HEATHER IRVINE: Rethinking the public interest provisions in the Competition Act

The prohibition of the Vodacom-Maziv transaction by the SA competition authorities has prompted debate about whether the enforcement of the Competition Act is disincentivising investment in SA and hampering the realisation of benefits associated with an increase in merger activity.

Is the answer, as suggested by the DA ahead of the elections, to repeal the public interest provisions in the Competition Act? A close look at the Competition Tribunal data on large mergers provides some interesting insights.

The tribunal rarely prohibits large mergers — in 25 years only 16 large mergers have been prohibited. This suggests that generally it is possible to resolve potential competition or public interest concerns by means of applying conditions for approval, rather than the tribunal imposing a prohibition.

However, there has been a significant increase in the number of large mergers cleared by the tribunal subject to public interest conditions. In 2020 only 12 large mergers were approved subject to conditions, comprising 18.5% of all approved mergers that year. By 2024, the number of conditional approvals had risen to 45, about 45.5% of total approvals.

Most importantly, the data indicates that the scope (and cost) of these conditions has ballooned, mainly as a result of the Competition Commission’s application of the approach set out in its Public Interest Guidelines, which were published in early 2024. These state that unless parties to a proposed merger can demonstrate that the shareholding by historically disadvantaged persons will increase, they will be required to tender a condition that addresses this failure to “promote a greater spread of ownership” in line with section 12(3)(e) of the act.

The commission’s preferred condition is that merging parties establish an employee share ownership programme that holds 5%-10% of the equity of the target firm or the acquiring firm, for beneficiaries who are “workers”. If merging parties cannot, or will not, agree to this condition, the commission sometimes accepts public interest commitments in lieu of this.

Even global transactions that raise no competition concerns, in which there is no SA subsidiary, face these demands. As a result, the SA merger review process is increasingly perceived by local and foreign investors as an extractive exercise, in which the question has become what the merging parties are willing to do to get their deal cleared (or cleared on time).

As former Competition Tribunal chair David Lewis put it in his seminal book, there is a sense of being hijacked at the pass. The result is that investors — both local and foreign — are incentivised to avoid an investment that will result in an SA merger filing.

Does this suggest that parliament should revoke the public interest provisions in the Competition Act? The answer is clearly no. Without any form of foreign investment control in effect, SA would have no other mechanism to deal with acquisitions of critical strategic national assets such as minerals or defence assets. Mergers may result in mass job losses or have negative effects on particularly vulnerable sectors of the SA economy, small or black-owned businesses. They may potentially significantly undermine transformation.

The Competition Act provides a critical mechanism to address these concerns by means of the imposition of appropriate conditions. What is needed is a rethink on how we apply the public interest provisions in the Competition Act to ensure these are applied in the manner that has been determined by the Competition Tribunal in circumstances such as the Epiroc and Walmart cases.

The Competition Act requires that merging parties are able to show — on balance — that their transaction can be justified on public interest grounds. In Epiroc, the tribunal explained that each of the public interest grounds should be separately assessed and then, if necessary, weighed against each other to arrive at a net conclusion on the public interest effect of the proposed merger.

Only if there is a “substantial” negative effect should conditions be imposed. Moreover, any conditions that are imposed must be reasonable and proportionate to merger-specific public interest effects that have actually been identified by the commission. This is a holistic exercise in which the competition authorities must balance all the public interest effects of the proposed transaction (positive and negative).

The question is thus not what merging parties can afford to offer to get their deal cleared, or whether public interest commitments that feel proportionate to the size of a deal or the profitability of an acquiring firm have been tendered, but whether any conditions are warranted to address identified, substantial public interest harms.

Acquisitions may enable firms to innovate and future-proof, to move resources into new or adjacent markets, or acquire new technology or scarce skills. Mergers may breathe new life into tired teams or promote more diversity. If benefits of this kind are likely to flow from a proposed merger, no public interest conditions would be warranted.

This approach does not create special or different rules for foreign-based firms or transactions involving firms with a limited SA presence: it applies the same rules in an appropriate way, which recognises that the facts matter. As the tribunal put it in the Walmart decision, “our job in merger control is not to make the world a better place, only to prevent it becoming worse as a result of a transaction”.

Merging parties and their advisers need to clearly outline the likely public interest impact of their proposed transaction. The competition authorities should then evaluate these claims based on the available evidence. If, on balance, there are substantial public interest concerns identified, suitable conditions should be presented at an early stage of the merger review process to address these. If no substantial concerns are identified, merging parties should be waved on their way, without burdensome conditions.

This approach would ensure that the merger review process is more efficient and more predictable. This is critical to attract the local and foreign investment SA so desperately needs.

• Irvine is a partner at Bowmans.