During the 2017/2018 financial year, the Commission received 377 merger notifications. This demonstrates a 9 per cent decrease from the 418 mergers received in the 2016/2017 financial year. While the Commission received fewer merger notifications in the 2017/2018 financial year than in the previous year, it finalised 388 mergers, which represents a slight increase from the 385 mergers finalised in the previous financial year. Of the finalised mergers, 120 were large, 260 were intermediate and eight were small mergers. During this period, 325 mergers were approved without conditions, while 52 were approved with conditions. This is a substantial increase from the 31 mergers approved with conditions in the 2016/2017 financial year, the 37 mergers approved with conditions in the 2015/2016 financial year and the 43 conditional approvals in the 2014/2015 financial year.
The Commission also prohibited 12 merger transactions in the 2017/2018 financial year, which is more than double the five prohibited mergers in 2016/2017.
In March 2019, the Commission published final Guidelines for the determination of administrative penalties for failure to notify mergers and implementation of mergers contrary to the Competition Act (Guidelines). The Guidelines present the general methodology that the Commission will follow in determining administrative penalties when concluding consent or settlement agreements and when seeking an administrative penalty where there has been a failure to notify or prior implementation referral before the Tribunal.
For purposes of determining the administrative penalty that a firm will be liable to pay in instances of failure to notify and prior implementation, the Commission has proposed the following methodology:
- Step 1: determination of the nature or type of contravention – since failure to notify and prior implementation can take place in many forms, the Commission will consider how the failure to notify or prior implementation occurred. To the extent that the parties are competitors and the conduct amounts to a contravention of Section 4(1)(b) for example if the merging parties agree on prices, the conduct will be assessed under Section 4(1)(b) of the Competition Act and not as prior implementation. Furthermore, if the Commission determines that the conduct is wilful or deliberate, the Guidelines will not apply and the Commission will seek the maximum allowable penalty.
- Step 2: determining the base amount – the base amount will be double the applicable filing fee. The filing fees increased with effect from 1 January 2019 and are now 165,000 rand for an intermediate merger and 550,000 rand for a large merger.
- Step 3: duration of the contravention – in this step, the Commission will add to the base amount an amount calculated in terms of a formula. For contraventions not exceeding one year, the additional amount (to be added to the base amount) is 50 per cent of the base amount multiplied by the number of months of the contravention. For contraventions exceeding one year but less than two years, the additional amount is 75 per cent of the base amount multiplied by the number of months of the contravention and for contraventions exceeding two years, the additional amount is 100 per cent of the base amount multiplied by the number of months of the contravention.
- Step 4: considering factors that might mitigate or aggravate the amount reached in step 3.
- Step 5: rounding off this amount if it exceeds the cap provided for in Section 59(2) of the Act – the administrative penalty cannot exceed 10 per cent of the turnover of the firm in the Republic and its exports from the Republic for the preceding financial year.
Since these guidelines have only recently been published, they have not yet been used for purposes of imposing an administrative penalty in any failure to notify or prior implementation case.i Significant casesHCI
In this landmark decision, the Constitutional Court confirmed that merger approval is a 'once-off affair'. As such, once de facto control has been acquired, a party does not need to notify and seek approval from the Commission for a transaction when control is subsequently acquired in a different way.
In 2017, Hosken Consolidated Investments Limited (HCI) proposed to increase its shareholding in Tsogo Sun Holdings Limited (Tsogo) to more than 50 per cent. HCI already exerted de facto control over Tsogo pursuant to an unconditional prior merger approval issued by the Tribunal in 2014. In 2014, HCI sought approval for the acquisition of sole control of Tsogo. While HCI did not acquire control by virtue of Section 12(2)(a) of the Competition Act at the time as it did not acquire more than 50 per cent of the shares of Tsogo, it was common cause that HCI exerted de facto control within the meaning of Section 12(2)(g) of the Competition Act.
The Commission was of the view that the acquisition of more than 50 per cent of the shares crossed 'a bright line' by acquiring control in terms of Section 12(2)(a) of the Competition Act. HCI and Tsogo did not agree with the Commission's analysis and approached the Tribunal for an order declaring that the proposed transaction does not require approval. The Tribunal declined to grant the order on the basis that it did not have jurisdiction.
On appeal to the Competition Appeal Court, the Competition Appeal Court disposed of the jurisdictional issue, finding that it and the Tribunal did have jurisdiction to hear and make a decision on the matter.
The Competition Appeal Court stated that Section 12(2) of the Competition Act does not list different kinds of control, each of which must be separately notified. Instead, it illustrates the different ways in which control may be acquired. The Competition Appeal Court went on to say that:
Merger approval is thus a 'once-off' affair. We find that the proposed transaction does not constitute a notifiable merger because the competition authorities have previously approved the acquisition of sole control of Tsogo in 2014 by HCI, and because HCI already exerts sole control of Tsogo pursuant to the 2014 merger approval.
The Competition Appeal Court therefore concluded that the Commission could not require the notification based on the reason that it wished to assess the implications of the 2017 transaction.
On appeal, the Constitutional Court stated that there is no indication in Section 12(2) of the Competition Act that one form of control (notably de jure control) is more significant than any other form of control. Each of the instances of control listed in Section 12(2) of the Competition Act are freestanding and each, on its own, constitutes a 'bright line'.
The questions that the Constitutional Court considered in making its decision included (1) is the transaction notifiable simply because HCI now acquired de jure control in distinction to a different form of control (de facto control); and (2) can the respondents rely on the once-off principle to avoid having to notify the 2017 transaction?
The Constitutional Court confirmed the once-off principle but stated that the competition authorities retain their power to revoke approval if a firm has breached an obligation attached to the approval. Accordingly, the Commission retains its wide powers in terms of the Competition Act to investigate the assurances given by the parties in 2014. The Constitutional Court agreed with the Competition Appeal Court that HCI and Tsogo were not obliged to notify the 2017 transaction to the Competition Authorities. However, the appeal only succeeded partially because it is within the power of the Commission to investigate assurances given during the 2014 merger approval proceedings in terms of Sections 15 and 16(3) of the Competition Act (the sections permitting revocation).Other
As mentioned above, the Commission is increasingly approving mergers subject to conditions. Of the 52 mergers approved subject to conditions, public interest conditions were imposed on 32 mergers. Apart from a moratorium on retrenchments – which remains relatively commonplace in mergers and seems to be increasing in frequency – other public interest remedies imposed by the Commission in the 2017/2018 financial year include, among others, an obligation to maintain procurement from local suppliers; an obligation to continue procuring from small suppliers; an obligation to conclude a broad-based black economic empowerment (BEE) transaction within a certain period; an obligation to invest, maintain or increase the current level of local procurement of goods and services, use reasonable endeavours to promote the export and sale of manufactured products for sale to China, give preference to black-owned businesses and small businesses for independently owned service stations and set up a development fund to develop small businesses and black-owned businesses; an obligation to increase BEE shareholding within a certain period and set up a development fund to develop black enterprises;and an obligation to continue with internship programmes offered by the target firm in South Africa.
In terms of behavioural remedies, the competition authorities predominantly concerned themselves with cross-directorship. Remedies aimed at limiting the extent to which directors sit on the boards of competing companies and limiting the exchange of commercially sensitive information between competitors with common shareholders and directors were imposed in several transactions. Another remedy that was imposed in two mergers was divestiture.ii Trends, developments and strategies
The focus on public interest considerations has markedly increased. Only four public interest conditions were imposed in the 2010/2011 financial year, which increased to 22 and 28 in the 2011/2012 financial year and the 2012/2013 financial year, respectively. There was decrease in the 2013/2014 financial year, with only 10 transactions being approved subject to public interest conditions, but this number increased substantially to 39 in the 2014/2015 financial year and 28 in the 2016/2017 financial year. During the period under review, the number has increased to 32.
From the above cases, it is clear that large international transactions garner significant interest from ministers and trade unions, and, where appropriate, significant creative conditions are imposed. Employment considerations have in earlier years been of significant concern, and continue to play a big role. However, in addition to maintaining employment levels, the competition authorities have now started to impose far more onerous conditions on merging parties to ensure local procurement, continued promotion of historically disadvantaged individuals through equity shareholding and the creation of large funds. These funds in particular have significantly increased over the years, from a 200 million rand fund in the Walmart/Massmart merger in 2012 to a 1 billion rand fund in 2016 in the AB InBev/SABMiller merger.
The conditions imposed, while aimed at protecting local industry, place a significant burden on international companies seeking to invest in South Africa. For example, in the Bayer decision, conditions to offer discounts to small emerging farmers as well as an obligation to continue with various social initiatives was imposed.
In addition to the trend to impose extensive public interest conditions, the Commission is also taking a more interventionist approach by prohibiting mergers between competitors that give rise, or have the potential to give rise, to a high market share accretion or monopoly position. However, the Tribunal does seem to more readily impose conditions aimed at addressing these concerns, as opposed to prohibiting these transactions.
A notable amendment to the Competition Act is the introduction of a new executive approval regime applicable to foreign investment. It is intended that the President of South Africa will constitute a Committee responsible for considering whether the implementation of a merger involving a foreign acquiring firm will have an adverse effect on the national security interests of the Republic. The President will be required to publish a list of national security interests (which has not yet been done). Some of the factors that will be considered in compiling the list include the impact of a merger transaction on the Republic's defence capabilities and interest, the supply of critical goods or services to citizens and the economic and social stability of the Republic.
Where a merger requires approval by the Committee, the Commission or the Tribunal (as the case may be) cannot make a decision on the merger if the merger has been prohibited on national security grounds. As such, approval before the competition authorities will be delayed until a finding has been made by the Committee that is likely to have an impact on the timing of approval of a transaction.iii Outlook
In light of the trends over the past few years, this interventionist trend is likely to continue. The competition authorities are carefully scrutinising mergers that have an impact on the public interest, and in light of the implementation of the Public Interest Guidelines on 2 June 2016, which give a clear indication of the Commission's approach in merger transactions, we are likely to see additional focus on these issues, particularly in light of the amendments to the Competition Act.
For example, public interest has been elevated to the same status as the competition analysis in a merger transaction. Furthermore, public interest grounds have been expanded to include 'increasing the spread of ownership by workers'.
Given the level of scrutiny being applied to public interest factors lately and which will be centre stage going forward, merging parties will need to build in sufficient time for these issues to be properly ventilated, as well as allocate potentially required resources, when setting an implementation timeline. Considering the current economic climate, the competition authorities are likely to focus on ensuring the protection of local industry and employment.