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Thorts - Need to limit uncertainty for foreign acquiring firms
Thorts - Need to limit uncertainty for foreign acquiring firms
Published Date: 2019-03-15 | Source: DealMakers | Author: Heather Irvine | Comments
The Competition Amendment Act was signed into law by the President in February. One of the most important changes the Act introduces is an additional review and clearance requirement for any merger which involves a foreign acquiring firm relating to a South African national security interest.
If the merger "relates to" a list of national security interests, any acquiring firm which is incorporated under the laws of another country, or whose "place of effective management is outside the Republic" will, in addition to notifying and obtaining clearance for a merger from the Competition Commission (in the case of an intermediate merger) or the Commission and the Competition Tribunal (in the case of a large merger), also have to notify a new Committee of its proposed transaction, at the same time that it notifies the Commission.
The President (or a Cabinet Member whom he nominates) has yet to publish this list but the list of factors he is required to take into account in terms of the Act include the potential impact of a merger transaction not only on "the Republic's defence capabilities and interests", "the supply of critical goods and services to citizens", or which may result in "foreign surveillance or espionage", "the activities of illicit actors, such as terrorists, terrorist organisations or organised crime" but also on the supply of any "goods or services to government" and "the economic and social stability of the Republic". Unfortunately, the Legislature appears to have ignored pleas from several quarters during the Bill's drafting phase to narrow down these factors significantly.
The Committee is required to decide whether transactions of this nature will have an "adverse effect"' on "the national security interests of the Republic" taking into account "other relevant factors" (presumably a drafting error) and "whether the foreign acquiring firm is a firm controlled by a foreign government". Section 18A(10) provides that within 30 days of the decision, the Minister of Economic Development must publish in the gazette a notice of the decision to either prohibit or approve the merger, or approve it subject to conditions. The competition authorities may not consider such a merger if the foreign acquiring firm has failed to notify the Committee (although precisely how the Commission or Tribunal are going to make this determination, is unclear), the Commission and Tribunal may not make a decision on any merger if the Minister has prohibited the implementation of the merger on national security grounds (and if they do, the approval is deemed to be revoked). It seems that the Legislature intended that the Tribunal would be able to impose an administrative penalty if parties fail to comply with the notification requirement, or the transaction has been prohibited (although the reference to the section of the Competition Act is incorrect, and accordingly, there is some doubt about whether this provision is operative or not).
It is most unfortunate that s18A (which only appeared in later versions of the Bill) was not substantially revised before being promulgated. There are several difficulties with the drafting of the section, which were pointed out to parliament, and should have been remedied. Unless an impartial, efficient and clear review process is adopted to give meaningful effect to this new provision, it will create considerable uncertainty for foreign investors which will risk undermining the confidence President Ramaphosa is currently working so hard to build.
Several steps need to be taken by the President to ensure that this new piece of legislation doesn't unjustifiably intrude on the Constitutional rights of foreign acquiring firms, the companies with operations in South Africa that they are trying to acquire, and the shareholders of both parties. Firstly, it is critical to ensure that the cabinet members and other public officials appointed to the Committee are capable of discharging their mandate in an unbiased fashion. No individual tainted with even a hint of state capture should be able to wield a sword over normal commercial transactions - the potential for corruption would simply be too great. The Committee should be composed of sufficient members to ensure a diversity of views.
Secondly, the President must ensure that the list of national security interests is as narrow as possible, and clearly defined. This is a highly invasive piece of legislation which exposes merging parties to an additional form of scrutiny, significant potential delays and additional costs, and a highly unpredictable outcome. As things currently stand, it is impossible to determine which acquisitions will trigger a notification to the Committee. The list should use existing definitions of activities contained in legislation or refer to holders of existing licences in terms of that legislation: for example, in the defence industry, it could refer to the Firearms Control Act and the Private Security Industry Regulatory Act, or in the telecommunications and broadcasting industry, the ICASA Act, the Broadcasting Act and the Electronic Communications Act. It would be much better if the list referred to the holder of a "broadcasting licence" rather than, for example, "the media industry". Merging parties will otherwise be unable to determine whether or not their transactions fall within the scope of this new regulation, and protracted and costly litigation is likely to result. If the list is too broad, the Committee may be flooded with notifications which will jeopardise its ability to perform its functions effectively.
Thirdly, the President must ensure that the regulations he issues concerning notifications to the Committee and the relevant timeframes actually facilitate swift, efficient and cost-effective reviews. One hopes that he will publish draft regulations for comment by transaction specialists and their legal advisers, prior to issuing them. Ideally, there should be a short-form procedure in terms of which merging parties can simply furnish the Committee with a copy of the merger notification which they have lodged with the Competition Commission and a short statement on whether the foreign acquiring firm is a firm controlled by any foreign government, and why their proposed transaction will not have any adverse effect on any national security interest. Only transactions that actually raise any potential national security concerns should be subjected to onerous additional filing requirements, and only these transactions should be delayed for the maximum period specified in the Act. In many cases, it should be possible for the Committee to certify within a relatively short space of time that it does not intend to undertake a detailed review.
Lastly, the President should avoid agreeing to extend the maximum period specified in s18A unless there are very good reasons for doing so. Cross-border merger transactions frequently feature complex financing arrangements, including exchange rate hedging. Undue delays in obtaining clearances can result in unforeseen costs and may spook shareholders. This can result in the collapse of transactions, even if they are ultimately cleared.
The date on which the Amendment Act will come into effect has yet to be proclaimed in the gazette. However, any firms considering a merger in the near future, which may require notification in terms of these new provisions, should carefully consider the potential impact on their transaction and intended timetable, and plan accordingly.
Heather Irvine is a Partner with Falcon & Hume.
This article first appeared in DealMakers' sister publication Without Prejudice
DealMakers is SA's M&A publication.
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