Burger King Merger: Expanding the Public Interest Horizon
Author: Sapna Kataria
4th year student at School of Law, CHRIST (Deemed to be University)
While the Competition Act, 1988 of South Africa (“the Act”), has allowed for mergers to be evaluated and forbidden solely on the basis of ‘lack of greater spread of ownership’ since July 2019, the Burger King merger is the first to be prohibited on the ground of public interest.
Grand Parade Investments (“GPI”) is an investment company that primarily indulges in the gaming and food sector. On 18th February 2021, it entered into talks to sell its 95.36 % stake in Burger King, South Africa (“BKSA”) and Grand Food Meat Plant (Pty) Ltd. (“Grand Foods”) to Emerging Capital Partners (“ECP”), a private equity fund. The move was made in an attempt to close the gap between the holding company's market valuation and its underlying investments' intrinsic net asset value. Due to the impact of COVID-19, the parties had to renegotiate the value of the target companies and the price of the target companies dropped from 697 million Rand (“R”) to R616 million.
GPI issued a Circular to its shareholders proposing the sale of its stakes in BKSA and Grand Foods before the value of the company drops further. The same was duly approved and passed by 99% of GPI’s shareholders in the general meeting conducted on 15th April 2021. However, the disposal of shares was subject to the approval of the Competition Commission of South Africa (“CCSA”).
The proposal submitted by GPI and ECP to the CCSA was elaborate and focused on promoting public welfare by providing job opportunities and increasing the number of outlets in the country. The parties had proffered that the acquiring firm would procure an investment of more than R500 million in aggregate expenditure by the end of 2026 and would utilize the same towards the establishment of at least 150 new Burger King stores in South Africa. They also submitted that the merged entity would increase the number of permanent Historically Disadvantaged Persons (“HDPs”) employees to more than 1,250 and would increase the total value of payroll and employee benefits in respect of all employees employed by the merged entity by no less than R120 million. In addition, it proposed that the merged entity will increase its procurement of products and/or services from Broad-based Black Economic Empowerment (“B-BBEE”) accredited suppliers in South Africa during the twelve months preceding the merger. They submitted that within 24 months of the implementation date, the merged entity would allocate an effective interest of 5% of the shares in the merged entity for an appropriate B-BBEE ownership structure. Finally, GPI emphasized on how the sale of BKSA and Grand Foods would result in foreign direct investment into South Africa and payment of up to R498 million to GPI, which would help GPI to pay its debt and resume paying dividends to its shareholders.
II. Decision by CCSA
Under Section 14A of the Act, the CCSA is required to provide its recommendation on a proposed merger to the Competition Tribunal. In furtherance of Section 14A, the CCSA issued a press release stating that it has prohibited the acquisition of BKSA and Grand Foods by ECP. This statement came as a bolt from the blue to the parties since the CCSA found that the merger was unlikely to result in a substantial prevention or lessening of competition in any relevant markets.
The CCSA denied the merger on the ground that it would result in a significant reduction in the shareholding of HDPs in the target firm, from 68% to 0%. Additionally, it remarked that the merger is rejected under Section 12A(3)(c). Section 12A(3)(c) states:
“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.”
Nevertheless, there is a ray of hope for GPI and ECP as the rejection by CCSA is not final because as per Section 16(2), only the Competition Tribunal has the power to approve or object to a large merger.
III. Analysis of the Decision
Under Section 12A of the Act, the CCSA must consider public interest factors while assessing proposed mergers. Hence, denial of the merger on the grounds of public interest is not new to South Africa, however, rejection of a merger on the basis of ‘greater spread of ownership’ is a new addition to this category. An example of the application of the public interest factor is the merger between PepsiCo and Pioneer, wherein the merger was approved by the CCSA only after the parties agreed to implement a B-BBEE ownership plan.
However, the question that still persists is whether the CCSA is right in denying the merger as the role of CCSA and the Competition Tribunal is to promote economic growth and efficient functioning of the economy. GPI’s motive to sell its shares was to release itself from a huge debt. However, denial of this merger would lead to a continued loss for GPI.
The Competition Tribunal in the case of Shell South Africa (Pty) Ltd. and Tepco Petroleum (Pty) Ltd. noted that the Act does not provide any guidelines or yardstick to balance competition and public interest assessments. Hence, the ground of ‘public interest’ can be extremely vague where a public interest component can either be used to sanitize an anticompetitive merger or impugn a merger that is not anticompetitive, thus making it difficult to be analyzed.
IV. Analyzing the usage of ‘public interest’ component in India
The laws and precedents in India do not pay importance to the ‘public interest’ component while approving or rejecting mergers, in comparison to South Africa. Every proposed merger in India must comply with Section 6 of the Competition Act, 2002, and not cause an appreciable adverse effect on competition in the market.
The said Section 6 is read with Section 20(4) of the Competition Act, 2002, which enumerates various factors that have to be considered by the Competition Commission of India (“CCI”) before approving the merger. Even though the role of CCI is to safeguard consumers’ interests, the Competition Act, 2002 does not include a component for public interest. In fact, under Section 20(4), one of the key factors that CCI looks into is whether the merger would save a failing business. In addition, Section 18 states that CCI should ensure freedom of trade. Hence, it can be seen that the law weighs saving a business over public interest. Nonetheless, Section 369 of the Companies Act, 1956, which resembles Section 233(5) of Companies Act, 2013, has been used by the courts to reject schemes of arrangements on the ground of public interest.
Until 2018, the courts generally relied on the case of M/s Miheer H. Mafatlal v. Mafatlal Industries Ltd., where the Supreme Court held that as long as there are no objections to the scheme, no fault or illegality has been brought out, and relevant documents have been placed before concerned parties at the appropriate time, courts cannot intervene with schemes of arrangement, as proposed by the companies. This is because those schemes are based on the wishes of concerned shareholders, creditors, experts, professionals, and authorized authorities, following a thorough examination of the companies’ records and affairs. This rule was extensively relied upon by the courts even if the schemes of arrangement only benefited the promoter group and not the public at large.
However, in 2018, in the matter of Wiki Kids Limited v. Regional Director & Ors., the National Company Law Appellate Tribunal rejected a scheme of arrangement on the ground that it was not in public interest. The Court highlighted that the National Company Law Tribunal (“NCLT”) is obligated to protect public interest by refusing a scheme of arrangement that only benefits a limited section of the group, such as promoters, and not the public at large. Following this judgment, the NCLT in a later case, extended the scope of ‘public interest’ by refusing sanction to a merger on the ground that the proposed merger would help the parties evade tax.
Although the CCSA analyzed the merger under the statute, the outcome of the decision created certain uncertainties. The negative effect of this prohibition was evident when GPI's stock dropped by 17% the day after the rejection was announced. In future, this prohibition might also create adverse effects on merger activities in South Africa, especially for foreign direct investment. Previously, the Competition Tribunal has held on various occasions that when competition authorities claim public interest as a basis for intervention, extreme caution should be exercised, particularly when competition is unaffected and HDP investors, whose interests are directly affected, reject the Commission's interventions. Hence, it is safe to presume that the proposed merger might be approved by the Competition Tribunal.
To make a comparison, South Africa focuses more on public interest in a merger analysis, while India barely considers it. In India, courts are required to consider and promote public interest by utilizing the provisions of the Companies Act, 2013. But there are no explicit sections that have been added to the Competition Act, 2002 to deny a merger purely on the ground of public interest. In a diverse country like India, there is a necessity for the laws and the courts to promote a 'greater spread of ownership'. The one way in which this can be ensured is by adding a sub-clause – “public interest” to Section 20 (4) of the Competition Act, 2002 wherein the CCI and the courts will be obliged to consider the public interest unequivocally.
There is a need in both the countries to adopt a multifaceted strategy to create a balance between the interests of the stakeholders seeking a return on their investments and public interest benefits.