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The Competition Amendment Bill, 2018 introduced in Parliament: National security considerations

7 August 2018
– 18 Minute Read


The eighth in a series of perspectives of the main proposals contained in the Bill.

This article focuses on the proposed insertions under the revised draft Competition Amendment Bill, 2018 (Bill) that introduce national security considerations as part of the Competition Act, 89 of 1998 (the Act). 

The national security provision introduced under section 18A to the Bill concerns “Intervention in merger proceedings involving [a] foreign acquiring firm” and contemplates an assessment in respect of impacts on national security by an executive body, in a process that is prior to, and separate from, the merger control regime under the Act.    

While, for the most part, the latest draft amendments reflect the discourse that has taken place since the publication of the first draft of the Bill in December 2017, the introduction of national security considerations was an unexpected addition to the latest version. Much of the content of the provision is earmarked for later input by the President (by way of regulations and gazette notices) such that several crucial questions in respect of the national security assessment remain unanswered. 

There is also no background or guidance as to Government’s overarching policy or approach to national security issues. A legitimate concern is that, in hastening to include this provision as part of the proposed amendments to the Act, the extensive consideration in respect of the underlying strategic policy and appropriate legislative framework that such a provision warrants has not been properly undertaken or communicated. The amendment may also attract criticism for its lack of clarity in respect of applicable requirements, processes and mechanisms and its seemingly overbroad and open-ended scope. Even without these issues, the process contemplated in the amendment is anticipated to extend the timelines for regulatory approval of mergers falling within the scope of this provision. 

The lack of content and clarity in respect of the proposed Section 18A assessment and the anticipated delays that the process is likely to occasion is troubling given that regulatory certainty and expeditiousness in relation to merger control are critical for attracting and developing foreign investment.

The framework for the proposed amendment

The amendment proposes that the President must constitute a committee “comprised of cabinet ministers and other public officials” (Committee) that will be responsible for determining whether certain transactions may have an adverse effect on the national security interests of the Republic. The Bill does not provide guidance as to the particular representatives on the Committee. However, the Ministers for Defence, Energy, International Relations and Cooperation, Mineral Resources, Public Enterprises and agencies such as the State Security Agency may likely be represented. It is however unclear whether it is envisaged that the Minister for Economic Development (Minister) should play a role on the Committee. The inclusion of the Minister in this process may well blur the lines between the Minister’s interventions in respect of public interest under the competition assessment, and national security interests.

The processes and procedure to be followed by the Committee in the execution of its functions are not outlined in the Bill and are to be determined by the President and issued as regulations to the Act. As such, important aspects such as how the Committee is to reach decisions (e.g. by consensus or majority) and whether the President, or any of the committee members may have a deciding vote or veto remains unknown. Such features are significant as they impact several outcomes within the Committee, including the timelines for assessment under the provision. For example, the Committee on Foreign Investment in the United States (CFIUS) comprises nine state departments and is required to reach a determination on national security by consensus, which can lead to extended timeframes for the assessment, particularly where state departments may have conflicting priorities. 

Notifications to the Committee are required where parties are involved in a transaction that:

  • constitutes a notifiable merger in terms of Section 13A(1) of the Act (i.e. a large or intermediate merger);
  • involves a “foreign acquiring firm”; and
  • relates to any of a list of national security interests (to be determined and published by the President). 

Section 18A applies to those mergers that must be notified to the Competition Commission (Commission) in terms of Section 13A(1) of the Act. The requirement that the transaction should cause a change of control is therefore “built in” to Section 18A, and the Committee would therefore not be able to assess acquisitions involving “pure” minority interests. In addition, as Section 13A(1) concerns the notification of large and intermediate mergers, it appears that a small merger need not be notified to the Committee, even in circumstances where the parties have voluntarily notified the small merger, or where the Commission has called upon parties to a small merger to submit a merger notification. However, Section 18A later references Section 13(5)(b) of the Act that concerns decisions of the Commission in respect of small merger notifications, which appears to contradict this interpretation. It is hoped that the later, contradicting reference has been made in error, as the application of the “merger size” thresholds makes sense in circumstances where the impact of a small transaction on matters of national security is likely to be limited. That said, the provision may well have been intended to cover all transactions, considering that in jurisdictions such as the UK (where foreign takeover laws currently apply to large mergers only) there have been recent calls to tighten the laws to apply to all transactions, regardless of size.

Under the amendment, a foreign acquiring firm includes any firm established or formed outside South Africa. The definition of a “foreign acquiring firm” fits with the definition of an “acquiring firm” under the current Act, in that it is broadly construed as any firm acquiring direct or indirect control over the whole or part of the business of a target firm. While not part of the definition, ownership by a foreign government is noted as a relevant factor as part of the Committee’s assessment. 

It bears emphasis that the framework of the Section 18A assessment proposes no delineation in respect of the target firm. As the draft does not include any requirement that the target entity be either partially or fully South African owned, the firm that may be the subject of a national security assessment may (somewhat paradoxically) already be a foreign-owned firm. The target firm under a Section 18A assessment may therefore, be any firm that falls within the jurisdiction of the South African competition authorities, and would theoretically include a firm that merely derives revenue from sales into South Africa without having a physical, local presence in the country. However, having regard to the nature of activities and controlled assets or infrastructure that would be expected to give rise to national security concerns, and following a purposive interpretation of the provision, it is difficult to conceive of transactions involving target firms with mere sales into South Africa and no physical presence or assets as falling within the scope of Section 18A. 

The final “trigger” for a Section 18A assessment is that the transaction must relate to a list of national security interests. This list is not specified in the amendment but is left to be determined by the President. The guidance in the amendment is that the list should identify the markets, industries, goods or services, sectors or regions in respect of which national security interests may arise in the context of a “foreign takeover”. Other than this, the amendment provides only that the President must take into account “all relevant factors” in determining the list, including the impact of a transaction (among other things) on:

  • the country’s defence capabilities and interests, or the enabling of foreign surveillance or espionage;
  • the use or transfer of sensitive technology or know-how outside of South Africa;
  • the security of the country’s infrastructure, including processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of citizens and the effective functioning of government;
  • the supply of important goods or services to citizens or the government;
  • the country’s international interests or relationships; and
  • the economic and social stability of the country.

The list to be determined by the President is crucial to give content and necessary clarity in respect of the scope of the executive’s jurisdiction to assess impacts on national security. The lack of substance in respect of an essential aspect of the amendment causes some consternation, particularly since the list of factors that purport to guide the determination are not intended to be exhaustive. Even if the set of factors were constructed so as to define the parameters of the national security interests to be determined by the President, they are articulated in sufficiently broad terms to allow for a wide range of interests to fall within them. As such, it appears that the factors set out in the draft are not crafted with reference to a concretised set of national security objectives, but rather, have been framed so as to widely capture any possible matters concerning the national interest.

The factors relating to defence, foreign surveillance, sensitive technology or know-how are expected, as these align with the national security interests assessed under foreign takeover laws. Other factors are much less clear – “security of infrastructure”, for example, is listed as a factor, and considering the interventions made in other jurisdictions, would typically be understood as comprising strategic assets and infrastructure such as ports, railways, telecommunications or infrastructure relating to utilities such as water and electricity. The amendment, however, suggests that such infrastructure may include processes, systems and “services essential to the health, safety, security or economic well-being of citizens and the effective functioning of government”. References to the “economic well-being of citizens” and the “economic and social stability” of the country may capture a very broad range of transactions beyond what may be “traditionally” understood as national security interests and may well serve as a means to broaden, indirectly, the scope of public interest considerations. Other factors, such as the country’s international interests, or the supply of “important” goods or services are similarly vague and broad.

Process and outcomes of a Section 18A assessment

Once triggered, Section 18A requires that a transaction be notified to the Committee. The precise requirements for the notification are not provided for under the regulations but are to be determined by the President at a later time. As such, important aspects – such as the nature of the information to be provided to the Committee and the treatment of such information, including with respect to confidentiality, and the procedures to be followed within the Committee – remain open. 

The notification to the Committee must precede a notification to the Competition Commission. The Committee has a 60 day period within which to make its assessment, and this period may be extended by the President on good cause shown. It appears that it is not envisaged that the national security and competition assessments should run in parallel. Section 18A(10) – which deals with decisions of the Committee – indicates that the national security assessment will suspend the competition notification process, as it provides that (as an outcome of its processes) the Committee may either prohibit the transaction, or permit the notification of the transaction to the Commission (with or without conditions). This process is seen as unduly delaying the timelines in which parties to a transaction may obtain regulatory clearance. If the national interest is, as the amendment framework seems to establish, a separate process to the competition process, it should be open to parties to notify the transaction to both the Committee and Commission and have the two assessments run in parallel. Should they choose to do so, parties should be free to proceed on the risk of losing out on the cost of a competition notification should their transaction not be cleared by the Committee. Merging parties may, of course, elect to defer the notification to the Commission until they have secured executive approval for their transaction. 

Practically, a parallel process may be beneficial, particularly since the amendment contemplates that the Committee may consult with the Commission, which would be facilitated if the merger were presented to the Commission in parallel. This parallel process may require some regulation in respect of the Commission’s review timelines in circumstances where extensions are granted to the Committee. Alternatively, the Commission should be allowed to provide its separate determination on competition and public interest grounds notwithstanding that the Committee may not have rendered its decision, or its decision was in the negative. 

The Committee is required to decide whether the transaction may have an adverse effect on the national security interests of the country. The amendment has drawn criticism for failing to establish a sufficient standard as it does not require that impacts be shown to be either likely or substantial.

It is likely that, while not specifically provided for, parties to a transaction may seek to engage the Committee proactively (on an informal or pre-notification basis where they consider that a transaction may raise issues relating to national security) to identity the steps that may be taken to mitigate any anticipated impacts by way of agreed conditions. Such a process would mirror the practice that developed under the assessment of public interest under the current merger control regime, in which merging parties have sought to engage with the Minister on matters of public interest prior to, and in parallel with the Commission’s merger investigation, in order to reach an agreement with the Minister on the necessary steps to address possible public interest concerns.

At the close of the stipulated period, the Committee is required to render a decision and to publish a notice indicating whether the transaction has been prohibited or permitted (with or without conditions). A welcome requirement, in the interest of transparency, is that the Committee’s report and decision must be submitted to the National Assembly. 

The Committee may have broad scope in respect of the conditions that it may impose on a transaction. In the US, for example, CFIUS may require divestiture or the restructuring of aspects of a transaction, or may require operational controls to mitigate the perceived risks to national security. These conditions are generally the outcome of engagement between CFIUS and merging parties. The Committee to be established in terms of Section 18A may well be competent to impose similarly complex and innovative conditions to mitigate perceived risks. However, the amendment is silent as to the monitoring and enforcement of such conditions, and the processes for interrogating and resolving failures to comply. These processes should be provided for as part of the regulations to be issued by the President.

The amendment makes no provision for parties’ recourse, should they disagree with the outcome of the decision of the Committee. In light of the framework established, it is likely that parties’ recourse may lie outside the jurisdiction of the competition authorities. 

Questions and challenges under the proposed amendments

Considerations of national security are increasingly necessary in the changing global context, and are in line with the laws applied by other countries. However, the proposed national security assessment that has been inserted into the latest draft raises concerns as it leaves several important questions unanswered and presents a number of challenges. 

Foreign takeover laws reflect an ideological resistance to foreign ownership, due to either the perceived security or economic threats that foreign ownership may pose. Such provisions are a feature of several countries’ merger control regimes (including the US, UK, Australia, Canada, Germany and Japan) where these laws are generally seen as a defensive position against increasing Chinese acquisitions. The genesis of and rationale for the inclusion of the national security provisions as part of the amendments to the South African Competition Act is not entirely clear. 

While comparisons may be drawn between the foreign takeover provisions that have been adopted elsewhere, these countries have notably larger and different economies to South Africa and accordingly have distinct objectives, including with respect to investment. Because of the sensitive nature of the issues under consideration, all of these countries to some extent provide for a “black box” assessment of national security interests. However, considering the South African context and strategic imperatives for fostering investment, the proposed framework should provide for as much transparency as reasonably possible without compromising the outcomes sought to be achieved under the national security provisions. 

A comprehensive policy of transparency around Government interventions in the name of national security is necessary to give investors and citizens confidence that the process is not open to abuse. Canada’s National Security Transparency Commitments may provide a useful model as they reflect government’s commitments to: disclose the interventions made by its departments or agencies in the interests of national security (information transparency); explain the legal structure for the protection of national security interests and the choices made under this structure (executive transparency); and allow for engagements in respect of the government’s strategic objectives (policy transparency).

The content of the national security provision and its application will depend on the criteria to be published by the President. As it stands, it is not clear what particular national security imperatives are to be achieved or which transactions may attract scrutiny from a national interest perspective. Further content and refinement is therefore required to ensure a greater degree of clarity and certainty over the executive’s possible interventions in foreign acquisitions. 

In addition to the above concerns in respect of transparency and specificity, the added time that will be required for matters that trigger a Section 18A approval will pose a challenge as the timing of regulatory approvals can be a significant consideration for parties to a transaction. It would be regrettable if these timing delays were to undo the positive steps made by the Competition Tribunal through its willingness, in past matters, to deal with mergers as expeditiously as possible.

Concluding comments

While the provision introduces into the Act a separate decision-making body and stand-alone process from the existing merger control regime, which may appear quite foreign in the context of the current Act, it makes sense to do so, as it would be inappropriate to burden the competition merger review process with national security assessments.

This framework is also preferred to possible scenarios in which national security considerations may be contorted to fit within a public interest or competition assessment. The introduction of the national security provision as part of the Act also presents an opportunity to better align the competition and national security review processes and may allow the processes to be synchronised for the sake of expediency of merger reviews. 

The provisions that aim to achieve transparency through reporting to the National Assembly are welcomed, but as noted already, transparency can be bolstered through clearly articulated policy reflecting Government’s obligations to provide information in respect of its interventions on national security grounds.

The chorus of practitioners and business in respect of several of the proposed amendments has been that these changes will frustrate and deter investment.  The foreign takeover provisions proposed under Section 18A will, at a minimum, increase the cost and risk for potential investors transacting within particular markets or sectors. By corollary, the higher transaction costs that the amendments would impose may have the unintended consequence of limiting local businesses’ ability to attract the best investments. 

It is not suggested nor expected that the Minister should not intervene – for the sake of securing investment – where there may be legitimate threats to the welfare of South Africans, nor would the President or members of the executive be expected not to take any steps in respect of transactions that may be to the detriment of the South African citizenry. There can therefore be no quarrel with the concept of equipping Government with the appropriate regulatory framework within which to legitimately evaluate outcomes of proposed acquisitions from a national security perspective. Indeed, such mechanisms are by no means new, or unique to South Africa. The global economic and political environment is one in which more countries are seeking to tighten foreign takeover laws to protect strategic assets and businesses. But in the South African context, a balance must be struck between creating a regime that allows for appropriate intervention for the sake of the preservation or protection of clearly defined national security interests, and the need to foster an economic and political environment that is conducive to investment and confidence in the South African economy. 

Therefore, while the objectives of the new Section 18A are not faulted, the provision (as currently proposed) does not provide the necessary counterbalance of clarity, specificity and transparency. The deficiencies of the proposed section may be as a result of some haste to include as part of the amendments to the Act and, as these provisions have not been considered and debated in the various forums as the other proposed amendments have been. 

If you have any questions relating to the above, please contact your usual contact in our Competition Practice.