JOB PRESERVATION IMPACT OF MERGER CONDITIONS IN THE SPOTLIGHT

By Heather Irvine Saturday, February 29, 2020
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The latest statistics on low growth rates and high unemployment in South Africa, released earlier in February 2020, raise question marks over the effectiveness of public interest conditions applied to mergers by the competition authorities. These conditions – whilst well intentioned - are adding to the cost of doing business in South Africa, which in turn, is hindering foreign investment and local expansion through acquisitions at a time when the country is desperate to grow and create jobs.

‘There has been considerable debate in South Africa about whether conditions imposed on merging parties in response to public interest concerns have really been effective,’ says Heather Irvine, partner at African law firm Bowmans. ‘In particular, it is unclear whether conditions that impose a three-year moratorium on retrenchments have permanently preserved jobs - or just afforded a temporary stay of execution.’ In 2019, the Tribunal imposed employment related conditions on merging parties in 11 different transactions, including some large and high-profile deals like the Glencore/Chevron, British American Tobacco /Twisp, Edcon restructure and SAB / Diageo transactions.

‘Public interest concerns – including about potential job losses – have become a regular feature of merger reviews in South Africa. Other African countries like Namibia and Zambia are increasingly examining these issues, which also feature in regional blocs such as the Common Market of East and Southern Africa (COMESA),’ says Irvine.

While it can be challenging to predict the nature and scope of public interest concerns at the inception of a proposed transaction, these concerns can significantly extend the deal timetable, and potentially result in the imposition of costly and burdensome conditions.

Even smaller, local transactions are affected

What’s more, in South Africa at least, public interest conditions are no longer limited to mega-deals involving large foreign firms such as Walmart/Massmart or ABInbev/SAB. ‘Public interest concerns are now a regular feature even in smaller transactions between local companies,’ says Irvine. 11 large mergers approved by the Competition Tribunal were subject to job preservation conditions, usually in the form of a complete prohibition on any involuntary retrenchments which are related to the merger for a period of 3 years.

In addition, in 2019, in 7 instances, the Tribunal required parties to large mergers to commit R6 billion to local production expansion and to contribute R10.2 billion to development funds. It also imposed conditions aimed at developing local procurement in 7 large mergers.

This broadening of public interest concerns in mergers in South Africa is in step with the 2019 amendments to the South African Competition Act. ‘The public interest factors in the Act now go further than the impact of a merger on employment and the local supply chain,’ says Irvine. ‘They also include the ability of small and medium businesses, or firms controlled or owned by historically disadvantaged persons, to effectively participate or expand within the market, as well as the promotion of a greater spread of ownership.’

The implications of these changes have yet to be tested, she says. ‘There is likely to be considerable litigation in South Africa about what these terms mean, and what kinds of economic evidence are required in order to establish a merger-specific effect.’

National interest adds to merger complexities

An added complication for certain mergers in South Africa is on the horizon, in the form of a new parallel process for mergers involving a ‘foreign acquiring firm’, if these impact on the national security interests of the Republic.

‘Once signed into law by the President, these provisions will require a separate review by a committee constituted by the President, and foreign investors will have an additional hurdle to cross before they can invest in South Africa,’ Irvine says. ‘It is not clear that this is consistent with President Ramaphosa’s drive to facilitate greater investment in our country.’

This pending legislative change is but one example of how national interests are growing in importance in competition regimes, not just in South Africa and other African countries such as Zambia, but further afield.