Public interest justification for mergers
Authors: Phuti Mashalane – Director & Tebogo Maunye – Candidate Attorney
The need for legal certainty in approach to section 12A(3)(e)
One of the cornerstones of the South African Constitution is the achievement of equality. The duty to achieve a South Africa (SA) for all, is widely recognised by laws and regulations in keeping with the constitutional mandate. The integration of historically disadvantaged persons (HDPs) into the economy is one meaningful way of achieving this equality. The Competition Act 89 of 1998 (as amended) (“The Competition Act”), among other legislation, seeks to advance this constitutional mandate.
It is stated in the preamble to the Competition Act that the people of SA recognise the need for an economy that is ‘open to greater ownership by a greater number of South Africans’. In fact, one of the purposes of the Competition Act is to ‘promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged persons’. Hence, the promotion of a greater spread of ownership by HDPs is advocated when considering mergers. However, there appears to be no sufficient legal certainty as to what it entails, which is the focus of this article.
The need for legal certainty in approach to section 12A(3)(e)
Section 12A(3)(e) of the Competition Act states 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 – (e) the promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons.
What can be gleaned from this provision is that it is a prerequisite for competition authorities when assessing mergers to consider whether a merger can be justified on public interest ground(s). In fact, the competition authorities can and have in the recent past prohibited a merger purely based on substantial public interest grounds.
In the Shell South Africa (Pty) Ltd and Tepco Petroleum (Pty) Ltd merger, the Competition Tribunal was of the view that prohibiting mergers purely based on public interest should be saved for exceptional circumstances. The Tribunal stated that there should be ‘considerable caution’ applied when ‘competition authorities use public interest as a basis for their intervention’ in merger proceedings. But this gave rise to concerns that the competition authorities were reluctant to enforce a clearly defined purpose under the Competition Act and approved mergers that appeared to contradict this purpose. Amendments to the Competition Act were made and, accordingly, s 12A(3)(e) was introduced to address this issue.
A clear application of s 12A(3)(e) of the Competition Act was demonstrated in the ECP Africa Fund IV LLC and ECP Africa Fund IV A LLC and Burger King (South Africa) RF (Pty) Ltd and Grand Foods Meat Plant (Pty) Ltd (“ECP Africa/Burger King”) merger.
The Commission, in initially prohibiting the merger, cited that it lacked BEE credentials and that the merger as it was, would have a ‘substantial negative effect on the promotion of a greater spread of ownership’ (GN1823 GG46000/4-3-2022). This was because post-merger, the shareholding of HDPs in the target firms would drop from 68,56% (with 22,87% held by black women) to 0% (‘Competition Commission prohibits merger on new public interest ground’ (www.ensafrica.com, accessed 1-8-2022)). To get the approval, the acquiring firms agreed to set up an Employee Share Ownership Plan (ESOP) that would then take the shareholding of HDPs up to 5% post-merger in the target firms.
It is not sufficiently clear from the ECP Africa/Burger King merger and the provision in the Competition Act what percentage of HDP ownership would be considered sufficient for purposes of s 12A(3)(e). This brings about a lot of uncertainty for investors. One can reasonably opine, regarding the ECP Africa/Burger King merger, that it was a fairly straightforward determination that the merger would give rise to a ‘substantial negative effect on the promotion of a greater spread of ownership’ by HDPs (GN1823 GG46000/4-3-2022).
But some cases may not be as clear as the ECP Africa/Burger King merger. One may then ask, how the ‘effect on the promotion of a greater spread of ownership’ will be determined by the competition authorities as required by s 12A(3)(e) (GN1823 GG46000/4-3-2022). Is it sufficient for the discretion to be exercised by the authorities or would it be more beneficial to bring about legal certainty by amending the Competition Act or issuing guidelines to clearly set out the percentage that should be achieved?
The mining industry
The mining industry provides a helpful case study in this regard. To transform the industry to accurately capture the demographics of SA and advance equality and effective participation of HDPs, the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA) was promulgated. The MPRDA has a similar provision to s 12A(3)(e) of the Competition Act. At s 100(2)(a) it states:
‘To ensure the attainment of the Government’s objectives of redressing historical, social and economic inequalities as stated in the Constitution, the Minister must within six months from the date on which this Act takes effect develop a broad-based socio-economic empowerment Charter that will set the framework for targets and time table for effecting the entry into and active participation of historically disadvantaged South Africans into the mining industry, and allow such South Africans to benefit from the exploitation of the mining and mineral resources and the beneficiation of such mineral resources’.
The Broad-based Socio-Economic Empowerment Charter for the Mining and Minerals Industry, 2018, in giving effect to the MPRDA, specifies what percentage of ownership needs to be achieved to be compliant with the mandate to give effect to meaningful economic participation, integration into the mainstream economy, and effective ownership of the country’s mineral resources by HDPs. It states, at s 22.214.171.124 that:
‘An existing mining right holder who has achieved a minimum of 26% BEE shareholding shall be recognised as compliant for the duration of the mining right.’
The energy industry
In the energy industry, the Renewable Energy Independent Power Producer Procurement Programme (REIPPP) is the one programme that supports an increase in participation of HDPs through increase of, among other things, ownership level. The REIPPP ‘is aimed at bringing additional megawatts onto the country’s electricity system through private sector investment in wind, biomass and small hydro, among others’ (‘Renewable Independent Power Producer Programme’ (www.gov.za, accessed 1-8-2022)). This is done through what is called Independent Power Producers (IPP) Procurement Programme where bidders are requested to submit proposals for a certain bid window. Bidders who are then picked to carry on with their projects are known as preferred bidders and their projects preferred bidder projects.
In each bid window, the IPP Procurement Programme sets out a given number of key economic development targets that are to be achieved by bidders. For 2021, the preferred bidder projects ought to have met a 49% South African entity participation. Twenty-five preferred bidder projects ensured 49,2% South African entity participation in line with the minimum requirement. Furthermore, a minimum target of 30% black people shareholding in the IPPs was also imposed. Against this minimum requirement, a 34,7% shareholding by black people in the IPPs was achieved.
Further to the 2021 bid window, a minimum target of 5% ownership by black women in the projects was also imposed and accordingly, a 7% of ownership by black women was met in the bid window. The clearly defined minimum targets of HDP ownership and participation in the IPP Procurement Programmes are to keep in line with transforming the energy industry and ultimately reaching the equality goals that are mandated by the Constitution.
The gas industry
In the gas industry, when one applies for a licence to construct or operate piped-gas facilities, for example, the applicant is required to provide information regarding the quantity and percentage of subcontracted work for companies with more than 50% ownership by South African HDPs. The gas regulator must then use this information to facilitate the addressing of historical inequalities.
One can, in this regard, reasonably opine that in the mining industry, energy industry and gas sector (contrary to the assessment of mergers in competition law) there is sufficient certainty as to what levels of ownership would be considered sufficient. A similar provision can be implemented regarding public interest considerations when assessing mergers, so that parties can have certainty pertaining to what percentage will achieve a greater spread of ownership by HDPs in the manner contemplated by the Competition Act.
Can public interest objectives be achieved via competition law?
The idea of achieving public interest objectives using competition law is not without its critics. The main purpose of the competition authorities is said to be to ensure competition within the South African economy. Prohibiting mergers due to public interest concerns, without any threat to market contestability, creates an undue tension between the two conflicting ideas.
While established with an understanding and appreciation of their speciality in mind, competition authorities, one can argue, are relegated to achieving political ideologies of the governing party. Another concern that can be raised in this regard is the implication of domestic policy on foreign investments. Though all in good faith, politicians should be careful when treading the fine line between legitimate policy objectives and potential foreign investments within given markets. It is argued these policies can result in deterring investments that may otherwise have had more positive effects on the market. This would have a knock-on effect on other public interest grounds, like employment. Deference should be shown to the duties of other regulators by the competition authorities.
Section 12A(3)(e) does not go far enough
Legal certainty and the rule of law principles go hand in hand in many jurisdictions around the world, including SA. The central tenet of these principles is that laws should be predictable and sufficiently clear for persons to go about their business knowing, with a given level of certainty, what legal consequences will follow.
The gas, energy and mining industries seem to have fared well over the years and continue to attract a fair amount of investment, even with these requirements in place, seemingly because investors know beforehand what to expect. Although the introduction of s 12A(3)(e) of the Competition Act is widely and correctly welcomed, it appears that the challenge with the South African competition regulation will lie in the uncertainty of what percentage of ownership by HDPs need to be achieved. Investors will find this unworkable.
It would be prejudicial to parties if they find out (after expending sizeable resources) that their merger has been prohibited because it has a negative effect on the promotion of a greater spread of ownership by HDPs. It would help a great deal if investors knew beforehand what percentage of their business will need to be held by HDPs. This uncertainty may lead to undue waste of resources.
An amendment of the Competition Act or the issuing of guidelines specifying the percentage of ownership by HDPs that will be considered sufficient would create a level of certainty that the merging parties or investors need.
This article is published with permission from the editor of De Rebus. The article first appeared in 2022 (Sept) DR 20 and on the De Rebus website at www.derebus.org.za on 1 September 2022.
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