The Competition Amendment Bill, which was published on 1 December 2017, proposes several amendments to the Competition Act aimed at transforming patterns of economic concentration and ownership in South Africa. It includes amendments that allow for scrutiny of the competitive effects of changes in ownership over time, and cross-shareholdings and cross-directorships, in the context of merger investigations.
Structural linkages in merger investigations
The Bill proposes three new factors that the Competition Commission and Competition Tribunal should consider when determining, under the current section 12A, whether or not a merger is likely to substantially prevent or lessen competition. These factors are—
- the extent of shareholding by a merging party in other firms in related markets;
- the extent to which a merging party is related to other firms in related markets, through common members or directors; and
- any other mergers engaged in by a merging party in the preceding three years.
The precise scope of the amendments is unclear. Notably, the term “related markets” is not defined, and is presumed to mean “the same markets” or “markets at different levels of the same supply chain”. If the term “merger” in the third amendment is interpreted to mean “acquisitions of control”, it could be read in conjunction with a different amendment (described below) that seems to capture so-called “creeping mergers”, which occur when a firm gains market power through a series of changes in control over time.
Although the precise scope of these amendments is unclear, it appears that, collectively, they are intended to ensure that the Commission and Tribunal scrutinise, on an ex-post basis, incremental structural changes in markets that they do not currently have the opportunity to assess ex-ante through the merger notification process.
Theoretically, changes in ownership and influence that are not captured under the current merger regime could change incentives in a way that results in horizontal, vertical and coordinated effects post-merger. However, when performing economic assessments, the authorities will need to bear in mind that (1) existing empirical evidence that these types of structural changes lead to harm to competition is mixed, and (2) an economic assessment to determine effects on competition will be more nuanced for minority shareholdings than for complete acquisitions of control.
The Bill proposes a new section 12B, which deals with creeping mergers and introduces a concept of “series of transactions” over a three year period, all of which may be seen as one merger. The wording of the proposed section is, however, unclear and its implications are potentially serious. By way of example, if a firm acquires a non-controlling 10% shareholding in year 1, increases that to a non-controlling 35% in year 2, and to 60% in year 3, all three acquisitions may be assessed as one in year 3. The proposed amendment implies, if the transaction is prohibited, that a firm may have to divest of its entire shareholding. This raises practical questions regarding how to achieve the unwinding of all three acquisitions of shares, and could raise constitutional challenges based on infringement of property rights.
If the amendment is passed in its current form, parties to a merger should be prepared to present lists of all cross-shareholdings and cross-directorships in competitors, suppliers or customers, with merger filings.
The relationship between cross-directorships and cross-shareholdings, on the one hand, and negative effects on competition, on the other hand, is not straightforward and the amendment could, depending on the facts, add significant complexity to merger assessments.
The authorities are likely to deal with any likely competitive harm with conditions that ensure the ring-fencing of directors who serve on the boards of competitors, customers and suppliers or, alternatively, the divestiture of shareholdings.