Competition is a good thing. This is the common thread through global competition law, which aims to prevent monopolies – when one firm dominates a sector.
For instance, if the two most prominent companies in an industry want to merge, a country’s competition authority would likely block the merger. This would be on the grounds that the new entity would reduce competition. Such dominance wouldn’t be good for consumers, as competition usually drives down prices and is good for product quality.
South Africa’s competition law follows the same principles. But it has another unique set of conditions too. South African law says that public interest should also be considered in company mergers or acquisitions. Mergers must consider the impact on employment, small and medium businesses, and ownership by historically disadvantaged persons (those who were discriminated against before 1994).
South Africa is not the only country whose competition policy includes public interest conditions. But it’s the only one which specifically includes this in the aims of the law: the Competition Act of 1998. The public interest conditions have been part of merger reviews for the last two decades.
They are a way of dealing with South Africa’s socio-economic challenges: high levels of poverty, unemployment and inequality.
But the implementation of public interest objectives has had its critics. Business leaders and politicians, among others, have voiced concerns that the use of these conditions in merger transactions will deter investment in South Africa.
In one of the first published studies on the topic in South Africa, we analysed the application of public interest conditions in merger decisions since 2010.
Our research investigated the frequency of the competition authorities – the Competition Commission and the Competition Tribunal – applying these conditions in 221 merger cases between 2010 and 2019. This aspect of South Africa’s competition law framework has not been well researched. So our study, which used descriptive statistics and regression analysis, contributes to the understanding of the use of non-competition goals in adjudicating mergers and acquisitions.
Our results indicate that the competition authorities focused on employment, supplier development fund programmes and black economic empowerment conditions when considering merger cases.
We also found that public interest conditions were indeed used more often and more extensively as time went by. Statistical evidence confirms a potential change in the practical application of public interest conditions in merger decisions since 2015.
Public interest conditions in South African merger cases (2010-2019)
In most merger cases approved by the competition authority, the newly formed entity was not allowed to lay off any employees for a certain period after the merger. This condition was probably imposed because of South Africa’s high unemployment rate – currently 32.9% – and low economic growth.
More recently, further conditions were also used more often. One was to promote ownership by previously disadvantaged persons. This led to the merged entity providing employees with shares in the company through an employee share ownership programme.
We found that black economic empowerment, employment and supplier development fund conditions were imposed more often in cases where the value of the acquiring firm’s assets was high. This is probably because these companies have the financial capacity to help ease unemployment and assist smaller businesses.
In mining sector mergers, the probability of public interest conditions being imposed was high. The reason for this could be the large number of South African workers – 477,000 – employed by the mining sector.
If the merger increased the profits of the target firm, the probability of conditions being imposed also rose. This was true for conditions such as employment, supplier development fund programmes, black economic empowerment and conditions specific to the industrial sector or regional economy.
Authorities assess the impact of the proposed merger on the whole sector’s value chain and on the geographic region and location of the entity.
If, for instance, one party to a merger is the main employer or provider of a specific product or service in a specific area, public interest conditions would differ from those where there are multiple potential employers or suppliers.
Some empirical evidence points towards a focus on employment, supplier development funds and industrial sector or region conditions in merger cases in the manufacturing sector.
Lastly, we observed a tendency to impose conditions when the acquiring firm was not a local firm.
We conclude that South Africa’s use of public interest conditions is warranted because of the country’s circumstances, including high unemployment and the racially skewed nature of economic ownership. However, it must be done coherently. It must consider each merger case’s specifics. And it must not cause an undue increase in the costs of mergers and acquisitions. These include transaction and opportunity costs.
Where to from here?
The appropriate application of these public interest conditions can lead to positive outcomes. The effective enforcement of all these conditions, especially of black economic empowerment and employment, can assist to reduce unemployment and get the country back on track to positive growth.
Supplier development fund programmes can create opportunities for small, medium and micro enterprises in South Africa to elevate their businesses and expand with the assistance of the larger corporations. We believe that these conditions can potentially benefit all in South Africa, but they need to be applied in a coherent and case sensitive manner to be truly in the public interest.
However, business leaders and politicians, among others, are increasingly voicing concerns over the inclusion of public interest conditions as part of merger transactions.
In one application of public interest conditions, a proposed merger involving Burger King was initially prohibited on public interest grounds – the first one ever in South Africa. In the run up to the 2024 elections the official opposition, the Democratic Alliance, called for public interest conditions to be repealed from the Competition Act.
For businesses involved in this process, the time delay in approving merger transactions leads to increased costs, as confirmed in media reports. It also adds to uncertainty about what to expect from the decision makers. In the case of international mergers, the process in South Africa is much more lengthy and completely different from experiences elsewhere.
At a time when big companies with long standing commitments in South Africa are leaving (such as Shell, GM Motors and BNP Paribas), the country’s way of assessing merger proposals could discourage potential investment. It’s questionable whether that would be in the public interest.
The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
This article was originally published on The Conversation. Read the original article.
