New merger laws in South Africa have a huge problem: experts

The Competition Commission has published a revised draft merger assessment public interest guidelines (Guidelines) for public comment, but there are serious problems for black-owned businesses.

Susan Meyer and Robin Heeney from Cliffe Dekker Hofmyer said that the Commission has done well in bringing certainty to the complex world of mergers.

“At the outset, the Guidelines reiterate what is now well known, namely that the competition and public interest assessments are equal in status, and notwithstanding a clear competition bill of health, a merger can only proceed if it is also justifiable on substantial public interest grounds,” the experts said.

“In 2019, the Competition Act was amended with the critical aim of remedying high levels of concentration, racially skewed ownership, and lack of support for small businesses. However, an inconsistent approach in assessing the amended statutory public interest factors has caused controversy.”

“Predictability has been made more elusive by an absence of guiding jurisprudence, coupled with a myriad of ‘negotiated outcome’ public interest commitments, sometimes seemingly far removed from the legal requirement of ‘merger specificity’”

The provision which causes the most alarm amongst investors is 12A(3)(e) of the Competition Act, which requires promoting a more significant share of ownership to previously disadvantaged people and workers in the market.

When looking at section 12A(3)(e), the guidelines state a merger that does not promote a spread of ownership to historically disadvantaged persons (HDPs) may be substantial enough to render the merger unjustifiable.

This pertains to all South African mergers, including foreign-to-foreign mergers with no transacting company domiciled in South Africa.

In addition, a historical policy which forbids third-party shareholding will likely not be considered acceptable in terms of the public interest factor.

“Where an employee share ownership plan (ESOP) is proposed, it should remedy the full dilution (for example, if a merger results in a dilution of shareholding by HDP/workers of 10%, an ESOP of 10% will be required) and if the merger is neutral as to its effect on HDP/worker ownership, the ESOP proposed should hold no less than 5% of the value/shares of the merged entity (unless required to hold a higher share). The Guidelines are also prescriptive as to how ‘acceptable’ ESOPs are to be structured,” the experts said.

“When HDP transactions are proposed to promote ownership in terms of section 12A(3)(e), they ‘should be no less than 25% + 1 share and should ideally confer control on the HDPs.'”

Problems for black private equity

The experts warned that there are problems for black-owned businesses, especially black private equity firms, who will struggle to unlock the full value of their investments if they can only sell to a buyer with higher HDP ownership credentials than their own.

They noted that allowing black investors to redeploy their sale proceeds into new investments, which would create jobs and allow for growth, would also be in the public interest.

“In some cases, a merger’s value creation for HDPs offsets the decrease in HDP shareholding, but the Guidelines don’t appear to give credits for that.”

“A draconian approach may incentivise some firms to minimise black ownership before engaging in any merger activity or exclude South African operations from global deals.”

There are also questions on how foreign investors would respond to these requirements, with questions over whether the Commission can impose stricter requirements on companies than those already found in B-BEE legislation.

This is especially the case for firms willing to improve their B-BBEE scorecards’ non-ownership elements.

“The Guidelines do not appear to consider the variation in the spectrum of commercial transactions notified to the Commission. For example, a 5% – 10% ESOP might tangibly benefit workers in certain organisations but be a commercial non-starter in others,” the experts added.

“A merger may be notified based on a firm acquiring a lettable enterprise only, a minority (but controlling) interest in another firm, or a ‘technicality’ – is it proportional to expect such transactions to attract a 10% ESOP or a 25% + 1 black shareholding transaction?”

They added that stakeholders should submit comments on the guidelines to ensure that the nation’s transformational objectives do not have any unintended consequences.

Stakeholders will have until Monday, 6 November, to submit comments on the revised draft merger assessment public interest guidelines.

Read: South Africa can expect another interest rate hike in 2023, say economists