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South Africa: Final Guidelines on the revised approach to public interest in merger control

27 March 2024
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Overview

  • The South African Competition Commission has issued Revised Public Interest Guidelines relating to Merger Control (Guidelines).
  • The Guidelines are intended to give businesses and practitioners insight into the Commission’s approach to the assessment of public interest when it reviews mergers in terms of the Competition Act, 1998.
  • Comments on the previous draft guidelines have – at least in part – been incorporated into the Guidelines.
  • In particular, the Guidelines address the amendment to the Competition Act in 2019, which introduced the requirement that the competition authorities assess whether a proposed merger will promote a greater spread of ownership by Historically Disadvantaged Persons and workers in markets.

In September 2023, the South African Competition Commission (Commission) published a draft of its Revised Public Interest Guidelines relating to Merger Control (Draft Guidelines) (click here for further detail regarding rationale and content of the Draft Guidelines).

Business, law firms, international competition law associations, economists, and other stakeholders submitted extensive comments.

On 20 March 2024, the Commission published the Revised Public Interest Guidelines relating to Merger Control (Guidelines).  For the most part, the Guidelines maintain the approach suggested in the Draft Guidelines, although certain aspects have been amended. The key similarities and differences between the Guidelines and the Draft Guidelines are summarised below.

General approach to assessing public interest provisions

The Guidelines maintain the following approach:

  • Standard of analysis: The Commission’s general approach is: (i) to determine the likely effect of a merger on each public interest ground; (ii) to determine if the effect is substantial; (iii) where it is determined that there is an effect and the effect is substantial, the Commission will consider possible remedies to cure that effect; and (iv) where the effect cannot be remedied, the Commission may, on a case-by-case basis, consider equally weighty countervailing grounds.
  • Each factor must be assessed separately and addressed by suitable conditions: If a merger has an effect on a particular public interest ground, the Commission will require conditions that specifically address the effect identified (e.g. an effect on employment should be addressed by an employment-specific condition and not, for instance, by a condition advancing another public interest ground). However, if the effect cannot be remedied by means of condition/s, the Commission ‘may’ on a case-by-case basis, consider equally weighty countervailing public interest grounds which outweigh the effect identified.
  • Section 12A(3)(e) creates a positive obligation: The Commission’s point of departure is that section 12A(3)(e) of the Competition Act creates a positive obligation to promote a greater spread of ownership in every merger. ‘Therefore, a merger that does not promote a greater spread of ownership is not responsive to the obligation arising under section 12A(3)(e) of the Act.’ See further below.

The promotion of a greater spread of ownership

The Guidelines maintain:

  • Section 12A(3)(e) creates a positive spread of ownership obligation: All mergers are required to promote a greater spread of ownership. A finding that a merger does not promote a greater spread of ownership will inform the Commission’s determination of whether the merger can or cannot be justified on substantial public interest grounds. It is possible that a merger that does not promote a greater spread of ownership in terms of section 12A(3)(e) is substantial enough to render a merger unjustifiable on public interest grounds. This means that neutral mergers that do not change the status quo as regards ownership and involving firms that already have HDP/ worker ownership shareholding in place, are still required to demonstrate that they have promoted a greater spread of ownership in terms of section 12A(3)(e) of the Competition Act. On the Commission’s approach, section 12A(3)(e) is a feature in every merger assessment, including for example: (i) global foreign-to-foreign transactions where a filing in South Africa may be ‘technically’ triggered (where there is no local subsidiary in South Africa); (ii) mergers where parties are already substantially empowered; (iii) private equity transactions that raise no competition concerns; and (iv) acquisitions of minority interests with material influence, but insufficient influence to decide corporate strategies.
  • This approach pertains to all mergers that have an effect in South Africa: There is now an express provision that transactions involving foreign acquiring and/ or target firms are not excluded from the application of the Guidelines.
  • Attribution of sellers’ credentials: The Commission will consider the selling firm’s HDP and/ or worker ownership levels to be attributable to the target, where the target does not have its own.
  • HDP and worker ownership – the one does not necessarily preclude the other: Even if a merger promotes ownership by HDPs, this does not preclude the obligation to consider increased ownership by workers, and vice versa.

 Remedial measures

Where a merger results in a dilution of HDP/ worker ownership, or otherwise fails to promote a greater spread of ownership in terms of section 12A(3)(e), the Commission will, in the first instance, consider ownership remedies including the following:

  • An ESOP concluded in accordance with the design principles articulated in case precedent and refined by competition regulators. The ESOP must hold a minimum range of 5% to10% of the equity of a merging party or the merged entity and must represent a broad base of workers.
  • The sale of a minimum range of between 5% and 25% of the equity of a merging party or the merged entity to one or more HDPs.
  • Direct share ownership schemes in terms of which workers will acquire shares in a merging party or merged entity, at no cost to workers for a reasonable period post implementation of the merger.
  • A divestiture of a business or assets of a merging party or merged entity to HDP purchasers within a reasonable period post implementation of the merger.
  • Community or other investment trusts that hold shareholding in an operational firm, for the benefit of HDP beneficiaries.

 HDP transactions of 25% + 1 share no longer strictly required

In terms of the Draft Guidelines, where a HDP transaction was proposed to promote ownership, there was a requirement that the HDP shareholders should acquire no less than 25% + 1 of the shares and control. However, this has not been carried through in the Guidelines.

ESOPS may no longer be a strict requirement in every merger

In terms of the Draft Guidelines, mergers that would result in negative or neutral empowerment outcomes would be required to implement a 5% ESOP. Where ESOPs were not feasible, the Draft Guidelines contemplated that the merging parties would enter into transactions whereby they divested parts of their businesses to HDP shareholders or introduced HDP shareholders to hold no less than 25% + 1 share of the issued shares of the relevant entity, coupled ideally with controlling rights.

Even where a merger was found to be additive to empowerment outcomes, the Draft Guidelines still suggested that at least a 5% ESOP could be required in all instances.

In terms of the Guidelines, ESOPs are not a strict requirement in every merger. Nevertheless, the threshold of 5% has been retained, and increased, to between 5% and 10%.

Provisions in the Draft Guidelines that have fallen away in the Guidelines

  •  Factors to consider when analysing a merger’s impact on section 12A(3)(e): Whereas the Draft Guidelines explicitly provided for: (i) factors the Commission would consider to establish the effect a merger would have on section 12A(3)(e); (ii) factors to establish the extent of harm on section 12A(3)(e); and (iii) factors that would be considered by the Commission in analysing representations made by parties for not complying with section 12A(3)(e), these have not been carried through in the Guidelines.
  • Principles relating to ESOPs: Also not carried through in the Guidelines, are principles around; (i) the structure of the ESOP; (ii) cost to workers participating in the ESOP; (iii) governance of the ESOP; (iv) duration of the ESOP; (v) participants of the ESOP; (vi) participation benefits of qualifying workers; and (vii) value and funding of the ESOP (including the trickle dividend ratio suggested).

Conclusion

The Guidelines are a helpful articulation of the approach that the Commission intends to follow when investigating the public interest impact of a proposed merger. They are, however, not binding, and merging parties that believe a different approach is warranted will still be able to engage with the Commission in the course of its investigation, and (if necessary) to approach the Tribunal to reconsider any decision of the Commission on an intermediate merger.

The Tribunal remains the decision maker in respect of large mergers and is expected to apply the holistic approach to the assessment of public interest that it has articulated in Epiroc Holdings SA / K2022596519 (South Africa) (Pty) Ltd and Polkadots Properties 117 (Pty) Ltd (Case No. LM148Nov2022) (here) and other cases.