New antitrust guidelines for mergers may stifle investment
It still unclear how guidelines to advance economic transformation will affect transactions
In any private equity investment life cycle the exit environment is a fundamental factor. For a seller, finding a financially capable and bona fide buyer is crucial. A buyer does not have any statutory protection regarding acquisitions, and together with the acquisition of an asset inherits the obligations and commitments underlying that asset.
In this article we consider the effect of the Competition Commission’s merger guidelines on private equity exit transactions.
In September the Southern African Venture Capital & Private Equity Association published its yearly private equity industry survey, setting out the performance of private equity firms in 2022. The survey states that despite a tough environment private equity firms remained resilient, driving revenue and employment growth within underlying portfolio companies. Despite a 13% fundraising decline globally, R19.6bn in funds were raised during 2022, 21% higher than in 2021.
Despite multiple challenges the association points out that Southern Africa private equity firms witnessed a strong increase in both the value of exit proceeds and the number of exits. The quality and volume of exits is a key consideration for any new investor looking to make acquisitions in a particular market. The role of regulatory authorities is also a key factor.
The commission is mandated to consider public interest conditions during the assessment of reportable M&A. Recently, trade, industry & competition minister Ebrahim Patel pointed out how “R20bn in salaries have been preserved as a direct result of these public interest interventions, while approximately 143,000 workers are now shareholders in their respective companies thanks to the expansion of public interest criteria”.
The approach being applied by the commission is that transactions will be thoroughly interrogated, and there is an unequivocal commitment by the government to use public interest conditions as a strategic tool for advancing economic transformation. On October 6 the commission invited stakeholders and interested parties to submit comments on the draft revised public interest guidelines related to merger control.
In 2019 there were amendments to the Competition Act to, among other things, “explicitly create public interest factors that address ownership, control and support to small businesses and firms owned or controlled by historically disadvantaged persons”. Of particular interest for the purposes of this article on public interest assessments is the commission’s approach to the public interest provision referred to in section 12A(3)(e) of the Competition Act.
The explanatory note to the amendments to the Competition Act explained that the amendments envisaged an established framework that incentivises merging parties and active firms to “proactively address concentration and ownership representativity concerns arising in markets in which they are active”. Therefore, all notifiable M&A will be tested against the public interest provision referred to in section 12A(3)(e) of the Competition Act.
The section requires, when determining whether a merger can or cannot be justified on public interest grounds, consideration of “the promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers in firms in the market”. This legislative provision is a feature of every merger assessment, which may well have a major effect on the overall public interest assessment.
With the section in mind, the draft guidelines say the commission will consider the following factors, among others, to establish the effect of the merger in question on this public interest provision:
● The extent of the dilution and/or increase of the historically disadvantaged persons and/or worker shareholding within the target firm post-merger;
● The breadth of representation of the shareholding and sector transformation targets;
● The extent of participation of historically disadvantaged persons/worker in the operations of the merged entity;
● The size of the merger parties’ respective operations in SA;
● Whether the acquiring firm is transformed; and
● It is also worth noting that, in terms of the draft guidelines, the commission considers section 12A(3)(e) to confer “a positive obligation on merging parties to promote or increase a greater spread of ownership” by historically disadvantaged persons and/or workers.
Legal predictability and certainty play a significant role when parties decide to conclude M&A, which also have an effect on the national economy.
The commission must be applauded for giving stakeholders an opportunity to comment and engage the commission on the proposed draft guidelines. That said, the effect of the draft guidelines in their current form on reportable private equity deals will be felt.
If a merger transaction is reportable to the SA competition authorities, considering a buyer’s financial capability and bona fides to conclude a transaction will not be sufficient. The buyer’s existing empowerment credentials are also an important factor from a public interest assessment perspective in terms of section 12A(3)(e) of the Competition Act.
Exiting transacting parties have to bear in mind what effect a sale transaction will have on the shareholding by historically disadvantaged persons and/or workers in the target firm. Transacting parties will have to take a proactive approach in rigorously considering what commitments may be required, and if such commitments are achievable if the anticipated merger and acquisition transaction qualifies to be reported as a notifiable merger.
At this point there may be more questions than answers on the true effect the draft guidelines will have on qualifying M&A once they are finalised. However, with the opportunity to engage the commission all parties involved should seek an outcome that satisfies both the transformational objectives of the Competition Act and the commercial requirements of the transacting parties.
AT THIS POINT THERE MAY BE MORE QUESTIONS THAN ANSWERS ON THE EFFECT OF THE DRAFT GUIDELINES