SA to tighten investor rules

Presidential body will block foreign takeover bids if security is deemed to be at risk

● Foreign takeover bids that are deemed to be a threat to national security will be at risk of being blocked by a presidential committee, in terms of new competition rules that parliament will debate on Tuesday.

This is one of a series of far-reaching changes to South Africa’s 20-year-old competition legislation which Economic Development Minister Ebrahim Patel has tabled in parliament. They will also give the competition authorities powers to tackle the high levels of concentration in South Africa’s economy, where many sectors are dominated by just a few large companies.

“There is a much stronger focus on economic inclusion, and we have brought small and medium enterprises much more directly into the objectives and purpose of the act,” Patel told Business Times.

Though questions have been raised about whether the draft legislation, particularly the national security provisions, will add to the hurdles deterring foreign investors from investing in South Africa, Patel said the country was open for business and welcomed foreign investment, arguing that the proposed legislative changes would be a positive.

“The focus is on opening up the economy via a range of measures, which will be very good for investment,” Patel said.

The national security provisions, which are new additions to the draft bill which Patel first published in December, will require the president to establish a committee to scrutinise any foreign takeover bid that potentially affects areas such as defence, sensitive technology, security of infrastructure or “the supply of important goods or services to citizens, or . . . to government”.

The government had earlier considered a separate piece of legislation to regulate foreign takeover bids but Patel said it had been decided instead to incorporate the provisions into the competition legislation.

The presidential committee will comprise cabinet ministers and officials chosen by the president and will have 60 days to consider the deal. It can block it or approve it, with or without conditions, and if approved, the deal will then have to go to the competition authorities.

Herbert Smith Freehills partner Jean Meijer said the provision, which gives a political body the power to prohibit a merger independent of the competition authorities, or impose conditions on the grounds of national security, was “likely to create significant uncertainty and disincentivise foreign direct investment”.

The president will have to publish a list of South Africa’s national security interests, including the markets, industries, goods or services, sectors or regions in which a merger involving a foreign firm will have to be notified to the new committee. One of the factors the committee could also consider is whether the foreign firm is controlled by a foreign government.

Meijer said in a note the list of national security interests contemplated was extremely broad and it was not clear what would qualify, nor was there any requirement that the adverse effect on national security is likely.

Countries such as the US, Australia, Canada as well as China have mechanisms to vet foreign takeovers on national security grounds, though this is generally a separate process – such as the Committee on Foreign Investment in the US or Australia’s Foreign Investment Review Board — and not part of their competition or anti-trust regimes.

South Africa’s competition legislation requires the competition authorities to consider public interest issues as well as pure competition concerns when it investigates mergers.

The draft legislation in December added a fifth public interest test to the four that are already in the act, requiring the competition authorities to consider the effect of a merger on the promotion of a greater spread of ownership, particularly by black South Africans — and the new version has now added worker ownership into the mix.

“We are trying to build a new model of economic partnership in South Africa,” Patel said. The new draft bill has also increased the penalties companies are liable to pay for offences such as collusion or price discrimination if they commit these more than once.

We are trying to build a new model of economic partnership in South Africa Ebrahim Patel

Minister of Economic Development