WHEN A TRANSACTION MUST BE NOTIFIED TO THE COMPETITION COMMISSION FOR APPROVAL AS A MERGER

WHEN A TRANSACTION MUST BE NOTIFIED TO THE COMPETITION COMMISSION FOR APPROVAL AS A MERGER

The competition authorities have been established in terms of the Competition Act 89 of 1998 (as amended) (the “Competition Act“) to promote and maintain competition in South Africa. This includes the role of assessing proposed mergers for the effects that such mergers may have on competition in any relevant markets. In addition, the competition authorities have been assigned a role in assessing the effect that a particular merger may have on relevant public interest considerations.

Notifiable mergers

All significant mergers must therefore be notified to and assessed by the authorities before they may be implemented. However, the responsibility for ensuring that the competition authorities are aware of all mergers that must be assessed lies with the parties to the merger themselves and a failure to notify the authorities of a notifiable merger may result in the parties being levied with a fine equalling up to 10% of annual turnover of the merging parties and other remedies that may be imposed include retrospective unbundling of a merger transaction.  There are of course other consequences, such as reputational damage that may also have a massive economic impact on the parties involved. It is therefore imperative that the notifiability of a merger to the competition authorities is considered in respect of all transactions and that all notifiable mergers are in fact notified to the competition authorities in the appropriate form.

A transaction constitutes a notifiable merger when all of the below criteria are met:

  • the transaction falls within the jurisdiction of the competition authorities;
  • the transaction meets the definition of a merger as defined in the Competition Act; and
  • the transaction meets the financial thresholds as prescribed by the Minister of Economic Development from time to time.

Jurisdiction

The Competition Act applies (subject to certain exceptions) to all activity within, or having an effect within South Africa. This requirement will be met in respect not only of a transaction that occurs between South African entities, but in any case, where the transaction will have any effect in South Africa.

“Merger” definition

The Competition Act defines a merger as occurring where “one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm“.

In this regard, we note that the concept of “control” is broad for purposes of establishing a merger and does not only extend to cases of over 50% shareholding / voting rights / the right to appoint or veto the appointment of over 50% of the directors of an entity but extends to minority rights that grant a party the right to materially influence the policy of a firm in a manner comparable to a person who exercises majority control (this may include, for example, a minority right to veto material strategic decisions).

It is therefore not always a straightforward matter to determine whether control is established and it is best to seek legal advice in this regard. We note, for example, that in 2016 the Competition Tribunal found that a merger had occurred between Life Healthcare Group (“Life Healthcare“) and Joint Medical Holdings (“JMH“) where, despite Life Healthcare’s minority stake of 49% in JMH, it was found to have, in practice, exercised strategic influence over JMH. The parties were fined a penalty of R10 million for failing to notify this merger.

It is also worth noting that the definition of a merger refers to the acquisition of the whole or part of a business. A merger does therefore not only occur where there is a sale of business as a going concern / a sale of shares, but may also occur where, for example, an asset constituting a part of a business is sold. A merger may also occur where a joint venture is formed.

Financial thresholds

The final criteria that must be met is that a merger must meet the relevant financial thresholds. Mergers are categorised into small, intermediate and large mergers – all intermediate and large mergers must be notified to the competition authorities. The current merger thresholds for an intermediate merger are that the combined assets / turnover of the merging parties must meet or exceed R600 million and the assets / turnover of the target firm must meet or exceed R100 million. The current thresholds for a large merger are that the combined assets / turnover of the merging parties must meet or exceed R6.6 billion and the assets / turnover of the target firm must meet or exceed R190 million. Where the thresholds for either an intermediate or large merger are met, the merger meets the financial threshold criterion.

Conclusion

Any transaction that meets all three of the above criteria must be notified to the competition authorities. As discussed above, whether a merger is notifiable is not always straightforward and it is best to seek expert legal advice in this regard.

WHEN DOES A COMPANY NEED AN AUDITOR AS OPPOSED TO AN ACCOUNTANT?

WHEN DOES A COMPANY NEED AN AUDITOR AS OPPOSED TO AN ACCOUNTANT?

The Companies Act, 71 of 2008 (“the Act“) contains a number of provisions relating to auditing and accounting requirements. However, unlike the old Companies Act of 1973 which required all companies to be audited, the Act is less onerous in the sense that only certain categories of companies will need to be audited and this also depends on whether the audit would be in the public interest to do so.

In terms of the Act, there are two main categories of companies, namely a profit company and a non-profit company. A profit company is further divided into four sub-categories, being a (i) private company, (ii) personal liability company, (iii) state-owned company and (iv) public company. In order to establish whether a company must comply with the requirement to be audited (by an auditor) or simply independently reviewed (by an accountant), will depend on the type of company concerned.

When will a company need to appoint an auditor

Not all companies require an auditor to be appointed and in terms of section 90 of the Act, only a public company or a state-owned company must appoint an auditor upon its incorporation and each year after that at the company’s annual general meeting.

In addition, the regulations to the Act (“the Regulations“) provide that companies which are not public or state-owned companies must have their financial statements audited if it is in the public interest to do so and if the company meets the criteria prescribed in the Regulations. In particular, Regulation 28 states that any company that falls within any of the following categories in any particular financial year, must have its annual financial statements audited by an auditor:

  • any profit or non-profit company if, in the ordinary course of its primary activities, it holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R5 million;
  • any non-profit company which was incorporated:
    • directly or indirectly by the state, an organ of state, a state-owned company, an international entity, a foreign state entity or a foreign company; or
    • primarily to perform a statutory or regulatory function in terms of any legislation, or to carry out a public function at the direct or indirect initiation or direction of an organ of the state, a state-owned company, an international entity, or a foreign state entity, or for a purpose ancillary to any such function; and
  • any other company whose public interest score in that financial year is 350 or more or is at least 100 (but less than 350) and whose annual financial statements for that year were internally compiled.

Any “non-public” company (in this case a private, personal liability or non-profit company) may also voluntarily elect, either by board / shareholder resolution, to have its annual financial statements audited or to include an audit requirement in the company’s memorandum of incorporation (“MOI“). In the event that the company voluntarily elects, by resolution, to have its annual financial statements audited, such company will not automatically be required to comply with the enhanced accountability requirements contained in Chapter 3 of the Act dealing with auditors, audit committees and company secretaries, unless the MOI of the company provides otherwise by specifically requiring Chapter 3 compliance.

It is important to note that if the MOI of any company requires compliance with certain or all of the provisions in Chapter 3 of the Act, then that company will be required to comply with the enhanced accountability requirements to the extent that the company’s MOI so requires.

When will companies require an independent review

Certain categories of private, personal liability and non-profit companies that are not subject to the audit requirements may rather be required to have their annual financial statements independently reviewed. The following companies will need to be independently reviewed (unless the exemptions apply):

  • private, personal liability and non-profit companies whose public interest score in that financial year is at least 100 (but less than 350) and its annual financial statements for that year were independently compiled; and
  • private, personal liability and non-profit companies whose public interest score in that financial year is less than 100.

It’s worth noting that in terms of section 30(2A) of the Act, if with respect to any particular company, every person who is a holder of, or has a beneficial interest in, any securities issued by that company is also a director of that company, then that company is exempt from the requirements to have its annual financial statements audited. Thus, if a company meets the requirements of this section and whose public interest score is less than the target, then the company need not be audited, but can be independently reviewed.

Conclusion

Many people are under the impression that their companies have to be audited but this is not always the case. If you are uncertain whether you need to have your company audited or reviewed or whether you need to comply with Chapter 3 of the Act, get in touch and we can assist with these concerns.

TREATING CUSTOMERS FAIRLY – A REQUIREMENT IN TERMS OF FAIS

TREATING CUSTOMERS FAIRLY – A REQUIREMENT IN TERMS OF FAIS

In terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (“FAIS“), The Financial Services Board (“FSB“) published the Treating Customers Fairly (“TCF“) outcomes as the foundation of the FSB’s objectives for consumer protection and market conduct. The need for these outcomes is because of the imbalances previously experienced between financial services consumers and regulated financial entities, rendering consumers vulnerable to market conduct abuse. As financial products are complex, poor decision making and bad advice in respect of these products can lead to unintended consequences being experienced and suffered by a consumer a long time after the transaction was entered into.

The aim of TCF

The TCF outcomes are aimed at reducing market conduct risks and protecting consumers of financial products. The outcomes must be delivered to consumers throughout the product life cycle and at all stages of the relationship with the consumer. The TCF outcomes must be incorporated throughout the company so that everyone understands what TCF is and so that they can apply it.

The TCF outcomes address certain issues that are common in all industries. The outcomes may assist companies and consumers in instances where consumers have unrealistic expectations about the financial products/services being offered by companies even where the consumer was treated fairly; and on the other hand, where a consumer with a low level of understanding about the product/service is satisfied with the service received from the company but is unaware that he/she has been treated unfairly.

The key principles

TCF focuses on two key principles:

  1. ensuring that consumers understand the risks and benefits of the financial products/services they are investing in; and
  2. minimising the sale of unsuitable products/services to consumers.

What TCF is not

TCF is not about creating satisfied consumers at all costs. A satisfied consumer can still be treated unfairly and not know that he/she was treated unfairly.

TCF does not absolve consumers from making decisions and taking responsibility for such decisions – consumers still have a responsibility to know what they are getting into and to take responsibility for their decisions.

It also does not mean that all companies must do business in an identical manner – as long as business is done fairly and transparently, TCF requirements will be met.

The 6 TCF outcomes

  1. Culture: consumers should be confident that they are dealing with companies where TCF is central to the corporate culture;
  2. Products and services: products and services marketed and sold in the retail market should be designed to meet the needs of identified consumer groups and should be targeted according to such identified groups;
  3. Clear and appropriate information: consumers must be provided with clear information and kept appropriately informed before, during and after point of sale (i.e. throughout the product/service’s life-cycle);
  4. Consumer advice: where advice is given, it must be suitable and should take account of the consumer’s circumstances;
  5. Product performance expectations: products should perform in the way that consumers have been led to expect and service must similarly be of an expected acceptable standard; and
  6. Post-sale barriers: consumers must not face unreasonable post-sale barriers imposed by companies when they want to change products, switch providers, submit a claim or make a complaint.

Conclusion

The TCF outcomes were created to ensure that the fair treatment of consumers is imbedded in the culture of companies operating in the financial services industry. The outcomes must be implemented throughout the life-cycle of the product/service, meaning that financial service providers have a duty to continuously ensure that consumers are treated accordingly.

Enforcement of the TCF outcomes will occur through a range of deterrents with the objective of preventing unfair treatment of consumers, and may be penalised through mechanisms such as intensive and intrusive supervision, naming and shaming of offenders, and financial penalties.

Essentially, the ultimate goal of TCF is to ensure that the financial needs of consumers are suitably met through a sustainable industry. If a financial services provider aims to achieve the outcomes, the direct effects should be appropriate financial products and services and heightened transparency in the industry.

PRODUCT LIABILITY: IS THE SUPPLIER LIABLE FOR HARM SUFFERED BY A CONSUMER?

PRODUCT LIABILITY: IS THE SUPPLIER LIABLE FOR HARM SUFFERED BY A CONSUMER?

In a previous article entitled “The responsibility of a supplier to conduct a consumer product safety recall“, we dealt with various matters around product safety recalls. As a follow-on to that, this article deals with the “product liability” concept which goes hand-in-hand with “product safety recall“.

INTRODUCTION

From as far back as the early days of the Romans, a plethora of claims for damage suffered or loss incurred as a result of defective or unsafe goods or products have been a part of the ever-evolving legal fraternity. These claims ranged from a claim against a horse-drawn coach manufacturer, to a claim against a man who sold a diseased horse which later dies in the possession of the buyer, or anything in between. To date, product liability claims is still a practice in most legal systems around the world – including South Africa.

PRODUCT LIABILITY

In essence, the concept “product liability” refers to a supplier’s liability towards the consumer or third-party for damage suffered or for loss incurred as a result of the supplier’s defective or unsafe goods/products supplied.

Product liability is regulated by the Consumer Protection Act 68 of 2008 (the “CPA“). As the name suggests, the main objective of the CPA is to regulate relations between the supplier and the consumer. In line with that objective, the provisions of the CPA relating to product liability focus on regulation of the relationship between the supplier (i.e. manufacturer, designer, distributor or retailer) and the consumer, rather than between suppliers themselves.

SUPPLIER’S LIABILITY FOR HARM SUFFERED BY A CONSUMER

Until the inception of the CPA, claims arising from damage suffered or loss incurred by a consumer or third party as a result of defective product were regulated by our common (i.e. uncodified) law. As such, liability for such damage or loss could only be determined in terms of the common law of delict. Given the burden an aggrieved party is required to discharge in order to succeed with a delictual claim, it was often difficult for many consumers to successfully prove their claims in this regard.

To plug this gap, the Legislature introduced a different approach with regards to the consumer’s burden of proof through the CPA. In terms of section 61 of the CPA, a supplier may be held liable to a consumer for any damage or loss arising from (i) the supply of a defective/unsafe product or (ii) where damage or loss arises from the supplier’s failure to provide adequate information relating to the risks associated with the use of a product. The main benefit to the consumer lies in the fact that the supplier may be held liable regardless of whether it (the supplier) was negligent or not.

Consideration of whether there is any probability of success in a claim in terms of section 61 hinges on the following three questions:

  • whether goods and/ or services as defined in CPA are involved;
  • if so, whether the person (against whom the claim has been instituted) is in fact the “supplier” as defined in the CPA; and
  • whether the claimant suffered harm as a result of defective goods supplied by the such supplier?

CONCLUSION

The purpose of this article is to provide an insight into the supplier’s liability towards the consumer for damage or loss arising from supply of defective goods/product and should not be considered as advice.

In our last article of this series, we will discuss some aspects around whether the role-players in the supply chain can decide, among each other, who will be liable to the consumer.

LATEST IN LEGISLATION

LATEST IN LEGISLATION

On 24 November, the Portfolio Committee on Trade and Industry published the draft National Credit Amendment Bill, 2018 and the Memorandum on the Objects of the Bill (the Bill) for public comment. The Bill establishes a procedure by which low income and over-indebted consumers under credit agreements (who may not qualify to undergo the debt review or sequestration processes) may apply for debt intervention.

The Bill provides for the National Credit Tribunal and National Credit Regulator to make a myriad of orders. Note that debt intervention orders will result in all qualifying credit agreements being suspended for an initial period of 12 months and, subject to a review of the consumer’s financial circumstances, may extend the suspension period for a further 12 months or make an order extinguishing the credit agreements, partially or in full, where the financial circumstances of the consumer have not improved. Further, where a credit agreement is subject to credit life insurance, the credit agreement may be suspended to allow for the consumer to claim from the insurance provider.

The Bill also implements criminal sanctions for certain contraventions of the National Credit Act, 2005.

The proposed amendments by the Bill will directly impact credit providers and consequences of the new provisions will need to be considered carefully.

The public has until 15 January 2018 to submit written comments to the Portfolio Committee on Trade and Industry where after public hearings will be held to discuss same.

EQUITY CROWDFUNDING VS OTHER TYPES OF CROWDFUNDING

EQUITY CROWDFUNDING VS OTHER TYPES OF CROWDFUNDING

A little while ago we wrote an article on the regulatory vacuum relating to equity crowdfunding. Whilst there has been little movement from a regulatory perspective as to how South Africa is going to regulate crowdfunding – meaning that it is still unregulated – there have been some positive steps taken by the Financial Services Board (“the FSB“). Crowdfunding has been at the forefront of the FSB’s recent discussions – hopefully an indication of their support.

If you are unfamiliar with the term “crowdfunding” and you have looked to “professor” Google to gain a bit of an understanding of what it is, here is a small overview on what crowdfunding is and the types that are available.

The term “crowdfunding” is essentially a description of a funding raise of multiple (typically small) sums of money from the general public to fund some form of venture, whether that be a charitable venture or a profit-making venture.

  • Donations based crowdfunding is fairly straightforward – a group of people donate money to an organisation or person that they believe in, generally for a charitable cause. Backabuddy is a good example of this in motion in South Africa.
  • Rewards based crowdfunding is widely used to incentivise people to fund the venture of a small business. This is similar to donations based crowdfunding, but with a key difference, as the person seeking funding offers a reward to the person / people donating. Thundafund is an example of a South African rewards based crowdfunding platform.
  • Loan based crowdfunding occurs where the person / company borrows money from the crowd and the crowd receives interest as their return. Entrepreneurs typically use this to get a better interest rate than they would have gotten if they went to the more established money lenders.
  • ICO’s (Initial Coin Offerings) have become the most recent of the crowdfunding fads. Unfortunately, there have been a few notorious fraudulent schemes using ICO’s. In fact, the Useless Ethereum Token famously launched a satirical ICO that clearly stated that its coins were worth nothing and it raised USD$93,949 (+/- R1 million)! ICO’s are fairly complex, so we are not going to go into them in this article, but if you would like to see a previous article written on the subject, you can read about it here.
  • Equity based crowdfunding occurs where shares in a company are offered to the public in exchange for funding. This is really significant as the crowd become business owners of the company and have certain rights attached to their investment.

Equity based crowdfunding has previously been avoided in South Africa, as people are generally wary of entering a space like this due to the regulatory concerns. Uprise.Africa (which has already had its soft launch) has, however, started an equity based crowdfunding operation in South Africa and is about to become fully operational.

What’s the difference?

Equity based crowdfunding differs significantly from its more underpowered cousins, as shareholders in a company (even minority ones) have certain rights that they can exercise to ensure that startups aren’t off buying bean bags and half-price sushi with investor funds. This means that the crowd has some oversight and can share in the rewards or growth of the business. So, the crowd is rewarded in the long term for investing into the startup (although most startups are high-risk investments and returns are not very common).

What this means for the startup is that they can market test their product to see whether the general public would be interested in the investment. It also means that the startup can probably get a more favourable investment than your average venture capital (“VC“) firm would give as the crowd isn’t normally as interested in the bottom line of the startup as your average VC firm is.

Equity crowdfunding has such huge potential to boost the South African economy, in fact the World Bank recently predicted that the market potential in Africa for crowdfunding will be up to $2.5 billion by 2025. Equity crowdfunding in South Africa will hopefully tap into that and unleash significant potential in the startups that are based here.

NATIONAL WILLS WEEK – DOMMISSE ATTORNEYS

NATIONAL WILLS WEEK – DOMMISSE ATTORNEYS

This year we’ll be participating in National Wills Week from 11 – 15 September 2017.

For anyone who wishes to have a basic will drafted at no charge, all they’ll need to do is contact leanne@dommisseattorneys.co.za to schedule an appointment.

The attending practitioner will send a short questionnaire that each person is required to complete and return prior to any consultation.

Please note that this is a free service and is offered on a first come first serve basis.

http://www.lssa.org.za/our-initiatives/advocacy/national-wills-week

What is the deal with preference shares? Part 1: liquidation and dividend preference

What is the deal with preference shares? Part 1: liquidation and dividend preference

(This post is the first in a series, giving practical information to start-up founders to gain a better understanding of the mechanics of preference shares. This post will focus on liquidation and dividend preferences.)

Venture capital investors are almost always aiming to invest in start-ups through “preferred” equity, typically referred to as preference shares. Preference shares trump ordinary shares, as the holders of preference shares normally receive preferential treatment in the event of a liquidation of the business. (For these purposes, a liquidation event can be the insolvency, a dissolution or a sale of the company.)

When start-ups enter funding stages, the good and/or lucky ones may end up with a few term sheets from an array of interested investors. These term sheets often come with an abundance of terms regarding the structure of the preference shares. As an inexperienced founder, this can be an overwhelming experience and it can be a daunting task to understand which terms are “standard” and which are particularly important. Venture capital investors have the upper hand due to their experience in this area – this is where professional advisors, such as start-up lawyers, come in handy in assisting the start-up and its founders.

The purpose of this series of articles is not to cover all aspects of term sheets, but to give you, a start-up founder, a better understanding of what preference shares really are, what to look out for and how they are typically structured during a series seed or series A investment.

What are preference shares?

When early-stage start-ups issue shares, there are generally two classes of people receiving shares: founders and investors. Founders typically receive ordinary shares and investors generally receive preference shares in return for their investment and risk taken.

The main characteristic of preference shares is that they provide for the preferential treatment of their holders and rank above ordinary shares in the event of a liquidation event. This means that if a company is unable to pay its debts or its business is sold, the investor will have a first claim on the company’s assets or sale proceeds over ordinary shareholders i.e. the founders. This is a protection mechanism given to the investor in return for the risk incurred when investing in the company.

Preference shares may further entitle the holder to preferential dividends, based on the profits of the company. Preference dividends are normally fixed at a certain annual percentage. As a preference shareholder, the investor will receive dividends ahead of ordinary shareholders when dividends are declared by the board of the company.

Liquidation preference

The liquidation preference determines how the pie is shared on a liquidation event. Preference shares almost always come with a liquidation preference, but the amount of the liquidation preference can differ. For example, the investor’s preference shares may come with a multiple of 1x purchase price. This means that upon a liquidation event, the investor will be paid 1x the issue price of his shares before the ordinary shareholders get anything. (For example, if the investor invested R1 million into the company, the investor wants R1 million paid back to him before the founders receive anything.) Similarly, if the investor’s liquidation preference is 2x purchase price, the investor will receive a multiple of 2x the issue price of his shares before the ordinary shareholders get anything.

As a start-up founder, you need to know what you are promising the investor. You might realise a few months down the line, when it’s too late, that you have given the investor a preference of 10x return on liquidation, leaving you and your co-founders with nothing. How a liquidation preference is structured can make a significant difference when the proceeds from a sale are split between the shareholders. Start-up founders should pay particular attention to this term.

Participating and non-participating

Generally, as seen above, the preference shareholders receive preferential returns. This means that they are paid back their initial investment plus some preferential payment (the liquidation preference multiple) before any other proceeds are disbursed. The extent to which additional funds, beyond this preference, are disbursed to investors depends on whether the equity is participating or non-participating preference shares. Participating preference shares take a share of the additional proceeds, along with ordinary shareholders, after receiving their preferential returns. For example, the preference shareholder participates in the equity apportionment in addition to receiving his liquidation preference. Holders of non-participating preference shares, however, only receive the preference plus any accrued dividends.

For example, an investor invests R2 million into a company at a 2x liquidation preference and at a post money valuation of R10 million (giving the investor a 20% stake in the company). The company is sold for a net sale price of R20 million. Therefore, the investor receives his 2x R2 million liquidation preference (receiving R4 million) and a R16 million surplus remains. If the preference shares are participating preference shares, the investor will receive an additional 20% of the surplus amount (a further R3.2 million). Alternatively, if the shares are non-participating preference shares, the other shareholders, i.e. the founders, will distribute the surplus among themselves according to their shareholding percentages.

An important point to note is that “participation” in venture capital deals generally refers to capital, however, it may also refer to a participation in pro rata dividends beyond the fixed preference dividend. As a founder, you must have clarity on this from the start.

Dividend preference: cumulative and non-cumulative

Preference shares often provide for a preferential dividend as well – investors with preference shares are entitled to receive dividends before ordinary shareholders.

Dividends increase the total return for the investors and decrease the total return for ordinary shareholders. Dividends are often stated as a percentage of the share issue price for the preference shares (for example, 8% of the total share issue price). There are at least three general ways dividends are structured in venture capital deals: (i) cumulative dividends; (ii) non-cumulative dividends; and (iii) dividends on preference shares only when paid on the ordinary shares.

Dividend structures (i) and (ii): If a company does not declare a dividend in respect of a particular year, then preference shareholders with a right to non-cumulative dividends would lose the right to receive a dividend for that year. However, preference shareholders with a right to cumulative dividends would be able to carry over their right to receive a dividend for that year, entitling them to receive that dividend in the future, together with the dividend declared in that next year (before any dividends are payable to ordinary shareholders). Clearly, cumulative dividends are the most beneficial to the investor and the most burdensome on the founders (being ordinary shareholders).

Dividend structure (iii): Where dividends are paid on the preference shares only if paid on the ordinary shares, the preference shares are treated as if they had been converted into ordinary shares at the time the dividend is declared. This is the least beneficial to the investor and the most beneficial to the founders.

If not clearly understood, agreeing to a cumulative dividend can lead to significant and unexpected monetary burdens on the available and distributable profits for you and your co-founders. As a start-up founder, you must understand the different ways in which dividends can be structured. You need to consider the company’s projected cashflow from now until the expected exit and the impact the dividend preference has on shareholders.

Concluding remarks

We trust that the issues highlighted above will give you some insight and guidance as to why it is so important to have a good understanding of the preference share terms you are likely to find in a term sheet. If you would like to discuss any of these topics in more detail, please feel free to contact our Start-up Law team and we’ll gladly assist.

COMPETITION COMISSION INVITES COMMENTS ON DRAFT GUIDELINES FOR INFORMATION EXCHANGE BETWEEN COMPETITORS

COMPETITION COMISSION INVITES COMMENTS ON DRAFT GUIDELINES FOR INFORMATION EXCHANGE BETWEEN COMPETITORS

The exchange of information between competitors treads a thin line between enhancing efficiencies and potentially causing harm to competition. While the potential benefits of an information exchange system include the improvement of investment decisions, improved product positioning, lower research costs, benchmarking best practices and a more precise knowledge of market demand, such systems could also facilitate collusive / co-ordinated behaviour among competitors, to the detriment of consumers.

Recognising the difficulty in determining which side of the line an exchange of information falls, the Competition Commission (the “Commission“) intends to set out, based on its experience and international best practice, the general approach that it will follow in determining whether an exchange of information contravenes the Competition Act 89 of 1998 (the “Competition Act“).

The Commission has published and called for written comment on its Draft Guidelines on the Exchange of Information between Competitors (the “Draft Guidelines“) from any interested person. We set out the basic principles as set out in the Draft Guidelines below.

Legal basis for assessing information exchanges

Section 4 of the Competition Act regulates practices amongst competitors, with competitors including all firms that are in the same line of business (whether these firms actually or may only potentially compete with one another).

The section prohibits any agreements (including contracts, arrangements or understandings, whether legally enforceable or not) between competitors:

  • that have the effect of substantially preventing, or lessening, competition in any market (without sufficient technological, efficiency or other pro-competitive justifications); or

 

  • that involve cartel practices, including price-fixing, market allocation or bid rigging (which automatically fall foul of the Competition Act and for which no justifications may be advanced).

Where an exchange of information has the effect of substantially preventing or lessening competition in any market (without sufficient pro-competitive justifications for such exchange), or where it facilitates price-fixing, market allocation or bid rigging, such an information exchange system will therefore contravene the Competition Act.

General principles of assessment

Importantly, the guidelines only concern the exchange of information between competitors. Also, information in this context refers to “commercially sensitive information”, being trade, business or industrial information which has a particular economic value to a firm and its business strategy and is generally not available or known by others.

Information exchange systems between competitors are evaluated on the following general bases (among others).

  • The nature of the information sought to be exchanged: considerations will include whether the information is based on past, current or future conduct or outcomes, the level of aggregation of information, the frequency of sharing and the age of information;
  • The purpose for which the information is being exchanged; and
  • The market characteristics and dynamics: considerations include whether products are homogenous, the level of concentration in the market, the transparency of information in the market, the symmetry and stability of the market shares of competing firms and barriers to entry.

It is important to note that the Guidelines are just that – they are not binding on the competition authorities and will not be applied mechanically – there is no set formula / combination of the above factors that will ensure that an information exchange system is compliant with competition law and assessment will be multi-factorial and on a case-by-case basis.

Forums for information exchange

The Commission also set out an (open) list of platforms over which information exchange may occur and practical considerations and platform-specific guidelines to ensure competition law compliant exchanges over such platforms.

These platforms include, among others, trade / industry associations and regulators / policy makers, public announcements (which may constitute market signalling), joint ventures, cross-directorships / shareholdings, market studies and benchmarking and cartels.

Information exchange and your business

Whatever the final guidelines, given the inherent difficulties in determining whether an information exchange system between competitors will fall foul of the Competition Act, and the significant penalties and reputational harm that such conduct (even if unintentional) may incur, obtaining legal advice before embarking on any such practice may prove invaluable to your business.

The full draft guidelines can be found here.

Please note that the closing date for the submission of comments is 14 September 2017.

Service agreements: why they are necessary and what they should cover

Service agreements: why they are necessary and what they should cover

If you are a service provider of any kind, regulating your engagement with your customers is crucial to show potential investors how you have secured your revenue stream and managed your risk. Investors are going to be interested in how you protect your revenue stream. They will typically assess how “water-tight” your agreements are with your clients in order to determine business level risk.

A service agreement is an example of a revenue contract. This is the agreement that describes how your company generates revenue in return for delivering services and describes the fees which you charge.

Some key considerations for a service agreement are as follows:

  1. Description of your services:

It is important to accurately describe your services so there is clarity and certainty regarding what it is your customers are paying for. It can sometimes work well to describe the services by referring to your website which then provides for a full description of the services in greater detail. This has the advantage of allowing you to evolve your services over time, and change the specific terms and pricing on your website (on notice to the client).

  1. Duration of the agreement:

How long do you expect the service agreement to be in place? Depending on the nature of the services rendered, it may be for a specific period or ongoing. Whether the contract can be renewed and on what terms should also be carefully considered together with termination rights. You will want to ideally strike a balance between easily terminating the relationship when it no longer suits you while still attracting and maintaining a constant revenue stream without too much unexpected disruption.

  1. Risk provisions:

You should consider what warranties you are willing to make with respect to the quality or outcome of your services. This will be specific to your service offering but you should also consider the industry in which you operate and what your average client would expect. Your appetite for risk and the level of risk associated with your services should also determine what warranties will be offered. Another related consideration is what your liability to your clients should be, whether you will have any liability at all and how you manage this.

The other considerations which we discuss with our clients for the purposes of drafting their service agreements include service levels, payment terms, exclusivity, IP and license arrangements, data and privacy matters and whether there are any specific regulatory aspects applicable.

We provide a Service Agreement Package to start-ups and through this process we are able to prepare bespoke service agreements applicable and appropriate for each client. We can also assist with reviewing and updating existing service agreements, if you are not sure whether your existing contract is up to scratch.