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.

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.