Uncategorized

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

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

Introduction

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

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

Background to Digital Merger Guidelines

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

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

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

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

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

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

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

  • the extent of ownership by a party to a merger in other firms in a related market;
  • the extent to which a party to the merger is related to other firms in related markets, including through common members or directors; and
  • any other mergers engaged in by a party to a merger for a period to be stipulated by the Commission.

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

Small Merger Notifications South Africa

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

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

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

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

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

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

Small Mergers in the EU and Germany

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

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

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

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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Uncategorized

South Africa’s Price Discrimination Provisions: Interpretational Guidance to Section 9

African focused competition lawyer and regular contributor to Africanantitrust, Michael-James Currie, has kindly made available to all Africanantitrust readers his dissertation titled “SOUTH AFRICA’S AMENDED PRICE DISCRIMINATION PROVISION: AN ANALYTICAL FRAMEWORK IN RELATION TO THE GROCERY RETAIL MARKET”.

In his thesis, Currie explores various economic and legal principles which are of particular relevance to ensuring that section 9 of South Africa’s Competition Act is interpreted in a manner which is sensible and does not lead to unintended consequences which might harm consumers or dampen pro-competitive conduct.

Currie utilises the grocery retail market as a basis to explore the applicability (and suitability) of the price discrimination provisions in so far as the objective to protect a specific class of competitors is concerned (rather than protecting competition).

By drawing on economic principles and European and US precedent, Currie provides a well articulated and reasoned analytical approach to section 9 coupled with practical interpretational guidance in what is likely to become a very useful resource.

To access Currie’s dissertation (for free), please follow the link below:

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BRICS, cartels, collusion, fines, South Africa, Transportation

Shipping Cartel: Recent approach to fining in SA

By Michael Currie

AAT previously reported (here and here) that the SACC had been investigating cartel behaviour which allegedly took place between multiple shipping liners who transported vehicles for various Original Equipment Manufacturers (“OEMs”).

The investigation resulted in two consent agreements being concluded between the SACC and Nippon Yusen Kaisha Shipping Company (“NYK”) and Wallenius Wilhelmsen Logistics (“WWL”) respectively (the “Respondents”).

On 12 August 2015, the Competition Tribunal (“Tribunal”) was requested to make the consent agreements, orders of the Tribunal.

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In terms of the consent agreements, the Respondents had admitted that they had contravened Section 4(1)(b) of the Competition Act, 89 of 1998 (the “Competition Act”) on multiple occasions (between 11 and 14 instances), and accordingly agreed to pay administrative penalties of approximately R95 million ($ 8million) and R103 million (R8.5 million) respectively.

We had noted in our previous article on this matter, that in light of the SACC’s recently adopted Guidelines for the Determination of Administrative Penalties for Prohibited Practices (the “Guidelines”), it would be interesting to see how the SACC and the Tribunal go about calculating and quantifying an administrative penalty, when dealing with factual circumstances similar to this matter.

We had been concerned that in cases which involve cartel conduct relating to tenders (i.e. bid-rigging), the Guidelines will have limited application.  Andreas Stargard, an attorney with the Africa consultancy Pr1merio, notes:

There are two main reasons why there we view only a narrowly circumscribed application of the Guidelines in these particular circumstances:

  • Firstly, the Guidelines require in the case of bid-rigging that the affected turnover to be used for purposes of calculating an administrative penalty must be the higher of: the value of the bid, the value of the contract ultimately concluded, or the amount of money ultimately paid to the successful bidder. While this approach to calculating affected turnover when dealing with tenders such as those in the construction industry may be useful, the Guidelines present an anomaly when one is dealing with a tender, the value of which is subject to one or more variable and the tender contract has not been completed yet at the time of the calculation or imposition of an administrative penalty.

  • Secondly, and perhaps even more problematic, is that the Guidelines envisage that a party involved in cartel conduct should be fined for the tenders that the party successfully ‘won’, as well as being held liable for tenders that the party ‘lost’. In terms of the Guidelines, a party who was involved in ensuring that another company was awarded the tender (due to collusion), the ‘unsuccessful’ party will be subjected to an administrative penalty for such a tender as well. In this regard, the affected turnover that will be utilised to calculate the administrative penalty for the ‘unsuccessful’ party, the SACC would also choose the greater of the actual value of the bid submitted by the ‘unsuccessful party’, or the value of the contract or the amount ultimately paid to the successful bidder.

This in itself creates two further issues. The first is from a policy perspective; in terms of penalising the unsuccessful bidder, the unsuccessful bidder’s affected turnover would in most instances be either than the affected turnover of the successful bidder higher (because when a firm deliberately ‘loses’ a bid, they usually submit a cover bid which is higher than the ‘winning’ bid), or at a minimum the same value as the affected turnover attributed to the successful bidder. Thus it is conceivable that the ‘unsuccessful’ bidder while not having derived any benefit from the bid in question, would be subjected to a similar or greater administrative penalty than the successful bidder.

Furthermore, for purposes of reaching a settlement quantum, it is often not possible for the ‘unsuccessful bidder’ to know or calculate the value of the contract or the amount paid to the successful bidder. The only way to obtain such information would require information sharing between competitors, which raise a host of further competition law concerns.

Accordingly, while the adoption of Guidelines for purposes of ensuring greater certainty and transparency is created for parties who are potentially subjected to administrative penalties, the Guidelines have respectfully fallen short of doing that, when dealing with instances of bid-rigging.

The difficulty of applying the Guidelines to cases of bid-rigging was acknowledged by the SACC during the shipping cartel hearings before the Tribunal, a consequence of which saw the SACC adopt a novel and individualised strategy to calculating the administrative penalties which the Respondents ultimately agree to.

The SACC decided firstly that whichever strategy they adopt for purposes of calculating the Respondents financial liability, must be one that can be consistently and fairly applied to all respondents in the investigation.

Accordingly, the SACC decided to impose a administrative penalty of 3.5% of the Respondents’ turnover derived within or from South Africa, in respect of bids which the Respondents were awarded, and a lesser percentage of turnover was used in respect of bid’s which were not awarded to the Respondents.

The SACC thus acknowledge that it would not be fair to impose the same penalty quantum on the successful bidder on the unsuccessful bidder as well.

The M/V Thalatta, a WWL High Efficiency RoRo vessel

The M/V Thalatta, a WWL High Efficiency RoRo vessel (image (c) WWL)

When pressed on how the SACC reached a value of 3.5%, the SACC indicated that the Respondents’ willingness to engage the SACC and their commitment to settling the process was a weighty factor taken into account.

Importantly, the SACC decided to penalise each of the respondents cumulatively. In other words, for each instance of a contravention, the SACC imposed a penalty equal to 3.5% of the firm’s annual turnover (or a slightly lesser amount if the firm was the unsuccessful bidder’).

Section 59 of the Competition Act limits the amount of affirms administrative penalty to 10% of the firm’s annual turnover derived within or from South Africa in its preceding financial year.

Due to the fact, however, that the SACC ultimately imposed a cumulative penalty, the administrative penalty imposed on the Respondents exceeded 10% of the Respondents annual turnover.

On a side note, the SACC did use the annual turnover of the proceeding financial year as the based upon which to penalise the respondents, but rather opted to use the year 2012 which was the most recent year during which there was evidence of collusion.

Accordingly, the Commission has exercised a considerable degree of discretion when choosing a strategy for purposes of imposing an administrative penalty and while the SACC considered the sic-step approach to calculating an administrative penalty, opted rather to impose a turnover based percentage figure, and thus, we are left none the wiser as to how the Guidelines are actually going to be interpreted and implemented.

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BRICS, personnel, politics, public-interest, South Africa

Patel commends his competition team

south_africa

Minister finds praise for competition agencies, having increased fines “1000%”

The official South African news agency reports that Economic Development Minister Ebrahim Patel has lauded the country’s competition authorities as “remarkably effective over the past 15 years.”

“The competition authorities have done solid investigations as they have stepped up actions against cartels and promoted public interest consideration when conducting investigations,” he is quoted as saying at the 8th Annual Competition, Law, Economics and Policy Conference in Johannesburg. “The remedies and fines imposed by the competition authorities climbed ten fold compared to the previous five years, call it 1000 percent, reaching over R6 billion.”

Minister Patel said the competition authority had come into their own with solid pipelines of anti-cartel investigation, the systematic consideration of public interest and issues in merger acquisition.

Setting aside the unorthodox phraseology (“merger acquisition”) in the quoted paragraph, the Minister’s remarks indeed echo what we at AAT have observed for well over a year now, namely the renewed and increased focus of the competition agencies on so-called “public-interest” factors, in lieu of (or in addition to) traditional, classic antitrust considerations, such as market power, concentration/HHIs, and prediction of unilateral/coordinated effects of proposed mergers.

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collusion, settlement, South Africa

Details of $2.9 billion bid-rigging come to light in South African parliament

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As SAcommercialPropNews reports, the South African Parliament heard testimony from the chairman of the Construction Industry Development Board (CIDB), Mr. Bafana Ndendwa, on the developments and results of the South African Competition Commission’s investigation into the building industry at large.

The investigation into the potential 26 billion Rand collusion had begun when building budgets related to the 2010 FIFA soccer world cup in South Africa were plagued with cost overruns.  Since then, it appears that well over 40 construction companies have been investigated by the Commission.  We had previously reported on antitrust settlements in the S.A. building industry here.

Even with some settlements underway, the building-industry antitrust saga appears far from over, though.  Creating a spectre of double jeopardy, Mr. Ndendwa stated that leniency from the Commission may not yield similar treatment by other investigating bodies.  The cited article also quotes members of the ‘Portfolio Committee’ of the Parliament as pressing for criminal charges to be filed.  This is an interesting development, as the South African competition law (as it is currently in effect) does not [yet] provide for criminal sanctions against individuals.  While the law had been amended to include such a provision, the amendments have not yet been ratified and put into effect.

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Uncategorized

Family feud: Which S.A. agency gets the first bite at the apple?

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Why is the South African government flexing its anti-fraud and corruption laws in the long-running investigation of potential bid-rigging in the construction sector, when it could perhaps more straightforwardly apply its competition law — and only that — to the alleged offences?  In its role as the antitrust watchdog, the SA Competition Commission has been attempting to induce guilty co-conspirators to seek leniency or corporate immunity from prosecution for cartel offences under the country’s Competition Act in exchange for information on rigged bids for construction projects.

Corporate leniency is one thing — personal liability for fraud or other racketeering charges is quite another…  Individual employees or directors of the leniency applicants should beware the double jeopardy they are exposed to, personally, when their employers ink settlements with the CC: The National Prosecuting Authority is not using the country’s civil-offence based competition law to pursue the alleged wrongdoing, even though the accusations raised by them would fall rather neatly within the category of prohibited horizontal agreements among competitors (i.e., cartel conduct).  Rather, the prosecution is applying the Prevention and Combating of Corrupt Activities Act, which — unlike the Competition Act — criminalises the illicit behaviour that allegedly took place.

On the policy side, had the as-of-yet dormant Competition Amendment Act 2009 come into force and the competition law therefore criminalisation “teeth”, we here at AfricanAntitrust.com are wondering whether we’d be seeing parallel, ongoing dual-agency investigations on a scale such as this — or rather an initial battle for jurisdiction between the CC and the NPA’s Hawks?  The S.A. family feud between the twin siblings, fraud laws and antitrust? The purely legal question of “double jeopardy”, raised above, would doubtless also figure in the debate who gets to enforce which law(s).  One of the CC’s public-relations managers, Trudi Makhaya, recently hinted at the potential for greater enforcement powers of the Competition Commission, mentioning the “pending amendments to the Competition Act”. For now, the so-called Construction Fast Track Settlement Project will have to keep churning out non-criminal settlements with offenders.

This specific post will serve as a lead-up into the broader arena of criminalisation of antitrust law, which we will cover soon in its own category.  It brings with it fascinating questions beyond those raised here (including, for instance, the potential for dis-incentives to corporate executives to seek leniency).

As always, we welcome your opinion — this is a question that will sooner or later have to be answered.

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