The Competition Commission has prohibited a proposed transaction where Emerging Capital Partners ("ECP"), a US based private equity firm with a focus on investment holdings and interests in Africa, sought to acquire Burger King (South Africa) from Grand Parade Investments on public interest grounds where the shareholding of Historically Disadvantaged Persons (HDPs) would fall significantly to zero as a result.
Currently, Burger King (South Africa) is 68% owned by HDPs whilst ECP through its various private equity funds investing on the African continent, has no HDP ownership at all.
Despite the Commission finding that the proposed transaction is unlikely to result in a substantial prevention or lessening of competition in any relevant markets, it nevertheless prohibited the proposed transaction based on the proposed transaction resulting in a substantial negative public interest effect. This is the first time a transaction has been prohibited solely on these grounds.
The Commission in its findings raised concerns regarding the complete reduction of ownership by HDPs from 68% to 0%. It argued that this reduction constitutes a substantial negative effect on the promotion of greater spread of ownership, in particular to increase the levels of ownership by HDPs in firms in the market as contemplated in the Competition Act.
The parties to the transaction advanced other public interest considerations and benefits such as job creation to justify the negative effect. However, these considerations were not sufficient to persuade the Commission to approve the merger.
Recent amendments to the Competition Act introduced HDP ownership as part of the public interest criteria that the Commission takes into account when assessing mergers and it was on this public interest assessment that the Commission prohibited the transaction based on the conclusion that it would result in a substantial negative effect which could not be justified or mitigated by conditions to the merger.
The decision of the Commission has been widely criticised by those lobbying for foreign direct investment into South Africa and although it is subject to appeal, until such time as greater clarification is given, foreign parties without the requisite HDP ownership who are planning to acquire empowered firms in South Africa should be prepared to provide commitments to transformation objectives before entering the country if they wish to have their acquisitions approved.
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