Relationship triangle between M&A, BEE and Foreign Entities

15 April 2024 ,  Johnny DavisMark le Riche 454
The Merger & Acquisition (M&A) landscape in South Africa does not only consider competition within the South African market but also considers the impact M&A transactions may have on historically disadvantaged people as regulated by the Broad-Based Black Economic Empowerment Act 53 of 2003 (“BEE Act”). In this article, we look at the relationship triangle between M&A transactions, the requirements of the BEE Act, and its impact on foreign entities wishing to invest in South Africa through an M&A.

Major changes were implemented to the M&A landscape in 2019 by the Competition Amendment Act 18 of 2018 ("Amendment Act"). The Amendment Act included additional aspects for the Competition Commission to consider when evaluating M&A transactions, more specifically the following public-interest provisions as found in section 12A(3)(e) of the Competition Act 89 of 1998:

“[t]he promotion of a greater spread of ownership, in particular, to increase the levels of ownership by historically disadvantaged persons and workers in firms in the market”

This has had a significant impact on the M&A landscape as authorities must now consider public interest considerations when evaluating M&As and encourage a wider ownership distribution to raise the proportion of ownership held by historically disadvantaged persons (“HDPs”).

Since the Amendment Act took effect, the Competition Commission has paid extra attention to the promotion of HDP and/or employee ownership in M&A deals. To date, the most notable example of this stricter approach can be seen in the Burger King M&A. A private equity firm founded in the US, wished to acquire Burger King from Grand Parade Investments Limited, in an M&A transaction that would see the subsidiary entities of the ‘target firm’ sell the shares held in Burger King South Africa (RF) (Pty) Ltd and Grand Foods Meat Plant (Pty) Ltd to the US private equity firm.

What unfolded was the first of its kind, with the Competition Commission rejecting the proposed M&A transaction not due to issues raised regarding competition in the market but due to there being a considerable decline in HDP shares, leaving no ownership held by any HDPs. 

The Competition Commission continues to consider the BEE impact of every M&A transaction by focusing on whether the M&A is consistent with the underlying transformation objectives of the BEE Act. It is also clear that the Competition Commission is more committed to assessing not only fair competition in the market but the public interest as a whole and the impact that this will have on HDPs. 

The Competition Commission, when considering the reasonableness of an M&A, places strict requirements on ‘acquiring firms’ such as foreign entities, and may fail to find an M&A justifiable should foreign entities not meet this positive obligation of a “greater spread of ownership” post the M&A.
The above highlights how BEE and HDP considerations can impact foreign entities, who in most instances, do not have BEE or HDP involvement and would need to address this when considering M&A transactions in South Africa. Local knowledge and an understanding of both BEE and Competition Commission views on public interest issues to be addressed in M&A transactions is therefore vital.

For guidance or assistance with your transaction feel free to make contact with our M&A Team who can help establish the correct approach for your transaction. 
Visit our M&A Team page

Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s). 
Related Sectors: Mergers & Acquisitions