In a welcome development for business, the Competition Tribunal has finally provided valuable insights into the application of public interest conditions in mergers. These conditions, outlined in the Competition Act, have gained a worrying prominence in recent years, leading to a surge in their implementation.
A closer examination of this trend reveals the growing influence of the department of trade, industry and competition (DTIC) and the Competition Commission, particularly since the introduction of trade, industry & competition minister Ebrahim Patel’s “Policy Statement on localisation for jobs and industrial growth” in May 2021.
Initially, the number of large mergers subject to public interest conditions was limited, with just 16 approved by the Competition Tribunal in 2017. These conditions primarily focused on employment matters, preventing staff retrenchment resulting from the merger. However, by 2022 the figure skyrocketed to 74. Alongside employment considerations, acquiring companies were required to commit substantial financial resources towards enterprise and supplier development, as well as bursaries and similar initiatives that pleased the minister.
One notable recent example is the case of Dubai Ports World’s acquisition of Imperial’s SA operations, which necessitated a staggering minimum expenditure of R2.1bn over four years. A brave undertaking in the midst of an ongoing trucking war on the N3 highway and endless power and water cuts.
The key driver behind this surge in public interest conditions lies in Patel’s policy statement, aimed at fostering broader ownership among black South Africans. The policy emphasises the promotion of employee and worker ownership arrangements within merged firms, which resulted in an increasing number of mergers being subject to Employee Share Ownership Plans (ESOPs), which I wrote about on May 29th. Since the amendment of the Competition Act in 2018, merged entities are now required to establish an ESOP to hold 5% of the shares in the target firm, even in intermediate mergers involving smaller deals.
These developments have been celebrated by the DTIC, with Patel and his team frequently highlighting the positive impact of these conditions on “industrial competitiveness and growth” in reports to parliament, when the outcomes couldn’t be further from the truth. Accordingly, local and foreign investors will heave a sigh of relief at the guidance recently provided by the Competition Tribunal on the scope of the commission’s powers to require these kinds of commitments.
In this case, Epiroc, a Swedish mining machinery group, wanted to invest in Aard, a SA business which supplies loader and other vehicles that are used in low seam mining operations, and by doing so, increase its presence in SA and grow the business based on its global footprint. A manifestly positive transaction from a public interest perspective, you would say, and exactly the kind of investment we spend millions trying to attract?
Not so fast, said the Competition Commission. The seller of the shares was a “historically disadvantaged person”, and as a result, the transaction would not “promote a greater spread of ownership” as envisaged by the Competition Act. Remember Burger King?
Then, the minister intervened, and consequently the merging parties agreed to establish an ESOP to hold 5% of the shares. They also proposed an empowerment transaction, which together with the ESOP would mean that 28.2% of Aard’s shares would be held by historically disadvantaged people.
In considering whether these proposed conditions would address the commission’s concerns about the “very significant reduction it would bring about in the effective HDP ownership of New Aard”, the tribunal considered the nature of the public interest obligations created by the Competition Act, and confirmed that it is “a holistic one” which requires that the different public interest grounds listed in section 12A (3) must be separately assessed, and then, if necessary, weighed against each other to arrive at a net conclusion on the public interest effects of the merger. Basically, if a merger is overall in the public interest, it should be approved.
Evidence
Conditions can only be imposed where there is evidence to suggest there is a public interest harm that requires a remedy, and even then, it should be proportional to the harm identified. So there is certainly no lawful basis to require merging parties to create an ESOP or offer “commitments” in every transaction. And certainly no reason to expect, in every merger, that an ESOP would hold 5% of the shares in every target firm.
Frankly, the tribunal’s decision is a welcome affirmation of the principle so carefully crafted by the former chair of the tribunal, Norman Manoim, in the Walmart case, in which he noted that the commission’s “job in merger control is not to make the world a better place, only to prevent it becoming worse as a result of a specific transaction”.
The obvious truth Patel’s transformation-through-public-interest merger conditions conveniently ignores is that anything which unnecessarily diverts funds out of SA businesses may harm their future growth, development and international competitiveness. It is difficult to estimate how many companies have already been put off acquiring a business in SA because of our long merger review periods, or the prospect of being hijacked by the DTIC into spending large sums on B-BBEE (despite SA’s empowerment legislation not making this compulsory for any business trading in the country).
Hopefully, the tribunal’s decision will assist to limit the application of public interest conditions to those (relatively rare) cases in which the competition authorities identify that there is a real risk that a proposed acquisition will actually negatively affect small suppliers or customers or suppliers, or flood the country with imports. On that point, a wandering albatross tells me that firms are giving up on trade remedies due to Patel’s prevarication, but that’s a column for another day.
• Avery, a financial journalist and broadcaster, produces BDTV’s “Business Watch”. Contact him at badger@businesslive.co.za.
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