During last year Grand Parade Investments (GPI) announced that it would sell Burger King South Africa and Grand Foods Meat Plant, which primarily supplies Burger King with patties, to a fund which is owned by Emerging Capital Partners (ECP). The Competition Commission (the Commission) has announced that it has prohibited ECP’s proposed acquisition of Burger King South Africa and Grand Foods Meat Plant, stating that the merger would lead to a significant reduction in the shareholding of historically disadvantaged persons (HDPs) in the target firm, from more than 68% to 0%. The Commission stated that it is concerned that the proposed merger will have a substantial negative effect on the promotion of greater spread of ownership, in particular to increase the levels of ownership by HDPs in firms in the market. Hence, it argued that the proposed merger cannot be justified on substantial public interest grounds.
It is not clear at this stage whether the merger parties will appeal the Commission’s prohibition to the Tribunal as they have indicated that they are considering their position.
In its media release, the Commission has expressly stated that the merger will not give rise to any anti-competitive effects, nor is there any suggestion that the merger would have a negative impact on any of the public interest grounds other than the public interest ground introduced in the recent amendments to the Competition Act relating to the promotion of a broader spread of ownership. The section on which the Commission hinged its prohibition is section 12A(3)(e) of the Competition Act, which stipulates that “[w]hen 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 and workers in firmsin the market.”
This provision was introduced through the Competition Amendment Act and has not been the subject of a detailed appraisal by the Competition Tribunal or the Competition Appeal Court and this is the first time that it has been relied upon as the basis for the prohibition of a merger.
It is uncontroversial that a merger which results in an increase in ownership by HDP’s would be regarded as being beneficial from a public interest perspective. However, the converse situation gives rise to considerable complexity. It would appear that the Commission contends that where a merger will result in the exit of an HDP shareholder, this should be regarded as being negative from a public interest perspective. In this case, the merger parties have claimed that the merger will give rise to significant potential benefits, inter alia, that the merged entity would increase the number of permanent employees employed by it in South Africa by no less than 1 250 HDPs and that the merged entity would increase the total value of all payroll and employee benefits in respect of all employees employed by the merged entity by no less than R120-million. It is not clear how these benefits were weighed against the reduction in HDP ownership in Burger King.
Going forward it is not clear how this particular provision will be interpreted by the Competition Authorities and in particular whether it will only be applied in circumstances where there is a material reduction in HDP ownership in a particular firm as a consequence of a particular merger or whether an attempt will be made to interpret the provision more broadly to require merging parties to demonstrate that a particular transaction will be beneficial from the perspective of ensuring a greater spread of ownership and particularly by previously disadvantaged persons. We do not believe that the legislation lends itself to the broad interpretation, but this could become the subject of litigation in due course.
However, a more fundamental question which emerges is whether the approach adopted by the Competition Commission in the Burger King matter, discriminates against HDP owned firms. The seller (an HDP controlled firm) has stated publicly that its financial position is constrained and that it wishes to dispose of its interests in Burger King to improve its financial position. GPI’s share price on the JSE fell by 25% following the Commission’s announcement. The perverse consequence of the approach adopted by the Commission is that it would mean that an HDP shareholder wishing to dispose of its shares by way of a merger would be constrained to sell only to another HDP shareholder. This discriminatory approach simply perpetuates inequality. The Tribunal previously (albeit long before the Act was amended) warned against such an approach in the context of Thebe’s sale of its interests in Tepco to Shell South Africa (the Commission had recommended the imposition of certain conditions including that Tepco continue to exist in the market jointly controlled/owned by Thebe and Shell South Africa):
“Thebe, in its commercial wisdom, may have decided to consolidate and expand its interests in the leisure and tourism industry. In order to do this, it may have elected to dispose of its assets in the oil industry. White owned and controlled firms obviously do this with impunity – it represent a significant and perfectly respectable mode of financing business expansion. The Commission may believe that its proposed condition only constrains the acquiring firm. On the contrary its condition constrains the seller the target firm, to sell its assets only to a purchaser who will accept these conditions, or, what is the same thing, it is constrained to offer its assets at a discount because the assets are accompanied by conditions specifying the post-transaction utilisation of these assets. To constrain the capital-raising options of firms owned by historically disadvantaged persons in this way not only condemns these firms to the margins of the economy and the margins of those sectors in which it believes it is best able to make a significant mark, it also lays the Commission open to a charge of paternalism. …”
It is plain that this decision will reverberate across the global Competition Law fraternity and will raise concerns. Paradoxically it may have the effect of not only discouraging foreign investment into South African firms, but also undermining the value of shares held by HDP shareholders. This may in fact reduce the incentive of HDP shareholders to invest as the ability to exit an investment may be constrained because the universe of potential purchasers could be limited.