Introduction
The Competition Commission (Commission) has published Draft Amended Public Interest Guidelines relating to Merger Control (here) (Guidelines). The Guidelines are aimed at providing clarity to businesses and practitioners on the Commission’s approach to the assessment of the public interest factors under the merger control provisions in the Competition Act 89 of 1998 (Competition Act).
Whilst the Guidelines will not have the force of law, they are aimed at articulating the Commission’s approach to the merger control process in South Africa.
The Guidelines primarily flow from the amendments to the Competition Act in 2019 which introduced a specific requirement that the competition regulators consider the effect of a merger on the promotion of a greater spread of ownership with respect to Historically Disadvantaged Persons (HDPs) and workers within markets. The 2019 amendment implicated an important imperative confronting South African society – in circumstances where the economy remains materially unequal and characterised by skewed ownership as a consequence of apartheid legislation which inhibited Black people from participating in the South African economy.
The 2019 amendments to the Competition Act introduced a new aspect to competition law enforcement in South Africa – one which attempts to utilise competition law to deal with the high levels of concentration and skewed spread of ownership in the South African economy.
In circumstances where Government endeavours in the area of other legislative and related interventions have been seen as not sufficiently addressing changes in the nature of ownership and as fostering meaningful empowerment within the South African economy, Government has turned to merger regulation to achieve these outcomes.
There is no question that appropriate measures to address inequality within the South African economy must be strongly supported. However, there are legitimate concerns that the use of merger regulation for this purpose is an inappropriate tool and will not achieve meaningful results. Measures to address the public interest should be undertaken through legislation of true general application (such as through various pieces of empowerment legislation dedicated to achieving this important objective).
Utilising individual mergers on a piecemeal basis to extract empowerment and ownership outcomes which only apply to the merging parties (and not to other participants within the sector) will likely be ineffective and undermine meaningful and economically incentivised investment in the economy (potentially undermining the public interest in the medium to long term) – and materially increase direct or indirect costs, and uncertainty, of doing business in South Africa.
These concerns are exacerbated by the interpretation of the law that the Guidelines appear to support that does not align with a consideration of the public interest as expressed in the Competition Act. The Commission’s approach, reflected in the Guidelines, aggravates the existing uncertainty and is more likely to undermine investment in South Africa, especially if applied in an inflexible manner.
The Guidelines make little effort to engage with the substantive and complex issues that will result from the approach set out in the Guidelines – in order to foster confidence in the integrity of the Commission as an independent regulator and to reflect a meaningful engagement on the issues, including potential unintended consequences that may undermine the public interest.
The Guidelines are intended to apply to all mergers and, as noted above, all mergers are seen as being subject to the requirement that the merger promote a greater spread of ownership. According to the Guidelines, a failure to do so may render the merger unjustifiable on public interest grounds.
This approach, that entails a ‘positive obligation’ on the part of merging parties even where a merger raises no competition or public interest concerns, creates an interpretive challenge that is inconsistent with the Competition Act and which has not been considered by the Competition Tribunal or the courts. The approach deviates from that adopted by the competition authorities in the past and by regulators around the world – in circumstances where merger assessment generally involves considering whether a merger ‘makes things worse’ (as opposed to an obligation on the part of merging parties to ‘make things better’ – especially where such obligations do not apply to other firms within the sector).
The Guidelines are also intended to apply to mergers taking place outside South Africa and with limited South African ‘centricity’ – arguably reinforcing the disincentive to invest in South Africa and contributing to under-investment in South Africa.
Counterintuitively, the Guidelines may also potentially devalue the existing interests held by HDP shareholders especially if, as the Guidelines suggest, such shareholdings may need to be ‘replaced’ on a like for like basis in certain instances. Where such replacements cannot be found, HDP shareholders may not be able to realise the value of their investments.
The Commission’s intended ‘one-size-fits-all’ merger approach is inappropriate and may well have unintended consequences of dis-incentivising investment in South Africa and the related benefits that accompany such investments including potentially undermining both the competition outcomes and the public interest which the competition legislation is intended to promote.
The Commission should be encouraged to engage meaningfully with each merger on a case-by-case basis and in a manner which promotes the South African economy (in particular to support job creation). A rigid approach as contemplated by the Guidelines will undermine the integrity of the Commission and foster perceptions of arbitrariness.
Heightened focus on public interest considerations
In line with the above, the amendments mean that competition and public interest factors in the Competition Act carry equal weight in the merger review process. Where a merger raises no competition issues, the merger may still be prohibited, or conditionally approved, on public interest grounds alone. On the other hand, if a merger is found to be anti-competitive, it can still be approved if the public interest considerations outweigh the anti-competitive effects.
Except for the provision dealing with the effect of a merger on the promotion of a greater spread of ownership, the Guidelines appear to largely align with past approaches and the case law in South Africa insofar as the assessment of the public interest is concerned.
The Guidelines indicate that, when assessing the effect of a merger on public interest, the Commission will first conduct an assessment of each public interest factor and determine whether the merger is likely to have a positive, or negative, effect on each factor.[1] Once the effect has been determined, the Commission will consider whether the effect is merger-specific and, only if so, will it consider whether the effect is substantial. Where a determination is made that a particular public interest factor is positive, merger-specific and substantial the enquiry into that factor ends.
Importantly, however, where a determination is made that a particular public interest factor is negative, merger-specific and substantial, the Commission will:
- require remedies – for example, a negative effect on employment will require a remedy that addresses the employment harm; and
- where the negative effect on that public interest factor cannot be remedied, the Commission may consider ‘equally weighty countervailing public interest factors that outweigh the negative impact identified’.
By way of illustration, the heightened focus on public interest factors in merger control has yielded more conditional approvals in the last two years, than was previously the case:
Year | 2016/17 | 2017/18 | 2018/19 | 2019/20 | 2020/21 | 2021/22 |
Total number of notified mergers | 418 | 377 | 348 | 302 | 242 | 295 |
Total number of mergers approved subject to public interest conditions | 16 | 32 | 27 | 30 | 34 | 74 |
Percentage | 4% | 8% | 8% | 10% | 14% | 25% |
The Commission’s proposed approach to section 12A(3)(e) of the Competition Act – to promote a greater spread of ownership
A different approach is contemplated by the Guidelines insofar as the promotion of a greater spread of ownership in terms of section 12A(3)(e) of the Competition Act is concerned – this section is aimed at increasing the levels of ownership in firms by HDPs and workers.
In this regard, the Guidelines adopt the perspective that section 12A(3)(e) ‘confers a positive obligation on merging parties to promote or increase a greater spread of ownership, in particular by HDPs and/or Workers in the economy’. The Commission’s point of departure, therefore, is that ‘all mergers are required to promote a greater spread of ownership’ and that ‘[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.
The approach and expectations of the Commission
The Guidelines provide the following perspectives on the manner in which the Commission will assess the public interest effect of a merger and the Commission’s expectations of merging parties when it is determined that the merger results in an adverse public interest impact:
Section 12A3(e): The promotion of a greater spread of ownership, in particular to increase the levels of ownership by HDPs and workers in firms in the market
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The Commission may consider the following remedial actions for mergers which are not seen as promoting a greater spread of ownership by HDPs and/or workers in firms in the market (it being noted that an employee share ownership plan (ESOP) as discussed below is generally seen a promoting such outcomes):
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Where an ESOP is proposed as a remedy, the following principles are envisaged:
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Where a HDP transaction is proposed as a remedy, the following principles are envisaged:
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Where a divestiture is proposed as a remedy, the following principle are envisaged:
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The Commission’s proposed approach to the remaining public interest factors
In relation to the other public interest factors, the Guidelines provide the following:
Section 12A(3)(a): A particular industrial sector or region | A merger may have a substantial effect on a particular region or sector where:
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The Commission may consider the following remedial actions/commitments to be appropriate if it is found that a merger has a substantial negative effect on a particular region or sector:
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Section 12A(3)(b): Employment | The Commission will consider whether a merger would have a substantial effect on employment on a case-by-case basis, taking into account, for example:
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The Commission may find the following remedial actions/commitments to be appropriate if it is found that a merger may have a negative effect on employment:
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Section 12A(3)(c): Ability of small and medium businesses (SMEs), or firms owned or controlled by HDPs, to effectively enter into, participate in or expand within the market | In analysing this public interest factor, the Commission will consider, for example, whether:
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The Commission may find the following remedial actions/commitments to be appropriate when addressing a merger which gives rise to a negative effect on the ability of SMEs and HDPs to be competitive:
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Section 12A(3)(d): Ability of national industries to compete in international markets | In analysing this factor, the Commission will consider:
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The Commission may consider the following actions/commitments as appropriately remedying any negative effect caused by a merger on the ability of national industries to compete in international markets:
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[1] Section 12A(3) of the Competition Act provides that:
‘When determining whether a merger can or cannot be justified on public interest grounds, the Competition Commission or the Competition Tribunal must consider the effect that the merger will have on:
(a) a particular industrial sector or region;
(b) employment;
(c) the ability of small and medium businesses, or firms controlled or owned by historically disadvantaged persons, to effectively enter into, participate in or expand within the market;
(d) the ability of national industries to compete in international markets; and
(e) the promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers in firms in the market.’