As AAT has reported on extensively, the South African Competition Amendment Bill, currently pending in Parliament, is likely to be adopted in short order in its current draft form.

It carries with it significant, and in our view, adverse, effects that will burden companies trying to conduct business or invest in South Africa. These burdens will be particularly onerous on foreign entities wishing to enter the market by acquisitions, as well as any firm having a market share approaching the presumptive threshold of dominance, namely 35%

On Wednesday, 17 October 2018, the law firms of Primerio and Norton Incorporated held an in-depth seminar and round-table discussion on the ramifications of the Competition Amendment Bill. The setting was an intimate “fireside chat“ with business and in-house legal representatives from leading companies, active across a variety of sectors in the South African economy.

Moderated and given an international pan-African perspective by Primerio partner Andreas Stargard, the panel included colleagues John Oxenham and Michael-James Currie, who delved into the details of the proposed amendments to the existing Competition Act, covered extensively by AAT here.

As of today, 18 October 2018, the Bill appears set to be promulgated.  The SA Parliament’s committee on economic development has rubber-stamped the proposed amendments after a prior committee walk-out staged by the opposition Democratic Alliance (DA), in opposition to the Bill. DA MP and economic development spokesperson Michael Cardo states:

The ANC rammed the Competition Amendment Bill through the committee on economic development, and adopted a report agreeing to various amendments. To make sure they had the numbers for a quorum, the ANC bussed in two never-seen-before members to act as pliant yes men and women. Questions from the DA to the minister… This bill is going to have far-reaching consequences for the economy. It gives both the minister and the competition authorities a great deal of power to try and reshape the economy. It is unfortunate that the ANC, and the committee chair in particular, have suspended their critical faculties to force through this controversial bill and behaved like puppets on a string pulled by the minister of economic development.”

The Amendment Bill introduces significant powers for ministerial intervention and bestows greater powers on the Competition Commission, the investigatory body of the competition authorities in South Africa.

The panel discussion provided invaluable insights into the driving forces behind the Bill and ultimately what this means for companies in South Africa as it certainly won’t be business as usual if the Amendment Bill is brought into effect – particularly not for dominant entities.

[If you attended the panel discussion and would like to provide feedback to the panelists or would generally like to get in touch with the panelists, please send an email to editor@africanantitrust.com and we will put you in touch with the relevant individuals]

 

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South Africa Competition Tribunal: Merging Parties Penalised for Failure to Comply with Public Interest Conditions

By Michael-James Currie

On 29 June 2018, the South African Competition Tribunal (Tribunal) penalised the RTO Group R75 000 for failing to comply with the Tribunal’s conditional merger approval in respect of two companies now within the RTI stable, Warehouseit and Courierit. The Tribunal approved the large merger in August 2015.

In terms of the Tribunal’s merger approval, a moratorium on merger specific retrenchments for a two year period was imposed – now a frequently imposed public interest related condition by the competition agencies in South Africa.

RTI, however, was penalised not for retrenching any employees during this window but for failure to adhere to the monitoring obligations as set out in the Tribunal’s conditional approval certificate.

In this regard, the merging parties were obliged to notify their employees (and Courierit’s subcontractors) of the conditions to the merger approval within five days of the merger approval date. The merging parties were also obliged to provide the Competition Commission with an affidavit confirming that the obligations in terms of the conditions had been complied with.

By way of a consent order, RTI admitted that it failed to comply with its monitoring obligations and agreed to pay an administrative penalty for breaching the Tribunal’s conditional merger approval.

Although there have been a limited number of cases in respect of which an administrative penalty has been imposed for a breach of the merger conditions, this case demonstrates the importance of fully complying with the terms set out by way of a conditional merger approval.

Furthermore, although notifying the employees of the relevant conditions may not have been a particularly onus obligation, merging parties should take particular cognisance of monitoring and reporting obligations when negotiating conditions with the Competition Commission. Merging parties understandably place greater emphasis on the substantive aspects of the conditions and may underestimate the reporting obligations related thereto – particularly if conditions are being negotiated at the eleventh hour (which is not uncommon).

While there are mechanism’s available to merging parties to remedy any patently unworkable aspects contained in merger approval conditions, it is advisable to ensure that the conditions are practical and capable of being adhered to in full prior to being finalised – assuming the merging parties have that luxury.

[Michael-James Currie is a South African based competition lawyer and practices across Sub-Saharan Africa]

Business community embraces COMESA competition law: First-ever #CCCworkshop at full capacity

The first-ever COMESA-sponsored competition law workshop focussed solely on the business community, currently underway in Nairobi, Kenya, stretches the capacity of the Hilton conference room where it is being held.

The event’s tag line is “Benefits to Business.” Especially now, with the African continent sporting over 400 companies with over $500m in annual revenues, the topic of antitrust regulation in Africa is more pertinent than ever, according to the COMESA Competition Commission (CCC).

The head of the Zambian competition regulator (CCPC), Dr. Chilufya Sampa, introduced the first panel and guest of honour. He identified the threats of anticompetitive last behaviour as grounds for he need to understand and support the work of he CCC and its sister agencies in the member states.

With COMESA trade liberalisation, the markets at issue are much larger than kenya or other national markets. The effects of anticompetitive conduct are thus often magnified accordingly.

The one-stop shop nature of the CCC’s merger notification system simplifies and renders more cost-effective the transactional work of companies doing business in COMESA.

The Keynote speaker, Mr. Mohammed Nyaoga Muigai, highlighted the exciting future of the more and more integrated African markets, offering new challenges and opportunities. He challenged the audience to imagine a single market of over 750 million consumers. Companies will have to think creatively and “outside the box” in these enlarged common markets.

His perspective is twofold: for one, as a businessman and lawyer, but also as a regulator and board chairman and member of the Kenyan Central Bank. Effective competition policy (and access to the legal system) allows to prepare the ground for the successful carrying out of business in the common market. Yet, businesses must know what the regulatory regime actually is. Therefore, the duty of lawyers is to educate their clients about the strictures and requirements of all applicable competition law, across all COMESA member states.

After a group photo, the event continued with an informative presentation by Mr. Willard Mwemba on key facts that “companies should know” on merger control in the (soon enlarged to 21 member states, with the imminent addition of Tunisia and Somalia) COMESA region, starting with its historical roots in COMESA Treaty Article 55 and continuing through the current era since 2013 of the CCC’s regulatory oversight.

Willard Mwemba, Head of M&A at the CCC

He provided relevant merger statistics, jointly with Director of Trade affairs, Dr. Francis Mangeni, which were of great interest to the audience, followed by a discussion of substantive merger review analysis as it is undertaken by the Commission. The benefits of the “one-stop-shop” characteristic of CCC notification versus multiple individual filings were extolled and individual past M&A cases discussed.

AAT will live-update the blog as the event progresses.

Dr. Sampa, CCPC executive

Dr. Sampa, as head of the Zambian CCPC and a former CCC Board member, emphasized the importance for companies to have functioning and well-implemented antitrust compliance programmes in place.

A spirited discussion was had relating to the 30% market share threshold the Commission utilises to evaluate triggers for launching antitrust conduct investigations. Primerio’s Andreas Stargard argued for COMESA’s consideration of an increase in this trigger threshold to 40%, proposing that:

“Especially in an already concentrated market (where players possess majority shares anyway), a low initial share threshold is of little to no additional enforcement value. On the contrary, a low threshold may hamper vigorous competition by smaller to midsize competitors or newer entrants, who wish to grow their (previously innocuous) smaller share of the market but are simultaneously held back in their growth efforts by trying not to cross the 30% barrier so as not to attract the attention of the Commission.”

There was also an issue raised regarding private equity and non-profit / “impact investors” and the like having to bear the burden of notifications and ancillary fees in cases that are otherwise unobjectionable almost by definition (since the investors are not present on the market of the acquired entities in which they invest). Dr. Mangeni indicated that the CCC will investigate and consider whether a proposed change in the applicable Rules to account for this problem may be advisable in the future.

Mary Gurure, head of legal (CCC)

The CCC’s chief legal advisor, Ms. Mary Gurure, presented on conflict of laws issues within the COMESA regime, harmonisation of laws, and CCC engagements with individual member states on these issues.

Crucially, she also mentioned a novel initiative to replicate a COMESA-focused competition enforcer network, akin to the ECN and ICN groupings of international antitrust agencies.

Business panel #CCCworkshop 2018

The conference concluded with a business lawyer panel, in which outside counsel and in-house business representatives voiced their perspectives, largely focusing on the issue of merger notifications. These topics included the (1) burdens of having to submit certified copies of documents, (2) high filing fees (particularly in light of relatively low-value deals being made in the region), (3) comparatively low notification thresholds (e.g., the $10m 2-party turnover limit), (4) remaining, if minimal, confusion over multiple filing obligations, (5) questions surrounding the true nature of the “public interest” criterion in the CCC’s merger evaluation, which could benefit from further clarification via a Guideline or the like, and (6) the importance of predictability and consistency in rulings.

Panellists also commented on the positive, countervailing benefits of the one-stop-shop nature of the CCC, as well as highlighting the friendly nature of the COMESA staff, which permits consensus-building and diplomatic resolutions of potential conflicts.

Mr. Mwemba concluded the event by responding to each of the panel members’ points, noting that forum-shopping based on the costs of filing fees reflected a misguided approach, that the CCC may consider increasing filing thresholds, and that the CCC’s average time to reach merger decisions has been 72 (calendar) days.

Restriction on parallel imports gets red-lighted by CAK

Enforcement Update: Kenya Exemption Applications

The Competition Authority of Kenya (“CAK”) recently issued a press release on its two decisions to reject exemptions applications under sections 25 and 26 of the Kenyan Competition Act 12 of 2010. The CAK rejected applications by WOW beverages (a leading distributor in the alcoholic beverages industry) and the Institute of Certified Public Secretaries (a professional body, hereafter “ICPS”).

WOW beverages filed an exemption application to the CAK, which would have allowed it to secure contracts with seven international suppliers to import and distribute exclusively 214 premium wine and spirit brands in Kenya. WOW beverages argued that the proposed exclusive contracts were necessary to protect its investment and would protect consumers from defective products, and guarantee accountability in the event that such products enter the Kenyan market. The CAK rejected this argument stating: “The Authority [CAK] is of the opinion that parallel imports, through legal channels, are likely to bring more benefits to Kenyan consumers, including the enhancement of intra-brand competition which often leads to lower prices.

The CAK’s decision on the application brought by ICPS (which was one of the first professional bodies to attempt to obtain an exemption to set fee guidelines) made it clear that there was no evidence to suggest that fixing prices for auditing services will improve the profession or prevent its decline and, instead, it is likely to eliminate the incentive to offer quality services. Interestingly, the CAK went a step further to state that “price fixing by professional associations extinguish[es] competition with no plausible public benefits” and went on to warn other professions that “the decision to reject the institute’s exemption application sends a strong message to professional bodies that fee guidelines decrease competition, reduce innovation and efficiencies, and limit customer choices”.  This likely follows from the recent increase in exemption applications brought by other professional bodies in Kenya such as the Institute of Certified Public Accountants of Kenya and the Law Society of Kenya (which has a remuneration order). The CAK’s decisions on these applications are likely to be published in short order.

With increased awareness of competition law in Kenya, more entities are applying to the CAK for exemptions primarily to ensure that they are not found to be engaging in anticompetitive conduct, where the penalty can be up to 10% of the turnover of the entity.

According to practicing Kenyan antitrust lawyer, Ruth Mosoti, the CAK has powers to allow an entity to engage in what would ordinarily be considered anticompetitive conduct.  The Act provides a framework on how such applications are to be determined “but, most importantly, the benefits must outweigh the competition concerns and meet the public-interest requirement.  The competition authority also appears to put great emphasis on espousing international best practices.  It is therefore important when one is making such an application to ensure that the same is backed by international best practices.”

Andreas Stargard, Ms. Mosoti’s colleague at Primerio Ltd., echoes her sentiments.  He notes that the CAK follows in the well-tread footsteps of other international competition enforcers, which have dealt with antitrust exemption applications for decades: “Similar to the European Commission in its past rulings on meritless Article 101(3) exemption requests, the CAK has diligently applied common-sense competition principles in these two recent cases.”  Stargard advises that other companies or trade groups wishing to seek reprieve from the Kenyan Act should consider certain key factors first before approaching the CAK:

First, ask yourself whether the proposed conduct for which you seek an exemption contributes to improving something other than your own bottom line (such as innovation that benefits others, or efficiency or a reduction in emissions, etc.), and consider whether consumers at large receive share of the resulting benefits.

In addition, just as with traditional joint-venture analysis, be prepared to articulate how the proposed agreement or restriction is absolutely indispensable to obtaining these benefits and accomplishing the stated economic goal.

Finally, seek competent legal advice from experts, who will be able to provide a professional evaluation whether or not the agreement you seek to exempt is likely to qualify under the criteria of sections 25 and 26 of the Act — or whether the CAK will rule against it, finding that an exclusivity clause or or restriction you seek will more likely than not eliminate competition.

For more on recent exemption application see our related articles, exclusively at AAT: Seeking Exemptions From Resale Price Maintenance Rules and Airlines Seek Antitrust Exemption: Kq-Cak Application Pending

 

 

 

Angola does Antitrust: Latest addition to world’s competition-law regimes

After its 2017 administration change, the Republic of Angola is eager to join other African nations with nascent competition-law enforcement regimes: Having been approved by a unanimous majority of 183 votes in parliament, the new Angolan competition act is expected to be enforced by the also newly-established “Competition Regulatory Authority” (“ARC”) in short order, before year’s end, according to experts.

According to reports, the Angolan law (comprising 56 articles across 8 chapters) prominently includes principles such as the public-interest criterion and “rules of sound competition in morality and ethics.”

Says Andreas Stargard, an antitrust/competition and white-collar attorney with Primerio Ltd.: “These are concepts often deemed non-traditional in the antitrust laws in the Western hemisphere.  Yet, public-interest considerations are increasingly common in African competition-law legislation and indeed often form the basis for otherwise difficult to justify pragmatic enforcement decisions we now encounter more frequently across the continent, both in merger and non-merger cases.”

Angola is a member of the African Union and the SADC (Southern African Development Community), whose most prominent member, the Republic of South Africa, has a comparatively long history of including public-interest considerations in its two decades of antitrust enforcement.  As to the general concept of Angola finally adopting a competition-law regime, it appears that a key driver was the anticipated diversification of the domestic economy:

“A functioning Angolan competition regime (meaning not only the statute but also including an effective enforcement agency) is long overdue, as recognised by the recently elected Angolan president, João Lourenço,” says attorney Stargard. “By supporting enactment of the Competition Bill, Mr. Lourenço has made good on his campaign promise from 2017 to incentivise foreign direct investment, increase domestic business growth, and — importantly for the population — encourage price competition in local consumer goods markets, as the cost of living in Angola is among the highest on the African continent”.

One of the drivers of the new government’s push for FDI and organic GDP growth is the desire to de-link the Angolan economic dependence from oil prices and production, and possibly also from China (which remains the country’s largest trading partner by far). Angolan fossil fuel and diamond exports — together by far the largest sectors of the economy, and as commodity industries, quite naturally subject to collusion risk and/or monopolistic practices, according to Mr. Stargard — have yielded at best inconsistent benefits to the country’s population at-large, and President Lourenço’s pro-competition intitiative appears to support the diversification of his country’s lopsided economy historically focused on mining and resource extraction.

 

 

 

 

 

Competition Authority approves KFC Franchise M&A with public-interest conditions

On 7 February 2018 the Competition Authority of Botswana (“The Competition Authority”) approved, with conditions, the acquisition by Bradleymore’s Holdings (Pty) Ltd (“Bradleymore’s”), which is incorporated in accordance with the laws of the Republic of Botswana (a joint venture between Vivo Energy Africa Holdings Limited and Baobab Khulisani South Africa (Pty) Ltd) of KFC franchises in Botswana, namely VPB Propco (Pty) Ltd (in liquidation), QSR Food Company (Pty) Ltd (in liquidation), Boitumelo Dijo (Pty) Ltd (in liquidation) and Greenax (Pty) Ltd (in liquidation).

The Competition Authority determined that the Proposed Transaction is not likely to result in the prevention or substantial lessening of competition, or endanger the continuity of the services offered in the market for quick-service or fast food restaurants.

Section 60 of the Competition Act No 17 of 2009 (“the Competition Act”) allows the Competition Authorities to approve a merger “subject to such conditions as it considers appropriate” and “contain such directions as the Authority considers necessary, reasonable and practicable to remedy, mitigate or prevent any adverse effects of the merger”.

Furthermore, section 61 of the Competition Act provides for either of the parties to a merger to offer an undertaking to the Competition Authority to address any concerns that may arise or be expected to arise during the Competition Authorities consideration of the notified merger and the Competition Authority may make determinations in relation to the merger on the basis of such an undertaking.

Pursuant to the provisions of section 60 and 61 of the Competition Act; the Competition Authority approved the Proposed Transaction with the following conditions:

  1. Bradleymore’s shall source a significant portion of their input requirements locally by continuing to source from existing suppliers that were engaged by VPB, provided they are YUM accredited; as well as consider sourcing from any other YUM accredited suppliers based in Botswana who are currently not supplying KFC;
  2. Bradleymore’s shall ensure that local suppliers are assisted in penetrating or meeting YUM’s standards of accreditation with the aim of sourcing from these suppliers; and
  3. The Parties shall not retrench any employees of the target entities as a result of the acquisition for a period of three (3) years from the implementation date. For the sake of clarity, retrenchments do not include: voluntary separation; voluntary early retirement; unreasonable refusal to be deployed in accordance with the provisions of the labour laws of Botswana; resignations or retirements in the ordinary course of business; terminations in the ordinary course of business; dismissals as a result of misconduct of poor performance.

In order for the Competition Authority to properly monitor compliance with the above conditions, the Competition Authority shall require Bradleymore’s to adhere to the following:

  1. Bradleymore’s shall annually (for a period of three years from the implementation date) submit to the Competition Authority, a detailed report     indicating:-
  2. Any changes to its employment records in the country and the reasons thereof;
  3. A list of its existing and new locally based suppliers (including the type of inputs they supply). This information can be captured in the supply agreements KFC has with such suppliers; and
  4. A copy of the strategy to be employed in building capacity of local suppliers in ensuring they meet YUM accreditation standards. That copy should be availed to the Authority within a period of twelve (12) months from the implementation date. The parties need to demonstrate to the Authority efforts made in identifying potential suppliers in line with their expansion strategy.

Stephany Torres, a competition lawyer, believes such a decision is indicative of the Competition Authorities’ tendency to give public interest considerations a prominent role in merger review.

In terms of section 59(1) of the Competition Act, “[i]n assessing a  proposed merger, the Authority shall first determine whether the merger (a) would be likely to prevent or substantially lessen competition or to restrict trade or the provision of any service or to endanger the continuity of supplies or services; or (b) would be likely to result in any enterprise, including an enterprise which is not involved as a party in the proposed merger, acquiring a dominant position in a market”.

In addition to considering the effect of a merger on competition, in terms of section 59(2) of the Competition Act, the Competition Authority may consider any factor which it considers bears upon the broader public interest, including the extent to which “(a) the proposed merger would be likely to result in a benefit to the public which would outweigh any detriment attributable to a substantial lessening of competition or to the acquisition or strengthening of a dominant position in a market; (b) the merger may improve, or prevent a decline in the production or distribution of goods or the provision of services; (c) the merger may promote technical or economic progress, having regard to Botswana’s development needs; (d) the proposed merger would be likely to affect a particular industrial sector or region; (e) the proposed merger would maintain or promote exports or employment; (f) the merger may advance citizen empowerment initiatives or enhance the competitiveness of citizen-owned small and medium sized enterprises; or (g) the merger may affect the ability of national industries to compete in international markets”.

Torres believes the Competition Authorities’ willingness to push public-interest considerations even in instances such as the proposed transaction, where no competition issues arise, is indicative of them trying to address unemployment issues in Botswana through their merger review.  This willingness to let public interest take centre stage is often seen in countries with new competition law regimes.  She expressed concern that public interest considerations may possibly be the deciding factor when making decisions regarding mergers as these are particularly difficult to quantify or objectively assess.

Merger Control: Public Interest & SINOPEC/Chevron

When the Stick is Greater than the Carrot

While China Petroleum & Chemical Corporation (Sinopec), and global commodities trader and miner Glencore are the front runners in a bid to buy Chevron’s South African Business (Chevron SA), it appears that Sinopec has managed to edge ahead after the Chinese firm has agreed to a number of public interest conditions in an effort to placate the South African Minister of Economic Development, Ebrahim Patel (Patel) and avoid ministerial intervention before the Competition Tribunal’s (the agency responsible for approving the merger) hearing.

PublicInterestpic.jpgThe South African Competition Commission (SACC), responsible for investigating and making recommendations to the Tribunal, recently published its recommendation in relation to the proposed Sinopec-Chevron deal. Unsurprisingly, consistent with large mergers (particularly by foreign acquiring firms) – the SACC’s recommendations contain a number of non-merger specific public interest conditions. A feature of South African merger control which has become increasingly prevalent in recent years (refer to the AB-InBev/SAB or the SAB/Coca-Cola mergers) – largely as a result of Minister Patel’s ‘direct’ involvement in the merger control process.

It is not yet cast in stone that Sinopec will in fact be the acquiring entity as the minority shareholders in Chevron SA enjoy a right to first refusal. Regardless of the entity who is ultimately successful in acquiring Chevron SA (Chevron has confirmed that the proposed deal with Glencore is also currently before the SACC), the South African government has set its price for investing in South Africa, as confirmed by Minister Patel’s following statement:

Government will not choose to whom Chevron sells control of Chevron South Africa, but we will ensure that proper public interest conditions, in line with the Competition Act, should apply to whoever is the successful bidder,”

Apart from the significant Ministerial intervention and the direct influence this has on the SACC’s independent investigation and review of a merger, a particularly contentious issue in relation to the imposition of public interest conditions relates to the Minister’s comment that the public interest conditions are “in line with the Competition Act”.

Although conditions regarding employment falls within the scope of section 12A(3) of the South African Competition Act, the remainder of the recommendations made by the SACC in casu goes beyond what was envisaged by the legislature in Section 12A(3) of the Competition Act. In this regard, the conditions recommended by the SACC include inter alia the following:

  • Sinopec must set up its head office in South Africa in order for it to co-ordinate and oversee its operations in South Africa and to use South Africa as the platform to oversee its operations throughout Africa;
  • Sinopec undertakes not to retrench any of its employees, in perpetuity;
  • Sinopec agrees to invest further in Chevron’s Cape Town refinery;
  • Sinopec undertakes to make a significant investment over and above the current investment plans of Chevron South Africa;
  • Sinopec must upgrade Chevron South Africa’s operations and expand its refinery capacity in South Africa;
  • Sinopec undertakes to maintain Chevron SA’s current baseline number of independently owned petrol stations;
  • Where independently owned petrol stations are to be established, Sinopec must ensure that Chevron SA will give preference to small businesses, especially black-owned businesses;
  • Sinopec must ensure that Chevron will favour small businesses in granting rights in respect of any new retailer owned petrol stations.
  • Sinopec must also ensure that Chevron will increase its level of supplies of (liquefied petroleum gas) to black-owned businesses, following the expiration of current contractual arrangements; and
  • Sinopec must promote the export and sale of South African manufactured products for sale in China through its service stations network in China.

More specifically, Minister Patel requires that Sinopec makes a R6bn Capex investment, commits to increasing the level of BEE ownership in Chevron SA from 25% to 29% and, an all-time favourite condition, establish a development fund worth R200m.

As John Oxenham, Director of Primerio notes, the absence of merger specificity together with the imposition of public interest conditions which go far beyond the specified grounds listed in the Competition Act has been consistently criticised for resulting in uncertainty, delays and costs in the merger review process. It also sends a message to entities that South Africa is open to business… on condition (at a time when our economy could do with every bit of foreign direct investment).

Regardless of the criticism levelled against the role of public interest conditions in merger control proceedings, the prevalence of public interest conditions is set to play and even greater role in merger control (and competition enforcement more generally) should the Competition Amendment Bill be brought into effect.

John Oxenham further notes: “The Competition Amendment Bill has broadens the scope of the SACC’s powers with regards to public interest, to include the ability of small businesses to enter into, participate in and expand within the relevant market and the promotion of a greater spread of ownership.”

Practising competition law attorney, Michael-James Currie states: “The Bill has clearly sought to strengthen and codify the role of public interest conditions in merger control and expressly elevates public interest considerations to the same status as pure competition issues – the fact that the Bill specifically broadens the scope and role of public interest conditions brings into question whether the proposed conditions in the Chevron deal are in fact “in line with the (current) Competition Act”.

Competition law enforcement in South Africa is set for a significant shake-up to the extent that the Amendment Act is brought into effect – which is likely to occur in 2018. For further insight and commentary to the Amendment Bill, please see an AAT exclusive article here.

One message which business is desperately shouting across at the South African Government at the moment is “policy certainty!”  However, the SACC’s recommendation in casu and the proposed changes to the Competition Act is a move in the opposite direction as it seeks to place a great deal of discretion in the hands of a few key policy decision makers (namely the Minister of the Department of Economic Development and the SACC’s Commissioner). Discretion, exercised in a subjective manner, runs very much contrary to policy certainty – which, in light of an imminent cabinet reshuffle under new ANC President Cyril Ramaphosa’s leadership, may be of particular concern.

Although the Tribunal ultimately needs to approve the merger, the Tribunal is reluctant to intervene in proceedings which are uncontested – which Minister Patel knows all too well. Accordingly, as a crafty negotiator, Minister Patel is well aware that parties in the position of Sinopec have one of two options, agree to the public interest conditions and expedite the merger review or proceed with a contested hearing which will most likely be opposed by the Minister.

Despite calls for a more consistent, certain and transparent application of competition law in South Africa, however, there seems to be a move away from international best practice and competition law enforcement in South Africa and once the Amendment Act is brought into effect, there is a material risk that political influence will undermine the independence, impartiality and effective enforcement of competition law in South Africa to subjective, unqualified and discretion based enforcement.

[The ATT editors wish to thank Charl van Merwe for his assistance with drafting this article]

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

By Michael-James Currie currie2

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]

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.

 

 

Growing Pains: From One-Trick Pony to Full-Fledged Enforcer?

COMESA Competition Commission Expands Enforcement Ambit from Merger Control to Conduct —

CCC Seeks Information on “Potentially” Anti-Competitive Agreements

By AAT Senior Contributor, Michael-James Currie.

Breaking News: The COMESA Competition Commission (CCC) has issued a notice (the “Notice”) calling on firms to notify the CCC of any agreements (both historic and forward looking) that may be anti-competitive, for the purpose of having such agreements ‘authorised’ or ‘exempted’ in terms of Article 20 of the COMESA Competition Regulations (the “Regulations”).

In terms of Article 20 of the Regulations, agreements which are anticompetitive may be exempted by the CCC if such an ‘anticompetitive agreement’ contributes positively to the ‘public interest’ to the extent that the public interest benefit outweighs the anti-competitive effect.

In terms of the CCC’s notice 1/2013, the following agreements may well be considered to be in the public interest when evaluating whether an anti-competitive agreement or concerted practice should be exempted:

  • Joint research and development ventures;
  • Specialisation agreements; and
  • Franchising agreements

As to the agreements or concerted practices which may be anti-competitive, the Notice refers specifically to the restrictive business practices listed in Article 16 of the Regulations which states that:

The following shall be prohibited as incompatible with the Common Market:

all agreements between undertakings, decisions by associations of undertakings and concerted practices which:

(a) may affect trade between Member States; and

(b) have as their object or effect the prevention, restriction or distortion of competition within the Common Market.”

It should be noted that Article 16 is deliberately drafted broadly so as to prohibit conduct which has as its “object” the prevention, restriction or distortion of competition. Certain conduct, such as price fixing, fixing of trading terms or conditions, allocating suppliers or markets or collusive tendering may be considered as having as its ‘object’ the distortion or restriction of competition in the market. Accordingly, firms who have engaged in this type of conduct may be held liable in the absence of any evidence of an anti-competitive effect (whether actual or potential).

Says Andreas Stargard, a competition practitioner with Primerio Ltd., “[t]he CCC’s notice is a clear sign that the agency is gathering momentum in its efforts to detect and prosecute anticompetitive practices within the member states — and is going beyond its ‘one-trick pony’ status as a pure merger-control gatekeeper.  We anticipate a more active role by the CCC in conduct investigations and presumptively also enforcement actions, as opposed to its previous rubber-stamping activity of approving transactions with a COMESA community dimension (and concomitant collection of vast filing fees).”

The CCC has recently signed a number of Memoranda of Understanding and Cooperation Agreements with various member states as well as a tripartite agreement with other broader regional forums such as the Southern African Development Community and the East African Community.

COMESA old flag colorThe web of MoU’s recently concluded, which have as their primary objectives the facilitation of information exchanges and cooperation between competition agencies, is certainly a significant stride made to assist the authorities, including the CCC, in detecting and prosecuting anticompetitive practices which may be taking place across the African continent.

A further indication of the CCC’s growing appetite and confidence to identify anticompetitive practices is that the CCC has announced that it is conducting a market enquiry into the grocery retail sector.  This is the first market inquiry to be conducted by the CCC.

In terms of the CCC’s Notice, firms who have not yet notified the CCC of agreements which may be anticompetitive, have approximately one month to do so. In other words, the CC has offered a leniency ‘window’ to incentivise firms to come forward and obtain an exemption in respect of agreements already implemented which may be in contravention of Article 16 of the Regulations.