The New South African Competition Amendment Bill – What this Means for Business

By Michael-James Currie

Background

On 1 December 2017, the Minister of Economic Development (under whose auspices the South African competition authorities fall), Ebrahim Patel, published draft amendments to the South African Competition Act [PDF], 89 of 1998 (Act) for public comment.

The proposed amendments (Amendments) to the Act, which principally aim to address concentration in the market, go well beyond pure competition issues and bestow a significant public-interest mandate on the competition authorities.

In this regard, Minister Patel has remarked that the old, i.e., current, Act “was focused mainly on the conduct of market participants rather than the structure of markets, and while this was part of industrial policy, there was room for competition legislation as well”.

south_africaPatel’s influence in advancing his industrial-policy objectives through the utilisation of the public-interest provisions in merger control are well documented. AAT contributors have written about the increasing trend by the competition authorities in merger control to impose public-interest conditions that go well beyond merger specificity – often justified on the basis of the Act’s preamble which, inter alia, seeks to promote a more inclusive economy.  The following extracts from the introduction to the Amendments indicate a similar, if not more expansive, role for public interest considerations in competition law enforcement:

“…the explicit reference to these structural and transformative objectives in the Act clearly  indicates that the legislature intended that competition policy should be broadly framed, embracing both traditional competition issues, as well as these explicit transformative public interest goals”.

The draft Bill focuses on creating and enhancing the substantive provisions of the Act aimed at addressing two key structural challenges in the South African economy: concentration and the racially-skewed spread of ownership of firms in the economy.

The role of public interest provisions in merger control have often been criticised, predominantly on the basis that once the agencies move away from competition issues and merger specificity and seek conditions that go beyond that which is strictly necessary to remedy any potential negative effects, one moves away from an objective standard by which to assess mergers. This leads to a negative impact on costs, timing and certainty – essential factors for potential investors considering entering or expanding into a market.

As John Oxenham, director of Pr1merio states, “from a policy perspective it is apparent that consumer-welfare tests have been frustrated by uncertainty”. In this regard, the South African authorities initially adopted a position in terms of which competition law played a primary role, with public-interest considerations taking second place.  Largely owing to Minister Patel’s intervention, the agencies have recently taken a more direct approach to public-interest considerations and have effectively elevated the role of public-interest considerations to the same level as pure competition matters – particularly in relation to merger control (although we have seen a similar influence of public-interest considerations in, inter alia, market inquiries and more recently in the publishing of industry Codes of Conduct, e.g., in the automotive aftermarkets industry).

Minister Patel speaks

Minister Patel speaks

The current amendments, however, risk elevating public-interest provisions above those of competition issues. The broad remedies and powers which the competition agencies may impose absent any evidence of anti-competitive behaviour are indicative of the competition agencies moving into an entirely new ‘world of enforcement’ in what could very likely be a significant ‘over-correction’ on the part of Minister Patel, at the cost of certainty and the likely deleterious impact on investment.

The proposed Amendments, which we unpack below, seem to elevate industrial policies above competition related objectives thereby introducing a significant amount of discretion on behalf of the agencies. Importantly, the Amendments are a clear departure from the general internationally accepted view that that ‘being big isn’t bad’, but competition law is rather about how you conduct yourself in the market place.

The Proposed Amendments

The Amendments identify five key objectives namely:

(i) The provisions of the Competition Act relating to prohibited practices and mergers must be strengthened.

(ii) Special attention must be given to the impact of anti-competitive conduct on small businesses and firms owned by historically disadvantaged persons.

(iii) The provisions relating to market inquiries must be strengthened so that their remedial actions effectively address market features and conduct that prevents, restricts or distorts competition in the relevant markets.

(iv) It is necessary to promote the alignment of competition-related processes and decisions with other public policies, programmes and interests.

(v) The administrative efficacy of the competition regulatory authorities and their processes must be enhanced.

At the outset, it may be worth noting that the Amendments now cater for the imposition of an administrative penalty for all contraventions of the Act (previously, only cartel conduct, resale price maintenance and certain abuse of dominance conduct attracted an administrative penalty for a first-time offence).

Secondly, the Amendments envisage that an administrative penalty may be imposed on any firm which forms part of a single economic entity (in an effort to preclude firms from setting up corporate structures to avoid liability).

We summarise below the key proposed Amendments to the Competition Act.

Abuse-of-Dominance Provisions

Excessive pricing

  • The evidentiary onus will now be on the respondent to counter the Competition Commission’s (Commission) prima facie case of excessive pricing against it.
  • The removal of the current requirement that an “excessive price” must be shown to be to the “detriment of consumers” in order to sustain a complaint.
  • An obligation on the Commission to publish guidelines to determine what constitutes an “excessive price”.

Predatory Pricing

  • The introduction of a standard which benchmarks against the respondents own “cost benchmarking” as opposed to the utilisation of more objective standards tests.
  • The benchmarking now includes reference to “average avoidable costs” or “long run average incremental costs” (previously the Act’s only tests were marginal costs and average variable costs).

General Exclusionary Conduct

  • The current general exclusionary conduct provision, Section 8(c), will be replaced by an open list of commonly accepted forms of exclusionary conduct as identified in Section 8(d).
  • The definition of exclusionary conduct will include not only “barriers to entry and expansion within a market, but also to participation in a market”.
  • The additional forms of abusive conduct will be added to Section 8(d):
    • prevent unreasonable conditions unrelated to the object of a contract being placed on the seller of goods or services”;
    • Section 8(1)(d)(vii) is inserted to include the practice of engaging in a margin squeeze as a possible abuse of dominance;
    • Section (1)(d)(viii) is introduced to protect suppliers to dominant firms from being required, through the abuse of dominance, to sell their goods or services at excessively low prices. This addresses the problem of monopsonies, namely when a customer enjoys significant buyer power over its suppliers”.

Price Discrimination

  • The Amendment will look to expand Section 9 of the Act to prohibit price discrimination by a dominant firm against its suppliers.
  • An onus of proof has been shifted on to the respondent to demonstrate that any price discrimination does not result in a substantial lessening of competition.

Merger-Control Provisions

  • Introduction of certain mandatory disclosures relating, in particular, to that of cross-shareholding or directorship between the merging parties and other third parties.
  • Introduction of provisions which essentially allow the competition authorities to treat a number of smaller transactions (which fell below the merger thresholds), which took place within three years, as a single merger on the date of the latest transaction.
  • Introduction of additional public-interest grounds which must be taken into account when assessing the effects of a merger. These relate to “ownership, control and the support of small businesses and firms owned or controlled by historically disadvantaged persons”.

Market Inquiries

  • Granting the Commission powers to make orders or impose remedies (including forced divestiture recommendations which must be approved by the Tribunal) following the conclusion of a market inquiry (previously the Commission was only empowered to make recommendations to Parliament).
  • The introduction of a new competition test for market inquiries, namely whether any feature or combination of features in a market that prevents, restricts or distorts competition in that market constitutes an “adverse effect” (a significant departure from the traditional “substantial lessening of competition” test).
  • Focussed market inquiries are envisaged to replace the “Complex Monopoly” provisions which were promulgated in 2009 but not yet brought into effect.

Additional Amendments

  • Empowering the Commission to grant leniency to any firm.
  • This is a departure from the current leniency policy, under which the Commission is only permitted to grant leniency to the ‘first through the door’.

What does this all mean going forward?

The above proposed amendments are not exhaustive. In addition to above, it is apparent that Minister Patel envisages utilising the competition agencies and Act as a “one-stop-shop” in order to address not only competition issues but facilitate increased transformation within the industry and to promote a number of additional socio-economic objectives (i.e., to bring industrial policies within the remit of the competition agencies).

In a move which would may undermine the independence and impartiality of the competition agencies, the Amendment also intends providing the responsible “Minister with more effective means of participating in competition-related inquiries, investigations and adjudicative processes”.

The amendments also strengthen the available interventions that will be undertaken to redress the specific challenges posed by concentration and untransformed ownership”.

Competition-law observers interviewed by AAT point out that the principle of separation of powers is a fundamental cornerstone of the South African constitutional democracy and is paramount in ensuring that there is an appropriate ‘checks and balances’ system in place. It is for this reason that the judiciary (which in this context includes the competition agencies) must remain independent, impartial and act without fear or favour (as mandated in terms of the Act).

The increased interventionist role which the executive is envisaged to play, by way of the Amendments, in the context of competition law enforcement raises particular concerns in this regard.  Furthermore, the increased role of public-interest considerations effectively confers on the competition agencies the responsibility of determining the relevant ambit, scope and enforcement of socio-economic objectives. These are broad, subjective and may be vastly different depending on whether one is assessing these non-competition objectives in the short or long term.

Any uncertainty regarding the relevant factors which the competition authorities ought to take into account or whose views the authorities will be prepared to afford the most weight too, risks trust being lost in the objectivity and impartiality of the enforcement agencies. This will have a direct negative impact on the Government’s objective in selling South Africa as an investor friendly environment.

In addition, as Primerio attorney and competition counsel Andreas Stargard notes, the “future role played by the SACC’s market inquiries” is arguably open to significant abuse, as “the Competition Commission has broad discretion to impose robust remedies, even absent any evidence of a substantial lessening of competition.”

  • Mr. Stargard notes that the draft Amendment Bill, in its own words in section 43D (clause 21) “places a duty on the Commission to remedy structural features identified as having an adverse effect on competition in a market, including the use of divestiture orders. It also requires the Commission to record its reasons for the identified remedy. … These amendments empower the Commission to tailor new remedies demanded by the findings of the market inquiry. These remedies can be creative and flexible, constrained only by the requirements that they address the adverse effect on competition established by the market inquiry, and are reasonable and practicable.”
Andreas Stargard

Andreas Stargard

Although the Amendments recognise that concentration in of itself is not in all circumstances to be construed as an a priori negative, the lack of a clear and objective set of criteria together with the lower threshold (i.e., “adverse effect”) which must be met before the competition authorities may impose far-reaching remedies, coupled with the interventionist role which the executive may play (particularly in relation to market inquiries), may have a number of deterrent effects on both competition and investment.

Mr. Stargard notes in this regard that the “approach taken by the new draft legislation may in fact stifle innovation, growth, and an appetite for commercial expansion, thereby counteracting the express goals listed in its preamble:  Firms that are currently sitting at a market share of around 30% for instance may not be incentivised to obtain any greater accretive share for fear of being construed as holding a dominant market position, once the 35% threshold is crossed“.

The objectives to facilitate a spread of ownership is not a novel objective of the post-Apartheid government and a number of pieces of legislation and policies have been introduced in order to facilitate the entry of small previously disadvantaged players into the market through agencies generally better equipped to deal with this. These policies, in general, have arguably not led to the government’s envisaged benefits. There may be a number of reasons for this, but the new Amendments do not seek to address the previous failures or identify why various other initiatives and pieces of legislation such as the Black Economic Empowerment (BEE) legislation has not worked (to the extent envisaged by Government). Furthermore, the Tribunal summed up this potential conflict neatly in the following extract in the Distillers case:

Thus the public interest asserted pulls us in opposing directions. Where there are other appropriate legislative instruments to redress the public interest, we must be cognisant of them in determining what is left for us to do before we can consider whether the residual public interest, that is that part of the public interest not susceptible to or better able to be dealt with under another law, is substantial.”

Perhaps directing the substantial amount of tax payers’ money away from a certain dominant state-owned Airline – which has been plagued with maladministration – and rather use those funds to invest in small businesses will be a better solution to grow the economy and spread ownership to previously disadvantaged groups than potentially prejudicing dominant firms which are in fact efficient.

Furthermore, ordering divestitures requires that there be a suitable third party who could effectively take up the divested business and impose a competitive constraint on the dominant entity. It seems inevitable that based on the proposed Amendments the competition authorities will be placed in the invidious position of considering a divestiture to an entity which may not yet have proven any successful track record. The Amendments do not provide guidance for this and although the competition authorities have the necessary skills and resources to assess whether conduct has an anti-competitive effect on the market, it is less clear whether the authorities have the necessary skills to properly identify a suitable third party acquirer of a divested business.

In addition and importantly, promoting competition within the market achieves public interest objectives. Likewise, anything which undermines competition in the market will have a negative impact on the public interest considerations.

John Oxenham

John Oxenham

As John Oxenham and Patrick Smith have argued elsewhere, “competition drives a more efficient allocation of resources, resulting in lower prices and better quality products for customers. Lower prices typically result in an expansion of output. Output expansion, combined with the effect of lower prices in respect of one good or service frees up resources to be spent in other areas of the economy. The result is likely to be higher output and, most importantly for emerging economies, employment”.

While it is true that ordinarily, a decrease in concentration and market power should result in an increase in employment we have not seen a comprehensive assessment of the negative costs associated with pursuing public interest objectives. Any weakening of a pure competition test must imply some costs in terms of lost efficiency, or less competitive outcome, which is justified based on a party’s perspective of a particular public interest factor. That loss in efficiency and less competitive outcome is very likely to have negative consequences for consumers, growth, and employment. Accordingly, the pursuit of “public-interest factors” might have some component of a loss to the public interest itself. We have not seen that loss in efficiency (and resultant harm to the public interest, as comprehensively understood) meaningfully acknowledged in the proposed Amendments.

A further risk to the broad and open ended role which public interest considerations are likely to play in competition law matters should the Amendments be passed is a significant risk of interventionism by third parties (in particular, competitors, Trade Unions and Government) who may look to utilise the Act to simply to harass competitors rather than pursue legitimate pro-competition objectives. The competition authorities will need to be extra mindful of the delays, costs and uncertainty which opportunistic intervention may lead to.

Although there are certain aspects of the Amendments which are welcomed, such as limiting the timeline of market inquiries, from a policy perspective the Amendments appear to go far beyond consumer protection issues in an effort to address certain socio-economic disparities in the South African economy, and may, in fact very likely hinder the development of the economy.

Based on the objectives which underpin the Amendments, it appears as if the Department of Economic Development is focused on dividing the existing ‘economic pie’ rather than on growing it for the benefit of all South Africans.

From a competition law enforcement perspective, however, firms conducting business in South Africa are likely to see a significant shake-up should the Amendments be brought into effect as a number of markets have been identified as highly concentrated (including, Communication Energy, Financial Services, Food and agro-processing, Infrastructure and construction, Intermediate industrial products, Mining, Pharmaceuticals and Transport).

[To contact any of the contributors to this article, or should you require any further information regarding the Amendment Bill, you are welcome to contact the AAT editors at editor@africanantitrust.com]

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SOUTH AFRICA: ZUMA’S STATE OF THE NATION ADDRESS MAY BE HINT AT INTRODUCTION OF COMPLEX MONOPOLY PROVISIONS

While the media headlines are largely filled with the disruptions that took place at the State of the Nation Address (SONA) by President Jacob Zuma on 9 February 2017, the President made an important remark which, if true, may have a significant impact on competition law in South Africa, particular in relation to abuse of dominance cases.

In this regard, the President stated that:

During this year, the Department of Economic Development will bring legislation to Cabinet that will seek to amend the Competition Act. It will among others address the need to have a more inclusive economy and to de-concentrate the high levels of ownership and control we see in many sectors. We will then table the legislation for consideration by parliament.

In this way, we seek to open up the economy to new players, give black South Africans opportunities in the economy and indeed help to make the economy more dynamic, competitive and inclusive. This is our vision of radical economic transformation.”

Patel talksNeither the President nor Minister Patel have given any further clarity as to the proposed legislative amendments other than Patel’s remarks early in January 2017 in which he stated that:

The review covers areas such as the efficacy of the administration of the Competition Act, procedural aspects in the investigation and prosecution of offences, matters relating to abuse of dominance, more effective investigations against cartels and the current public interest provisions of the act.

Says John Oxenham, a competition attorney who has closely followed the legislative and policy developments, “despite the broad non-committal remarks by Minister Patel, it is clear that the Minister is zealous in having the ‘complex monopoly’ provisions brought into force to address in order to address, what the Minister perceives to be, significant abuse of dominance in certain concentrated markets.”

In terms of the provisions, as currently drafted, where five or less firms have 75% market share in the same market, a firm could be found to have engaged in prohibited conduct if any two or more of those firms collectively act in a parallel manner which has the effect of lessening competition in the market (i.e. by creating barriers to entry, charging excessive prices or exclusive dealing and “other market characteristics which indicate coordinated behavior”).

white-collar-crimeDespite having been promulgated in 2009, the ‘complex monopoly’ provisions have not yet been brought into effect largely due to the concerns raised as to how these provisions will be enforced, says Primerio Ltd.’s Andreas Stargard: “It is noteworthy that the introduction of criminal liability for directors and persons with management authority who engage in cartel conduct was also promulgated in 2009, but surprised most (including the Competition Authorities) when it was quite unexpectedly brought into force in 2016.”

Minister Patel was no doubt a key driving force behind the introduction of criminal liability and it would, therefore, not be surprising if the complex monopoly provisions are brought into force with equal swiftness in 2017.

Copperweld elsewhere: Why SA is not pursuing fisheries “cartel”

The concept of single economic entities and intra-company conspiracies

 

Competition forum highlights antitrust enforcement, international cooperation

South Africa signs cooperation agreements with Russia and Kenya

Leading government officials presented their respective countries’ accomplishments in the antitrust arena at the 10th annual Competition Law, Economics & Policy Conference in Cape Town yesterday.

south_africaThe attendees ranged from the SA Minister of Economic Development, Ebrahim Patel, and the Commissioner of the Competition Commission, Tembinkosi Bonakele, to their Russian and Kenyan counterparts.  Kenya Competition Authority director general Francis Kariuki emphasised the officials’ desire to remove barriers to trade.  He was quoted as saying he looked forward to exchanging information on cross-border cartels, which affect both the South African and Kenyan economies: tsar_200“We have regional economic communities and regional trade. There are some infractions in South Africa which are affecting Kenya and vice versa. We want to join hands to do market enquiries and do research. This will inform our governments when they come up with policies.”

On the inside-BRICS front, the SA Commission signed an MoU with Russia, adding to Russia’s “rich and diverse bilateral agreements portfolio.”  The MoU is described as focussing particularly on pharmaceutical and automotive sectors, in which pending or future sectoral inquiries would see information-sharing between the Federal Antimonopoly Service (FAS) of Russia and the SACC, according to the FAS deputy chief Andrey Tsarikovskiy.

Patel talksMister Patel’s keynote address showed the glass half-full and half-empty, focussing in part on the need to “scale” the South African agency activity up to the level of the “success story” of domestic competition enforcement and its large caseload (quoting 133 new cartel cases initiated in the past year).

Never one to omit politicisation, Mr. Patel noted the perceived parallels he saw between South African history of concentrating economic power in the hands of a minority, raising indirectly the issue of public-interest concessions made in antitrust investigations, including M&A matters.  Mr. Patel clearly sees the SACC’s role as including a reduction in economic inequality among the populace, rather than being a neutral competition enforcer guided solely by internationally recognised legal antitrust & economic principles.  Both he and Commissioner Bonakele drew parallels between their anti-cartel enforcement and a purported reduction in the SA poverty rate of a whopping four tenths of a percent.

 

 

The Coca Cola bottlers merger & the costs of placating third parties in merger control

Tax Man Patel Strikes Again: Merger Conditions Going Beyond Antitrust

By Michael-James Currie

On 4 May 2016, it was announced that the merging parties to the SABMiller/Coca-Cola merger have agreed to establish a R850 million development fund in order to address public interest concerns raised by the Minister of Economic Development, Minister Patel.

south_africaThe latest deal struck with Patel follows the R1 billion commitment from the merging parties in the SABMiller/AB-Inbev merger less than a month ago.

Collectively, these two commitments, which equate to R1.85 billion (or approximately U.S. $132 million), exceed the total administrative penalties which were paid by over 13 firms in the “construction cartel” (in 2013, the total penalties amounted to approximately R1.4 billion) which is regarded as the most significant and highly publicised cartel to be investigated and prosecuted by the Competition Commission to date.

A South African competition practitioner with knowledge of the recent cases observed that “[c]onsidering that there have been, in our view, no substantial arguments raised that either of the two mergers pose any substantial anti-competitive concerns, it appears absurd that to date, not a single administrative penalty imposed on a firm for hardcore cartel conduct matches the quantum which the respective merging parties have agreed to pay to get their deals done.” It further appears evident that the conditions imposed, although broadly described by the Minister as being necessary to address public interest concerns, are in fact at all merger specific.

In a clear move to placate Minister Patel and preclude further intervention by the Minister which may have the effect of delaying the merger, the merging parties in both mergers respectively, have agreed to these conditions. The timing of the two commitments are, however, illuminating.

Patel talks.jpgThe commitment made by the merging parties to the SAB/Coca-Cola merger, which was filed at the Competition Commission in March 2015, comes after the Competition Commission itself recommended that the merger be approved subject to an agreed R150 million development fund to help train and support historically disadvantaged farmers and suppliers. Despite the agreement reached with the Competition Commission and a confirmed hearing in May 2016 (effectively 14 months after the proposed transaction was filed) the merging parties have recognised the risk of further delays should Minster Patel intervene during the hearing proceedings.

In contrast, the in the SAB/AB In-Bev deal, the top executives met with Minster Patel soon after the deal was notified (albeit behind closed door discussions outside of the SACC’s merger-control process) in an attempt to pre-empt Minster Patel’s intervention. It is expected that the Competition Commission would, today, conclude its investigation and make its recommendations to the Competition Tribunal some four months after the this deal was filed at the competition authorities.

Patel signature on 73AMinister Patel has expressed his satisfaction with the two ‘agreements’ as  it is in line with his express commitment to target multinational deals, in particular, in order to promote government’s industrial policies and socio-economic objectives.

In the world of commercial negotiations and deal-making, the parties are, however, hardly in an equally bargaining position when before the competition authorities – a bargaining chip in Minister Patel’s favour which is no doubt aware of.

Whether the strategies adopted by the merging parties in respect of both the SABMiller/Ab-Inbev or the SAB/Coca-Cola merger will pave the way for the expeditious conclusion of the review process remains to be seen (although we would tend to think it certainly will in Patel’s absence from the hearings). The agreements will, however, certainly influence the Landscape of merger control in South Africa.

The precedent set by these two proposed mergers will no doubt result in greater uncertainty in South Africa’s merger control process as the message seems clear. If merging parties want to get a multinational deal concluded in South Africa and you are in Minister Patel’s sights, pay-up – irrespective of the merger specific effects of the deal.

As Andreas Stargard, a U.S.-based Pr1merio antitrust practitioner with a focus on Africa notes: “It will be interesting to see whether the Competition Tribunal, which is tasked with ultimately approving or prohibiting a large merger, will consider whether the interventionist conditions imposed by the current ministry and agreed to by the merging parties are in fact merger-specific.”  Although the Tribunal is often reluctant to get involved in conditions which have been agreed to by the respective parties, the Tribunal should be cognisant of the fact that orders of the Tribunal are precedent setting and that imposing conditions to a merger which go beyond what is necessary in terms of the Competition Act as far as merger specificity is concerned, may be undesirable.

Both parties to both recent mergers have agreed to further public interest-related conditions pertaining to employment. In the SAB/Coca-Cola deal, the parties have further agreed to “maintaining employment at current levels for three years and not reduce jobs by natural attrition”, however, may retrench up to 250 “non-unionised” head office employees. Despite the intervention by Minister Patel (who formerly headed the Southern African Clothing and Textile Workers Union) and the Food and Allied Workers Union, it would appear completely outside the realm of competition policy if the Competition Tribunal imposes this condition, as effectively the competition authorities would be providing greater protection to trade union members as opposed to non-trade union members. A clearer indication of a complete lack of merger specificity may be hard to come by.

 

Criminal Antitrust: South Africa begins to enforce felony provisions

Price-fixers face up to 10 years prison time, starting May 1st

Prison time for executives is now firmly on the not-so-distant horizon in South Africa: As reported in some media outlets, the criminalisation of certain hard-core (and possibly lesser) antitrust offences is finally being implemented in the Republic — notably after more than 8 years of the relevant legislation technically being on the books.

white collar crimeWe are referring to the “phased” implementation of the 2009 Competition Amendment Act.  The legislation technically criminalised hard-core antitrust offences such as bid-rigging or price-fixing cartels.  However, President Zuma has, until now, not yet implemented or effectively signed the criminal provision of the Act (section 73A) into law.

Enter his Economic Development Minister, Ebrahim Patel:

Patel signature on 73AAccording to news reports, Mr. Patel announced today (Thursday), that the criminalisation of the price-fixing cartel offence would henceforth be enforced.  Section 73A will be gazetted tomorrow, 22 April 2016, and hold the force of law from 1 May 2016.  BDLive also reports that even the lesser “abuse of dominance” (or more commonly “monopolisation”) offence would be subject to the criminal penalties, but AAT is awaiting independent confirmation on this subject.  As Andreas Stargard, a U.S.-based Pr1merio antitrust practitioner with a focus on Africa and experience counseling clients in criminal competition matters, explains:

“If Mr. Patel indeed made this statement, and I doubt this, it would signal a departure from the rest of the world’s antitrust regimes: It is highly uncommon to have the monopolisation offence constitute a criminal act — indeed I am aware of no jurisdiction where this is the case.

In the United States, the only conduct constituting a Sherman Act offence pursued by the DOJ as a potential felony involve so-called ‘hard-core’ violations.  This would include horizontal price-fixing among competitors; territorial allocations; output allocations; and bid-rigging.  The same holds true in the UK.  That said, monopolisation or abuse of dominance is simply not among the criminalised antitrust violations elsewhere, and I’d be surprised if South Africa took this unusual path.

We have since been able to confirm that the BDLive report incorrectly refers to abuse of dominance as being criminalised.  AAT has obtained a copy of Mr Patel’s speech which provides clearly only for cartel conduct to be subjected to imprisonment:

“We are confident that because our work on cartels over the past five years has given clarity in the market on what collusion entails and what kind of acts falls within prohibited practices, we can now step up our efforts to the next level in our endeavor to combat corruption, cartels and anti-competitive conduct that raise prices and keep businesses and new entrants out of local markets.

Accordingly, government will tomorrow gazette a Presidential Proclamation that brings into effect certain sections of the Competition Amendment Act, with effect from 1 May 2016, which make it a criminal offence for directors or managers of a firm to collude with their competitors to fix prices, divide markets among themselves or collude in tenders or to acquiesce in collusion and they expose themselves to time in jail if convicted.”

The Patel announcements come ahead of his upcoming budget vote speech, and as he has shown in recent months, Mr. Patel is a proud advocate for tougher competition enforcement in the country.  “We want to make sure that it just does not make sense to collude,” he is reported as saying today.  This follows the Minister’s speech during the Parliament debate in February, where he announced that, “we will now introduce measures shortly to make it a criminal offence in any industry to collude and fix-prices. It will send a message to everyone that we mean business on stamping out corruption and collusion. We must build competitive strengths through innovation, not through sitting in rooms somewhere fixing tenders, prices and contracts.”

White-collar crime: it pays, but is getting riskier

white collar crime 2We live in the era of the Panama Papers, where the notion of white-collar business people going to jail is not an entirely unlikely outcome for some.  Antitrust offences, however, have historically not been enforced worldwide as stringently as public corruption or tax-evasion matters, for instance.  Key jurisdictions with criminalisation of competition offences remain few, notably the U.S. and the UK.

In South Africa, since at least 2014, both Competition Commissioner Tembinkosi Bonakele and Minister Patel have been engaging in discussions on how and when to implement the Act “to ensure that the necessary institutional capacity is available to apply the [criminal] amendments.”  While some provisions (relating to the agency’s market-inquiry powers) went into effect in 2013, the criminalisation provisions remain unimplemented to date — but this is about to change.

During these negotiations, as reported on AAT, the minister and SACC admitted in a remarkable self-assessment that the Commission then lacked “the institutional capacity needed to comply with the higher burden of proof in criminal cases.”  One notable aspect of potential discord lies in not only in the different standard of proof in civil vs. criminal matters (“more probable than not” vs. “beyond a reasonable doubt”), but perhaps more importantly can be found on the procedural side, preventing rapid implementation of the law: There has been historic friction between various elements of the RSA’s police forces and (special) prosecutorial services, and the power to prosecute crimes notably remains within the hands of the National Prosecuting Authority, supported in its investigations by the South African Police Service.

History & Legislative Background – and a bit of Advice from the U.S.

Starting in the spring and summer of 2008, the rumoured legislative clamp-down on corrupt & anti-competitive business practices by the government made the RSA business papers’ headlines.

During a presentation Mr. Stargard gave at a Johannesburg conference in September that year (“Criminalising Competition Law: A New Era of ‘Antitrust with Teeth’ in South Africa? Lessons Learned from the U.S. Perspective“), he quoted a few highlights among them, such as “Competition Bill to Pave Way for Criminal Liability”, “Tough on directors”, “Criminalisation of directors by far most controversial”, “Bosses Must Pay Fines Themselves”, “Likely to give rise to constitutional challenges”, and “Disqualification from directorships … very career limiting”.

Stargard, whose practice includes criminal and civil antitrust work, having represented South African Airways in the global “Air Cargo Cartel” investigations, also notes that  international best-practice recommendations all highlight the positive effect of criminal antitrust penalties. For example, the OECD’s Hard-Core Cartel Report recommended that governments consider the introduction and imposition of criminal antitrust sanctions against individuals to enhance deterrence and incentives to cooperate through leniency programmes.  Then-DOJ antitrust chief  Tom Barnett said in 2008, the year South Africa introduced its legislation: “Jail time creates the most effective, necessary deterrent. … [N]othing in our enforcement arsenal has as great a deterrent as the threat of substantial jail time in a United States prison, either as a result of a criminal trial or a guilty plea.”

Mr. Stargard points out the following recommendations to serve as guide-posts for the Commission going forward in its “new era” of criminal enforcement:

Cornerstones of a successful criminal antitrust regime

  • Crystal-clear demarcation of criminal vs. civil conduct
  • Highly effective leniency policy also applies to individuals
  • Standard of proof must be met beyond a reasonable doubt
  • No blanket liability for negligent directors – only actors liable
  • Plea bargaining to be used as an effective tool to reduce sentence
  • Clear pronouncements by enforcement agency to help counsel predict outcomes

Demarcation of criminal vs civil antitrust conduct in U.S.

What lies ahead?

After 1 May, the penalties for violating Section 73A of the Competition Amendment Act will range from a period of up to 10 years in prison and/or a fine of up to R500 000.00.  It appears that the introduction of criminal provisions will not have a retrospective effect, but will only apply prospectively from 1 May 2016 onward.

robber barons

Robber barons…

The introduction of criminal sanctions for cartel conduct raise several constitutional concerns. It is likely that, in the event of the imposition of criminal sanctions, the constitutional validity of the relevant Competition Amendment Act provisions will be challenged. In particular, section 73A(5) of the Amendment Act, introduces a reverse onus on the accused, in that the onus for rebutting the Competition Tribunal of Competition Appeal Court’s conclusion rests with the accused in criminal proceedings. The reverse onus’ constitutional validity is questionable given the constitutional right to a fair trial and the right to be presumed innocent.

John Oxenham, also with Pr1merio, notes that the “criminalisation of cartel conduct is a development which needs to be carefully considered and well planned before its official introduction due to the imminent effects it will have on current South African competition law.” The successful prosecution of cartel conduct rests heavily on the efficiency of corporate leniency policies. The introduction of criminal sanctions and in turn the National Prosecuting Authority will undoubtedly have an effect on the current corporate leniency policies. It is important to consider granting the staff of a company applying for corporate leniency in relation to cartel activity ‘full immunity’ from criminal prosecution in order to encourage companies to come forward and not debilitate the very purpose of corporate leniency policies. The careful integration of criminal sanctions is therefore vital in ensuring that the very purpose of its introduction, namely to deter corruption and anti-competitive conduct, is achieved.

Update [22 April 2016]: As anticipated, the South African government gazetted [published] the official document starting the era of criminal antitrust enforcement under section 73A as of today, signed 18 April 2016:

gazette 73A.jpg

Ministerial meddling in mergers

Intervention by economic ministry outside proper competition channels yields R1 billion employment fund

As reported yesterday, AB InBev has agreed to a R1bn ($69m) fund to buoy the South African beer industry and to “protect” domestic jobs.  It is widely seen as a direct payment in exchange for the blessing of the U.S. $105 billion takeover of SABMiller by InBev — notably occurring outside the usual channels of the Competition Authorities, instead taking place as behind-closed-door meetings held between the parties and the Minister for Economic Development, Ibrahim Patel, and his staff.

Patel talks.jpgAs we reported earlier this week, the previously granted extension of the competition authorities’ review was “widely suspected that the request for the extension is due to intervention by the Minister of Economic Development, in relation to public interest grounds. Although there is no suggestion at this stage that Minister Patel is opposing the deal, the proposed intervention does highlight bring into sharp focus the fact that multinational mega-deals face a number of hurdles in getting the deal done.”
AAT has reported previously on “extra-judicial factors,” as well as the interventionism by the current ministry.  This latest deal struck by Mr. Patel and the parent of famed Budweiser beer includes a promise by the parties to preserve full-time employment levels in the country for five years after closing, according to AB InBev.  Moreover, the companies pledged to provide financial help for new farms to increase raw materials production of beer inputs like hops and barley.
The minister is quoted as saying: “This transaction is by far the largest yet to be considered by the competition authorities and it’s important that South Africans know that the takeover of a local iconic company will bring tangible benefits.  Jobs and inclusive growth are the central concerns in our economy.”
ABInbev

The holy trinity of InBev’s beers

Our editors and contributing authors have reported (and warned) on multiple occasions that the extra-procedural behaviour of the economic minister effectively side-lines the competition agencies, thereby eroding the perceived or real authority of the Competition Commission and the Tribunal.  Says Andreas Stargard, a competition law practitioner with a focus on Africa:
“This ‘unscripted’ process risks future merger parties not taking the Authorities seriously and side-stepping them ex ante by a short visit to the Minister instead, cutting a deal that may be in the interest of South Africans according to his ministry’s current political view, but certainly not according to well-founded and legislatively prescribed antitrust principles.  The Commission and the Tribunal take the latter into account, whereas the Minister is not bound by them, by principled legal analysis, nor by competition economics.”
This is especially true as the current deal involves the takeover of SABMiller, an entity that controls 90% of South Africa’s beer market.  From a pure antitrust perspective, this transaction would certainly raise an agency’s interest in an in-depth investigation on the competition merits — not merely on the basis of job maintenance and other protectionist goals that may serve a political purpose but do not protect or assure future competition in an otherwise concentrated market.
Says one African antitrust attorney familiar with the matter, “What may be a short-term populist achievement, racking up political points for Mr. Patel and the ANC, may well turn out to be a less-than-optimal antitrust outcome in the long run.”

The Big Picture: Public-Interest Factors in Antitrust

AAT the big picture

Public-Interest Considerations in Competition Policy Take Center Stage… Once Again

By Michael Currie

An increasing trend in South Africa’s competition regulatory environment is the emphasis that the competition authorities and policy makers are placing on what is known as public-interest provisions. While we have authored a number of articles that have been published on African Antitrust highlighting our concern and disapproval of an overly-zealous reliance on public interest provisions, especially in the framework of merger control, the Competition Authorities have become increasingly bold in shaping there policies around public interest and industrial policy agendas.

In this article, we discuss the Vodacom/Neotel merger as well as COSATU’s response to the announcement that market inquiry will be conducted in the grocery retail sector, as these two developments personify the influence that Minister Patel has over the SACC’s policy and the very clear industrial policy agenda’s that Patel is using the SACC to promote.

In the past number of years in South Africa, public interest considerations have been no more prevalent than in merger control. While, to date, there has not been a merger prohibited based purely on public interest grounds, there have been a number of mergers which, despite no finding having been made that such a merger will lessen competition, have been approved subject to significantly onerous conditions, based on public-interest grounds.

south_africaThe Law

The South African Competition Act, 89 of 1998 (“Competition Act”) requires that the competition authorities consider the impact of a merger on certain public interest grounds, which are expressly listed in Section 12A of the Competition Act.

We have, on African Antitrust,[1] consistently stressed the inappropriateness of imposing burdensome conditions on mergers relating to public interest considerations, and raised the legitimate concerns that the South African Competition Authorities are increasingly being utilised as a mechanism by which to promote the government’s industrial policies.

Furthermore, conditions have been imposed on mergers without any substantial assessment done on balancing potential short term losses with long term gains.

Be that as it may, the conditions that have most commonly been imposed on mergers, based on public interest grounds, relates to employment. The impact of a merger on employment is one of the express public interest considerations that is contained in Section 12A.

What is deeply concerning, however, that as we will discuss below, the SACC has recently broadened the scope of public interest considerations to extend well past those grounds listed in Section 12A, effectively ensuring that when it comes to evaluating a merger on public interest grounds, the SACC is effectively, unrestricted.

Vodacom

Vodacom is South Africa’s largest mobile service provider and merging with Neotel would allow Vodacom to fast-track its rollout of a fixed line network.  The merger still needs to be approved by the South African Competition Tribunal (“SACT”).

On 30 June 2015, the SACC made recommendations to the SACT to approve the merger between Vodacom and Neotel, subject to stringent conditions.

The conditions recommended to be imposed on this merger will certainly ring alarm bells for all entities (especially large businesses which have a BEE shareholding) who are considering undertaking a merger in South Africa.

The SACC, who is of the view that the merger will substantially lessen competition in the market, has recommended that the following conditions to be imposed on the merger:

  • There be no retrenchments of Neotel employees;
  • That Vodacom invest R10 billion (approximately $1 billion) into data, connectivity and fixed line infrastructure; and
  • That Vodacom’s Black Economic Empowerment (“BEE”) shareholding is increased by R1.9 billion (the value of Neotel) multiplied by 19%.

The SACC’s recommendation that Vodacom’s BEE shareholding has to increase to a certain value is considerably worrisome, as it is very difficult, in our view, to justify the imposition of such a condition, in terms of the law or in terms of any social policy objective.

As noted above, the competition authorities are obliged, in terms of the Competition Act, to consider the impact that a merger may have on a number of public interest grounds. In terms of the Competition Act, the SACC and SACT, when evaluating a merger, must consider the impact that the merger will have on:

  • “A particular industry sector or region;
  • Employment;
  • The ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive; and
  • The ability of national industries to compete in international markets.”[2]

Simply put, there is in our view, no justifiable legal basis, upon which to impose a condition relating to the BEE shareholding as proposed by the SACC in this merger.

A Disconcerting Trend Away from Law & Economics

Regardless of whether the merging parties accept the SACC’s recommended conditions, the competition authorities are increasingly using conditions imposed in previous mergers, as precedent to justify and become increasingly ambitious when considering conditions to be imposed on any prospective transaction. Thus, even if the conditions imposed in this particular merger are not overly-burdensome on the parties themselves, it is most likely that the conditions, should they be approved by the SACT, will set new precedent for any future transactions.

The competition authorities are inadvertently creating a ‘threshold’ of conditions. This is evident by the way in which the Commission seems to default to a recommendation of a two-to-three year moratorium on retrenchments, whenever there is a concern arising or pressure placed on the SACC relating to retrenchments.

It is well noted that timing is of critical importance when it comes to the success of a implementing a merger. The fact that the SACC has quite brazenly taken upon itself, the duty to foster and advance the government’s socio-economic and industrial policies no doubt leads to greater uncertainty as to the nature of the conditions that may be imposed on a proposed merger.

In this regard it is worth noting that the SACC has published draft guidelines (currently for public comment) on the Assessment of Public Interest Provisions on Mergers (the “Guidelines”). While the Guidelines are still in draft form, like most of the SACC’s guidelines published to date, it allow for a significant degree of discretion on the part of the SACC.

The Guidelines were an attempt to provide greater clarity and certainty when it comes to assessing the impact that a merger may have on the public interest grounds listed in Section 12A of the Competition Act, however, the Guidelines do not provide guidance with respect to assessing the impact that a merger may have on grounds not listed in Section 12A.

Hence, despite the Guidelines seeking to add clarity and certainty to the issue, the SACC’s expansion of public-interest grounds has for all practical purposes brought us back to square one.

Another Market Inquiry: Grocery/Retail

As mentioned above, public-interest considerations have now been used as the catalyst to drive other competition objectives; most notably, the recently announced market inquiry into the grocery retail sector.

It has been our suspicion from the outset that the market inquiry into the retail sector is driven by an underlying desire to promote Patel’s industrial policies, rather than address any or understand the structure of the market to ensure more competitive market is advanced.

The response by one of South Africa’s largest trade unions, COSATU, has publicly proclaimed its support for the market inquiry, and the reasons advanced in support of the inquiry, very much confirms our suspicions.

In an article published on their website, COSATU has expressed a number of reasons why they support the inquiry. Unsurprisingly, few of the reasons put forward relate to a desire to better understand the functioning of the market from a competition perspective. Much like Mr Patel, the Minister of Economic Development, COSATU has viewed the market inquiry from a socio-economic paradigm as opposed to a competition one.

While the grocery retail market share is largely attributed to the four biggest retailers in the South Africa, the broad ambit of the inquiry coupled with Patel’s comments made in Parliament in which he stated that the retail sector was a great entry point for black South Africans should leave little doubt in any objective observer’s mind that the market inquiry into the grocery sector is steeped in promoting governments industrial policies through the channels of competition regulation.

It should also come as no surprise that Patel was previously a labour activist and previously headed the Southern African Clothing and Textile Workers Union (SACTWU).

COSATU has expressed its support for the market inquiry, largely because COSATU is of the view that the market inquiry will address a number of socio-economic concerns. The following statement made by COSATU clearly illustrates as much:

“It should also be noted that the grocery retail sector is characterized by precarious and atypical employment. Most workers in the sector do not enjoy their basic labour-related socio-economic rights. Negative practices such as labour broking, outsourcing, casualisation and low-pay are prevalent in the sector. COSATU strongly believes that this inquiry is essential for addressing the above-mentioned socio-economic trends.”[3]

The preamble to the Competition Act recognises that Apartheid created a certain concentration of market shares and that South Africa needs a greater spread of ownership. In no way, however, can competition law be used as policy to address, replace and undermine legislation and institutions designed specifically to address identified concerns. In other words, the claim made by COSATU that the market inquiry will address negative labour practices, shows a fundamental flaw in understanding the purpose and nature of competition law and policy.

South Africa has extensive labour legislation and a number of institutions that have been established to deal with negative labour practices.

Placing the responsibility of protecting our labour workforce beyond the scope of the Competition Act, would undermine the efforts of the legislature as well as the institutions entrusted in promoting and enforcing fair labour practices.

Furthermore, even if the market inquiry does in one way or another lead to a greater number of smaller independent retailers, it is difficult to foresee how this will benefit labour conditions. Large retailers’ employees generally belong to trade unions who can act as a voice on their behalf. Employees of small retailers have far less bargaining power.

While it may be that COSATU, as a trade union, need not be too concerned with competition issues as such, trade unions in general have played have had an increasingly significant influence on competition law policy.

It is imperative that an institution such as the SACC remain independent and impartial, yet the SACC’s willingness to align itself with the policies Patel is championing for undoubtedly risks the independence, proper functioning and impartiality of the SACC — a risk the SACC must ensure it protects itself against.


[1] See here, here, and here.

[2] Section 12A(3) of the Competition Act, 89 of 1998.

[3] http://www.cosatu.org.za/show.php?ID=10618#sthash.XLWeNExH.dpuf