Uncategorized

South African Competition Enforcement: a Juxtaposition.

AAT has previously reported on the South African “Consumer and Customer Protection and National Disaster Management Regulations and Directions” (Pricing Regulations) which came into force on 19 March 2020.

The Pricing Regulations provide the temporary framework within which excessive or unfair price increases will be assessed during the national state of disaster. Further, to give effect to the Pricing Regulations, the South African Competition Commission (SACC) and Competition Tribunal (Tribunal), both made specific provision to prioritize and prosecute matters arising out of the Pricing Regulations, on an urgent basis.

Following the publication of the Pricing Regulations, the SACC has reportedly received a myriad of complaints arising out of alleged breaches of the Pricing Regulations and, in order to effectively respond, has allocated its resources almost exclusively to dealing with such cases.

Notably, a large majority of these have not been referred to the Tribunal and, in some instance, the SACC has opted to, instead, resolve such allegations through direct and informal engagement with the relevant parties. In this regard, the SACC has taken the approach of liaising with industry players proactively, in order to greenlight pricing and other potentially anticompetitive conduct. This can be compared to the efforts of other international agencies who have undertaken to, on an expedited basis, consider and approve ‘waiver requests’. While firms may take comfort in the fact that the SACC will not prosecute firms who have cooperated in this informal manner, balancing cooperation with the right against self-incrimination may be a risky exercise for firms, particularly where such engagement takes place informally, without the advice of counsel.

Even so, there can be little doubt that the SACC, like its international counterparts, are wearing two hats, presenting firms with temporary but valuable measures to successfully navigate the uncertainty of a national state of disaster. The various exemptions published in terms of the Competition Act is a further such example.

In wearing the hat of enforcement, the SACC has concluded various settlements by way of consent orders, with small independent retailers and pharmacies emanating from the Pricing Regulations.

The most notable of these include a consent order, reached with face mask and protective gear distributor, Matus, following an investigation undertaken by the SACC which found that Matus increased the prices of dust masks (FFP1 and FFP2) for the relevant period, causing its gross profit margins to be markedly inflated. Matus, in the consent order, admitted to inflating its gross profit margins although it denied having contravened any laws (likely on the basis that it may not be dominant in any specific market, as required for a contravention of Section 8 of the Competition Act) and agreed to:

  • Pay an administrative penalty of R5.9 million;
  • Contribute R5 million to the Covid-19 Solidarity Fund;
  • Reduce its gross profit margin on dust masks to an acceptable level for the national disaster period (linked to an assurance that its gross profit margins for essential products will not be increased above that which was applicable on 16 February 2020).

The SACC has also, to date, referred and litigated two complaints before the Tribunal in terms of the Tribunal’s expedited Rules for Covid-19 Excessive Pricing Complaint Referrals (Tribunal Rules). These are:

Babelegi Workwear Overall Manufacturers & Industrial Supplies CC (Babelegi) – The SACC alleged that Babelegi increased the prices of facial masks for the period, earning a mark-up of over 500%, in contravention of the Pricing Regulations (and section 8 of the Competition Act).

Dis-Chem Pharmacies Limited (Dis-Chem) – The SACC alleged that Dis-Chem increased prices on surgical face masks (with increases between 43% and 261%) for the period February 2020 to March 2020, in contravention of the Pricing Regulations (and section 8 of the Competition Act).

The Dis-Chem matter has been interesting for a variety of reasons and is considered to be the ‘seminal case’ on prosecution in terms of the Pricing Regulations, with the SACC openly declaring that a “clear message must be sent that deters all other firms and Dis-Chem again from engaging in the same conduct”.

Dis-Chem is disputing its dominance in the relevant markets as well as the lawfulness of its decision to raise prices, arguing that it faced increased input costs and supply shortages which led to temporary price increases from all of its competitors and that Dis-Chem’s price adjustment was lower than that of other retailers.

From a procedural perspective, the matter has re-emphasized the need for compliance with the temporary Tribunal Rules, which provides for significantly reduced time periods, including that a respondent has 72 hours from service of the complaint referral in which to file a copy of their answering affidavit. Dis-Chem requested a one week extension for filing its answering affidavit, citing prejudice as a result of the complex nature of cases of excessive pricing and the severity of the penalty which may ultimately be imposed. The request was opposed by the SACC and Dis-Chem was forced to adhere to the shortened time period. Judgment is currently pending.

Competition agencies and advisors, globally, have stressed the pitfalls and advantaged of competition law during the state of disaster. A quick glance at enforcement statistics both now and following, for example the 2008 global financial crises, show that firms which have attempted to take advantage of consumers by flouting competition compliance during these times, have faced severe and endured consequences; economic and financial conditions cannot be used ex post to justify otherwise anticompetitive conduct.

Having said that, the proactive role played by the SACC also present opportunities for firms to utilize and take advantage of the temporary measures put in place by the SACC to green-light conduct which may otherwise be considered problematic.

The rules of the game have most certainly changed and, with it, there will be both winner and losers. A proactive approach to competition law compliance during these times, when perhaps firms are faced with more pressing concerns, may make all the difference.

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AAT exclusive, Access to Information, dominance, exemptions, South Africa, Uncategorized

Enforcement Alert: SACC ordered to remedy its complaint referral in 2nd CompuTicket abuse-of-dominance case

By Charl van der Merwe, assisted by Christine Turkington & Gina Lodolo

The South African competition Commission (SACC) has suffered yet another procedural setback- related to the facts pleaded in its referral affidavit – this time, in its ongoing saga with Computicket and Shoprite Checkers, apropos Computicket’s alleged abuse of dominance.

In its initial case against Computicket, which ultimately went to the Competition Appeal Court, SACC succeeded in holding Computicket to account for abuse of dominance in contravention of section 8(d)(i) of the Competition Act (Computicket One). Computicket One was based on the fact that Computicket had entered into exclusive agreements with customers which had the effect of excluding competitors from the market. See exclusive AAT article on Computicket One case here.

The SACC was critical of the conduct of Shoprite Checkers as, in Computicket One, the SACC alleged that the exclusive agreements were entered into between Computicket and Shoprite Checkers shortly after the Computicket was acquired by Shoprite Checkers. Computicket One was based on the agreement entered into for the period 2005 to 2010.

Accordingly and shortly after the conclusion of Computicket One, the SACC referred a second complaint against Computicket for abuse of dominance. The cause of action is substantively similar as that which had been found to be a contravention in Computicket One, however, this time based on the agreements entered into from January 2013 and which are alleged to be ongoing (Computicket Two). In Computicket Two, however, the SACC now seeks to hold Shoprite Checkers jointly and severally liable with Computicket in its capacity as the ultimate parent company of Computicket. Moreover, the SACC appears to seek the imposition of a penalty based on the higher turnover of Shoprite Checkers.

Note that Computicket Two was referred to the Tribunal prior to the enactment of the Competition Amendment Act, which provides for parent companies to be held jointly and severally liable for the conduct of subsidiaries and/or allows for the calculation of an administrative penalty, based on the turnover of the parent company where the parent was aware or ought to have been aware of the conduct of the subsidiary.

The Tribunal, therefore, found the SACC’s referral affidavit to be flawed and lacking of the facts (and points of law) necessary to sustain a cause of action, particularly in so far as it seeks to hold Shoprite Checkers liable. In this regard, the Tribunal expressly held that they view Computicket and Shoprite Checkers as separate economic entities and should thus be treated separately with respect to the allegations made in the Commission’s complaint referral.

The Tribunal went on the emphasize that on the consideration of dominance (which is the statutory first step to an assessment under section 8), “… the Commission conceded that Shoprite Checkers is not active in the market for outsourced ticketing services to inventory providers in which Computicket is active. Unsurprisingly, no market shares attributable to Shoprite Checkers are reflected anywhere in the Commission’s referral. It is simply unclear of what we are to make of the allegations against Shoprite Checkers.”

In order to correct these defects and instead of dismissing SACC’s case, the Tribunal ordered the SACC to file a supplementary affidavit. The Tribunal held that “[g]iven that the Commission’s reliance on the single economic entity doctrine fails and the question of dominance is abundantly opaque, the Commission must rectify its referral to properly reflect and clarify the case against Shoprite Checkers in order for it to meet the case put against it.”

Should the SACC fail to file its supplementary affidavit, within the 30 business days, as order by the Tribunal, Shoprite Checkers and Computicket may approach the Tribunal for an order that the case be dismissed.

John Oxenham, director of Primerio, notes that the Tribunal’s order in allowing the SACC an opportunity to first supplement or amend its referral affidavit is in line with the recent orders of both the Tribunal and Competition Appeal Court to first allow such opportunity for the SACC to remedy its case, instead of ordering an outright dismissal of the case on an interlocutory basis. This is likely to form the precedent for interlocutory applications, even where the facts suggest that the SACC’s case is opportunistic and incapable of being remedied.

According to competition lawyer, Michael-James Currie, the recent orders which have come out of the Tribunal and Competition Appeal Court in interlocutory applications will hopefully have a positive effect on the manner in which cases are referred and prosecuted in South Africa.

The SACC has at times demonstrated a tendency to be overly broad in its complaint referrals, causing respondent firms to engage in costly and time consuming internal investigations to assess the merits of such cases. With the development of the previously underutilized interlocutory processes, respondent firms are now able to, at an early stage of the litigation process, ensure that the SACC sets out its case in a concise manner, substantiated with the requisite factual allegations required to sustain its case, thereby avoiding the unnecessary cost of expansive internal investigations and protracted litigation.

 

 

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AAT, AAT exclusive, excessive pricing, South Africa, Uncategorized

South Africa Competition Tribunal: Regulations published to expedite COVID-19 excessive and unfair pricing complaint referrals

[The editors at AfricanAntitrust wish to thank Jemma Muller and Gina Lodolo for compiling this article]

On 3 April 2020, Minister Ebrahim Patel made amendments to section 27(2) of the Competition Act 89 of 1998 (“the Act”) with regards to the regulations pertaining to the functions of the Competition Tribunal (“the Tribunal”).

The amendment was enacted to regulate complaint referrals for alleged contravention of section 8(1)(a) of the Act which deals with the charging of excessive prices by a dominant firm. The amendment is crucial in light of the current state of affairs, where the charging of excessive prices has become more frequent during the Covid-19 outbreak. Accordingly, the amendment is only applicable for the duration of the period of the declaration of a Natural State of Disaster with regards to COVID-19.

An applicant who wishes to bring a complaint based on an alleged contravention of section 8(1)(a) of the Act, read with the Consumer and Customer Protection Regulations, must file a Notice of Motion and founding affidavit to the Tribunal.

Urgent complaint referral procedure

Who must file the complaint referral?

A complaint referral may be filed by the Commission or a complainant, as soon as possible after the commission has issued a notice of non-referral to that complainant.

Notice of motion requirements

An applicant must allege a contravention of section 8(1)(a), indicate the order sought against the respondent(s) and state the name and and address (electronic or otherwise) of each respondent in respect to whom the order is sought. Applicant’s may also state the date and time on which the applicant wishes the matter to be heard by the Tribunal.

Founding affidavit

The founding affidavit must set out the grounds of urgency and the material points of law and evidence that support the complaint. In addition, the applicant may include confirmatory affidavits from any factual or expert witnesses.

Procedure

The applicant must serve a copy of the Notice of Motion and founding affidavit on each of the respondent(s) named in the Notice of Motion and file a copy of the application with the Tribunal.

The important time periods:

A respondent must serve a copy of their Answering Affidavit on the complainant within 72 hours of service of the complaint referral. Thereafter the person who filed the Complaint referral may serve a copy for their Reply within 24 hours after being served with a copy of the Answering Affidavit.

The Tribunal will then determine the date and time for the hearing of the complaint referral (Tribunal Rules 6,16,17,18,18,47,54 and 55 apply to an application under this Rule unless they pertain to Rules which stipulate time-frames).

These documents may be filed electronically.

Urgent hearing

The Tribunal may direct that the urgent complaint proceedings in terms of the Rules may be conducted wholly as video or audio proceedings.

If no answering affidavit is filed within the period set out in the Notice of Motion or such extended period as may be determined by the Tribunal, the urgent complaint referral may be heard on an unopposed basis.

The Tribunal will determine if there was contravention of section 8(1)(a) of the Act based on the evidence contained in the affidavits unless there is a substantial dispute of fact which cannot be resolved by affidavits. In this case the Tribunal may determine an expedited procedure (which may include oral evidence on an expedited basis by way of video or audio proceedings). The Tribunal may also call for further evidence if it is required (subject to section 55 of the Act).

Remedies

The Tribunal may impose a pricing order if the respondent has been found to contravene section 8(1)(a) of the Act. The respondent may apply to appeal or review the decision on an urgent basis to the Competition Appeal Court (the pricing order will remain in force unless it is set aside by the court on appeal or review).

Consent order

The Commission may at any time (before, during and after and investigation) conclude a consent agreement for a complaint under section 8(1)(a) of the Act and it will be the full and final settlement of the matter  (including settlement of civil proceedings). This consent order may be confirmed by the Tribunal without hearing any evidence.

The amended complaint referral procedures equip complainants with the means in which to assist the competition authorities in penalizing those who have used the prevailing circumstances to exploit consumers, and is thus a commendable and efficient tool invoked by the Minister.

 

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Corona, Uncategorized

CORONA AND COMPETITION LAW: MINISTER PATEL AT THE FOREFRONT IN FIGHT AGAINST COVID-19 IN SOUTH AFRICA

By Charl van der Merwe

Global markets are in turmoil and governments around the globe are under increased strain to prevent the spread of the Covid-19 virus whilst maintaining necessary services. A key concern in South Africa and elsewhere has been the availability of key supplies and the capacity of the health care and other infrastructure system to meet the unprecedented demand.

In order to alleviate these concerns, South African Minster of Trade and Industry and Competition (DTIC) has moved to publish Regulations in terms of Section 78 of the South African Competition Act 89 of 1998 (Competition Act):

  1. exempting industry players in certain sectors from prosecution for conduct in contravention of Sections 4 and 5 (Act) (Block Exemptions); and
  2. prohibiting excessive pricing (and ensuring sufficient supply) by firms selling key supplies (Pricing Regulations);

Traditionally, exemptions in terms of the Competition Act were granted through application to the Competition Commission, based on the specific grounds as defined in section 10 of the Competition Act. In terms of the Competition Amendment Act, application for a block exemption can also be made directly to the Minister.

Related to the exemption process in terms of the Competition Act, is the powers of the Minister to publish directions under the recent Regulations issued in terms of section 27 (2) of the Disaster Management Act (GN 318 of 18 March 2020). In this regard, Regulation 10(6) provides that the Minister may issue directions to:

  1. protect consumers from excessive, unfair, unreasonable or unjust pricing of goods and services during the national state of disaster; and
  2. maintain security and availability of the supply of goods and services during the national state of disaster.

Block Exemptions

Block Exemptions have been published by the Minster in terms of section 10(10) of the Competition Act which provides that the Minister may, after consultation with the Competition Commission (SACC), issue regulations in terms of section 78, exempting a category of agreements or practices from the application of sections 4 and 5 of the Competition Act.

As at the date of writing, Block Exemptions have been granted to the Healthcare Sector, the Banking Sector and Retail Property Sector.

Health Care Sector

The exemption include a range of industry players, including healthcare facilities, pharmacies, medical suppliers, medical specialist, pathologists and laboratories, and healthcare funders.

Exemptions are fairly novel in South African competition law, although the National Hospital Network (NHN) has for many years now operated under an Exemption in terms of which it is permitted to engage in collective bargaining, global fee negotiations and centralized procurement (The NHN is a non-profit co-operative venture that is controlled by its members, a group of independent private hospitals who run medical establishments such as day clinics, sub-acute facilities and psychiatric facilities). The Exemption was renewed by the SACC for a further 5 year period in November 2018.

The Block Exemption will similarly allow industry players to coordinate on procurement of supplies, transferring equipment and coordinating the use of staff. In effect, the Block Exemption extends and broadens the scope of the exemption enjoyed by the NHN to include state and private healthcare.

While this move is certainly a welcome one to ensure that South Africa is able to effectively deal with the spread of Covid-19, its effect on competition in this market will be most interesting. The health care sector, and particularly large private sector players (Private Health Care), has long been in the cross-hairs of the SACC, with many enforcement actions, heavily contested merger control proceedings and most recently, the market inquiry into the private healthcare sector conducted and concluded by the SACC. Concentration and Coordination has been key to the debate.

Allied to this and according to industry expert, Avias Ngwenya of Nortons Inc, these measures are effectively a forced trail run of the South African Government’s recently proposed and highly criticized National Health Insurance (NHI) which, he believes will test the ability of private healthcare to provide healthcare services to the state.

While the Exemptions will apply only for so long as the state of disaster remains in effect, the effects of these measures on the industry is likely to endure for some time and will reform the debate around the future of health care in South Africa.

Banking Sector

The Block Exemption published in favour of the Banking Sector is aimed at exempting category of agreements or practices between Banks, Banking Association of South Africa and/or Payments Association of South Africa from the application of sections 4 and 5 of the Act and promoting cooperation between these industry participants to mitigate damages and to ensure the effective continuance of banking infrastructure. In this regard, industry participants are to coordinate and agree on, inter alia:

  1. operation of payment systems and the continued availability of notes at ATMs, branches and businesses;
  2. debtor and credit management to cater for payment holidays and debt relief (including limitations on asset recovery and the extension of further credit terms).

Retail Property Sector

The Block Exemption in respect of the Retail Property Sector applies only to retail landlords and designated retail tenants (required to shut down in terms of the national shut down currently in place) and aims to provide a framework for cooperation between industry participants in respect of payment holidays and rental discounts and limitations on the eviction of tenants. The Block Exemptions also seek to cater for cooperation on limitations to the restrictions placed on tenants to protect their viability during the nation disaster, likely to allow tenants to alter of expand their product or service offerings to fall within the category of businesses or services exempt from the restrictions currently enforced by Government, thereby ensuring alternative income and increased capacity on key products and services.

The Block Exemptions in respect of the Banking and Retail Sectors provide welcome relief to small businesses who have been hard hit by the restrictions put in place both locally and internationally. This is a key object and concern of the government and, in particular the DTIC who have placed small and medium business at the centre of competition policy in an effort to ensure greater participation by historically disadvantaged individuals in South Africa. This has been evident through the amendments to the Competition Act and recent conditions which have been imposed on large international mergers. The DTIC is, therefore, intent to ensure that these efforts are not effectively nullified by the emergency measures put in place to prevent the spread of the Covid-19.

Block Exemptions have not been widely utilised in South Africa. To the extent that the measures introduced by the Block Exemptions are effectively implemented, however, the use and application of the process of exemptions under the Competition Act may become a more prominent feature of the South African competition law process. The nature of emergencies are such that they expedite the implementation of historical process which were otherwise untouched or contested as the counterfactual has changed.

It is already evident that more and more industries affected by the Covid-19 will apply for or be granted block exemptions to ensure that they are able to effectively avert the negative effects associated with disruptions caused to the business and economy. Examples of these include the Grocery Retail and/or Fast Moving Consumable Goods Sectors, Security Sector and more.

Price Regulation

The Pricing Regulations, most interestingly was published by the Minster in terms of the Combination of the Competition Act, the Consumer Protection Act 61 of 2008(2008) and the Disaster Management Act (2002) and apply only to the ‘key supplies identified in the Pricing Regulations and will remain in effect only for so long as Covid-19 remains a ‘national disaster’.

Section 8(3)(f) of the Competition Act provides that in determining whether a price is an excessive price (for purposes of section 8(1)),  it must be determined whether that price is higher than a competitive price and whether such difference is unreasonable, determined by taking into account any regulation published by the Minister in terms of Section 78.

Now, in terms of the Pricing Regulations a price will be considered an excessive price for purposes of Section 8(1) of the Competition Act where, during this period of national disaster, a price increase:

  1. does not correspond to or is not equivalent to the increase in the costs of providing that goods or service; or
  2. increases the net margin or mark-up on that good or service above the average margin or mark-up for that good or service in the three month period prior to 1 March 2020.

Notably, Section 8 applies only to dominant firms.

In addition to the above, the Pricing Regulations contain a similar assessment for the consideration of what is termed unconscionable, unfair, unreasonable and unjust price increases in the Consumer Protection Act. While it is likely that what constitutes an excessive price under the Competition Act will also constitute an unreasonable price increase for purposes of the Consumer Protection Act, the opposite may not be true. The Consumer Protection Act is enforced by a different authority in South Africa and case precedent has been quite limited, compared to the competition authorities.

The Pricing Regulations also cover quantities and the restrictions on sale to maintain equitable distribution and curb stockpiling. No mention is made of the Competition Act or Consumer Protection Act in these paragraphs, although they should also be considered in the broader context of competition policy and what the Pricing Regulations seek to achieve. Although South African competition policy is not ordinarily concerned with discrimination at the final consumer level, in terms of the Pricing Regulations, retailers are effectively required to ration the quantity sold, as the normal economic mechanism, whereby suppliers sell to those parts of the demand curve with a sufficient willingness to pay, is suspended.

The penalty provisions of the Pricing Regulations require prosecution in terms of the underling legislation, being the Competition Act and Consumer Protection Act respectively as these sanctions exceed the powers given to the Minister in the Disaster Management Act. The Pricing Regulations state that subject to the further specific provisions of the respective pieces of legislation, a failure to comply with the Pricing Regulations may attract a fine of up to R1 000 000 and/or a 10% of a firms turnover and imprisonment for a period not exceeding 12 months (depending on the applicable legislation). In terms of the Competition Act, only cartel conduct under section 4(1)(b) attracts criminal liability.

The Minister has recently announced that 11 firms are currently under investigation for allegedly contravening the provisions of the Competition Act and/or Consumer Protection Act in a manner prohibited by the Pricing Regulations.

While these rather drastic measures are necessary and the Minster and SACC should be commended for their swift action, the effects of these measures are set to leave a lasting impression on competition law and the precedent arising out of the investigations and subsequent referrals in terms of these Pricing Regulations.

The Disaster Management Act provides that the declaration of a national state of disaster can terminate after the expiry of 3 months or upon notice in the Government Gazette by the Minister before the expiry of 3 months. The Minister can nonetheless extend such a period for one month at a time. Accordingly, the Disaster Management Act offers little certainty on how and when the measures implemented will come to an end.

Temporary measures tend to have a nasty habit of outlasting emergencies.

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AAT, mergers, public-interest, Uncategorized

PepsiCo/Pioneer merger: Minister Patel approves the Deal

In one of the few megamergers of the 2019/2020 season, the South African Competition Tribunal approved, subject to a wide range of public interest related conditions, PepsiCo’s acquisition of South Africa’s largest FMCG producers, Pioneer Foods.

In predictable fashion, this was not the type of transaction which would escape the attention of Minister Patel (who oversees the portfolio of the competition agencies). Despite not being a transaction which raises any competition concerns (i.e. there being no substantive overlap in product portfolios) and no material public interest concerns, the merger was an acquisition by a major international producer, PepsiCo and Minister Patel has openly expressed his intention to involve himself in acquisitions by foreign firms in an effort to extract a “socio-economic” tax from the merging parties. This was first seen in the Massmart/Walmart deal in 2012 but more recently in the AB-InBev/SAB and SAB/Coca-Cola mergers.

Competition lawyer, Michael-James Currie points out that a noteworthy difference between the legislative environment in terms of which the PepsiCo/Pioneer merger was assessed are the amendments to South Africa’s Competition Act. Under the new merger regime, public interest standards have been elevated, as a test, so as to be on par with the traditional competition analysis. Furthermore, the public interest grounds which the competition authorities are mandated to take into account have been expanded and now specifically include ownership levels among historically disadvantaged persons (commonly referred to as BBBEE policies in South Africa – Broad-Based Black Economic Empowerment).

The Competition Tribunal’s reasons are noteworthy. In a transaction of this magnitude, the Tribunal did not provide any reasons or findings as to the assessment of the merger. There was no analysis as to the relevant markets nor an assessment of the negative effects that the merger may have on the public interest factors.

The Tribunal’s reasons jump straight to the conditions ostensibly on the basis that the merging parties, the Competition Commission and Minister Patel had “agreed” to the conditions and, therefore, there was no reason to assess the transaction and the Tribunal could go ahead and rubber stamp the terms of the agreement.

Based on the majority of the conditions imposed, it is safe to assume that the transaction raised no material competition or public interest concerns. Notwithstanding that the transaction raised no adverse effects, the conditions imposed on the merger include:

  1. The creation of a BBBEE Workers Trust which will receive at least R1.6 billion (USD 10.6 million) in equity and the appointment of a non-executive director to the PepsiCo board together with voting rights of 12.9% in lieu of the equity for a period of 5 years;
  2. Employment:
    1. A moratorium on merger related retrenchments for a period of 5 years;
    2. An undertaking to maintain the aggregate levels of employment for 5 years; and
    3. An undertaking to create 500 direct new employment opportunities and 2500 indirect employment opportunities over the next five years.
  3. An undertaking to invest a cumulative amount of R5.5 billion (USD180 million) in production capacity over the next five years.
  4. Promote procurement from local suppliers and producers;
  5. Maintain all sales and distribution agreements currently in place for a period of two years;
  6. Contribute at least R600 million (USD60 million) to the creation of a development fund to be used for education, small medium enterprise development and agriculture programs.

Despite the substantial conditions imposed on the merger, Minister Patel surely finds himself in a catch twenty two. On the one hands, Minister Patel is a socialist at heart and has very much focused his efforts on utilising the Competition Act and authorities to promote industrial policy action and advance socio-economic objectives. Now, both as Minister of Trade and Industry and in light of President Cyril Ramaphosa’s drive to attract foreign direct investment, Minister Patel needs to tread a far more intricate line than ay previously the case (under President Jacob Zuma’s reign).

On the one hand, large foreign mergers present Minister Patel with a golden opportunity to extract non-merger specific public interest commitments – which merging parties often acquiesce to in order to preclude protracted litigation. On the other, Minister Patel needs to ensure that South Africa’s message to the rest of the world is that we would welcome foreign investment with open arms.

John Oxenham says that while it is perhaps regrettable that the Competition Tribunal did not grapple fully with the extent to which these types of conditions would have been objectively justifiable in terms of the new merger control regime or whether they amount to an overreach. While the Tribunal typically does not dedicate substantial resources to evaluating mergers when there is no dispute between the parties – and understandably so – the Tribunal should be mindful of rubber-stamping approvals of this nature. The message that this decision sends to foreign firms seeking to invest in South Africa is certainly not a warm and inviting message. The lack of analysis and objective justification for the conditions sends a strong message to merging parties that the most important aspect for purposes of obtaining merger approval is to engage and reach settlement terms with Minister Patel.

When the executive becomes the gatekeeper to merger control approvals (or competition law enforcement more generally), this very rapidly blurs the distinction of the separation of powers.

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AAT, price discrimination, Uncategorized

South Africa News Alert: Price Discrimination and Buyer Power Provisions brought into effect.

On 13 February 2020, exactly a year since the price discrimination and buyer power provisions were signed into law, President Ramaphosa and Minister Patel have brought into effect the operation of the amended section 9 of the South African Competition Act (price discrimination) as well as section 8(4) (buyer power provisions) together with the respective Regulations.

Both provisions are aimed at ensuring that small or medium owned businesses or firms controlled by historically disadvantaged persons are able to “participate effectively” in the market.

While the buyer power provisions are largely consumer protection provisions – which require large firms to impose fair trading terms vis-a-vis their smaller customers, the amended section 9 of the Act has material ramifications not only for large suppliers but consumers as well.

At the heart of section 9, is a prohibition of volume based rebates/trading terms. While the Act permits for certain efficiency based pricing differentials (provided they are proportionate and reasonable), suppliers are prohibited from competing purely based on quantities. Low margins high volume type strategies would in many instances be prohibited – with the concomitant imposition of administrative penalties.

The motivation behind the amendments is to assist smaller players participate in the market. A noble objective. Although it seems quite apparent that those in support of the amendments have not fully recognized, appreciated or cared about the unintended consequences which are likely to flow from section 9.

Pro-consumer welfare pricing strategies may, under the amended Act, be outlawed. So while the counter factual is that certain small businesses may benefit, is this an industrial policy victory if consumer welfare is diminished? Hardly.

Although section 9 and section 8(4) where brought into effect on the eve of President Ramaphosa’s State of the Nation Address – certainly not coincidental – a challenge to the rationality of section 9 seems most likely.

The Competition Commission’s price discrimination draft guidelines expressly preclude any considerations to the level of efficiency of downstream customers or any impact (good or bad) on consumer welfare).

Seriously concerning stuff and large suppliers (across all industries) should take note of these amendments with urgency.

 

 

 

 

 

 

 

 

 

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AAT, East Africa, Kenya, mergers, Uncategorized

KENYA: AIRTEL//TELKOM KENYA MERGER CONDITIONS TAKEN ON APPEAL

By Ruth Mosoti

In December 2019, the CAK approved the merger between two Kenyan telecom firms, Airtel and Telkom Kenya, subject to a number of wide ranging conditions.

The merging parties, however, were not satisfied with the conditions and have decided to take the CAK’S decision on review to the Competition Tribunal. Kenya’s Competition Tribunal was fully constituted and became operational in May 2019 after four members were appointed to the panel.

In terms of  the Kenyan Competition Act, any party aggrieved by a decision of the CAK in relation to a merger has 30 days to file for a review of that merger before the Tribunal. The 30 days period commences from the date the CAK’s decision is published in the gazette. Accordingly, although the merger was formally approved in October 2019, the merging parties had to wait until December 2019 for the gazette, containing the CAK’s decision, to be published before a notice for review could be filed.

The Tribunal has a broad range of powers and may overturn, amend or confirm the decision of the CAK. The Tribunal may also, if it considers it appropriate to do so, refer the matter back to the CAK for reconsideration of certain issues.

Turning to the conditions themselves, one of the contentious conditions relates to having the spectrum revert back to the government upon expiry of the merging parties’ license.

This is concerning as it is the Communications Authority of Kenya that issues and renews licences. The spectrum allocation by Communication Authority is an asset in the hands of the holder. Assuming that the spectrum is being utilized in accordance with the licence, ordinarily renewal is guaranteed.

The CAK’s decision that the license must revert back to the government is concerning as it seems to overlap with the Communications Authority’s mandate. John Oxenham, a director of Primerio, says that the interplay and conflict between the roles of competition and communications agencies are not unique to Kenya. In South Africa there have also been a number of issues which have raised as to which agency is best suited to assess ‘competition law matters’. A memorandum of understanding between the South African Competition Commission and the Independent Communications Authority of South Africa (ICASA) has been concluded in an effort to ensure consistency and enhanced collaboration between the two agencies in this regard.

The CAK’s conditions in this merger seem to be at odds with the CAK’s approach adopted in previous matters. For instance, when Yui exited the Kenyan market, both Airtel and Safaricom acquired Yu’s assets (including licenses). Although Safaricom had a larger chunk of the 2G spectrum, the CAK did not seem to take Safaricom’s market size into account when these assets were acquired. Perhaps the CAK appreciates that there was a missed opportunity.

This is will be the Tribunal’s first opportunity to review the CAK’s decision relating to a  merger and it will be interesting to see how robustly the Tribunal scrutinizes the CAK’s decision with reference to economic evidence. As competition lawyer Michael-James Currie points out, unfortunately, the CAK does not publish detailed reasons which underpin its decisions and it is, therefore, often difficult to fully appreciate the CAK’s reasoning or assess whether the CAK’s decision is sufficiently supported by the underlying evidence. Hopefully the Tribunal’s reasons in this matter will be more comprehensive, thereby contributing positively to creating precedent.

Currie also points out that the CAK imposed a public interest condition relating to a moratorium of any merger specific retrenchments for a two year period. The merging parties are appealing this condition as well and have proposed that the moratorium be reduced to 12 months. The role of public interest factors in merger control has been materially influenced by the South African merger control regime where employment related conditions are a common feature in merger conditions. Moreover, two year moratoriums is usually the ‘benchmark’ standard although moratoriums ranging from 3-5 years have also been imposed on parties in South Africa. It will be interesting to gauge the Tribunal’s approach to public interest factors and whether we will see a unique approach to the assessment of such conditions or whether the Tribunal is likely to follow the South African approach.

[Ruth is a Primerio competition law practitioner based in Nairobi, Kenya.]

 

 

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