The Importance of Clean Teams in Mergers and Acquisitions

The interrogation of a target business in a merger typically requires the merging parties to conduct a thorough due diligence investigation.

Due Diligence and Its Purpose

At the conclusion of a due diligence investigation, the acquirer should, at a minimum, have sufficient insight to assess whether the merger ought to proceed, notwithstanding any identified risks.

Critically, due diligence requires the disclosure of detailed and often highly sensitive information about the target business. In mergers involving competing parties, a tension arises between the acquirer's need for sensitive information to support its decision and the potential competition law concerns arising from such disclosure under the Competition Act, 1998 (Act No. 89).

Competition Law Considerations

At its core, South African competition law requires that merging parties remain independent economic actors until a transaction has been approved and implemented.

The Guidelines on the Exchange of Competitively Sensitive Information between Competitors, published by the Competition Commission on 24 February 2023 (Guidelines) define competitively sensitive information as “Information that is important to rivalry between competing firms and likely to have an appreciable impact on one or more of the parameters of competition”.

The difficulty here is that due diligence, by its nature, often necessitates the disclosure of precisely the type of information that competitors would not ordinarily share on the market.

Such information may include, inter alia, pricing models and strategies, customer-specific data, cost structures/margins and general business plans.

Risks of Information Exchange

Importantly the Guidelines state that an “information exchange may also allow firms to achieve collusive or coordinated outcomes without concluding explicit agreements to co-operate.”

Quite simply, if the sharing of information in a due diligence allows the acquirer to alter its method of competing by rendering portions of the relevant market transparent, such conduct could be viewed as anti-competitive.

Agreements which produce restrictive horizontal practices are dealt with and prohibited under section 4(1) of the Competition Act.

Under this section, agreements and arrangements can be considered anti-competitive if they include, inter alia, evidence of price fixing, market allocation or collusive tendering.

While due diligence investigations will not typically involve explicit agreements of this nature, the provision underscores the strict approach adopted to coordination between competitors.

The sentiment captured above is further echoed in the Guidelines which state that “the exchange of Competitively Sensitive Information may also be Anti-competitive by increasing the likelihood of, establishing, or facilitating collusion or coordination among competitors.”

The Role of Clean Teams

The need for restrictive protections in a due diligence investigation is therefore required to maintain the independence of competitors in a merger, to prevent collusive practices, and further preserve the competitive edge of the target should the merger be abandoned.

To deal with these issues, modern M&A transactions have produced the concept of the so-called “clean team”.

Clean teams comprise a select and ringfenced set of individuals who are permitted to access sensitive information that cannot be disclosed to the broader deal team.

The clean team performs a balancing act by considering and analysing the sensitive information while ensuring that the acquirer does not gain insights that could produce a competitive advantage.

Who may be considered designated “clean” strongly depends on their involvement in the general commercial decision-making of the acquirer.

Typically, a clean team will comprise external advisors such as attorneys, accountants and economists – those specific individuals removed from the management and directional planning of the acquirer.

An Essential Feature in Modern Deal-Making

When properly implemented and vetted, clean teams enable merging parties to complete due diligence investigations with confidence while preserving the integrity of the competitive process.

In this sense, clean teams are slowly becoming an indispensable feature in South African deal-making, particularly in mergers involving a horizontal competitive element.