For many multinational companies, investing in South Africa can challenge even the most experienced international teams in novel ways. Specifically, a multinational that has identified a South African company to acquire, and that is in the process of evaluating or implementing the transaction, should carefully consider both BEE ownership implications and the public interest factors considered by South Africa’s Competition Commission.
These issues require specific knowledge, experience, as well as expertise to navigate, and to achieve the desired result of a sustainable transaction that makes good business sense.
The Competition Act of 1998 regulates mergers in South Africa, applying to all businesses within or affecting South Africa. The Act states that a merger occurs where one or more firms establish direct or indirect control over the whole or a part of the business of another firm.
Responsible for evaluating mergers, the Competition Commission has the power:
to approve, prohibit or impose conditions in the case of small and intermediate (with combined asset and/or turnover thresholds of R560m and/or R80m respectively) mergers, and
to make recommendations to the Competition Tribunal in relation to large (with combined asset and/or turnover thresholds of R6.6b or R190m respectively) mergers.
Parties to an intermediate or large merger must get prior approval from the Competition Commission. For small mergers, the Commission can request that parties provide details of the merger within six months of implementation, if it believes that the merger may have significant anti-competitive effects or raise public interest concerns.
In evaluating a merger, the Competition Commission first considers whether the merger is likely to substantially prevent or lessen competition. This is assessed against criteria set out in the Competition Act and established through practice.
However, the Commission may determine that a merger is justifiable if there are efficiency, technology or other pro-competitive gains that outweigh any anti-competitive effects.
The Competition Commission also considers the effect of a merger on the public interest. The Competition Act states that, when assessing whether a merger can or cannot be justified on public interest grounds, the Competition Commission/Competition Tribunal must consider the effect the merger will have on:
a particular industrial sector or region,
employment,
the ability of small businesses or firms controlled or owned by historically disadvantaged persons (HDPs) to become competitive, and
the ability of national industries to compete in international markets.
In practice, the Commission generally approves and attaches specific conditions to mergers that have no anti-competitive effect, but that raise significant public interest concerns.
In our experience, there is more uncertainty around the public interest assessment than the competition assessment.
While the public interest assessment has the same objectives as BEE and BEE ownership, there are differences between the two perspectives in how ownership is viewed.
A company’s BEE status is assessed as its BEE contribution level, which is an expression of how well the business has embraced BEE against set targets.
These targets span various categories, reflected in a scorecard, with a key metric being the extent of black ownership in the business – as part of the ambition to increase the ownership of South African enterprises by black people.
BEE ownership is a critical aspect of BEE, which multinationals often find to be challenging.
Black ownership is assessed across three categories:
Economic Interest addresses the right of black people to participate in the economic returns of ownership of a company, via dividends and a share in capital gains.
Voting Rights address the right of black people to participate in shareholder decision-making.
Net Value addresses wealth creation by black people and assesses the net asset value of the BEE investor’s investment in a company against targets that escalate over time.
Learn more about BEE ownership here.
While the Competition Commission weighs the effect of a merger on competition and on the public interest equally, it could prohibit a merger based solely on public interest grounds.
As a result, it is beneficial for all parties to a merger to collaborate, to address any potential public interest issues pre-emptively. This is the case because, unlike with the anti-competitive effects, there is less precedent relating to the public interest considerations of the Competition Commission and matters surrounding these are less widely understood.
Again, the public interest considerations that relate to “the ability of small businesses or firms controlled or owned by HDPs to become competitive” touch on the concepts encompassed under the BEE ownership pillar of BEE legislation.
But there are some key differences between the two paradigms. This makes it critical for parties to a merger to unpack the impact of the transaction from both perspectives when developing a strategy for addressing potential public interest concerns.
In particular, where the merged firm is expected to face commercial and other regulatory BEE pressure outside of the merger filing process, parties should take care not to propose remedies to potential public interest issues that might complicate meeting the requirements of BEE ownership.
Given the complexity and opaqueness surrounding the joint issues of public interest and BEE ownership, as well as the risk of derailing a transaction, it’s advisable that parties make public interest strategy development a key part of the transaction process.
We believe that doing this early in the process gives buyers (and sellers) the greatest chance of success – and cost-effectiveness – in satisfying the Competition Commission. Parties should still think about how much detail they delve into at various stages of a transaction; we suggest going into limited detail in the early stages.
But once Competition Commission approval has been obtained, there is often limited time to complete detailed design and implementation of an ownership solution. For this reason, we believe that detailed design should begin as soon after approval as possible.
The BEE ownership landscape has shifted over the years, with the current BEE ownership climate characterised by the Department of Trade, Industry and Competition (dtic) encouraging employee ownership, alongside more active third-party shareholders.
It is important for parties to a transaction to explore structures that factor in the expectations of all stakeholders in the merger approval process. Given the Minister of dtic’s right to make submissions to the Competition Tribunal, an employee share ownership plan (ESOP) tends to be an important structure to consider.
Learn more about ESOPs.
Of course, such transactions don’t take place in a vacuum. At least one of the merging entities will have been operating in South Africa and will, almost certainly, have existing BEE strategies and initiatives. These may be driven by regulatory or commercial pressure or by a sense of commitment to contributing to the country’s transformation agenda.
In some instances, these strategies will include existing BEE ownership structures. The intricacies of these structures have the potential to complicate replacement structures that are put in place to meet the public interest requirements of the Competition Commission.
As a result, buyers must gain a detailed understanding of any existing BEE ownership structures, including potential implications on the merged firm after the merger, before finalising their strategy for addressing the HDP ownership aspects of the Competition Commission’s public interest considerations.
We advocate for a collective approach to addressing potential public interest concerns, such that none of the elements of public interest should be viewed in isolation. Rather, parties to a merger transaction should see the public interest elements as a portfolio of issues to be considered holistically, allowing for potential trade-offs of the various elements.
This means that the overlap of BEE with public interest considerations is not limited to BEE ownership, but extends to enterprise and supplier development initiatives; skills development programmes; and even socio-economic development initiatives.
A multinational that has identified a South African company to acquire must carefully consider the public interest and BEE ownership implications of the transaction. Merging parties should explore the potential impact of the Competition Commission’s public interest considerations, including on strategies for BEE ownership and other BEE elements.
But the fact remains that both the public interest and BEE ownership perspectives present unique challenges that require specific knowledge, experience, and expertise to navigate.
As a specialist BEE transaction advisor to multinationals and South African corporates, Transcend has advised on 200+ transactions since 2005. Our in-depth understanding of BEE ownership, together with our proven corporate finance expertise and understanding of the regulatory environment, means we can assist in finding sustainable and BEE-compliant solutions to the challenges of public interest.
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