers to ownership of a broad base of workers’
3 Including cases notified to the Commission over the prior financial year, but finalised in the financial year under review and excluding mergers that were abandoned/withdrawn.
4 Based on the Commission’s 2020/2021 annual report.
5 See LM137Oct20, pages 7-8 of the Tribunal’s reasons for decision.
6 See LM108Sep19, pages 12-17 of the Tribunal’s reasons for decision.
7 See LM198Mar22, pages 4-5 of the Tribunal’s reasons for decision.
Richard Bryce is a Senior Associate | Bowmans South Africa
This article first appeared in DealMakers, SA’s quarterly M&A publication.
DealMakers is SA’s M&A publication.
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