THE COMPETITION AMENDMENT BILL, 2018 INTRODUCED IN PARLIAMENT – THE SECOND OF A SERIES OF PERSPECTIVES OF THE MAIN PROPOSALS CONTAINED IN THE BILL
“The second of a series of perspectives of the main proposals contained in the Bill.”
Following the initial publication of the Competition Amendment Bill on 1 December 2017 (the Bill), a revised version of the Bill was presented to Parliament by the Minister of Economic Development (Minister) last week.
This article focusses on the proposed amendments in the Bill to the provisions of the Competition Act, 89 of 1998 (the Act) relating to mergers.
The competition authorities represent a critical gateway to the economy. No large deal can proceed without their approval (be that approval conditional or unconditional). The competition authorities’ application and enforcement of the relevant provisions of the Act is therefore central to fostering both foreign and local investment. This is especially pertinent in the context of South Africa’s continuing economic recovery.
Any perceived uncertainty introduced into the Act when the Bill is passed into law may have the unintended consequence of disincentivising firms from pursuing mergers in South Africa and/or investing in the country.
In this context, improvements to the latest version of the Bill need to be noted especially, for example, insofar as provisions relating to the potential unwinding of a gradual acquisition of control of a company over a three year period, as well as the introduction of the concept of so-called creeping mergers, have been removed.
Sections of the previous version of the Bill that were difficult to interpret and/or to meaningfully implement have been deleted.
However, potential concerns remain whereas other proposed changes to the merger provisions are not contentious. We explore these below.
As per the initial draft, the Bill retains its central focus on elevating the importance of the public interest. Consistent with article 1 in this series, this is reflective of central themes throughout the Bill in line with Government policy. In particular, inter alia, the Bill focuses on addressing issues of concentration; scrutinising the racially-skewed spread of ownership in the South African economy; and realising a transformative vision of economic empowerment for all South Africans, especially those individuals who are historically excluded and disadvantaged. These are certainly laudable ambitions.
Insofar as the merger control regime is concerned, this focus is not unexpected. Public interest has played a major role in the South African merger review process, becoming increasingly important over time. While South Africa has been on the forefront of such considerations, this is becoming a trend in many jurisdictions throughout the world.
The notion of the public interest has, in fact, been applied even more broadly than the stated public interest factors already included in the Act, being the effect that a transaction might have on: (i) a particular industrial sector or region; (ii) employment; (iii) the ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive; and (iv) the ability of national industries to compete in international markets.
Public interest focused merger conditions have become common-place even in transactions that raise no substantial public interest concerns. One just needs to consider, for example, the concessions achieved by the Minister in high-profile deals under the rubric of public interest and outcomes including commitments to establish development funds, make further investments into South Africa and maintaining a South African head office.
While the Bill does not codify this general public interest framework, it does introduce further public interest factors as follows:
- The amendment of item (iii) described above which now reads: “the ability of small and medium businesses, or firms controlled or owned by historically disadvantaged persons, to effectively enter into, participate in and expand within the market” (the amended public interest factor);
- The insertion of a new public interest factor, which reads: “the promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers in firms in the market” (the new public interest factor).
Whereas, under the Act as it stands, the competition authorities are required to consider whether an otherwise anticompetitive merger could be saved on the basis of a substantial positive public interest impact, the Bill elevates the public interest inquiry to be on equal footing with the competition inquiry. However, previously, no significant merger that was anticompetitive was ever saved on the basis of public interest benefits alone. Conversely, no pro-competitive significant merger has been prohibited on the basis of an adverse public interest impact.
Questions are being asked about how drastic a change this constitutes, especially where:
- In practice, public interest factors have (in many instances) been given, not only equal weight to competition factors, but sometimes even great import, hence the amendments may not be as far reaching as they appear;
- Given the new public interest factor, what is likely to receive greater scrutiny are transactions resulting in a diminution in ownership by historically disadvantaged persons. A careful balance will need to be struck by the competition authorities to ensure the interests of those persons are not rendered partially or wholly illiquid when not selling to other historically disadvantaged persons;
- In addition, merging parties may, as a matter of course, be compelled to offer public interest focused conditions in order to win approval (especially in South Africa “focused” transactions or where the parties have major operations in the country) – including perhaps a condition to implement a B-BBEE transaction (which has become a feature of the current landscape, albeit in larger deals). This remains to be seen though.
Although there is some concern over undefined terms (specifically “related markets”) in other provisions (which also featured in the original draft of the Bill) relating to the consideration of cross-directorships and cross-shareholdings in related markets as well as the need to disclose previous mergers (presumably even if now unwound), these introductions should largely be uncontentious given that these factors have always been considered as part of the merger review process.
What remains highly contentious though are provisions (as carried over from the initial draft of the Bill) empowering the competition authorities to make any appropriate decision or order regarding any condition relating to a merger, including in relation to employment and the amended public interest factor detailed above. While the Bill is unclear, an interpretation may be that, at any stage after approval, conditions may be varied. We would hope that this relates only to breaches of conditions of merger approval. If this is not the case, conditions could be unilaterally amended, extended or increased to cater for the public interest or otherwise, undermining both legal and commercial certainty. In this regard, parties need to know that conditions they agree to will apply for the duration for which they were initially imposed, unless: (i) varied, on application by the parties (usually on good cause shown); or (ii) if parties have breached those conditions. This provision, if misused, could effectively translate into merger conditions being perpetual and, in many instances, unjustifiable impediments to a merged entity.
Lastly, again carried over from the initial draft of the Bill, the Minister (who previously only had rights of review), as well as the Competition Commission (the Commission), now have rights of appeal in merger proceedings. The Minister’s right of appeal applies in respect of public interest grounds where there has been Ministerial participation before the competition authorities or with leave from the Competition Appeal Court. These newly-found rights have the potential to create further undue delay in obtaining merger control approval – a factor which has become a feature in South Africa where the regime is often described as that characterised by “regulation by delay”. Parties may face little comfort that a transaction can be legally implemented after receiving competition approval from the Competition Tribunal if every decision contrary to the Commission or the Minister’s expectations faces a potential appeal. This uncertainty is particularly critical in the case of large mergers, which may theoretically go on ad infinitum. This uncertainty may deter investors who have a set timeframe in which to implement a transaction or may cause them to walk away from deals they would have otherwise implemented. Such rights should be used with circumspection and the Minister and the Commission should also be required in the Bill to comply with timeframes in a transparent fashion to foster predictable outcomes.
While the overarching intention behind, and rationale for, the proposed amendments to the Act is certainly praiseworthy, and the Minister must be commended for the initiative taken, a balance must be struck to ensure predictable and swift merger review processes. If merger activity were to be stifled, so too would economic growth.
Should you have any questions relating to the above, please contact your usual contact in our Competition Practice.