The Competition Commission (Commission) has today (1 June 2021) issued a press release (access here) indicating that it has prohibited a merger on the basis that it would ‘lead to a significant reduction in the shareholding of historically disadvantaged persons in the target firm, from more than 68% to 0%’.

The proposed merger related to the much-publicised aim of Grand Parade Investments (GPI), an empowerment entity listed on the Johannesburg Stock Exchange, to restructure its portfolio and, in particular, dispose of its Burger King franchise. In this regard, GPI entered into an agreement with ECP Africa, a private equity fund, to dispose of its interests in Burger King (South Africa) (Pty) Ltd (BKSA) and Grand Foods Meat Plant (Pty) Ltd (Grand Foods).  BKSA operates more than 90 fast food restaurants across South Africa while Grand Foods supplies BKSA with burger patties.

When assessing a merger, the Commission is required in terms of section 12A(1) of the Competition Act, 89 of 1998 (as amended) (Act) to, ‘…initially determine whether or not the merger is likely to substantially prevent or lessen competition…’ (the so-called competition assessment) by assessing the factors set out in section 12A(2). More importantly, section 12A(1A), which was inserted into the Act by section 9(b) of the Competition Amendment Act, 18 of 2018 (Amendment Act), directs the Commission to, despite its determination on the competition assessment, ‘…also 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).

Some commentators had argued that the impact of the introduction of section 12A(1A) was to elevate the public interest assessment of mergers in South Africa to be on par with the competition assessment, such that it was conceivable that a merger with a neutral impact on competition could be prohibited on public interest grounds.

It had been argued that prior to the introduction of section 12A(1A) into the Act, mergers could not be prohibited solely on public interest grounds and indeed, neither the Commission nor the Competition Tribunal had prohibited a merger solely on public interest grounds. It is not clear that the Commission agrees that it could previously not prohibit mergers solely on public interest grounds but it has now indicated clearly that it believes that, at least since the advent of the Amendment Act, it can do so.

Relying on section 12A(1A), the Commission found that while the proposed merger is unlikely to result in a substantial prevention or lessening of competition in any relevant markets, it cannot be justified on public interest grounds.

In this regard, the Commission noted that its public interest assessment revealed that:

• ECP Africa has no ownership by historically disadvantaged persons (HDPs);
• BKSA and Grand Foods are ultimately controlled by an empowerment entity in which HDPs hold more than 68%; and
• as such, as a direct result of the proposed merger, the merged entity will have no ownership by HDPs and workers.

The Commission therefore found that the proposed merger will have a substantial negative effect on the promotion of a greater spread of ownership, in particular to increase the levels of ownership by HDPs in firms in the market as contemplated in section 12A(3)(e) of the Act.

The ramifications of the decision are still to be assessed once the Commission’s reasons are properly considered and contextualised. That said, the decision appears to have significant ramifications for the value attaching to the shareholding of existing HDP shareholders and their ability to realise value in line with the ordinary practices of investors in the economy.