The Importance of Clean Teams in Mergers and Acquisitions-Cox Yeats

The interrogation of a target business in a merger typically requires the merging parties to

conduct a thorough due diligence investigation.

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).

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.

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 co-

ordination 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 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.

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.

The Importance of Clean Teams in Mergers and Acquisitions-Cox Yeats