The national security veto included in the Competition Amendment Bill, tabled before Parliament on Tuesday, had been “tightly codified” so as not to deter potential investors, but rather offer certainty, Economic Development Minister Ebrahim Patel said during a briefing in Cape Town.
Currently, South Africa has no legal provisions for considering security issues in a merger involving a foreign acquiring firm.
However, in a move that has raised some eyebrows domestically, the Bill includes a section enabling the President to appoint a committee of Ministers to determine whether a merger by a foreign firm can be justified on national security grounds.
Patel said the provision for a national security veto was in line with the Constitutional responsibility of the executive for national security, as outlined in Section 198 of the Constitution.
A national security committee would be convened only in those instances where an acquiring firm was located in a sector, or region, listed for a national security review. The President would publish the list of affected sectors in the Government Gazette.
The committee would be empowered to approve the merger unconditionally, impose conditions on the transaction, or prohibit the merger on national security grounds.
However, the committee would have no say over competition and public-interest considerations, which would be adjudicated separately, and independently, by the competition authorities.
Possible triggers for a national security review included:
- Any deal involving the use or transfer of sensitive technology or know-how outside of South Africa.
- Deals impacting the security of infrastructure essential to the health, safety, security or the economic well-being of citizens and the effective functioning of government.
- The supply of important goods or services to citizens, or the supply of goods or services to government.
- Transactions where South Africa’s international interests, including foreign relationships, could be affected.
- Where the economic and social stability of South Africa could be affected.
- Instances where a merger could enable foreign surveillance or espionage, or hinder current or future intelligence or law enforcement operations.
- And instances where an acquisition could enable or facilitate the activities of illicit actors, such as terrorists or organised crime.
The committee, which had 60 days to determine if a merger was justifiable on national security grounds, could also consider other relevant factors, including whether a foreign government might control the acquiring firm.
Patel said international investors were unlikely to be put off by the provision, as national security reviews were common internationally, including in the US, the European Union, Canada, China and Australia.
In some of those countries the issue of national security had been more broadly framed to include everything from impacts on cultural heritage or land ownership. “So by the standards of what investors have seen elsewhere in the world, they will see this as a very tightly codified set of issues from which they can draw a very direct link to national security.”
However, in a note on the Bill, Herbert Smith Freehills partner Jean Meijer described the list of national security interests contemplated as “extremely broad” and going “beyond traditional public interest factors that have been the focus of legitimate Ministerial intervention to date”.
Meijer argued that the committee's broad discretion, together with the potentially far-reaching consequences of its decisions, could create additional risk for foreign entities considering investment into South Africa.
“In South Africa today, where the fight against corruption is a priority, it is of concern that a politically appointed Committee will wield this power over foreign investment. This is particularly so in circumstances where there is no clear guidance as to what standard the committee will have to apply in making its decision to block or impose conditions on foreign investment.”
She added that, although public-interest issues had played a role in merger control in South Africa for years, there were numerous checks and balances in place. “There are no similar checks and balances imposed in relation to the power of the committee, making the potential for corruption far greater.”
However, Patel argued that the risk for foreign investors was higher in the absence of legislation in place for sensitive sectors, as legislation could be imposed retrospectively. “So, when you have a clearly defined provision in your law, and foreign investors are entitled to come in to the country subject to that, they know that their investment is more secure.”
The Bill also stipulates that, once the committee makes its determination, the decision should be Gazetted for the public record. In addition, a report should be tabled for consideration by the National Assembly.
“So we have gone the route of transparency even in a difficult area such a [national security]. This is because we simply want to make the point that it is an important function in any democracy for the national executive to be responsible for national security, but, in a democracy, you also want to have a good balance between that imperative and transparency to ensure that decisions are taken in the national interest.”
Competition Tribunal chairperson Norman Manoim, who flanked Patel at the briefing, agreed that national security issues were better handled by a political body than by a competition adjudicator, who was not competent to assess whether a transaction posed a security threat.
“That is within the province of the national security authorities,” Manoim said, adding that the competition authorities could also not be asked to assess whether a particular country was hostile to the interests of South Africa.
“So I think the division of labour, as is designated in the Bill, and what is left with the competition authorities, is appropriate to the different functions that they serve.”
Patel said the Bill had been widely consulted with organised labour and business, including through several meetings at the National Economic Development and Labour Council.
As a result of interactions with business, government agreed to greater flexibility to enable firms to work with each other when there is demonstrated public benefit to doing so, such as increased production and employment.
The Bill also proposes new grounds for the Minister to designate an industry for purposes of possible exemption from parts of the Act if it promotes economic development, growth or transformation in an industry. In addition, the Minister can publish regulations to fast-track exemptions for certain types of collaboration.
The Bill also provides for the Competition Commission to provide firms with non-binding advisory opinions on collaborative activities.
Patel described the exemptions, along with advisory opinion and the guidelines that the commission would be expected to produce on collaboration, as a “flexibility package” that was absent in the current legislation, which was introduced in 1998.
“This is the outcome of an important conversation that we have had with the business community, where we have said to them that we are going to place economic inclusion at the centre of what we do. They raised, in their representations, the concerns large firms have with the ability to carry out their core business in conditions that would allow them to grow.
“The essential bargain that emerged from all of that is that business sees the importance of economic inclusion and the State taking steps to advance that. [In return], the State recognises that the South African economy’s future growth trajectory requires both the energy and enterprise of new entrants, black South African and small businesses, as well as the dynamism of existing firms.”
Patel anticipated that the Parliamentary process for considering the legislation would be concluded before the end of 2018.