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The competition authorities' emphasis on public interest factors challenges parties to be creative in their deal structuring. Picture: SUPPLIED/ADAMS & ADAMS
The competition authorities' emphasis on public interest factors challenges parties to be creative in their deal structuring. Picture: SUPPLIED/ADAMS & ADAMS

The SA economy has faced significant headwinds and continues to be constrained by sky-high interest and unemployment rates, power grid constraints and political uncertainty.

Despite these and many other challenges, local businesses find a way to remain competitive internationally, through innovative solutions and, in many instances, sheer grit and determination. Their ability to do so is testament to SA's world-renowned resilience and the ability of its people to overcome adversity. 

In advising clients in commercial or litigious matters, the attorneys from Adams & Adams, a leading law firm, are fortunate to enjoy an across-industry bird's-eye view of what sets apart the good from the great. One such indicator is the ability to respond effectively to policy changes.

Mergers are a key component in a well functioning and free economy; they unlock opportunities through realising synergies between different entities and act as an agent of discipline in relation to inefficiently managed businesses and assets.

The competition authorities regulate mergers and have the power to block mergers, or to impose far-reaching conditions on the parties involved. The authorities consider the impact that a proposed merger will have on the public interest as a factor in deciding whether to approve, prohibit or to impose conditions on a transaction.

Public interest considerations may include:

  • Representation of historically disadvantaged people within ownership or control structures;
  • Merger-related employment concerns; and
  • The ability of small businesses and firms owned or controlled by historically disadvantaged people to participate in the local economy. 

The focus on public interest considerations in mergers have been increased with the partial enactment of the Competition Amendment Act in 2019. 

Precisely how the competition authorities should apply public interest considerations to mergers has been contentious. It is a difficult question because public interest considerations, including those relating to the jobs of employees at the merging companies, often run counter to the competitive efficiencies, which act as the drivers of merger transactions and are supposed to benefit shareholders and consumers.

Precisely how the competition authorities should apply public interest considerations to mergers is a difficult because such considerations often run counter to the competitive efficiencies

By way of example, where a merger would result in a reduction in production costs through the introduction of technology, some of those potential efficiencies would be eroded by a condition that there may not be any merger-specific job losses for a period of time, typically one to three years. In such an instance the competition authorities would effectively give up some of the benefit to consumers in exchange for securing a number of jobs for a limited period of time. 

The Competition Act also sets out to achieve a greater spread of ownership, particularly by increasing the levels of ownership by historically disadvantaged people and workers, and increased participation in the market by small and medium-sized businesses. These are challenging policy goals which require a careful balancing between the achievement of public interest goals and pro-competitive outcomes. 

Recently, the competition authorities have shown their willingness to even prohibit mergers which do not directly promote certain public interest objectives, even where the transaction would be otherwise pro-competitive.

A notable example is the Burger King case, where in 2021 private equity firm EPC Africa intended to acquire Burger King SA. The transaction would have resulted in a decrease in shareholding by historically disadvantaged people from 68% to 0%. Though the merger raised no competition concerns, it was prohibited because of public interest concerns regarding the reduction of ownership by historically disadvantaged people. The matter was settled on the basis that the parties agreed to a number of conditions in respect of public interest factors, and the transaction proceeded.

The Burger King acquisition was well publicised, but is also reflective of the competition authorities’ general approach to mergers where no clear competition concerns arise. In most instances, mergers are time sensitive and parties find themselves under pressure to satisfy the competition authorities as soon as possible for transactions to proceed. 

Complying with the competition authorities' expectations on advancing public interest adds an additional dimension to formulating transaction considerations — especially when considering the Competition Commission’s 2023 draft Public Interest Guidelines. It requires a collaborative approach.

In certain instances, the Commission has adopted a pragmatic approach to assessing public interest in merger approvals, resulting in sensible conditions that appropriately balance competition and public interest considerations.

In some cases, the Competition Commission’s approach to merger approval applications extends beyond mere ownership. In cases where transactions do not directly benefit historically disadvantaged people, the Commission has been willing to engage on alternative solutions to balance the public interest. These commitments include support for small businesses through minimum spending, improved racial representation on boards of directors and a commitment to procurement initiatives.

The impact of public interest is not only seen in merger approvals. It has also manifested in the Commission’s assessment of settlement proposals after investigations into alleged prohibited practices, such as market allocation, price fixing and collusive tendering.

These negotiated outcomes typically lead to mutually beneficial outcomes, such as paying reduced fines while simultaneously contributing positively towards the economy. Examples include offering bursaries to previously disadvantaged people, committing a certain percentage of spend to support small businesses, establishing skills development funds for employees or committing to employing previously disadvantaged people through internships.

The emphasis on matters of public interest should therefore not be seen as an existential threat to investment. Though there is still much uncertainty to navigate after the Commission’s public participation process regarding the draft Public Interest Guidelines, the attorneys at Adams & Adams are confident that the Commission will continue to adopt a pragmatic approach when assessing matters of public interest. 

The emphasis on public interest factors challenges parties to be creative in their deal structuring, to recognise the sometimes contradictory policy objectives contained in the Competition Act, and to work with the competition authorities to achieve sound outcomes.

While parties must ensure that the competitive process is not undermined by regulatory overreach, there are real benefits from not only recognising the balancing act that the competition authorities are tasked with, but to embrace the benefits associated with an advancement of the public interest.   

About the authors: Jac Marais is a partner at Adams & Adams. Mia de Jager is a senior associate at the same firm. Both are experts in the field of Competition Law.

This article was sponsored by Adams & Adams.

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