DealMakers - Q1 2019
Widespread amendments to SA’s Competition Law Regime
Lerisha Naidu and Angelo Tzarevski
An extensive set of competition law amendments has been in the making since December 2017 when the Competition Amendment Bill (Bill) was initially gazetted for public comment. After robust public participation and commentary, the key features of the Bill have predominantly made their way into the Competition Amendment Act (Act), which, on 13 February 2019, received the requisite presidential assent. All that remains is a proclamation of a commencement date from which the Amendment Act will find application.
It has always been the case in South Africa that the competition authority's remit transcends pure competition issues into the realm of the public interest. It is in this context that the Amendment Act's overarching objective is to ensure the achievement of economic transformation. This it strives to do by addressing high levels of concentration, enhancing small business development and tackling the "racially-skewed" spread of ownership through merger control, the prosecution of abuses of dominance as well as market enquiries. The amendments will essentially empower the authority to "de-concentrate" what it considers to be otherwise highly concentrated markets.
A study conducted by the Competition Commission (Commission), which underpinned the formulation of the Bill, found that the following industries/sectors in South Africa were considered by it to be highly concentrated, based on market share estimates: ICT (55.2% market share), energy (60.8%), financial services (68.8%), food and agro-processing (60.5%), infrastructure and construction (52.6%), intermediate industrial products (63.3%), mining (62%), pharmaceuticals (59.6%) and transport (67.4%).
It is in this context that the widespread amendments to the Competition Act should be contextualised and understood.
Abuse of Dominance Provisions
The Act appears to render the prosecution of abuse cases easier for the Commission. In particular, it introduces a reverse onus in relation to excessive pricing prosecutions, requiring the allegedly dominant firm to refute the prima facie case against it by showing that prices charged are reasonable. The Act also prohibits a dominant firm from requiring an unfair trading condition or imposing an unfair price when the supplier is a small and medium-sized business, or a firm controlled by historically disadvantaged persons operating in a designated sector. The onus is placed on the dominant firm to prove that the prices or trading conditions are not unfair. The Act also sets the cost benchmarks in relation to predatory pricing provisions and also formally introduces the concept of margin squeeze into the list of specific abuses of dominance. Further, the Act specifically prohibits a dominant firm from price discrimination where it will have a net anti-competitive effect and impede the ability of small and medium businesses controlled by historically disadvantaged persons to participate effectively in a market. This too contemplates a reverse onus of proof.
An increased number of prosecutions of abuse cases is expected, given the reversal of the onus and the resultant dilution of the requirements that the Commission may satisfy in bringing a case. The dominance provisions are also a conduit to achieving de-concentration and the spotlight will be on businesses operating in highly concentrated industries identified.
Foreign Investment Interventions
The Act envisages the constitution of a committee that will be responsible for considering whether a transaction involving a foreign acquiring firm could have adverse effects on South Africa's national security.
The national security interests will be identified and published by the President after taking into account factors such as the use or transfer of sensitive technology/know-how outside of South Africa, and the security of infrastructure (including processes, systems, facilities, technologies, assets and services) essential to the health, safety, security or economic well-being of South African citizens.
Once the list is published and the committee has been constituted, a foreign acquiring firm (in the event of a compulsorily notifiable transaction) will be required to notify the transaction to both the Commission as well as the foreign investment review committee. Both must approve (with or without conditions) the transaction in order for it to be implemented in South Africa. The committee has the power to approve the transaction (conditionally or unconditionally) or prohibit its implementation.
Without the committee's decision, the competition authorities are hamstrung in furnishing a decision. However, where the committee makes a decision that prohibits the transaction, the necessity for a decision from the competition authorities will be obsolete as they will be precluded from approving a transaction that has already been prohibited.
Notably, the Act does not contemplate a right of appeal where the committee has prohibited a transaction or approved it subject to unfavourable conditions. It appears the only avenue for aggrieved parties would be a review on administrative law grounds in the High Court. The adjudicative arms of the competition authorities (being the Competition Tribunal and Competition Appeal Court) are not possessed of the jurisdiction to entertain appeals of the committee's decisions.
Under the current merger control dispensation, the competition authorities have a public interest mandate. This mandate has been extended by the Act to include an additional public interest factor, namely 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".
One of the existing public interest factors has also been tweaked to enable the authorities to take into account the "ability of small and medium businesses or firms controlled by historically disadvantaged persons to effectively enter into, participate in or expand" within a market.
Separately, when determining whether a proposed transaction is to be approved (conditionally or otherwise) or prohibited, the authorities must also consider the extent of ownership by a party to a merger in other firms in a related market; the extent to which a party to the merger is related to other firms in related markets, including through common members or directors; and any other mergers engaged in by a party to a merger for a period to be stipulated by the Commission.
The current confidentiality regime enables parties to make a claim for confidentiality, which the Commission is bound by until such time as it is struck down or varied by the Tribunal. In terms of the Act, the Commission may determine whether information submitted to it is indeed confidential. If it agrees that it is confidential, it may nevertheless make any appropriate arrangement concerning access to the information. If the Commission disagrees that the information is confidential, the party claiming confidentiality will need to assert its claim before the Competition Tribunal within a prescribed period. If the Commission disagrees that the information is confidential, it will invite the views of the party that has claimed confidentiality. The Commission will consider the parties' submissions but will not be bound by them and will then make its own decision on confidentiality.
In the pre-amendment dispensation, there are “yellow card” offences, which do not attract a penalty on a first-time offence and “red card” offences, which do. In terms of the new Act, all first-time offences attract a penalty of up to 10% of a respondent's annual turnover. In relation to repeat offences, the Act introduces an administrative penalty of up to 25%.
When determining an appropriate penalty, the impact of a contravention on small and medium business or businesses owned by previously disadvantaged groups will be considered in mitigation or aggravation.
In terms of the Act, an administrative penalty may be increased to include turnover generated by an offending firm's parent company if the parent company was aware or should reasonably have known that its subsidiary was engaging in the anti-competitive conduct. Controlling companies can also be held jointly and severally liable for the payment of an administrative penalty.
The proposed market inquiry provisions will be the key conduit used by the Competition Commission to analyse and address perceived structural concerns in a market. Notably, competition authorities will now be able to conduct a market inquiry if any feature or combination of features in a market adversely affects competition in that market, even if that impact is not substantial.
Following an inquiry, the Commission may take any action to remedy, mitigate or prevent an alleged adverse effect on competition. If the Commission takes the view that a divestiture must be ordered, it will be required to obtain an order from the Competition Tribunal, which must also be confirmed by the Competition Appeal Court.
Firms in concentrated markets may be drawn into inquiries and will need to actively participate in them, given the extreme remedies that may be imposed. It is also envisaged that more firms will be contesting recommendations made by the Commission for divestiture before the Competition Tribunal and Appeal Court.
It is not yet clear when the Amendment Act will fully come into force. In anticipation of its implementation, it is prudent for companies to begin engaging with the implications of its provisions.
Naidu is a Partner and Tzarevski a Senior Associate, Competition & Antitrust Practice, Baker McKenzie Johannesburg.