South African Competition Commission Publishes Draft Penalty Guidelines for Prior Implementation

  • By Michael-James Currie

The South African Competition Commission (SACC) recently published draft guidelines  for determining the administrative penalty applicable for prior implementing a merger in contravention of the South African Competition Acts’ merger control provisions (the Draft Guidelines).

Although the SACC has published guidelines for the determination of administrative penalties in respect of cartel conduct, the SACC has recognised that different considerations apply when calculating the appropriateness of a penalty for ‘gun-jumping’.

South Africa has a suspensory merger control regime and transactions which fall within the ambit of the Competition Acts merger definition, and which meet the mandatorily notifiable financials thresholds, may not be implemented until approval has been obtained by the Competition authorities.

The financial thresholds distinguish between intermediate mergers and large mergers. Both are mandatorily notifiable. Transactions which do not meet the notification thresholds are considered small mergers and may either be voluntarily notified or must be notified at the insistence of the SACC.

In relation to ‘intermediate mergers’ the Competition Commission is mandated with considering and approving (or prohibiting) an intermediate merger whereas in the case of large mergers, the Competition Tribunal is tasked with evaluating the proposed transaction.

Regardless of whether the merger is an intermediate or large merger, the Competition Act provides for an administrative penalty of up to 10% of the firms’ respective South African generated turnover to be imposed on the merging parties for failing to notify the merger.

In terms of the penalty calculations, the Draft Guidelines prescribe a minimum administrative penalty of R5 million (USD 384 615)  for the prior implementation of an intermediate merger and a R20 million (USD 1.5 million) penalty for implementing a large merger prior to being granted approval. The Draft Guidelines cater further for a number of aggravating or mitigating factors which may influence the quantum of the penalty ultimately imposed.

The Draft Guidelines also provide useful guidance as to when a transaction may amount to a ‘prior implementation’. Some of the examples listed in the Draft Guidelines include:

  • The acquisition of 49% of the issued share capital of a company coupled with control in the form of section 12(2)(c) i.e. the right to appoint the majority of the directors in the company.
  • The acquisition by two wholly-owned subsidiaries of certain properties and the failure to notify those acquisition due to the mistaken belief that the transactions amounted to two small mergers.
  • Where a senior executive of the acquiring firm had been engaging in the day-to-day operations of the target firm and the merging parties were already marketing themselves as a single entity.
  • Where the acquiring firm becomes involved in the strategic planning of the target firm, identifies target markets, develops new products or services, takes charge of ordering raw materials, amends procurement policies or becomes involved in customer relations.
  • Where the merging firms cease marketing in order not to compete with each other.
  • Acquiring firms appointing directors to the board of the target firm as the appointment of even one or two directors might give material influence and thus control.

The above instances are only a few of the examples listed and are based mostly on case precedent before the Competition Authorities. This list is, however, in no way exhaustive.

Importantly, the Draft Guidelines, in their current form appears to draw a distinction between “prior implementation” and a “failure to notify”. In relation to latter, the Draft Guidelines indicate that:

A contravention of failure to notify is committed where:

  1. the transaction constitutes a merger under the Act;
  2. the transaction meets the thresholds for notification under the Act; and
  3. the parties have failed to notify the Commission of the transaction.

Technically, a failure to notify does not amount to a contravention in of itself. A contravention only arises if the transaction was not notified and the transaction was subsequently implemented. In other words, merging parties would not be in breach of the Competition Act if a merger agreement has been concluded, but the parties are yet to notify the SACC thereof. Unlike a number of other jurisdictions, there is not a specified time period in which a transaction which meets the thresholds must be notified. A contravention only arises in the event that such a transaction is implemented prior to approval having been granted. We trust that this technical anomaly will be addressed in the final draft.

In light of recent case precedent, the South African Competition Authorities are increasingly less sympathetic to firms who ‘inadvertently’ fail to notify a mandatorily notifiable merger. The SACC’s decision to adopt specific guidelines for contravening the merger control provisions is clear affirmation that the competition authorities expect firms to familiarise themselves with the precise ambit and scope of the Competition Act.


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