Revised Public Interest Guidelines Relating To Merger Control Now In Effect – M&A/Private Equity

On 20 March 2024, President Cyril Ramaphosa, in his address at
the Second Black Industrialists and Exporters Conference,
emphasised the vital imperative of rectifying the injustices
endured by black South Africans during the apartheid era. This call
to action was echoed by the publication of the final version of the
Competition Commission of South Africa’s (the
“Commission“) Revised Public Interest
Guidelines on Merger Control (the
“Guidelines“), which came into effect on
the same day. The publication of the now final Guidelines follows a
brief public consultation period in October 2023.

The Guidelines outline the Commission’s approach to
assessing the public interest factors outlined in s12A(3) of the
Competition Act, 1998 (as amended) (the “Competition
Act“) in mergers.

This involves a cumulative inquiry that includes:

• Evaluating the likely impact of the merger on each public
  interest ground;




• Determining if such an impact is substantial;




• If so, identifying potential remedies to address the specific
  impact; and




• On a case-by-case basis, consider whether other equally weighty
  countervailing public interest factors could mitigate the
  impact.

A key tenet of the Guidelines is that in the Commission’s
view, all mergers must promote a greater spread of
ownership among workers or Historically Disadvantaged Persons
(“HDPs“) which is the central focus of
this newsflash.

The draft Guidelines and the Commission’s interpretation of
s12A(3)(e) of the Competition Act received significant criticism
from various stakeholders. Although there have been notable changes
to the section on assessing the promotion of a greater spread of
ownership, many concerns raised by stakeholders were not addressed
by the Commission and are therefore unresolved.

The Guidelines confirm that the Commission’s position is
that:

• Mergers involving an acquiring firm and/or a target firm
  domiciled outside of South Africa and subject to notification in
  South Africa are nonetheless subject to the provisions of
  s12A(3)(e) of the Competition Act, and are thus required to promote
  a greater spread of ownership;




• A merger that fails to promote a greater spread of ownership as
  outlined in s12A(3)(e) of the Competition Act, may be sufficient
  enough to render such merger unjustifiable on grounds of public
  interest; and




• Even if a merger enhances ownership by HDPs, the obligation
  remains to consider increased ownership by workers (and vice
  versa).

The Commission will evaluate the impact of mergers on HDP and
worker ownership levels by examining various quantitative and
qualitative factors, including:

• The quantity and value of shares or interests;




• The rights associated with shares or interests, such as board
  representation;




• The active or passive nature of assets associated with shares
  or interests; and




• The control granted by any increase in shares or
  interests.

In cases where the Commission determines that a merger does not
promote a greater spread of ownership, the Commission will, in the
first instance, consider ownership remedies, including:

• Establishing an Employment Share Ownership Programme
  (“ESOP“) representing a broad base of
  workers holding a minimum equity range of 5% to 10% in either one
  of the merging entities or the merged entity;




• The sale of a minimum of 5% to 25% of equity to one or more
  HDPs;




• Implementing “direct share ownership schemes” for
  workers to acquire shares at no cost for a reasonable period
  post-merger;




• Facilitating divestiture of a portion of the business or assets
  to HDP purchasers within a reasonable timeframe after the merger;
  and




• Community or other investment trusts that hold shareholding in
  an operational firm, for the benefit of HDP beneficiaries.

Positively, the Guidelines have removed much of the highly
prescriptive language regarding the structuring and establishment
of any ESOP or the structuring of an HDP transaction. The amount of
equity that the Commission will require to be disposed of for an
HDP transaction has also been reduced. However, many will argue
that the Guidelines still fundamentally misinterpret section
12A(3)(e) and that the Commission is wrong to assert that it is the
role of all mergers to promote or increase a greater spread of
ownership.

As predicted through our qualitative and quantitative research
into mergers since 2019 and outlined in our article titled ‘Revised Public Interest Guidelines, Are They
Really in the Public Interest?‘, the
Commission remains committed to its interventionist approach
despite differing opinions on the effects of this on mergers.
Merging parties must therefore adapt and innovate to overcome these
challenges, possibly making upfront adjustments to their
transaction structures.

Until there is a challenge to the Commission’s
interpretation in the Tribunal or a higher court that settles the
position, a failure to do so will likely result in more protracted
and adversarial merger investigations.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.