Snaid & Morris

Merger between ECP Africa (ECP) and GPI (Burger King)

This legal opinion will assess whether the decision of the Competition Commission (Commission) should be appealed to the Tribunal based on existing law. Specifically, this legal opinion will delve into how the proposed acquisition can be structured, if possible, to pass legal muster and thus be approved. As per schedule 4 specifically s4(c) of the Competition Act 89 of 1998 (Act), the term ‘acquisition’ must be regarded as a reference to merger in terms of the Act.

Date: 24th August 2021

Outline:

This legal opinion will assess whether the decision of the Competition Commission (Commission) should be appealed to the Tribunal based on existing law. Specifically, this legal opinion will delve into how the proposed acquisition can be structured, if possible, to pass legal muster and thus be approved. As per schedule 4 specifically s4(c) of the Competition Act 89 of 1998 (Act), the term ‘acquisition’ must be regarded as a reference to merger in terms of the Act.

Competition Contention Context:

The Commission refused to grant permission for the merger between ECP Africa (ECP) and GPI (Burger King) on the basis that such a merger would ‘lead to a significant reduction in the shareholding of historically disadvantaged persons (HDP) in the target firm, from more than 68% to 0%’. As per s13A (1)(3) of the Act, parties to an intermediate or large merger may not implement that merger until it has been approved by the Commission. On the facts, the merger between ECP and GPI is an intermediate merger since R616 million is lower than the threshold for a large merger. Section 2, s12A(3)(e) and the Act’s preamble outline the Act’s objective which purports to promote a greater spread of ownership particularly with the envisaged purpose of increasing ownership stakes of HDP. Thus, the reduction of inequality is one of the significant underlying rationales of competition law. With this in mind, the Commission found that the proposed merger was unjustifiable on substantial public interest grounds. Specifically, since it has a substantial negative effect on the promotion of a greater spread of ownership, in particular the levels of ownership by HDP’s and workers in firms in the market.

Mergers have potentially the greatest inequality inducing effect, since mergers can be the primary mechanism through which markets tend toward increased concentration of ownership and the potential for a monopolisation of market power. Section 12A(3)(e) intentionally lends credence to public interest considerations, specifically orientated toward a focus on racialised inequality. A series of empirical reviews by economists suggest that inequality is harmful for economic growth. Thus, public interest considerations are cognisable in competitive terms. The Commission primarily focused on public interest considerations. Prior to the insertion of s12A(3)(e), a merger would not have been rejected on public interest grounds alone. Indeed, this is the first instance where a case was determined solely on a public interest ground, acutely focused on racialised inequality.

Merger Considerations:

Central to substantive merger analysis is the counterfactual test which assesses the hypothetical scenario that compares the state of competition prior to the merger and post-merger. Competition authorities engage in a three-component enquiry when reviewing whether to approve or reject a merger. The first question asks whether the merger is likely to lead to a substantial lessening of competition. On the facts it is submitted that the Commission found that the proposed transaction is unlikely to result in a substantial prevention or lessening of competition in any relevant markets. In the event that the Commission does find the merger likely to substantially lessen or prevent competition the next question is assessed. The second enquiry relates to an investigation into whether or not efficiency gains resulting from the merger outweigh the negative impact on competition. On the facts, there is no indication that an investigation was made into this factor. This is presumed to be the case, since the second enquiry only follows if the merger is likely to substantially lessen or prevent competition. In this case the Commission ultimately found that this would not be sustained.

The final consideration of competition authorities is the merger’s impact on the defined set of public interest criteria. Specifically applicable to this case is s12A(3)(e) of the Act which considers the effects of the merger on ownership of HDP. Unlike the efficiency test, a public interest enquiry is undertaken regardless of whether a merger will substantially lessen or prevent competition. A finding that the merger is unlikely to substantially lessen or prevent competition may be counteracted by a negative impact on the public interest, as was the case in the matter before us. On face-value the Commission applied the Act, as per the Commission’s interpretation. However, this interpretation is contested as will be discussed below.

Having cake and eating it- Economic Efficiency and Reduction of Inequality: In Minister of Economic Development and Others v Competition Tribunal and Others, South African Commercial, Catering and Allied Workers Union (SACCAWU) v Wal-Mart Stores Inc (Walmart) two foundational propositions can be extracted. Firstly, competition authorities may impose conditions. Secondly, competition authorities may provide remedies that solve a particular concern. On the facts the concern relates to ownership inequality. Robert Bork famously said: “competition policy cannot be made rational until we have an answer to the question of what its goals are”. Section 2(f) of the Act promotes ownership stakes of HDP. Section 2(a) of the Act outlines the purpose of the Act: to promote the efficiency, adaptability and development of the economy. Since inequality has been shown by multiple economists to hinder economic efficiency, it therefore stands that these two purposes are not mutually exclusive. As such, a compelling case could be made to conditionally approve mergers so as to fulfil the envisaged purposes of championing both economic efficiency and reducing ownership inequality. In the Walmart matter, an investment remedy was raised. In Walmart, the investment remedy required that Walmart expend R100 million over three years through the establishment of a program aimed at the development of local suppliers, including SMMEs. In the PepsiCo / Pioneer merger the acquisition was conditionally approved. The merger parties agreed to implement a B-BBEE ownership plan resulting in 12 000 workers being granted a stake in the merged entity. This had the effect of promoting a greater spread of ownership in firms. Likewise on the facts, ECP committed to contributing R500 million into the acquired company within five years of merger, increasing the amount of stores to in the country to 150, and increasing the workforce by 1250. This would in effect increase the number of permanent employees employed by it in South Africa by no fewer than 1250 historically disadvantaged persons.

Unbalanced Score Card:

South Africa’s unemployment rate is considerable, job creation of 1250, benefitting the most marginalized, the consequence of the merger should ultimately be assessed as having a net positive public effect. Both s2(c) and s12A(3)(b) require that employment be considered. Despite this, the Commission took an uncompromising stance by rejected the merger without attaching favorable employment conditions, as was done in the PepsiCo/Pioneer merger. Minister Patel observed that changes in ownership on their own do not generate new growth and jobs. As observed in the PepsiCo /Pioneer merger, the objective is to create momentum in the economy and accelerate economic growth. Thus, it is submitted “that it is incredibly difficult to transform a shrinking pie”.

As such equal weight should be placed on employment growth and public interest factors outlined in s12A(3) of the Act. The Walmart case is illustrative of employment considerations of the Act prior to the amendment. This matter should be appealed to the Tribunal for the Tribunal to reconsider the matter and provide clarity as to how each factor ought to be weighed. As it stands, the argument that public interest considerations, acutely premised on racialized inequality, should overshadow all the other considerations (outlined in s12A(3) of the Act) that the Commission is required to consider should not be sustained.

Process Problems:

In an interview with Hardin Ratshisusu, the deputy competition Commissioner, Ratshisusu raised ECP’s non-response and lack of co-operation during the Commission’s investigation as a major reason for blocking the merger. The Commission raised several recommendations such as an employee shareholder scheme and inserting B-BBEE firms in the supply chain. However, despite providing ECP with multiple opportunities to engage with the Commission’s recommendations Ratshisusu contended that ECP was unwilling to co-operate. Ratshisusu contends that only subsequent to the Commission’s decision, did ECP exhibit a willingness to compromise and offer a transformation proposal. Previously, the Commission has conditionally approved mergers. However, the Commission has emphasised that a change from 68% HBP ownership to 0% HBP ownership creates a substantial dilution in HDP ownership and thus a commitment toward transformation is critical. Thembinkosi Bonakele, a competition Commissioner, has highlighted that South Africa has one of the highest inequality rates in in the world. As such, commitments to transformation cannot be exempted or shown leniency especially in instances where there is such a significant shift of ownership created by the merger.

Several counterarguments have argued that a ‘BEE discount’ unfairly constrains HDP firms since it creates red tape that makes marginal investments more expensive and thus more unlikely. ‘BEE discount’ is used in this context to convey the notion that mergers will only be granted if a conditional sum be attached to further the transformation agenda. This has the effect of damaging South Africa’s reputation as an attractive investment destination and ultimately far less jobs are created.

Discrimination against HDP firms:

Evaluating public interest concerns is riddled with considerable complexity. As raised by David Lewis, public interest is a loosely defined concept and thus susceptible to being invoked opportunistically. As such, evaluating public interest, being both complex and uncertain, has led Tribunals to emphasize that considerable caution ought to be applied when competition authorities assess the notion of ‘the’ public interest. The Tribunal has expressly asserted:

“The competition authorities, however well intentioned, are well advised not to pursue their public interest mandate in an over-zealous manner lest they damage precisely those interests that they ostensibly seek to protect’.”
It is worth noting that competition authorities are tasked with the promotion and protection of competition and not with second-guessing commercial decisions of historically disadvantaged shareholders who wish to exit an investment.
Uncompromising stances based on vague concepts can lead to unintended consequences. In Shell SA / TepCo Petroleum the Tribunal asserted that constraining the options of firms owned by HDP’s may condemn these firms to the margins of the market. Unintended chilling effects relate to a slowdown of foreign direct investment, merger activity and potential job creation. Accordingly, a fundamental question which emerges is whether the approach adopted by the Commission discriminates against HDP owned firms. GPI has publicly stated that it wishes to dispose of its interests in Burger King and use the proceeds to cut and restructure its debts. The Commission has ‘implicitly favoured’ B-BBEE ownership over job creation and has undermined the ability of black investors from releasing the value of their investments at a time of their choosing. This effectively prejudices the HDP seller as it creates a different class of shareholder since these constraints are not applicable to white investors. It is submitted that this only perpetuates inequality. The market ‘voted’ on the JSE after the Commission released its decision where the share price for the B-BBEE compliant seller-GPI- plummeted by 25%. This undermined Burger King as an asset, and paradoxically, the shareholders who the Commission was trying to protect, were harmed since shareholders wishing to divest their investments were barred from doing so. The detrimental constraint operates on two grounds. First, it constrains the seller to dispose of their assets only to purchasers who are willing to accept these conditions. Second, HDP firms are constrained to assets at discount because the assets are accompanied by expensive conditions which makes the asset less attractive. White investors are afforded the autonomy to freely dispose of their assets with impunity and so should HDP. Ultimately, what is likely to occur is sellers constrained to sell only to another HDP shareholder. It is submitted that this paternalistic approach undermines HDP shareholder’s autonomy and thus should not be sustained.

Recent Decisions:

Moreover, in K2021511200 (South Africa) Proprietary Limited (NewCo) / Consolidated Steel Industries Proprietary Limited (CSI) the Competition Commission conditionally approved the proposed merger whereby NewCo intends to acquire CSI. This decision was released in 2021. As compared to the Burger King matter, the Commission found that the merger was unlikely to result in a substantial prevention or lessening of competition in any relevant markets. Regarding public interest, the Commission found that the proposed transaction is likely to result in a reduction in ownership by HDP’s and that the merger may raise employment concerns. However, instead of rejecting the merger the parties engaged and agreed to a condition that it introduces a B-BBEE shareholding in the merged entity within a certain period. Fitting Forum for Transformation: Critics of this judgment have questioned whether South Africa’s transformation agenda is best achieved through the Act. The Broad-Based Black Economic Empowerment (B-BBEE) Act and the Employment Equity Act address unfair discrimination and racialized inequality. Du Plessis has argued that these Acts, aimed at tackling racialised inequality, as they currently exist in South Africa, are not economically efficient instruments to pursue demographic ownership transformation goals. However this is not to say that affirmative action policies are per se contrary to economic efficiency. Busa’s CEO Cas Coovadia has expressed concern that the Competition Commission is pronouncing on issues related to black economic empowerment, which is the ambit of the B-BBEE Commissioner. Thus, a compelling case can be made in favour of separating competition matters from transformation policy.

A Revised Approach: If the Commission adopted a nuanced approach which balances the interests of HDP shareholders, wishing to seek returns on their investments, with broader transformation considerations against other positive public interest benefits, such as employment growth and the national market’s ability to compete in international markets, as outlined (amongst others) in s12A of the Act. A counterargument to this raises the question of whether interests of HDP shareholder can be substituted for the interests of the public? There is an argument to be made that free-market economies, with few barriers to entry, stimulate investment and the broader economy. Administrative and regulatory stipulations impose barriers to free trade and reduce market attractiveness. Adam Smith’s trickle-down effect idea applied to these facts would suggest that the broader public, specifically HDP, would benefit from economic opportunity and the fruits of capitalist production and surplus. Thus, it is submitted that the interests of HDP shareholders, considered as a group, although not identical, are a fair and reasonable proxy for the broader interests of the general public, considered as a group as both represent the HDPs. If the Commission adopts this approach, firms entertaining mergers will be cognizant of the imperative to take demographics of business ownership and shareholder profiles into consideration. Ultimately this will improve business ownership levels of HDPs and make a contribution to reduce broader societal inequality. Thus, an application to reconsider the matter must be filed with the Tribunal to provide guidance on how competition authorities can pursue the public interest mandate. Currently, an unwavering stance stagnates markets. Competition authorities should not encumber interests which they are mandated to promote and protect. Implementing merger conditions may align potentially problematic mergers with the envisaged purpose of the Act and thus attempt to rectify any defect. Thus, it is important to emphasis that these conditions should not be unreasonably burdensome so as to deterr potential investors. Overall, the idea should be to balance all the considerations with equal weight.

An Appealing Appeal to Appeal:

Section 27(1)(c) of the Act provides that the Tribunal can hear appeals from the Competition Commission. Thus, the matter must be appealed to the Tribunal for re-consideration. As shown above, clarity is required regarding the respective weight of each consideration and as suggested by Heather Irvine, (Partner in Bowmans Competition practice) it is in the South Africa’s business communities’ interest to have that matter ventilated. The sooner legal clarity is provided the better it will be to inform merging- parties and their advisers of what is required for the Commission to grant the merger. Predictability is also likely to boost confidence in direct foreign investment. Specifically, the Tribunal will be tasked with clarifying the weight that ought to be given to each factor against other factors and whether a prohibition in this case was justified on the evidence before the Commission. On the facts, it seems that there was a hyper focus on public interest considerations to the exclusion of the positive net effects on employment, which is also a criterion of public interest that the Commission is required to consider. The matter is likely to succeed on appeal since the Commission cited a lack of co-operation from ECP as a significant reason for rejecting the merger. Subsequently ECP has formulated a proposal intended as a gesture of co-operation. On the evidence, acquired through the investigation, before the Commission the prohibition may have been justified. However, in light of ECP’s subsequent transformation proposal this will likely result in change. Especially viewed in light of the Commission’s recent decision in NewCo and CSI.

Structure of the Proposed Merger:

The proposed merger should be structured follows. On the facts, the merger is considered a horizontal merger since both parties compete in the investment market. Horizontal mergers are at risk of having either co-ordinating or unilateral effects. Both present a potential threat related to thir potential abuse of market power. As per, s12(1)(a) of the Act the term merger refers to the transfer of control of a business between firms. The merger has yet to be approved. On the facts ECP offered to acquire the shareholding of Burger King from GPI. Thus, the control element is yet to be satisfied. As previously stated, the GPI and ECP merger is an intermediate merger. Thus, the Commission must be duly notified. Both merging parties must make a joint notification to the Commission. Section 13A of the Act prescribes the formalities that must be applied with. Notification must classify the merger on the merger notice form. The second page of the form contains a statement of accuracy. Two schedules should be attached to this form. First, should provide identification information about every acquiring firm. Second, should summarise the effects of the merger on employment. On the facts, this is where ECP may insert their employment transformation commitment. This is followed by the acquiring firm lodging a statement of merger information.
The merger may only be implemented once the Commission has granted approval. The Commission will conduct an investigation as per s13B of the Act. The Commission may require additional information from the parties. Merging parties ought to engage constructively with the Commission and the Tribunal. It is advised that ECP co-operate by constructively engaging at this stage to find a practical alternative that appeals to a variety of public interests. Once the merging parties have fulfilled the notification requirements in the prescribed manner the Commission may, within 20 business days, approve, prohibit or conditionally approve the merger, as per s14 of the Act. In determining whether to reject, approve or conditionally approve the merger the Commission will consider the Herfindahl Index (HII) which assesses market concentration. The exact figures are not provided in the facts. However, the facts do state that Burger King holds 30% of the take-way market in South Africa, but only 9% of the market is defined as take-way prepared food market in South Africa.

As stated above, the substantial lessening or preventing test as well as the efficiency test where no contentious in this matter. Depending on the Tribunal’s finding with respect to the public interest factors in relation to each other, the proposed merger ought to appeal to other public interest factors. These s12A considerations include employment, a particular industrial sector or region, the ability of national industries to compete in international markets and interests of HDP that run small and medium firms. It is important to note, as per s15 of the Act, the Competition Commission may revoke merging parties’ conditional acceptance if it finds that the decision was based on incorrect information, deceitful information or if the firm has breached an obligation attached to the decision. As such, any conditional commitment that ECP makes they must perform as per that obligation. The Tribunal can be characterised as informal proceedings that lack formal notifications as required above for the Commission. The Minister of Trade, Industry and Competition may partake in the Tribunal’s proceedings if the merger will have an impact on the public interest.

Conclusion:

This legal opinion has argued that the matter should be appealed to the Tribunal to reconsider the matter and provide clarity on how the public interest factors are to be weighed against each other. If the Tribunal determines that the use of one public interest factor is not determinative and must be viewed holistically, the Commission’s decision is likely to be deemed unjustified.

Witten by: Sinead De Jager- Legal Intern