Advisers in the mergers and acquisitions (“M&A”) sphere are often inclined to treat Broad-Based Black Economic Empowerment (“B-BBEE”) as a compliance line item, an issue to be verified during due diligence, reflected in a warranty schedule, and otherwise left at the periphery of a transaction.
The Competition Tribunal’s decision in ECP Africa Fund IV LLC and Others v Competition Commission of South Africa (IM053Aug21) [2021] ZACT 99 (29 September 2021) serves as a useful reference. The Tribunal, established under section 26 of the Competition Act 89 of 1998 (“Competition Act”), is an independent adjudicative body that determines matters referred to it by the Competition Commission (“Commission”), including large mergers and prohibited practices.
The ECP Africa Fund decision demonstrates that where a target company’s empowerment credentials are integral to its ownership structure, B-BBEE is far more than a compliance consideration. It can constitute a substantive merger approval issue capable of delaying, reshaping, or even preventing a transaction.
The transaction
ECP Africa Fund IV LLC and ECP Africa Fund IV A LLC (collectively, “ECP Africa Funds”) sought to acquire 95.78% of Burger King South Africa and 100% of Grand Foods Meat Plant from Grand Parade Investments (“GPI”), a JSE-listed company.
At the time of the proposed transaction, GPI had 68.56% historically disadvantaged person (“HDP”) ownership, of which 22.87% was held by black women. By contrast, ECP Africa Funds had no HDP or worker ownership. The transaction would therefore eliminate GPI’s ownership interest in Burger King and Grand Foods.
From a competition-law perspective, the Commission found no horizontal overlap between the merging parties. ECP Africa Funds operated in the financial services sector, while Burger King and Grand Foods Meat Plant operated in the quick-service restaurant industry. The Commission further found that Burger King held a relatively small market share and that the merger was unlikely to substantially prevent or lessen competition.
Despite these findings, the Commission identified public-interest concerns relating to employment and the promotion of a greater spread of ownership, as contemplated in section 12A(3)(e) of the Competition Act.
The public-interest concerns
The Commission noted that, following implementation of the merger, neither ECP Africa Funds nor Burger King and Grand Foods Meat Plant would be owned, in whole or in part, by HDPs and workers.
The Department of Trade, Industry and Competition (“DTIC”) similarly expressed concern that the transaction would negatively affect Burger King’s B-BBEE status due to the loss of GPI’s shareholding. The Southern African Clothing and Textile Workers’ Union (“Union”), representing employees at Grand Foods Meat Plant, also sought clarity regarding proposed worker ownership arrangements.
The Commission took the view that section 12(1A) of the Competition Act required consideration of whether the merger could be justified on substantial public-interest grounds, irrespective of the outcome of the competition assessment.
In response, the merging parties proposed a number of commitments, including:
- Capital expenditure of R500 million;
- Expansion of Burger King’s store footprint; and
- The creation of 1,250 jobs for historically disadvantaged individuals.
The Commission did not regard these commitments as sufficient to address the ownership-related concerns arising from the transaction and consequently prohibited the merger.
The Tribunal’s decision
The merging parties subsequently applied to the Competition Tribunal for reconsideration and proposed revised conditions, including:
- The implementation by Burger King of the Enterprise and Supplier Development element of its B-BBEE scorecard;
- An Employee Share Ownership Programme (“ESOP”) providing employees with an effective 5% interest in Burger King; and
- The disposal of the Grand Foods Meat Plant to one or more HDP purchasers.
The Union raised further concerns regarding the impact of the proposed disposal on existing supply arrangements and employee security. In response, the merging parties undertook, subject to Burger King’s Global Standards, to conclude a supply agreement under which Burger King would continue procuring products from the meat plant.
The Tribunal ultimately approved the merger, subject to the enhanced conditions agreed by the parties and further refined during the reconsideration proceedings.
Practical takeaways for dealmakers
The ECP Africa Fund decision provides several important lessons for participants in South African M&A transactions.
Consider the impact on ownership
Due diligence should assess not only the target’s current B-BBEE position but also how the proposed transaction will affect HDP and worker ownership following implementation.
Identify public-interest issues early
The transaction required engagement with the Commission, the DTIC and organised labour on issues relating to ownership, employment and remedies. These considerations became central to the approval process and ultimately informed the merger conditions.
Ensure proposed remedies address the actual concern
The Commission did not view the parties’ initial commitments regarding expansion and job creation as responsive to the reduction in HDP ownership. Significantly, those commitments reflected plans Burger King had already contemplated. The revised conditions were more effective because they directly addressed ownership and employee participation.
Assess the commercial impact of potential conditions
The approved conditions included an ESOP, the sale of the Grand Foods Meat Plant to HDP purchasers and arrangements governing ongoing supply relationships. These measures were not ancillary obligations; they became part of the transaction’s commercial structure.
A merger that raises no competition concerns may nevertheless face significant public-interest scrutiny. In ECP Africa Fund, the Commission concluded that the transaction was unlikely to substantially prevent or lessen competition, yet it was initially prohibited on public-interest grounds. Approval was obtained only after the parties proposed conditions that adequately addressed those concerns.
The ECP Africa Fund decision underscores the importance of considering HDP and worker ownership at the earliest stages of transaction planning. Where a merger may materially alter an existing empowerment profile, advisers should assess the likely public-interest implications and consider whether ownership-related remedies may be required to secure approval.
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