Off the back of the 2021 Budget Vote on 18 May, the DTIC Minister has published a slew of transformative policy documents – including a Statement on Localisation for Jobs and Industrial Growth and a long-awaited Practice Note on Broad-based ownership schemes. While Minister Patel’s policy on underwear during the early lockdown still sits uncomfortably (so to speak), his latest moves appear far more measured and farsighted.
In line with his hands-on approach to competition enforcement, the Minister has also released a Competition Policy for Jobs and Industrial Development (Competition Policy). At less than seven pages, the Policy is punchy and digestible and serves as a useful precis of the policy approach the Minister has taken over the past few years and will continue to drive, especially insofar as interventions in mergers are concerned.
At the outset, the Competition Policy is ambitious. It, “aims to address our high levels of economic concentration and promote effective competition that supports industrialisation, builds dynamic firms, protects and creates jobs and promotes economic inclusion and transformation.” While that is a lot to expect from a competition regulator, the DTIC is also seizing other levers to help drive the policy – amendments to the Companies Act; developing trade policy under the AfCFTA; specific legislation addressing wage differentials and governance on director pay and other financial disclosure; and new thinking on a “Social and Solidarity Economy” are all in the pipeline.
In the mergers space, the Competition Policy is squarely focussed on public interest and reveals a truth that those in the business of notifying mergers have long understood: the impact of a transaction on certain public interest factors will attract as much, if not more, scrutiny as the effects on competition. In addition, the government will increasingly be looking to M&A players in South Africa deliberately and expressly to contribute to transformation ideals. As the Policy indicates: “Agreements reached between merging parties and government, using the provisions of the Competition Act, have produced significant developmental outcomes in a range of areas and provide a guide to the market of the kinds of concerns that policy-makers will explore with merger parties.”
By way of agenda points, five public interest considerations are highlighted in the Competition Policy:
- Employment: Mergers that result in job losses will be of concern. While there is recognition that a merger may need to reshape the employment profile (e.g. to address duplications in key functions) this will need to be ameliorated by other job-friendly measures, including: maintaining overall aggregate headcount for three to five years; commitments to expand employment after a merger (with measurable targets); and quantified financial support for skills development.
- Broad-Based Ownership: Merging parties will need to account for any impact on broad-based ownership. A change in ownership through a merger is seen as an opportunity also “to have a greater number of black South Africans drawn into ownership.” A greater focus will also be placed on providing workers with ownership stakes, coupled with board representation.
- Supplier Development: With a focus on developing small and medium businesses and localisation of production, merging parties in key industrial sectors or regions will be expected to maintain, if not improve, levels of local procurement. Where a local business is acquired by a foreign firm, concerns around displacing local value chains are acute. The Policy may also require a commitment to maintain headquarters in South Africa to ensure that decisions with local impact are taken in close proximity to operations.
- Investment: The DTIC will look favourably on mergers that include investments in the economy over and above the purchase price and beyond capex already anticipated absent a merger.
- Downstream beneficiation: As part of the Minister’s industrialisation policy, acquisitions involving key resources (e.g. in the mining or agricultural sector) will need to show support for local beneficiation, particularly in downstream sectors where job creation is likely.
Although the above reflect the key areas where an intervention by the DTIC might be expected, there will be no compunction about leveraging the particular context of a merger to drive other policy goals, such as environmental sustainability.
In practical terms, the DTIC’s policy approach matters because the Competition Act empowers the DTIC to participate in any merger investigation as custodian of the public interest effects of mergers. The Competition Authorities are required to consider the views of the DTIC and are often aligned with the DTIC on policy. A failure sufficiently to account for the public interest in any merger filing will lead to delays at best. At worst, the DTIC can intervene in mergers before the Competition Tribunal and appeal decisions to the Competition Appeal Court.
The Competition Policy provides a granulated codification of the “hot buttons” to consider when contemplating a merger. The DTIC has so far been mindful not to suggest that South Africa is hostile to M&A, particularly foreign investment. Accordingly, not every merger will beget a full workover from the Minister, and in most instances one or two of the factors will be considered rather than a full suite of conditions. In addition, where a merger creates an obvious public interest concern on one or more of the factors, a positive effect on the other factors can be used to secure support for the merger. In high profile mergers, the Minister will often look only to catalyse and pin down additional benefits and investments that appear to make sense in the context of the merger, and which merging parties can get behind.
Certainly, one might quibble with certain aspects of the Competition Policy – it is perhaps short on empirical evidence to back up certain claims (for instance, that dominant firms invariably disadvantage customers, offer inferior products and result “in increased imports depriving the local economy from expanding industrial output and jobs”) and some terms could benefit from clearer definitions (“dynamic firms” and “industrialisation” are cases in point). It also avoids the important caveat that a merger that has no negative impact on the public interest ought not to be interfered with (and so rather betrays a sense that M&A is somehow value extractive for the economy rather than a sign of vibrancy).
Nevertheless, the Competition Policy is something that architects of significant M&A transactions in South Africa should add into the mix early when considering a deal. It is essential reading as a transparent account of the Minister’s manifesto on competition policy, and merging parties that can demonstrate buy-in on its key tenets will enjoy a smoother pass to merger approval and ongoing support from the DTIC.