A controversial introduction in the latest draft of South Africa’s Competition Amendment Bill of 2018 is the inclusion of a section that requires the State President to constitute a standing committee of cabinet ministers and public officials to consider whether a merger, involving a foreign acquiring firm, will be adverse to national security interests in the country – with no reference to the proposed transaction’s bearing on the effect on competition in the relevant market.
Such protective measures are not unique to South Africa. The United Kingdom has recently amended its laws to substantially lower the merger notification thresholds in certain industry sectors that have an effect on national security. Last week, they launched a consultation process regarding the intention to introduce new governmental powers to permit the scrutiny of the acquisition of assets if they raise national security concerns, even if the merger thresholds are not met.
What are South Africa’s national security interests?
Of concern from a certainty point of view is that such security interests are yet be defined by the president.
Whilst the Bill expressly provides that specific markets, industries, goods and services, sectors or regions must be included in the list of security interests, the State President is also required to take into account various broad factors when making the determination. Although these factors include the to-be-expected shopping list of defence, exportation of sensitive technology or know-how, and counter-terrorism elements, they also include what appear to be atypical ‘security’ interests, namely the:
- security of infrastructure, including the security or economic well-being of citizens;
- supply of important goods and services to citizens, and
- economic and social stability of the country.
It seems that these factors were included as a means to guide the president. However, they are by no means comprehensive or constraining. In fact, the attempt to assist may have achieved the opposite effect by forcing the president to consider a broad concept of ‘national security interest’, for example food-security, electricity-supply and even job-security. Or was this the national executive’s intent from the outset, as a means to further its agenda of economic transformation and expand its ability to extract further investment out of foreign firms that have already identified investments in the country, to the benefit of the public interest?
What are the implications of a merger affecting national security interests?
Notably, if a merger involving a foreign acquiring firm affects whatever is eventually defined as a national security interest, a mandatory merger notification to the presidentially-appointed committee will be triggered.
Critically, mergers that fall into this category of transaction will first have to be notified to the committee, which, in the ordinary course, will have 60 business days to decide whether to prohibit the merger, or permit notification of the proposed transaction to the Competition Commission, potentially subject to conditions. This period can however be extended by the president.
Only upon receipt of the committee’s decision to allow the notification of a merger to the Competition Commission (with or without conditions), will the merging parties be able to take this mandatory step, and thereby trigger the ordinarily anticipated time periods and processes for the competition merger approval process. Not only does this ‘ticket to play’ committee approval create further levels of uncertainty, but it will delay mergers involving foreign investment in certain sectors by up to three months, if not longer.
What if the committee makes an adverse finding?
To add to the uncertainty, the Bill does not provide for participation in the process by the merging parties, nor does it make provision for the right of appeal or any means of recourse available to merging parties against an adverse decision made by the committee. This lack of consultation is unlikely to pass constitutional scrutiny.
Do all mergers involving an acquiring firm require committee approval?
Unlike in other jurisdictions, mergers which typically do no threaten national security interests involving, for instance, the acquisition of minority control by a foreign firm, foreign private equity firm or hedge fund, are not carved out of the application of the newly proposed section. Again, this could have a chilling effect on foreign direct investment, and add to the administrative red-tape of doing business in South Africa by firms that traditionally do not face such regulatory scrutiny in other jurisdictions.
The new provision will only apply to intermediate and large mergers, as determined by the monetary thresholds that trigger a mandatory merger notification to the Competition Commission. Whether South Africa will follow the UK’s steps to lower the thresholds when national security interests are potentially affected by a small merger, remains to be seen.
What are the implications for your business?
The proposed introduction of the additional ‘merger approval’ requirement will delay the implementation of transactions involving foreign acquiring firms, and are likely to add uncertainty as to whether the deal will be successful.
Please contact anyone in the Norton Rose Fulbright competition team for assistance in understanding how these proposals will impact on your business operations.