meddling, MergerMania, public-interest, South Africa

Revisiting the Burger King prohibition: [Unintended] Consequences & [Possible] Reconsideration

By Joshua Eveleigh

On the 1 June 2021, the South African Competition Commission (SACC) released its media statement announcing the prohibition of ECP Africa’s proposed acquisition of Burger King (South Africa) and Grand Foods Meat Plant Pty (Ltd) from Grand Parade Investments.   AAT published a note on this precedent-setting decision here.

Despite finding that the acquisition would not have any likely effect of substantially lessening or preventing competition, the transaction was prohibited as it would result in the merged entity having no ownership by historically disadvantaged persons (HDPs) and workers. In its media statement, the SACC states that both Burger King SA and Grand Foods Meat Plant form part of an empowering entity in which HDP’s have 68% ownership. This ownership stake would decrease to 0% if the transaction were to be approved. In this regard, Tembinkosi Bonakele, chairperson of the SACC, states:

“You had an entity that had quite an impressive transformation profile, and all of that was going to disappear at the stroke of a pen with this transaction.”

Unsurprisingly, Grand Parade Investments, as well as the general public, have responded to the SACC’s decision with discontent.

The topical concerns regarding the prohibition of the acquisition include:

  1. The unintended, prejudicial impact upon black shareholders of sellers / target companies; and
  2. The equally detrimental deterrence of foreign direct investment (FDI) into the Republic of South Africa.

i. Harm to HDP shareholders

Grand Parade Investments had supposedly been attempting to sell Burger King and Grand Foods Meat Plant for a period of 18 months in order to settle debts and pay dividends to its black shareholders, whom had reportedly not received dividends for a number of years. Furthermore, the shareholders would incur even greater harm upon the SACC’s media statement as Grand Parade Investments share price would plummet by 10%, making future dividend payouts ever less likely.

Bonakele argues that the Competition Act cannot waiver in its goal of transformation purely because of the prejudicial impact that a decision may have on individuals.

“This is about the system, it is not about individual shareholders. We are not really concerned about the immediate impact on Joe Soap today, that’s not the criteria.

ii. Deterring FDI

The decision of the SACC raises varying concerns for foreign investors, and understandably so. The key concerns can be encapsulated into the following: certainty, timing and costs.

Firstly, merger review is subject to ever-evolving standards. In this regard, foreign investors cannot approach a merger with full certainty as to whether it will be approved or not. Moreover, continually changing standards presents increased opportunities of opposition from competition authorities which furthers investor uncertainty. Secondly, subsequent to changing standards and increased opposition, the timing of proposed mergers is significantly lengthened. Lastly, the imposition of non-competition conditions on transactions incurs significant costs on the burden of investors.

These principles of certainty, timing and costs can be considered as the essential elements of a sound merger regime. Ultimately, the SACC’s decision of prohibition strikes at the balance of South Africa’s merger regime by introducing great uncertainty, prolonged timing and greater costs  – all of which present themselves as significant areas of concern for foreign investors.

In response to these FDI concerns, Bonakele states that South Africa’s democratic sustainability is of paramount importance and that foreign investors must consider the long-term effects that exclusionary investments would have on the Republic, particularly in regard to transformation and empowerment:

“But it’s not like empowerment imperatives are less important than FDI.”

A potential for reconsideration?

A window for reconsideration of the proposed acquisition presents itself where the merging parties present a better offering of HDP ownership. Bonakele suggests that this is potentially on the table as the parties to the agreement have continued engagement despite the SACC’s decision.

Therefore, the proposed acquisition may eventually find approval where ECP Africa and Grand Parade Investments agree on an improved HDP empowerment plan, of which the SACC is satisfied.

Image

Conclusion

In essence, the SACC’s decision to prohibit the proposed acquisition of Burger King (South Africa) and Grand Foods Meat Plant by ECP Africa has had prejudicial effects upon the seller’s black shareholders.

Further, the decision presents concern for foreign direct investment by striking at the essential elements of a sound merger regime, namely: certainty, timing and costs.

However, the chairperson of the SACC has now noted that the SACC may change its initial decision upon the improvement of empowerment considerations between the parties to the transaction.

Standard
Uncategorized

SOUTH AFRICA: EXEMPTIONS TO AID CONSUMERS DURING AND AFTER RIOTS

By Charl van der Merwe and Gina Lodolo

On 15 July 2021, Ebrahim Patel, the Minister of Trade Industry and Competition, published a block exemption for the supply of essential goods (“Exemption”), which came into effect on the day of publication and is granted until 15 August 2021, unless extended or withdrawn.

The Exemption is aimed at allowing conduct that would usually fall foul of Section 4 and 5 of the Competition Act 89 of 1998, as amended (“Act”) due to the conduct being a restricted horizontal (conduct between competitors) or vertical (conduct between suppliers and customers) practice.

The authority to grant exemptions is derived from section 10(10) read with section 78(1) of the Act. Section 10(10) of the Act states that the “Minister may, after consultation with the Competition Commission, and in order to give effect to the purposes of this Act as set out in section 2, issue regulations in terms of section 78 exempting a category of agreements or practices from the application of this Chapter”.

These specific Exemptions were granted in light of the recent riots in South Africa, which have caused massive losses at retail level as well as supply chain shortages and disruptions.  The purpose of the Exemption is to prevent a shortage of essential goods within South Africa, especially to poorer households and small businesses. These Exemptions apply to suppliers of essential goods. Essential goods are defined to mean: “basic food and consumer items, emergency products, medical and hygiene supplies (including pharmaceutical products), refined petroleum products and emergency clean-up products. Essential goods include the final good itself as well as all inputs in the supply chain required for the production, distribution and retail of the essential goods” (“Essential Goods Suppliers”).

The Exemption provides that Essential Goods Suppliers may communicate and coordinate with each other to ascertain the loss of stock, the gravity of shortages and their location as well as availability of stock in particular areas to gauge the ability of different Essential Goods Suppliers to supply to areas that are experiencing shortages and have a higher demand, including supply to smaller businesses.

Essential Goods Suppliers may also coordinate on inputs, stock expansion or capacity and equitable distribution between Essential Goods Suppliers. Coordinated distribution of essential goods to different geographical areas within South Africa will be allowed if connected to anticipated shortages of a type of essential good or an anticipated shortage of essential goods in a specific area.

The Exemption contains express provisions to monitor all conduct in terms of the Exemption. Essential Goods Suppliers must keep minutes of all meetings and communication and such minutes, as well as written records of agreements must submitted to the Competition Commission.

The Exemption will provide welcomed relief but is not without risk. Communications between competitors as well as customers/suppliers pose various difficulties not only from a competition law perspective, but also from a commercial perspective. Conduct and exchanges of information in terms of the Exemption may have lasting consequences. It is imperative that firms are fully aware of the perils of so engaging in terms of the Exemption, particularly regarding meeting minutes and the positive duty, in terms of case precedent, to distance yourself from potentially anti-competitive conduct.

Finally, the Exemptions do not allow price-fixing and collusive tendering, nor do they authorize discussions on pricing of essential goods. Firms should be aware that price-gauging is still prohibited in terms of the Consumer and Customer Protection and National Disaster Management Regulations and Directions issued on 19 March 2020.

Primerio Director, Michael-James Currie, says that the Commission published a report following the exemptions granted during the Covid-19 State of Disaster confirming the positive effects that collaboration between competitors can have in certain instances. This calls into question whether the “characterization” test ought to be recognized as a substantive defence to hardcore cartel conduct cases in South Africa.

These Exemptions can be accessed at: https://www.gov.za/sites/default/files/gcis_document/202107/44854gon616.pdf

Standard
Uncategorized

Webinar Alert: Zambian Competition Law Enforcement Trends and Due Process

Join Primerio director Michael-James Currie and Primerio’s Zambia in-country partner Mweshi Mutuna, when they speak to the head of the Zambian CCPC’s restrictive practices division, James Chalungumana on 23 June 2021 at 3pm CET.

Registration is free. Follow the links below to register.

https://lnkd.in/dPifc67

Standard
Big Picture, consumer protection, event, South Africa, Zambia

Competition Law Africa conference 2021 / this Tuesday

The Informa Competition Law Africa conference is back with a vengeance this year, albeit still held virtually due to the pandemic.

The overview can be found here, and the more detailed agenda here.

Speakers include South African enforcer Hardin Ratshisusu, COMESA chief Willard Mwemba, the OECD’s competition expert Frederic Jenny, Mahmoud Momtaz, head of the Egyptian competition authority, Lufuno Shinwana, senior legal counsel on competition issues for Anheuser-Busch Inbev, Ntokozo Mabhena, Anglo American’s Legal Advisor, and Maureen Mwanza, head of legal for the Zambian CCPC.

Primerio partner, Andreas Stargard, will host the afternoon panel on Vertical Restraints, interviewing Okikiola Litan, Senior Counsel, Commercial and Competition Law, with Coca-Cola Hellenic Bottling Company.

Standard
AAT exclusive, meddling, MergerMania, mergers, public-interest, South Africa

Precedent-Setting Decision: Burger King Acquisition Prohibited Purely on Public Interest Grounds

By Charl van der Merwe

The South African Competition Commission (SACC) made headlines with its first prohibition of an intermediate merger that was based solely on public-interest grounds.

Emerging Capital Partners (ECP), a private equity firm founded in the US, was to acquire all Burger King assets from South African Grand Parade Investments, a South African majority black owned entity. 

The SACC, while finding that the proposed transaction will have no actual impact on competition, prohibited the transaction on the basis that the transaction will have a substantial negative effect on “the promotion of greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons” (HDPs).

The SACC found that the merger would lead to a 68% reduction in the shareholding of HDPs in the target entity.

As John Oxenham, director at Primerio points out, “public interest” considerations have long been a feature of competition law in South Africa, particularly in relation to merger control. In this regard, mergers, which may otherwise be deemed problematic, could be ‘justified’ on public interest grounds. Public interest, while initially limited to employment, was first informally expanded through notable mergers such as Walmart/Massmart (2011) and AB Inbev/SAB (2016) where public interest conditions were imposed related to empowerment and ownership, through agreement by the merging parties.

The Competition Amendment Act, which largely became effective in 2019, formally expanded the recognised public-interest factors contain in Section 12A(3) of the Competition Act to include 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”. Further, the public-interest element was elevated to a separate and self-standing assessment, which must be assessed as an integral part of the merger assessment.

While the Competition Act, as amended, has made provision for mergers to be assessed and prohibited on pure public interest grounds since July 2019, the Burger King merger is the first merger to be prohibited on this basis.

SACC Commissioner, Tembinkosi Bonakele noted that the SACC had no choice but to recommend that the merger be prohibited as, clearly, the merger would result in a reduction of HDP ownership from 68% to 0%, which the SACC believes is substantial. This concern was raised with the merging parties, who were unable to address the concern in a suitable manner.

Regarding the broader impacts of the decision on investment and merger control in South Africa, Bonakele noted that the SACC is merely a statutory agency obliged to impose the law as it currently stands and, according to the Bonakele, there is no uncertainty regarding the transformation objectives which had been introduced to the Competition Act. The SACC is clear on its mandate in terms of the Competition Act, as amended, and will continue to implement such mandate.

The legal basis for the decision is clear, however, as is the case with any new legislation, implementation thereof less so. At the time of the enactment of the amendments to the Competition Act, it was well recognised that the practical implementation of these provisions will be critical and that it may lead to significant unintended consequences – including adverse effects on consumer welfare and even broader public interest. Primerio director, Michael-James Currie points out that, ironically, HDP-owned target firms might be negatively prejudiced by this criterion, as the pool of potential buyers is limited (and hence the value) if non-black owned firms are not able to successful acquire the target’s business.

It is not clear, at this stage, what the assessment in the Burger King merger entailed, what evidence was put forward by the parties and what the relevant counterfactual may have been. It is also not clear whether the transaction presented pro-competitive elements which outweigh the adverse effect on public interest – similar to what is required in terms of public interest where a merger may have an adverse impact on competition. The SACC confirmed, however, that the transaction was ultimately prohibited after ECP failed to adhere to requests to proffer conditions relating to shareholding and empowerment.

The SACC has the power to assess and prohibit intermediate mergers. Accordingly, the SACC’s prohibition can only be challenged by way of a request for consideration, to be filed by the merging parties, to the South African Competition Tribunal. The SACC opined, however, that unless the acquiring firm is prepared to make concession to remedy the public interest concerns, the decision is unlikely to be overturned.

Grand Parade has been vocal in its dissatisfaction of the prohibition. The matter will be highly contested, and it is not uncommon for transactions to be approved on a request for consideration to the Tribunal.  Furthermore, any decision by the Tribunal is likely to be taken on appeal to the Competition Appeal Court and likely also the Constitutional Court.

The Burger King decision, regardless of its eventual outcome, will leave a lasting precedent and shape merger control proceedings in South Africa going forward.

Standard
Uncategorized

Nigerian Competition Law: FCCPC Publishes Penalty Guidelines

By Michael-James Currie and Jemma Muller

Nigeria is quickly emerging as one of the more important antitrust regimes on the African continent. Not only because it is a significant market, but largely due to a raft of recent legislative developments. The Federal Competition and Consumer Protection Commission (“FCCPC”) has been formally established and is fully operational with the legislative tools to tackle and prosecute the traditional spread of competition law violations including restrictive horizontal practices, abuses of market power and conduct robust analysis in relation to its merger control regime.

The most recent publication by the FCCPC is its Administrative Penalties Regulations, 2020 (“Penalty Regulations”). The publication of these Penalty Regulations not only serve as stark reminder of the risks of non-compliance with the competition laws but also signals the start of an active enforcement regime.

The Penalty Regulations provide for a largely mechanical calculation for purposes of quantifying an administrative penalty. In essence, however, the Penalty Regulations provide for a prescribed “base amount” (which is either fixed fee or calculated as a percentage of turnover) and this base amount is increased (or decreased) based on aggravating and mitigating factors as well as taking the duration of the infringement into account.

Importantly, the penalties are calculated with reference to annual turnover. This is not qualified by local or Nigerian derived turnover only. There is a risk that when calculating administrative penalties a firms’ total worldwide turnover is taken into account. This poses a significant risk for foreign entities who might only have a relatively negligible presence in Nigeria but are significant players on the global market.

Failure to notify a mandatorily notifiable merger (i.e., gun-jumping or prior implementation) attracts a base penalty of 2% of the parties’ annual turnover. This includes a pure foreign-to-foreign merger (i.e. where parties are domiciled outside of Nigeria) but have a nexus to Nigeria by virtue of having a subsidiary in Nigeria or derive turnover in or from Nigeria.

The good news for foreign firms is that parties to a foreign-to-foreign merger (or to a merger which raises no overlapping business relationships) may apply to have their transaction assessed under an expedited review regime. The expedited regime envisages reducing the review period of a phase 1 merger by up to 40%. It is advisable to engage the FCCPC by way of the pre-merger consultation process in order to confirm whether a proposed transaction qualifies for an expedited review.

Over and above administrative penalties, firms operating in Nigeria should also note that the FCCPC has the powers to pursue criminal prosecution against firms and individuals who violate certain provisions of the legislation. These include provisions dealing with, inter alia, price fixing, conspiracy, bid-rigging, obstruction of an investigation or inquiry of the Commission, providing false or misleading information, the failure to give evidence or appear before the Commission, and the failure to comply with a compliance notice or order issued by the Commission.

Like most jurisdictions which adopt a new, novel or revamped competition law regime, there are several aspects of Nigeria’s legislation which would benefit greatly from precedent. But in relation to the primary obligations of firms operating in Nigeria, the fundamentals are clear and the consequences for contraventions are of sufficient import to ensure that Nigeria is placed on the compliance radar.

[Michael-James Currie is a partner at Primerio and specializes in competition law in several African jurisdictions including Nigeria. Please feel free to get in touch with Michael-James by sending an email to m.currie@primerio.international]  

Standard
AAT exclusive, consumer protection, Kenya

Let them eat bread: Consumer protection in Kenya

On May 24, 2021, the Competition Authority of Kenya (CAK or Authority) issued a notice to the manufacturers of bread on how to label the breads sold to consumers. The CAK claimed the producers were in contravention of Section 55 of the Competition Act 12 of 2012 (“Act”). Section 55(a)(i) of the Act states that “a person commits an offence when, in trade in connection with the supply or possible supply of goods or services or in connection with the promotion by any means of the supply or use of goods or services, he— (a) falsely represents that— (i) goods are of a particular standard, quality, value, grade, composition, style or model or have had a particular history or particular previous use” . The This section found application in, inter alia,  relation to the labelling of FMCG such as bread sold to consumers.

The CAK’s first concern was that the labels on the bread were illegible, thereby denying the consumer sufficient information. Second, the producers were directed to adjust the information on the wrappers from “Best before” to “Sell by” to indicate the date of expiration. This adjustment will make this information clearer to the consumers, according to the Authority. Sources close to the investigation stated that bread manufacturers had taken liberties with proper labeling previously and had been ‘mischievous’ with labels, as they initially placed the expiration date on the disposable part of the wrapper, thereby depriving consumers of reliable information after opening the packaging. Thereafter, upon being directed by the regulator that the information should be on the actual bread wrapper, the manufacturers purportedly caused the printing of the information to be illegible.

Regarding the issue of weight and ingredients, the bread manufacturers now have an obligation to indicate the correct weight as well as the ingredients of their breads. It was found that some breads alleged to have milk or butter while in reality they did not. Such conduct by manufactures amount to false information. This is itself a breach of the law under both the Competition Act and the Standards Act.

The CAK has the overarching consumer protection mandate, as provided under the Constitution and the Competition Act of Kenya. While carrying out this consumer protection mandate, the Authority must consult with the Kenya Bureau of Standards in all matters involving definition and specification of goods and the grading of goods by quality. Indeed in 2016, the Authority entered into a memorandum of understanding (MOU) to enhance cooperation with Kenya Bureau of Standards. Section 60 (1) of the Competition Act also makes it an offence for any person to supply goods which do not meet the consumer information standards prescribed by law.

Ruth Mosoti, a competition and consumer protection attorney with Primerio Ltd. in Nairobi, notes that the Authority’s chief “essentially informed the producers that compliance with the law was not a pick-and-choose buffet style option. In this instance, the consumer information standard is defined under the Standards Act and that is why the bread manufacturers have been directed to comply as Authority head Mr. Wang’ombe Kariuki correctly put it.” Kariuki stated: “manufacturers have no latitude to elect which laws to adhere to”.  The specific standards in question refer to labeling.

The Authority has taken a soft enforcement approach with a focus on compliance rather than imposing the maximum penalty as prescribed by law. Contraventions of the consumer protection provisions attract a penalty of a maximum of ten million Shillings ($100,000) or imprisonment for a term not exceeding five years. One can only assume that the assertion by the Authority that no actual harm to consumers had been recorded yet as a result of the contraventions by the bread manufacturers must have influenced this soft-enforcement approach.

Standard
COVID-19, South Africa

Competition Commission releases impact report of the results from enforcement initiatives during the COVID-19 pandemic

By Gina Lodolo

On the 25th of April 2021 the Competition Commission (“Commission”) released a media statement pertaining to its now final report titled “the impact of the COVID-19 block exemptions and commissions enforcement during the pandemic” (“Report”).

At the onset of the pandemic, the Minister of the Department of Trade, Industry and Competition  (“DTIC”) established block exemptions, which would exempt practices usually falling foul of section 4 and 5 of the Competition Act 89 of 1998 (“Act”). The block exemptions were granted to the Healthcare Sector, the Retail Property Sector, and the Banking Sector. Further, the Commission noted that the pandemic required a particular focus on potential price-gouging by enhancing the advocacy, investigation and prosecution thereof.

The DTIC was empowered to create the block exemptions by Section 78 read with section 10(10) of the Competition Amendment Act 18 of 2018 (“Amendment Act”) which states that “The Minister may, after consultation with the Competition Commission, and in order to give effect to the purposes of this Act as set out in section 2, issue regulations in terms of section 78 exempting a category of agreements or practices from the application of this Chapter”. Further the Commission had a chance to test Section 8 of the Amendment Act which provides a broader discretion to the Commission in testing whether there has been a violation of the Act through excessive pricing.

The Report highlights that due to the uncertainty of the pandemic and the need to act quickly, the block exemptions created the possibility for unpredictable results. As such, to limit the scope of the block exemptions, collaboration needed to be at the request of the Ministers and only granted, upon motivations to respond to the pandemic.

These block exemptions showed their benefits in the Health Care Sector, which allowed cooperation and discussions regarding, inter alia, medical supplies, capacity for testing, sharing of resources, testing cost reduction and coordination of pharmaceuticals and other PPE resources.

Through these collaborative efforts the price of testing became a standardised R850, as opposed to ranging from R1 000-R1 500. As the pandemic started, hospital capacity became a forefront of concern. To this end, the Report states that private hospitals and public hospitals shared data which related to capacity, enabling  hospital beds and staff in all the respective hospitals to be known. Accordingly, the Report states that “South Africa managed the pandemic effectively such that the health system was not overwhelmed in the first wave of the pandemic. As such, very few public sector patients were treated at private facilities”. This cooperation will be beneficial in aiding in a potential third wave of the pandemic, which may very well require more hospital beds, of which, availability between the various hospitals is now known.

However, stakeholders with less bargaining power were bound to those with bigger bargaining power and found that they had little choice on the agreed prices by the larger players. Further, according to the Report “certain provincial departments of health and public sector hospitals” refused to collaborate due to the voluntary nature of the exemptions and therefore, the Report notes suggestions for compulsory exemptions in future. Further, criticism has been levied in that block exemptions could have been granted to enable medical aid schemes to participate in the COVID-19 roll out discussions through agreements on prioritisation, access, sourcing and side-effect reporting. The Report notes that in the future advocacy work will be increased to ensure that smaller stakeholders who feared a violation of the Competition Act, are informed and encouraged to participated in these collaborative  efforts.

In the Retail Sector, collaborative rental arrangements were required due to Level 5 Lockdown, which necessitated the closing of non-essential retail outlets. Collaboration was allowed by limiting evictions, payments holidays and adjusted lease agreements. However, only payment holidays were utilised. These payment holidays were not uniformly agreed between landlords, but rather agreed individually between landlords and their tenants. Nonetheless, the Report notes that the block exemptions purpose of “relief” was met by creating the “platform for discussions” as opposed to landlords agreeing upon a coordinated relief. Further, all retailors were able to benefit from the payment holidays, regardless of their size.

Michael Currie, a partner with competition boutique firm Primerio Ltd., highlights that the Report notes criticism in that the lack of uniformity in the granting of payment holidays, created an opportunity for potential anti-competitive tactics and “cartel-like” behaviour from landlords who “collectively decided to require 100% rental payment in one instance and to require 70% rental payment in another instance”. Accordingly, the Report notes from the minority feedback received, that in the future, frameworks for negotiation “should have been coupled with tools for mediation between landlords and retailers, to ensure synergy”.  

Similarly to the Retail Sector, in the Banking Sector the Report notes that collaboration was only found in bilateral agreements between banks and debtors in the granting of debt relief or payment holidays, as opposed to blanket relief for all debtors. Stakeholders recommended that “future exemptions or industry solutions that target the sector must not be limited to banks only but include all lenders to ensure a level playing ground” and further that “some of the conditions set should be maintained post the pandemic” as debtors may need longer to recover from the adverse economic effects of the lockdown.

Importantly, the pandemic created opportunities for price-gouging of hygiene, food and medical products. To this end, the Consumer and Customer Protection and National Disaster Management Regulations and Directions (“Regulations”) were published by the DTIC. According to the Report, the Commissions initiatives included advocacy initiatives through “enforcement letters” and visible enforcement, which ensured that suppliers susceptible to price-gouging  were aware of the possible prosecution and penalties thereof. Further, price-gouging reporting initiatives were increased by the establishment of a consumer hotline, which created the opportunity for consumers to report via SMS/Whatsapp, which yielded a total of 1199 investigations.

Importantly, the Report highlights the precedent set by the decisions in Competition Commission v Babelegi Workwear and Industrial Supplies CC (“Babelegi”) and  Competition Commission of South Africa v Dis-Chem Pharmacies Limited (“Dis-Chem”) where it was held by the Competition Tribunal (“Tribunal”) that price-gouging in terms of section 8(1)(a) of the Amendment Act can be determined in cases where market power is not sustained over a longer period of time. The Tribunal found that firms who were seen to have temporary market power had engaged in price-gouging. The Report states that it “established precedent for a simplified test to determine whether price gouging occurred”.  Accordingly, The South African team at Primerio International is of the view that this application of Section 8(1)(a) of the Amendment Act is flawed in that the traditional economic tests in establishing excessive pricing were watered down to provide for the circumstances of the pandemic, without relying on the Regulations, but rather the legislation. Thus, as noted in the Report, creating precedent of a now simplified price-gouging test. [For an in depth discussion click here: https://academic.oup.com/jeclap/article/11/9/524/5917388 ]

Further, the Competition Appeal Court (“CAC”) in Babelegi went to great lengths to emphasis the flaws in the Tribunals decision. The CAC emphasised the competition law principle of durability, which requires that for a determination of market power to be reasonable, the pricing must be sustained for a long period of time. Durability is an important factor, because it becomes inevitable that other firms will display opportunistic behaviour during a crisis such as COVID-19, which will then create a new equilibrium as competitors once again become constrained to have better prices than their competitors. Accordingly, the context of the pandemic does not warrant short cuts in decision making, such that a small firm, who sold a few masks at an excessive price, should be considered to be dominant. The CAC decided that the consumers were still capable of purchasing masks from other firms, therefore, although the pricing was excessive, consumer harm cannot be assumed simply because the excessive prices were in the context of a health crisis. Following the CAC’s criticism of the Tribunal’s decision, The CAC did not overturn the Tribunal’s decision. This bazar decision potentially finds reasoning in the Report which states that “A failure to uphold these judgements would have hindered the Commission’s ability to respond to the conduct in question, making price gouging more widespread”.  This statement is concerning as it alludes to decision making which was made to fit a desired outcome of low prices for consumers, potentially creating unnecessary intervention in competition, which would have naturally found an equilibrium. To this end, the Report states that “a total of R16 532 105 was paid in fines”, which, coupled with advocacy initiatives, deterred price increases.

To conclude, although the Tribunal may have erred in its utilisation of Section 8(1)(a) of the Amendment Act instead of utilising the Regulations, as a whole, and according to the Report the block exemptions granted served their purpose and had an overall positive effect in mitigating against the harsh effects of the pandemic.

Standard
Uncategorized

SOUTH AFRICA: SMALL MERGER NOTIFICATIONS: THE SACC JOINS THE EUROPEAN COMMISSION IN EXPANDING THE APPLICATION OF SMALL MERGER NOTIFICATIONS TO ‘DIGITAL MARKETS’

Charl van der Merwe (Primerio, South Africa) Laura Roßmann (Gleiss Lutz, Germany)

Introduction

The South African Competition Commission (“SACC”) recently published amended draft guidelines for notification of small mergers in “digital markets” (“Digital Merger Guidelines”).

The Digital Merger Guidelines seek to amend the SACC’s existing guidelines on small merger notification and marks a significant change to the assessment of mergers in South Africa.  Judging from past experiences, the Digital Merger Guidelines are unlikely to be changed significantly, before being made final.

Background to Digital Merger Guidelines

Competition discourse in recent years have been largely centered around the regulation of digital markets. Various agencies internationally have considered and introduced different mechanisms of dealing with the perceived dangers of digital markets.

Similarly so, the SACC also recently shifted focus to the regulation of digital markets, starting with its informal study and report, titled “Competition in the Digital Economy” (“Report”). 

The Report, although informal and non-binding, now effectively serves as the SACC’s framework for the future regulation of digital markets. In this regard, the Report identified various market characteristics which, the SACC believes, warrant deviation from the traditional approach to competition regulation in South Africa. For current purposes, this includes most notably:

  • concentration arising from first-mover advantage, data accumulation and network effects (so called “tipping markets”), which necessitates pro-active intervention; and
  • merger notification thresholds which, currently, allow most mergers in digital markets to be implemented, without competition scrutiny, as they are primarily turnover or asset based, meaning that the acquisition of various small startups who, individually, are insignificant and do not trigger the thresholds, are collectively important (“creeping mergers”).

This is also a stated objective in the Digital Merger Guidelines, which state that: “There are concerns that these potentially anti-competitive acquisitions are escaping regulatory scrutiny due the acquisitions taking place at an early stage in the life of the target before they have generated sufficient turnover that would trigger merger notification as set by the turnover thresholds”.

The potentially harmful effects of ‘creeping mergers’ and ‘killer acquisitions’ are well documented. The SACC has, however, gone one step further to include, in its definition (informally), transactions which are significant internationally (such as Facebook’s acquisition of WhatsApp), but which do not meet the thresholds in South Africa. In this regard, the SACC also cites the Google/Fitbit merger, which was not notifiable in South Africa, but which the SACC insisted must be notified.

It is necessary to note that the recent amendment to the Competition Act already introduced the concept of ‘creeping mergers’ into South African merger control. In this regard, the Competition Act, as amended, require the SACC to assess:

  • 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.

While these provisions have not yet been fully put to the test, it seems evident that these provisions aid only in ensuring a ‘holistic consideration’ of the potential effects of a notifiable merger, they fall short in dealing with the identified concerns in the digital economy – being non-notifiable mergers.

Small Merger Notifications South Africa

Small merger notifications are not novel. Competition agencies, including the SACC, have in various forms, reserved the powers to assess transactions which do not meet the statutory merger thresholds. In South Africa, this was done through the publication of the SACC’s Guidelines on the notification of small mergers (“Guidelines”). The Guidelines required that small mergers be notified, voluntarily, where a party to the proposed transaction was under investigation by the SACC or a respondent to complaint proceedings before the Competition Tribunal.

The intention and rationale were clear, where a party was under investigation (or prosecution) for having engaged in anti-competitive conduct, the proposed transaction had to be assessed to consider whether the proposed transaction may harm competition (or the pending case under investigation/prosecution). Put differently, there was a clear and pre-defined potential harm.

The Digital Merger Guidelines seek to extend the application of the Guidelines to require the notification of small mergers where a party to the transaction “operate in one or more digital markets(s)” and any of the following thresholds are met:

  • the purchase consideration exceeds R190 million, provided the target has activities in South Africa;
  • the purchase consideration is less than R190 million (e.g. the acquisition of 25% shareholding), but the target value (100% shareholding) exceeds R190 million, provided the target has activities in South Africa and the acquisition amounts to a merger (change of control);
  • at least one of the parties to the transaction has a market share of 35% or more in at least one digital market; or
  • the merger results in the merged entity being ‘dominant’ in the market (as defined in the Competition Act).

Small mergers are to be notified by way of a “letter” (as opposed to the statutory merger filing forms).  Further in terms of the Digital Merger Guidelines, the letter must contain, “sufficient details” regarding: the parties; the proposed transaction; and the markets in which the parties operate.

Most notably, the transaction is not limited to the ‘relevant market’ for purposes of the competition assessment but may include related markets.

Small Mergers in the EU and Germany

The European Commission (EC) has also recently published guidance on the application of Article 22 of the European Merger Regulation (ECMR) in order to, inter alia, tackle mergers concerning digital markets, which fall short of the merger filing thresholds at both EU and Member States level. Article 22 of the ECMR allows for the referral of a transaction, which “threatens to significantly affect competition”. In such cases, the EC may ‘invite’ Member States to request a referral of the merger from national level to the EC, resulting in a notification at EU level, even if the transaction does not fulfil neither the EU nor the respective national turnover thresholds. This may further result in an uncertainty for the undertakings concerned as to whether their proposed transaction is to be notified and assessed by the EC.

Interestingly, the guidance on the Application of Article 22 ECMR only includes a “reappraisal of the application”, as the European Commission puts it, as the current wording of Article 22 ECMR already includes a referral mechanism for transactions not fulfilling the merger control thresholds in the respective Member State. This, however, did not play any role in the EC’s referral practice up to date.

The EC’s guidance now seeks to change its practice, particularly to aim at the prevention of so-called killer acquisitions in the digital economy – where potentially problematic transactions are not notified due to target thresholds not being met. The continued role and effectiveness of merger thresholds, particularly in relation to the digital economy, has long been debated in the EU. This is especially true, as the already mentioned Facebook/WhatsApp merger (used as a case in point by the SACC in its Report) was only notified with the EC after referral requests of some Member States based on Article 22 ECMR, as the merger fell short of the EU turnover thresholds, and most national thresholds.

To address this, some Member States, especially Germany and Austria introduced a “transaction value”-merger threshold, to ensure the notification of transactions involving a start-up ‘unicorn’ not (yet) achieving a substantial turnover. This threshold, inter alia, requires a filing based on the “consideration of the transaction”, usually being the purchase price, exceeding a certain threshold. However, this novella in 2017 did not result in any significant increase in merger filings. In Germany, less than 10 (of roughly 2000) mergers per year were notified based on this new provision. Further, it remains unclear whether a threshold based on the target’s purchase price is, indeed, better placed to evaluate the parties’ market position. This is especially true when considering that none of the mergers notified under this provision entered the so-called 2nd phase, meaning that all such mergers were cleared (or withdrawn by the parties).

In light of the above, the EC guidance highlights a few important considerations relevant to the South Africa Digital Merger Guidelines:

  1. the EC guidance notes that the ‘transaction value’ thresholds, which had been introduced in Germany and Austria, as said, do not appear to be effective; and
  2. with the increased number of merger filings likely to follow under the new guidelines, it is necessary to ensure a balanced approach, through the implementation of measures to ensure the “simplification of merger procedures”.

Conclusion

Small mergers are not mandatorily notifiable. The Competition Act does, however, provide that the SACC may, within six months after the transaction has been implemented, require the transaction to be notified.

This SACC’s powers in terms of section 13(3) of the Act is discretionary. In this regard, the SACC may call for a merger to be notified where, in the view of the SACC, the merger may substantially prevent or lessen competition or cannot be justified on public interest grounds.

The inclusion of specific provisions in the Digital Merger Guidelines suggest, by necessary implication, that mergers in the digital market may substantially prevent or lessen competition or importantly, negatively impact public interest.

Defining the relevant competitive theory of harm in the digital economy is notoriously difficult. It is notably, however, that in terms of the Competition Act, as amended, public interest considerations (and by implication ‘national interest’) have been elevated to a separate and self-standing assessment. Public interest, in this context, includes most notably the “ability of small and medium businesses or firms controlled by historically disadvantaged persons to effectively enter into, participate in or expand”.

Accordingly, the South African merger control framework, as amended, provide the SACC with a unique ability to assess mergers in the digital market on grounds other than pure competition grounds.

In a separate but related issue, the SACC have initiated a market inquiry into the market dynamics in online intermediation platform – which is seen to be an ‘emergent market’ in South Africa and the SACC considers effective competition between these platforms to be key to digital expansion. In doing so, the SACC already signaled a clear intent to focus its assessment of digital markets on the less complex assessment of creating a space for small business to enter and operate. Furthermore, the insights which the SACC can gather through the less adversarial market inquiry, is likely to provide it with the valuable insights, which it may then apply to its merger assessments.

The SACC’s unique ability to consider expanded ‘public interest’ consideration in merger control, coupled with the SACC’s clear intention to require the notification of all mergers in the digital market, including small mergers, pose a significant risk to firms operating in the digital market.

Concerns regarding the SACC’s Digital Merger Guidelines are exacerbated by the fact that these guidelines have failed to account for important issues, highlighted in the EC guidance (or addressed some of the perceived failures of the EC guidance). In this regard, it has failed to provide sufficient clarity regarding a simplified process to be followed in respect of such small mergers. Moreover, the Digital Merger Guidelines may add uncertainty to transacting parties, internationally, without any appreciable benefit to competition.

This risk in relation to the Digital Merger Guidelines is not unique to South Africa. Similar ambiguity already exists in the EU with the application of the “new” Article 22 ECMR.  It may be safe to assume that any transaction filed in the EU on a ‘cautionary basis’, which may have a jurisdictional nexus to South Africa, ought similarly to be notified in South Africa, in terms of the Digital Merger Guidelines (once finalized).

Standard
dominance, South Africa, Telecoms

Interdict Granted in Favour of GovChat, Preventing Removal from the Whatsapp Platform

By Gina Lodolo

The South African Competition Tribunal (the “Tribunal”) has been called to consider a complaint of abuse of dominance against Whatsapp, arising out of its notice to terminate its contract with “GovChat” and off-board GovChat from the Whatsapp platform. GovChat is a chatbot service that allows the government to engage with citizens and provide government services such as health and education.

GovChat approached the Tribunal, alleging that due to the high market shares of Whatsapp in South Africa, competing platforms do not have sufficient scale (consumer numbers and reach) to provide alternatives on their own separate platform (such as WeChat in China). Smaller platforms are forced to make use of the Whatsapp network where Whatsapp’s terms of service do not allow for the expansion of the GovChat business model to become a competitor to Whatsapp. GovChat stated that its “entire existence will be materially prejudiced” if removed from the platform. It was alleged that the decision to off-board GovChat would put GovChat out of business and affect millions of citizens who benefit from the platform. CEO of GovChat, Eldrid Jordaan stated that “GovChat’s case is that Whatsapp/Facebook have abused their dominance because off-boarding GovChat has an exclusionary effect, preventing GovChat from operating in the relevant market.”Exclusionary acts are prohibited by Section 8(1)(c) of the Competition Act 89 of 1998 (“Act”) which states that a firm is prohibited from engaging in an exclusionary act if the “anti-competitive effect of that act outweighs its technological, efficiency or other pro-competitive gain”.  In this matter, Whatsapp/Facebook would have to prove that the exclusionary act has a pro-competitive gain.  The respondent has to discharge the allegation that refusing consumers access to an essential facility or a scarce service is an abuse of dominance according to sections 8(1)(b) and/or 8(1)(d)(ii) of the Act.

The alleged breach of the terms of service lies in the use of GovChat as a de facto communications platform for the government, when it is in fact not a government owned entity and WhatsApp stated of concern that “GovChat seeks to intermediate itself between government and citizens as a profit-making entity. It seems to aspire to become the official communication channel for the South African Government and effectively be the gateway through which citizens access government through Whatsapp”, where GovChat monetises confidential information of citizens through the use of the Whatsapp platform. Accordingly, citizens share confidential information which is monetized by a private entity, of which practice Whatsapp believes to be prejudicial to its platform and its terms of use, and therefore in breach of its terms of service.

GovChat logo

The competitive harm towards GovChat lies in the manner in which Whatsapp made use of its dominance through the unilateral off-board of GovChat. Whatsapp argues that its conduct cannot be anti-competitive as Whatsapp and GovChat do not provide the same facilities and are therefore not direct competitors. To this end, representing GovChat, Advocate Paul Farlam stated that “Facebook founder and CEO Mark Zuckerberg intends to introduce a payment system, as such, locking GovChat out of Whatsapp would give Whatsapp an advantage as being locked out of the market for an indefinite period would stop GovChat from entering the market first, allowing Whatsapp to keep customers away from GovChat while Whatsapp enters that market”. If this is the case,  Facebook is hiding under the guise that the offboard is due to a breach in its terms of service, in order to remove the potential competition from GovChat in the same market.

On the 25th of March 2021, the Tribunal issued an interim interdict to restrain Whatsapp from removing GovChat from its platform, pending the outcome of the complaint that GovChat has lodged against Facebook with the Competition Commission. The interim interdict has been granted in favour of GovChat as it established a prima facie case demonstrating the alleged exclusionary conduct and anticompetitive effects that the off-board would have on GovChat. Facebook failed to rebut the prima facie case by providing pro-competitive gains that outweigh the alleged anti-competitive effects of the off-board. Due to the nature of the GovChat platform being in the public interest during the COVID-19 pandemic, the Tribunal held that “the balance of convenience favours the granting of interim relief to the applicants who provide an invaluable service.”

Importantly, the relief is only interim in nature. Accordingly, the Competition Commission has not yet made a finding that Facebook has indeed contravened the Competition Act 89 of 1998  through an abuse of dominance.

Standard