Why Is Burger King Proving a Hard Sell?

Introduction

When Emerging Capital Partners (“ECP”) decided to acquire Burger King from Grand Parade Investments (“GPI”), it set up a battle of royal proportions with the Competition Commission (the “Commission”). The deal suffered a blow when the Commission prohibited the transaction on the grounds that it was contrary to the public interest, because the deal was set to reduce Historically Disadvantaged Persons (“HDP”) ownership in Burger King from 68% to zero. This brief explores the legal basis of the Commission’s decision and argues that it was borne of an incorrect interpretation of the Competition Act.

Merger Control In The South African Context

In terms of the Competition Act, a merger occurs whenever one firm acquires control over another, or a part thereof.[1] This legal definition is designed to cover what are colloquially known as ‘acquisitions,’ so that our competition authorities have a broad view of South African corporate activity and its effect on our economy. With a few exceptions, a merger becomes worthy of the Commission’s attention only when the firms involved are of a particular size.[2] All such mergers must be notified to the Commission for investigation and approved, in terms of the Act, before the transaction can be implemented.[3] So-called “intermediate mergers” – like the one between ECP and Burger King – are decided upon by the Commission, with an option for the merging parties to apply for reconsideration to the Competition Tribunal (the “Tribunal”).

Once notified to the Commission, the transaction is analysed for potentially negative effects on competition. Here the Commission will consider whether the transaction will award the merged firm newfound market power, which it can use to exploit consumers or exclude competitors. It will also consider whether the structure of the market after the transaction will incentivise the firms remaining therein to co-ordinate their conduct in a manner that is harmful to competition. The Commission found nothing wrong with ECP’s proposed acquisition of Burger King on these grounds.

However, there is a second leg to merger analysis in South Africa that can count as a separate and sufficient ground to prohibit a merger, regardless of its benign effect on competition. Section 12A(1A) of the Competition Act provides that our competition authorities “must also determine whether the merger can or cannot be justified on substantial public interest grounds.” As it pertains to the matter at hand, the spirit of the public interest leg begins in the Competition Act’s preamble, where the legislature recognises that –

“apartheid and other discriminatory laws and practices of the past resulted in excessive concentrations of ownership and control within the national economy… [And] that the economy must be open to greater ownership by a greater number of South Africans [in order to] regulate the transfer of economic ownership in keeping with the public interest.”

This recognition of the Competition Act’s historical context prompts a call to action in section 2(f), which proclaims one of the statute’s many purposes –

“The purpose of this Act is to promote and maintain competition in the Republic in order… to promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged persons.”

This statement of purpose is yet further distilled into an injunction to consider the public interest on the basis of a closed list of factors, whenever analysing a merger worth notifying to the Commission. Relevant to ECP’s proposed purchase of Burger King is section 12A(3)(e), which provides as follows –

“When determining whether a merger can or cannot be justified on public interest grounds, the Competition Commission or the Competition Tribunal must consider the effect that the merger will have on… the 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.”

Here we see a clear progression from the Competition Act’s historical context, to its purpose and ultimately to an instruction to our competition authorities to act accordingly in analysing particular mergers. Competition authorities are uniquely fit to receive this instruction, because mergers are natural mechanisms for market concentration and, thereby, create opportunities for the entrenchment or the undoing of racialised patterns of capital ownership.[5] It is this institutional responsibility, guided by the legal framework above, that the Commission argues left it no option but to prohibit ECP from purchasing Burger King.

The question is whether this decision was the only legal outcome available on the facts at hand. I think not, on the basis of two observations about the meaning of section 12A(3)(e) in the context of the Competition Act.

First: The Part Must Serve The Whole

What is striking about the Competition Act’s statements of context and purpose is that they are concerned with racially skewed ownership patterns in the economy as a whole. Section 12A(3)(e) differs in that it distils the Competition Act’s far-reaching vision for an equitable distribution of capital into guidance for analysing particular mergers. It does this simply because the broad goals of South African merger control are carried out through the analysis of individual mergers – not because section 12A(3)(e) serves to parochially defend particular merger-related reductions in HDP-held capital. Rather, section 12A(3)(e) should be read to best serve the Competition Act’s goal of undoing racialised market concentration in the economy as a whole.

Interpreting section 12A(3)(e) in this way obliges our competition authorities to seriously consider how a decision to prohibit the sale of Burger King to ECP – indeed any similar deal – will affect the economics of capital markets that are plagued with racialised inequality. The issue here is that if the Commission takes a hard-line view of the HDP level of ownership not being allowed to decrease substantially in an acquisition, then the obvious problem for the HDP shareholders who want to exit, is that their exit is dependent on finding an acquiror with an equivalent HDP status. This may well narrow the field of potential acquirors, with a very real danger that the offered price may be lower than one would expect in a market without these limitations. An equivalent HDP-owned acquiror may even offer a lower price, in the knowledge that the existing HDP shareholders have little option if there are no other HDP-offerors that are interested.

The motivation for the content of section 12A(3)(e) is fully understood, but the problem is that it could well have a very perverse effect in certain situations, which can work not only to the detriment of existing HDP shareholders, but on the HDP investor base in the market as a whole. The profit motive is, after all, the basic driver for investors, and this applies to HDP and non-HDP investors alike. If, however, HDP investors are now confronted with conditions of this nature, over which they have little or no control when they want to exit, one would expect them to become more cautious in future investment decisions, potentially leading to a greater reticence, which in turn leads to less HDP investment. Section 12(A)(3)(e) can, therefore, achieve exactly the opposite of what it is intended to do – unless the Commission becomes more discerning and takes far greater cognisance of market conditions in any particular sector, with a preparedness to exercise a wide discretion to suit the case before it.

Second: Section 12A(3)(e) Need Not Favour Prohibition

The above should not be taken to imply that the Competition Act is compatible with completely unencumbered markets for HDP-held capital. It is reasonable for the Commission to worry that successive deals which reduce HDP-held capital to zero in particular firms may, eventually, hollow out HDP ownership in general. However, the Competition Act provides a mechanism to approve these sorts of deals, subject to conditions designed to address tensions with the Act’s goals. Reading section 12A(3)(e) with this mechanism should call for a creative effort on the part of the Commission and the merging parties to craft a conditional approval of ECP’s proposed purchase of Burger King that is sensible and lawful. According to GPI’s latest SENS announcement, the following conditions were put forward:

1. By the end of 2026, the acquiring firms shall procure the investment of no less than R500 million in aggregate capital expenditure, which will be utilised towards the establishment of new Burger King stores in South Africa, so that they total at least 150.
2. By the end of 2026, the merged firm will increase the number of permanent employees employed by it in South Africa by no less than 1 250 HDPs and increase the total value of all payroll and employee benefits in respect of all employees employed by the merged entity by no less than R120 million.
3. By the end of 2026, subject to supply on reasonable commercial terms, the merged entity will increase its procurement of products and/or services from B-BBEE accredited suppliers in South Africa from approximately R665 million to an aggregate value of at least R930 million per year.
4. Within 24 months of the implementation date, the merged entity shall allocate an effective interest of 5% of the shares in the merged entity for appropriate B-BBEE ownership structure.”

The first three conditions are relevant since sections 12A(3)(a), (b) and (c) of Competition Act expressly ask the Commission to consider the merger’s effect on: a particular industrial sector or region, employment, and the economic participation of firms owned by HDPs in general, when assessing the impact a merger has on the public interest. Even if one concedes that section 12A(3)(e) holds a unique place in the context of the Competition Act, it would be incorrect to let it act as a trump over other considerations expressly implicated in the public interest analysis.[6]

Therefore, the merging parties may be successful yet if they can make a case before the Tribunal that gives it confidence that their broader public interest commitments will materialise, and that it is unreasonable or impracticable to ask them to offer more than 5% equity to meet the concerns raised by section 12A(3)(e).

Conclusion

A workable interpretation of section 12A(3)(e) is proposed here, rather than arguing against it in principle. This is because the Competition Act, read holistically, suggests that our competition authorities must eventually act to promote a greater spread of ownership to HDPs when analysing and approving mergers. A mix of important moral, institutional and economic reasons join to explain and justify this approach to merger control. Ownership – as a crucial gateway to economic participation – was historically racialised in South Africa, and the momentum of the market forces skewed by apartheid are felt today still. Our competition authorities are well placed to play an incremental part in addressing this injustice, because mergers present both risks to, and opportunities for, promoting HDP ownership. This is a task for which the Commission and Tribunal have been designed and entrusted – and they should carry it out with the necessary care.

Christopher Fisher
Legal Researcher
christopher@hsf.org.za

[1] The Competition Act No. 89 of 1998 (as amended) at section 12(1)(a).