Worker Ownership, Black Empowerment and Merger Control: A Short Story�

Liberty Mncube

14 July 2022

The Economic Problem

• The economic problem:
• Widespread inequality of wealth and economic opportunity
• Aggravated by (1) excessive market power and (2) high barriers to entry and expansion
• Excessive market power is associated with high costs of goods and services for consumers
• It is also associated with reduced wages for workers and holds back innovation and economic progress
• Worse still, the poor, powerless and disadvantaged in society who are majority black South Africans are more likely to be the victims of excessive market power and have the least ability to avoid its consequences.
• This dynamic exacerbates economic inequality and compounds the harms of the apartheid economic legacy
• Excessive market power and concentrated markets present a significant political-economic dilemma

• The other path:
• Take competition policy not just as legal regulation but as a core component of economic policy and as the mode of regulating of public and private power in the public interest
• Recall: The Competition Act states that its purpose includes promoting and maintaining competition in order to promote a greater spread of ownership in the economy, in particular to increase the ownership stakes of historically disadvantaged persons

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• While Competition policy is not the only tool that can be used to promote economic growth and inclusion, unlike other polices it does not come with shadow costs, as do most other policies that redistribute income
• Many policies that redistribute resources from the wealthy to the poor include taxes of some form that come with shadow costs
• This makes competition policy one of the best choices policy makers have for increasing productivity, real income and equality
• Policies that enhance competition offer what is close to a free lunch

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The Assessment of Mergers

• In any discussion about product markets, equity and efficiency meet
• There are short run trade-offs, but there are also long-term gains
• In merger control, there are also nuanced ways to strike a balance between the trade-offs, but in a meaningful way
• First, the Competition Act specifies what qualifies as a public interest to address the problem of discretionary bounds
• Second, a complete competition analysis (which focuses on balancing competition harms with efficiency) is done first and separately, the competition analysis is followed then by a complete public interest analysis
• This separation keeps it clear what competition assessment requires (and what a public interest assessment requires) and makes it possible to observe trade-offs
• To third parties, the separation makes it possible to predict competition enforcement outcomes
• The separation has, in my view, advanced the cause of both efficiency and equity; and has helped to make South Africa’s competition law a flagship enterprise

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• The assessment of mergers
• The Amendment Act states that when required to consider a merger, the Commission or Tribunal must first determine whether the merger is likely to substantially prevent or lessen competition
• Despite its determination, the Commission or Tribunal must also determine whether the merger can or cannot be justified on substantial public interest grounds

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• Public interest considerations, effect of a merger on:
1. A particular industrial sector or region
2. Employment
3. The ability of small businesses (“SMEs”) or firms controlled or owned by historically disadvantaged persons (“HDIs”) to effectively enter into, participate in and expand within the market
4. The ability of national industries to compete in international markets
5. Promotion of a greater spread of ownership

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Second Revolution in Merger Control

• Arguably three main inflection points (in merger control)
• First, it was the Tribunal’s decision in Shell South Africa (Pty) Ltd / Tepco Petroleum (Pty) Ltd in 2002.
• The Tribunal issued a cautionary note: the Tribunal reasoned as follows: “The role played by the competition authorities in defending even those aspects of the public interest listed in the Act is, at most, secondary to other statutory and regulatory instruments – in this case the Employment Equity Act, the Skills Development Act and the Charter [Charter for the South African petroleum and liquid fuels industry] itself immediately spring to mind. 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.”
• Second, the rise of government’s participation in mergers under the watchful eye of Minister Ebrahim Patel
• Third, the Competition Amendment Act

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• In February 2019, the President signed the Amendment Act into law
• The focus of the Amendment Act is on economic transformation
• The Amendment Act also introduced a fifth public interest consideration relating to the promotion of a greater spread of ownership
• The object of this consideration is to address a structural challenge facing South Africa, relating to the racially skewed spread of ownership of firms in the economy

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• In the Assessment of mergers with public interest
• The Tribunal is required to consider all five of the public interest factors in making its determination – however, one factor does not take precedence over another factor when determining whether the merger can or cannot be justified on public interest grounds
• They should all be considered together to strike a reasonable equilibrium between the different factors

Second Revolution in Merger Control

• Advantages of Worker Ownership
• The beneficiaries of ESOP are the employees on whom ownership is given
• Workers often, if not usually, gain substantial wealth
• Sizable ESOP benefits accrue usually without the risk or sacrifice associated with business creation or purchase
• Employee owners derive other benefits as well, including increased job security and work satisfaction, although these may be contingent on increased participation, not ownership alone
• Beyond the employee owners, ESOP may build employee commitment, which could ease workplace tensions, reduce disparities of wealth, and help build a better society
• There are high risks for South Africa arising from historic and protracted lack of diversification of ownership stakes…

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• Following the Amendment Act, a quiet transformation of South Africa’s business is about to occur
• This transformation, if natured (and supported) well will be driven by employee share ownership programmes (ESOP) conditions in merger control (and conditions relating to an increase in the ownership stakes of HDIs)

Selected Case Studies

• Simba’s, a subsidiary of PepsiCo Inc, acquisition of Pioneer Food, one of the major agro-processing companies [in 2020]
• The Tribunal imposed conditions requiring PespsiCo to implement a B-BBEE ownership plan and provide PepsiCo common stock to the value of R1.6 billion to be issued to a South African, broad-based workers’ trust
• The common stock would be unencumbered and allow for immediately releasable dividends
• The conditions required that the stock in PepsiCo be converted into a direct shareholding in Pioneer Food of up to 13% after 5 years from implementation of the merger

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• The acquisition of Comair Ltd (an airline business in South Africa) by a group of investors seeking to revive the company after the airline sector was heavily disrupt ted by the Covid-19 crisis [in 2020]
• On black empowerment, the Tribunal imposed conditions requiring the merged entity to allocate a portion of its shares to a B-BBEE ownership structure which would include the participation of an Employee Share Ownership Program with a broad representation of black people
• In addition, the conditions provide for the merged entity to enter into an agreement with one or more B-BBEE purchaser(s) to acquire a minority stake in the merged entity on mutually acceptable commercial terms

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Selected Case Studies

Commission

• The Commission prohibited a merger in which ECP Funds IV proposed acquiring 95.78% of the issued share capital of Burger King South Africa and 100% of the issued share capital of Grand Foods Meat Plant
• ECP Funds IV did not have ownership by HDIs and workers whilst Burger King South Africa and Grand Foods were ultimately controlled by Grand Parade Investments Ltd (GPI), an empowerment entity with 68.56% of its shareholdings held by HDPs, 22.87% of which is held by black women
• On public interest, the Commission found that the effect of the merger was to reduce the ownership by HDPs and workers in the target firms to zero
• Following the prohibition, the merger parties entered into discussions with the Commission and the DTIC, seeking to remedy concerns around the effect of the merger on the promotion of a greater spread of ownership and increasing levels of ownership by HDPs and workers in firms in the market

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Tribunal

• [In 2021] The Tribunal approved the merger subject to conditions
• The conditions included a commitment involving (1) local procurement and improving compliance with the Enterprise Supplier Development element of the merger parties’ B-BBEE scorecard; (2) ESOP with 5% in Burger King South Africa; (3) a commitment to divest the meat plant; and (4) Expansion commitments: involving (1) an investment of no less than R500 million in terms of capital expenditure; (2) increasing the number of Burger king outlets in South Africa from 90 to at least 150; (3) in addition to current permanent employees, employing no less than 1250 HDPs as permanent employees in Burger King SA, increasing the value of the payroll as well as employee benefits (in respect of the 1250 employees) by an amount of no less than R120 million

Selected Case Studies

• In March 2022, the Tribunal conditionally approved the merger wherein Net1 SA acquired Ovobix and Luxanio, Net1 SA is active in the provision of low-cost financial services to underserviced consumers and payment processing
• The Tribunal required conditions, among others, on: employment; the establishment ESOP and a financial commitment towards Enterprise and Supplier Development
• Regarding the ESOP conditions, the Tribunal required that:
• By the end of 36 months from the implementation date of the proposed transaction, Net1 Inc shall establish an ESOP for the benefit of workers of the merged entity to receive shareholding in Net1 Inc equal in value to at least 3% of the issued shares in Net1 Inc
• If, within 24 months of the implementation date of the proposed transaction, Net1 Inc generates a positive net profit for 3 consecutive quarters, the ESOP to be established, shall receive shareholding in Net1 Inc equal in value to at least 5% of the issued shares in Net1 Inc as at the implementation date of the proposed transaction

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• In February 2022, the Tribunal conditionally approved the merger wherein DP World Logistics FZE (“DP World”), ultimately owned by the Dubai government, acquired the South African firm, Imperial Logistics Limited (“Imperial”)
• Regarding the ESOP condition, the Tribunal required that:
• Within 24 months of the merger implementation date, the merged entity is required to establish an ESOP through which Imperial employees (excluding top and senior management) will benefit from an effective 5% interest in ILSA through an employee trust
• Imperial employees will not be required to pay to participate in the ESOP
• The ESOP shareholding should not substitute the existing HDP shareholding in ILSA; before establishing the ESOP
• The merged entity must provide the Commission with the principles which it proposes to apply in the ESOP, consult with the Commission on these and not implement the ESOP before obtaining the Commission’s written approval

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• Placing value through competition policy on increasing the spread of ownership for historical disadvantaged persons and workers is important for efficiency (economic growth) and as well as, a moral imperative
• This route has the potential to produce more efficiency (economic growth) as well as more equity

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• Two Recommendations and A comment

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• Invest in Competition Policy Tools

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• Invest in a Whole Government Approach to Competition Policy

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A Modest Agenda for South Africa

Invest in competition policy tools, the most important being people

• Recent appointment of Ms Doris Tshepe (as Commissioner) an important step in the right direction
• However, the Tribunal also requires urgent strengthening and a significant increase in resources
• This is important for the process of more effectively adjudicating competition cases in the public interest and simultaneously reducing the time it takes to finalise cases
• Competition institutions strapped for resources are more willing to accept flawed settlement agreements or conditions prosed by business
• Investing in people is important because people are central to reimagining the application of competition law enforcement tools to respond to South Africa’s development challenges
• Today’s realities and not yesterday’s market realities
• But of course, increasing resources alone will not solve today’s manifest excessive market power problems, but substantially increasing resources is an important part of the solution….

Thinking out of the Competition Enforcement Box: - A Whole of Government Approach�

• Doing substantially more with the existing competition law enforcement system is seriously incomplete
• In many markets, government directly participates as a market-maker through public procurement or as a supplier of goods and services
• In some other markets, government indirectly participates in markets through regulation, subsidy, or other state-support activities
• These actions may distort competition if, for example, they create barriers to entry and effective participation in markets
• Competition law enforcement is not the only weapon in the government’s arsenal to attack excessive market power

• Competition policy should be one of the cornerstones of carefully designed government policy, including industrial, trade, agriculture, small business, energy, transport and macroeconomic policy measures
• The mandate of the Operation Vulindela Unit alternatively, the Department of Trade, Industry and Competition should be expanded to raise the prominence of pro-competition policies across government
1. This would promote, throughout government, the promulgation (or amendment) of rules or state-support policies designed to reduce barriers to entry, open industries to entrants, or otherwise improve the functioning and competitiveness of markets
2. It would coordinate actions by sector regulators and government departments to tackle endemic competition problems in specific industries
3. It would monitor the rule-making process so as to discourage or prevent rules that unnecessarily inhibit market entry (importantly by small firms or black owned firms), or otherwise amount to anti-competitive uses of the regulatory state

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• In summary then, a variety of complementary policy tools are necessary to support and bootstrap competition law enforcement moving forward

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The Comment

…A competition policy discussion may seem esoteric against the backdrop of challenges that are far too real for so many South Africans…

Yet, the consequences of competition policy are real and significant, especially at a time of a cost of living crisis and other hardships