INVESTORS NEED TO KNOW WHERE GOVERNMENT STANDS ON PUBLIC INTEREST ISSUES IN SA MERGERS
The mood of investors has tangibly changed since December 2017, when South Africa’s political environment entered a new phase. Land issues aside, investors are feeling more positive and more inclined to invest. One of the steps the South African Government can take to capitalise on this optimism is to give investors more certainty over its approach to public interest concessions in mergers and acquisitions.
Unpredictability in how Government deals with public interest issues has characterised mergers involving foreign investors in the past two years.
Now that the political outlook has improved, the question is: will Government continue endeavouring to extract maximum public interest value from mega-M&A transactions? Or will it take a less interventionist stance on what investors should put on the table when coming into South Africa?
Furthermore, will the Competition Commission re-establish itself as the driver of public interest in merger control, or will the Ministry of Economic Development continue to dominate?
The background to these questions is the changing face of competition law, and specifically its public interest aspects, over the past 30 years or so.
Administrators are taking a back seat
Under apartheid, the dominant mode of dealing with foreign investors was for the cabinet minister concerned to lay down the law. Then, from 1994, the constitutional environment introduced a structured competition regime where the relevant administrative authorities, the Competition Commission and the Competition Tribunal, dealt with merger matters.
In the past two years, the pendulum has been swinging back again; the administrators have been taking a back seat with politics coming to the fore. This heightened political involvement is evidenced in the prominent role of the Economic Development Ministry, negotiating “public interest” concessions in various major transactions involving foreign investors.
At the same time, Government’s expectations of how mergers should contribute to the public interest have become broader and broader.
Public interest first entered the country’s competition framework relatively recently, notably when the economy started slowing and unemployment rising. As the economy hardened from 2010 onwards, the Competition Commission started closely scrutinising the employment implications of mergers.
Public interest considerations have since gone from focusing mainly on employment to including a range of other issues, most recently the spread of ownership in companies being acquired.
This has gone hand in hand with the growing involvement of the Economic Development Department and Ministry in negotiating public interest concessions in some mega-transactions.
Time is not on investors’ side
A key reason for the Minister’s success is that a lot of merger transactions are stretched for time. Investors do not want long delays and so inevitably they strike a deal to give away more from a public interest perspective than they are legally required to do.
The legal standard on public interest was laid down in the Walmart case in 2011, when the Competition Commission said its job was not to make the world a better place, just not worse off than before. That is the legal base point.
What has happened in practice, through the agreements struck with the Economic Development Ministry, is that much more is being put on the table than is required. And the Competition Commission, which is the authority that should be engaging the merger parties, has become the missing piece.
Instead, the Economic Development Ministry has taken control of the public interest space. So when a merger is on the cards, the parties engage with Economic Development, strike a deal and then go to the Competition Commission to rubber stamp it.
The problem with this is that the Competition Commission, which should be managing public interest in merger control, is deferring to Economic Development. Nowhere in the Competition Act does it say that Economic Development has the powers to take control in this way.
The situation is even more complicated, however. Only some, but not all, mergers involving foreign investors are selected for scrutiny by Economic Development. What’s more, each engagement is a bespoke engagement, with little predictability as to what will be expected in a particular case.
That lack of predictability is problematic, given investors’ basic requirement for stability and predictability over a reasonable period of time.
When it comes to public interest in mergers, South Africa has moved away from the legal basis and into the domain of overinvestment in public interest aspects. This could be said to be better for the national interest… but how will this impact the attractiveness of the country as an investment destination?
What is needed, above all, is certainty on South Africa’s approach to public interest matters in merger control, ensuring that investors know exactly where they stand.