I INTRODUCTION

Competition law in South Africa is regulated by the Competition Act 89 of 1998 (as amended) (the Act) and the regulations promulgated in terms of the Act. The Act is enforced by the Competition Commission (the Commission), the Competition Tribunal (the Tribunal) and the Competition Appeal Court (CAC). The Constitutional Court (CC), as the apex court, also has jurisdiction in certain competition matters. The Commission is responsible for the investigation and evaluation of mergers, including being the decision-maker in relation to small and intermediate mergers. Large mergers are investigated by the Commission and referred to the Tribunal for a decision.

A transaction is required to be notified to the Commission if it: (1) constitutes a merger (as defined in the Act); (2) meets financial thresholds (of assets and turnover) set out in the Act; and (3) constitutes economic activity within, or having an effect within, South Africa. If a transaction meets these requirements, pre-merger notification is required and the transaction may not be implemented without competition approval.

In terms of the Act, a merger occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm. The law provides for instances of legal control (a majority interest, or similar) as well as instances of control arising as a function of a person's factual ability to control a firm.

The financial threshold test applied is two-fold: (1) the turnover or asset value (whichever is greater) of the target must meet the stipulated thresholds; and (2) the combined value of the assets or turnover (whichever is greater) of the target and the acquirer must meet the stipulated thresholds. In the case of intermediate mergers, the annual turnover or the asset value of the target firm or firms must be 100 million rand or more, and the combined value of the annual turnover or assets of the targets and acquirers must be at or above 600 million rand. A transaction will meet the thresholds for a large merger where the annual turnover or the asset value of the target firm or firms equals, or exceeds, 190 million rand and the combined value of the annual turnover or assets is at or above 6.6 billion rand. Turnover for purposes of the calculation includes all turnover in, into or from South Africa as reflected in the firms' most recent audited financial statements.

For purposes of calculating thresholds, the Act defines an acquiring firm broadly, referring to the entire group of which the acquirer forms a part, while a target (or transferring) firm is defined narrowly, referring to the actual business (or assets) being acquired.

In the ordinary course, only intermediate and large mergers require pre-merger notification and approval from the competition authorities before their implementation. Small mergers are not ordinarily required to be notified to the Commission and may be implemented without approval unless notification is specifically requested by the Commission. The Commission has issued a Guideline on small merger notification, which provides that it may require notification of small mergers where the merging parties are under investigation for prohibited practices by the competition authorities, or if the merging parties are respondents in pending proceedings referred by the Commission to the Tribunal in terms of the Chapter 2 of the Act (dealing with prohibited practices). Parties to a small merger may also voluntarily submit a merger notification, and in such circumstances, must await clearance before implementing the merger.

Failure to notify the Commission of a notifiable merger or implementing a notifiable merger before approval being obtained is a contravention of the Act, and exposes the parties to administrative penalties of up to 10 per cent of turnover derived in, into or from the Republic, as well as potential injunctions on implementation. The level of penalties applied has varied, depending on the circumstances. On 2 April 2019, the Commission published final Guidelines for the Determination of Administrative Penalties for Failure to Notify a Merger and Implementation of Merger, which set out its approach to prosecuting parties for non-notification or the pre-approval implementation of mergers. The Commission uses a filing fee-based methodology for penalties for failure to notify mergers, unlike the turnover-based methodology for determining administrative penalties in cartel cases.

Once notified, the Commission must undertake both a competition and public interest assessment of the merger. In February 2019, the President signed the Competition Amendment Act 2018 (the Amendment Act) into law; however, the amendments are not yet in effect. The Amendment Act introduces additional considerations in the assessment of a merger, including the extent of common ownership and common directorship in competing firms, and recent mergers undertaken by the merging parties.

Of particular significance is the expansion of the public interest factors relevant for merger assessment. Relevant considerations will now include the ability of small or medium-sized enterprises (SMEs) or firms controlled or owned by historically disadvantaged persons 'to effectively enter into, participate in or expand within the market' and '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'.2

The Amendment Act has also introduced a new provision concerning acquisitions by foreign acquiring firms and their likely impact on national security. In this regard, the acquisition of a South African firm by a foreign acquiring firm is required to be notified to the Commission and a Government Committee (to be constituted) if the merger may impact national security interests of the Republic. The Committee must decide whether the transaction may have an adverse effect on national security interests. The competition authorities may not make any decision where the merger has been prohibited on national security grounds. As at the date of writing, there is no indication as to the composition of the Committee, the list of relevant national security interests, or the form or process to be followed for the submission of a notice in respect of national security.

Finally, the Amendment Act allows for greater participation by the designated Minister in merger proceedings, through the ability to appeal merger decisions on the expanded public interest grounds. In relation to the latter, the Commission is specifically required to provide the Minister with a copy of a large merger notification to allow the Minister to decide whether to make representations on public interest grounds.

II YEAR IN REVIEW

According to its 2017/2018 annual report, the Commission considered 377 mergers, and finalised 338 of them.3 Of the 338 reviewed, 52 mergers were approved with conditions and 12 were prohibited. The property sector was the biggest sector that notified mergers, followed by manufacturing and wholesale.

i Prohibited transactions

In a press release dated 23 January 2019, the Commission advised that it has prohibited the intermediate merger between Ostrich Skins (Pty) Ltd (Ostrich Skins), Mosstrich (Pty) Ltd (Mosstrich) and Klein Karoo International (Pty) Ltd (KKI). KKI and Mosstrich are both active in the production of ostrich meat, leather and feathers. The Commission found that the proposed merger is likely to result in unilateral effects in the market for the production and supply of ostrich meat as the merged entity would have a post-merger combined market share in excess of 90 per cent in South Africa.

Notably, the Commission found that the notified transaction did not raise horizontal concerns in the production of ostrich leather, as ostrich leather is mainly exported. However, the Commission still identified vertical concerns in this market as the Commission found that the merged entity had the incentive and ability to foreclose downstream processors of feathers.

In a bulletin dated 16 May 2019, the Commission indicated that it has recommended that the Tribunal prohibit the proposed acquisition of WeBuyCars (Pty) Ltd (WeBuyCars) by MIH eCommerce Holdings (Pty) Ltd (MIH eCommerce), an entity of the Naspers Group. In terms of the notified transaction, MIH eCommerce, an investment holding company that does not supply or produce any products or services in South Africa, intends to acquire 60 per cent of WeBuyCars. MIH eCommerce has investments in OLX and the Naspers subsidiary Car Trader, which trades as AutoTrader. Although the Commission held that the proposed acquisition did not present any horizontal overlap in the Republic as Naspers is not actively in the business of the online buying and selling of used cars, it found that the Naspers Group, through Frontier Car Group, has been anticipating entering this market for the wholesale and online buying of used cars in competition with WeBuyCars. These entry plans were thwarted directly as a result of the proposed acquisition.

On the Commission's assessment, the notified transaction therefore had the effect of removing a potential competition in South Africa. The Commission also noted potential vertical concerns in that Naspers owns and operates online classified automotive advertising platforms. The merged entity would, therefore, have the ability to leverage its significant AutoTrader position as well as the OLX platform to exclude rivals of WeBuyCars. According to the Commission, the notified transaction would result in the foreclosure of other traditional dealers – rivals of WeBuyCars on the sell side.

ii The concept of control

In Competition Commission of South Africa v. Hosken Consolidated Investments (HCI) Limited & Another,4 the Tribunal provided direction in respect of firms' obligations to notify a transaction where the merger had been previously approved. In this case, HCI had in 2014 notified the Commission of an intended merger that was subsequently approved and confirmed by the Tribunal without conditions. Although HCI secured approval for legal control (over 50 per cent interest) in the target entity, it acquired an effective interest of below 50 per cent but was able to exercise de facto control. In 2017, HCI decided to consolidate the assets of its subsidiaries stemming from the 2014 unconditional approval. Although the restructuring would result in HCI's interest in the target increasing to above 50 per cent, HCI did not believe that this restructuring constituted a merger and considered that it was therefore not notifiable. HCI sought an advisory opinion from the Commission, which regarded the intended 2017 transaction to be a notifiable merger as it entailed an acquisition of more than 50 per cent of the shares of Tsogo (one of HCI's subsidiaries). HCI took the matter to the Tribunal, which held that it did not have jurisdiction to issue declaratory orders and dismissed the matter. HCI and Tsogo appealed the matter to the CAC, where it was successful. The Commission in turn appealed the matter to the CC.

The CC, among other things, had to decide whether it was appropriate for the Tribunal to grant a declaratory order and whether the 2017 transaction was notifiable in terms of the law. Regarding the former, the CC held that the Tribunal may make any ruling or order that is necessary or incidental to the performance of its functions in terms of the Act. Section 58 of the Act further grants the Tribunal the power to make an appropriate order in relation to a prohibited practice, including an order interdicting any such practice. Both of these sections are formulated widely enough to include the power to grant declaratory relief in respect of issues in dispute referred to it. The Tribunal has, in numerous instances, exercised its discretion and granted declaratory relief in a variety of cases. The CC noted that parties would ordinarily approach a High Court for declaratory relief, but since this jurisdiction is ousted for competition matters, this would unfairly leave parties without relief. Declaratory orders can bring clarity and finality to disputes that may, if unresolved, have far-reaching consequences for each party. Finally, the CC found that litigants have a constitutional right to have a remedy to resolve a dispute in an appropriate forum. The CC concluded that the Tribunal is competent to grant declaratory orders.

Regarding whether the 2017 transaction required notification to the competition authorities, the CC reiterated the two-step approach to merger control, namely (1) a transaction must meet the definition of a merger as set out in Section 12 of the Act, and (2) the financial thresholds for an intermediate or large merger must be met. To determine the definition of a merger, the CC critically analysed the meaning of control. Control can either be de jure control (e.g., acquisition of more than half of the issued share capital) or de facto control (the ability to materially influence). Central to this issue is the 'bright line' principle, which monitors instances of when control is assumed. The 2014 transaction resulted in HCI acquiring de facto control of Tsogo. The effect of the 2017 transaction would be HCI's acquisition of de jure control within the meaning of Section 12(2)(a). The relevant consideration was whether notification obligations arose simply because the nature of control has changed. The CC held that once a firm has acquired control, it need not notify again simply because the nature of control has changed. If the statute required a new notification regime once the form of control has changed, it would have explicitly stated so. A change in the quality of control does not in itself constitute a merger. Obligating firms to notify in such instances is not only overly formalistic, but also burdensome. In the CC's view, merger approval gives the merged entity immunity from any challenges as it necessarily involves a forward-looking assessment of the likelihood of competition harm, and effects on the public interest. Specifically, the CC also noted that the Commission was aware from the 2014 transaction that its approval would likely result in further changes down the line.

The true import of this judgment of the CC is still being debated, and it remains to be seen whether the fact of the notification of the 2014 transaction is interpreted by the Tribunal and CAC as being decisive in the CC's reasoning.

iii Public interest

The recent CAC case of Association of Mineworkers and Construction Union (AMCU) and Another v. Competition Tribunal of South Africa and Others5 dealt with public interest concerns in the context of a proposed merger. Some 32,000 employees of the merged entity were at risk of losing their jobs and with this in mind, the Tribunal imposed certain public interest conditions on the merging parties to mitigate the potential job losses. Unsatisfied with the decision of the Tribunal, AMCU approached the CAC arguing that insufficient weight had been given to the public interest concerns it raised and asked that the merger be prohibited or alternatively, be approved subject to additional restrictions or an amendment of some of the existing conditions. It was common cause that there were substantial potential job losses but the key question was whether these were related to the merger or not. The CAC considered this question, as well as the relevant counterfactual. The merging parties submitted that the job losses were not related to the merger but, rather, were a direct consequence of the target firm's precarious financial state and the need to strategically restructure to save the company from being placed in business rescue. Regarding the counterfactual, the CAC was convinced that the extent of job losses would be even greater if the merger was not approved.

Further, the Tribunal considered that the parties had undertaken a reasonable and rational process in assessing the number of retrenchments, whether merger specific or not. Notwithstanding this view, the CAC still amended the public interest conditions to better protect employees by requiring the parties to publish a notice of the conditions – presumably so that employees could rely on the condition in direct actions against the merging parties.

On 9 March 2018, the Tribunal approved a merger between Sinopec Corp (Sinopec) and Chevron South Africa (CSA), subject to a wide range of employment, investment and other public interest conditions. Among the conditions imposed by the Tribunal was that Sinopec would establish its head office in South Africa and invest 6 billion rand over and above its investment plans to develop a refinery in South Africa. Sinopec was required to make this investment within a five-year period of the merger. Sinopec is also required to use reasonable endeavours to promote the export of South African manufactured products for sale in China.

III THE MERGER CONTROL REGIME

i Review periods and time frames

The review process or periods for intermediate mergers comprises an initial waiting period of 20 business days. This period may be extended by a single period not exceeding 40 business days. The Act provides for a 'default' approval in cases where the Commission fails to extend the review period before the expiry of the initial waiting period, or fails to render a decision within the stipulated time frames.

In the case of large mergers, the Commission must, within 40 business days, forward to the Tribunal a written recommendation, with reasons, regarding the merger. This period is extendable with the consent of the Tribunal or the merging parties by periods of no more than 15 business days at a time. If upon the expiry of the period of 40 business days (or any extended period of time granted by the Tribunal) the Commission has neither applied for a further extension nor forwarded a recommendation to the Tribunal, any party to the merger may apply to the Tribunal to begin the consideration of the merger without a recommendation from the Commission.

When the Commission has forwarded a recommendation to the Tribunal, the registrar of the Tribunal must schedule a date within 10 business days for either the beginning of the hearing of the matter or for a pre-hearing conference in relation to the merger (should the circumstances require). This period of 10 business days may be extended for a further 10 business days by the chairperson of the Tribunal or for a further period by the chairperson with the consent of the parties. After completing its hearing in respect of a merger, the Tribunal must issue its decision within 10 business days after the end of the hearing, and within 20 business days thereafter, issue written reasons for its decision.

The Commission has published a medium-term performance plan that sets out the maximum number of business days within which the Commission aims to complete its review of notified transactions. The review period is calculated from the business day following the date on which a complete merger notification was filed. The 2018/2019 performance plan contemplates the following timelines.

Phase I (non-complex)

The Commission aims to review Phase I mergers within 20 business days. These are mergers in which there is little or no overlap between the activities of the merging parties, no public interest issues and a simple control structure.

Phase II (complex)

The Commission aims to review a Phase II merger within 45 business days. These are mergers between direct or potential competitors, or between customers and suppliers, where the merging parties have a combined market share of more than 15 per cent, or where public interest issues arise.

Phase III (very complex)

The Commission aims to review a Phase III intermediate merger within 60 business days and a Phase III large merger within 120 business days. Phase III mergers are likely to result in a substantial prevention or lessening of competition (including any transactions involving 'leading market participants' where the combined market share of the transacting parties is more than 30 per cent).

ii Ability to accelerate the review procedure, tender offers, hostile transactions

If a merger is a hostile transaction and the target is unwilling to submit a joint merger notification to the Commission, the acquiring firm may make an application to the Commission in terms of Rule 28 of the Commission Rules for an order authorising the parties to submit separate filings and directing the target to prepare and submit its merger notification within a specified period of time. The acquiring firm may also, to the extent possible, apply to submit certain information or documents on behalf of the target firm. The target firm will have an opportunity to contest the acquiring firm's application.

Mergers effected by way of tender offer are subject to competition review.

Once a merger notification is made and to the extent that there may be a need to accelerate the review periods, the Commission and Tribunal are prepared to consider expediting matters. However, neither the Commission nor the Tribunal have a formal 'fast track' procedure.

iii Third-party access to the file and rights to challenge mergers

The Minister of Economic Development (now Trade and Industry) has the power to intervene in merger proceedings on public interests grounds.6 Employee representatives and trade unions also have locus standi to intervene in respect of employment-related matters, as per Section 12A of the Act and Rule 37 of the Commission Rules.

Section 13B (3) allows any person, whether or not a party to or a participant in merger proceedings, to submit any information that could be relevant to the investigated merger proceedings. However, this provision does not confer rights on any person to access the Commission's investigation file especially insofar as some material may be claimed as confidential by the parties or constitute 'restricted information'. Rule 46 of the Tribunal Rules permits a person who has a 'material interest' in a matter to apply for intervention by filing the prescribed documents which should include a substantiation of that person's interest in the matter. A material interest is a factual analysis to be analysed by the Tribunal that will also inform the extent of the intervention the Tribunal will allow. In Caxton and CTP Publishers and Printers Limited and Media 24 (Pty) Limited, Caxton, a competitor of Media24, was allowed to intervene and have rights, among others, to discover documents and attend pre-hearings in the merger involving Media24.

iv Resolution of authorities' competition concerns, appeals and judicial review

The Commission is empowered to investigate any merger activity.7 Upon investigating a notified small or intermediate merger, the Commission can unconditionally approve the merger, approve the merger with conditions or prohibit the merger.8 Large mergers are investigated by the Commission and decided on by the Tribunal.9 If the Commission or the Tribunal identify competition or public interest concerns during the merger assessment, they will typically invite the parties to offer remedies to address the concerns or to adduce further evidence to demonstrate that the concerns do not arise, or are not merger-specific. In cases where conditions are imposed, the merger parties are consulted beforehand and generally afforded an opportunity to make submissions in respect of the proposed conditions.

The Commission is empowered to revoke its own decision pertaining to an earlier merger approval of a small or intermediate merger.10 Revocation may be applicable if the approval was based on materially incorrect information provided by the parties to the merger, if the approval was obtained by deceit,11 or if the firm concerned has breached a condition attached to the approval.12

Intermediate or small mergers considered by the Commission can be referred to the Tribunal for re-consideration by an aggrieved party.13 A party aggrieved by the Tribunal's decision can approach the CAC for a review or appeal of the decision. The final court of appeal is the CC, which can also be approached by an aggrieved party where constitutional issues arise. The jurisdiction of an ordinary High Court has been ousted by competition legislation.

The Commission habitually publishes its decisions on proposed merger activity in the form of weekly bulletins found on its website.

v Effect of regulatory review

The Commission has exclusive jurisdiction under the Act in relation to the review of mergers having an effect within South Africa. There are, however, new provisions under the Amendment Act that introduce parallel consideration of the national security concerns that may arise from a merger involving a foreign acquiring firm. While national security concerns are distinct from the competition and public interest assessment undertaken by the Commission, there is potential scope for overlap in relation to considerations of public interest issues.

In cross-border mergers, foreign competition authorities may simultaneously review a merger as it relates to their jurisdiction, but cannot make determinations that are binding on the South African competition authorities.

IV OTHER STRATEGIC CONSIDERATIONS

i How to coordinate with other jurisdictions;

South Africa is a member of the Southern African Development Community (SADC) and BRICS, and the Commission is a member of the African Competition Forum, International Competition Network and regularly participates in activities of the Organisation for Economic Cooperation and Development. The competition authorities of the SADC countries signed a memorandum of understanding (MOU) in 2016 and the BRICS competition authorities similarly signed an MOU in May 2016. The Commission also has MOUs with the following entities and regulators: International Finance Corporation; eSwatini Competition Commission; Administrative Council for Economic Defense of Brazil; Competition Authority of Kenya; Competition Commission of Mauritius; Namibian Competition Commission; Federal Antimonopoly Service of the Russian Federation; and the Directorate-General for Competition of the European Commission. In the context of these MOUs, it is not unheard of for the Commission to reach out to these regulators in the course of its investigation of mergers. To expedite the Commission's review in South Africa, parties may wish to seek to facilitate the speedy interaction of regulators and assist them in ironing out the issues being investigated by each regulator. Where an issue has already been resolved by a foreign regulator, it is often beneficial for this to be shared (if appropriate) with the Commission.

ii How to deal with special situations

There are no special rules dealing with financial distress and insolvency or minority ownership interests. These are dealt with in the ordinary course. However, the Commission has published a Practice Note on Risk Mitigation Transactions (the Practice Note). The Practice Note provides that where a bank or state-owned finance institution acquires an asset or controlling interest in a firm in the ordinary course of its business of providing finance based on security or collateral, the Commission would not require notification of the transaction at this point. Similarly, if upon default by the firm, the bank or state-owned finance institution takes control of the asset or controlling interest in that firm with the intention to safeguard its investment or onsell to another firm or person to recover its finance, a notification would not be required. However, if the bank or state-owned finance institution fails to dispose of the assets or the controlling interest within a period of 24 months (the disposal period under a previous version of the Practice Note was 12 months), notification would be required upon the expiry of the 24-month period.

The Tribunal case of Competition Commission of South Africa v. Standard Bank of South Africa (FTN228FEB16) [2016] ZACT 56 (5 July 2016) dealt with the application of the Practice Note. The Commission sought to impose an administrative penalty on Standard Bank for its failure to notify a merger and gun-jumping. Standard Bank acquired 100 per cent of the shares of Halberg, pursuant to Halberg defaulting on numerous loan agreements with Standard Bank. Standard Bank had intended to dispose of this acquisition of the shares immediately when it found a suitable buyer within a short period post-acquisition. The Tribunal held that it was necessary for an acquiring party to notify the acquisition in the event that it failed to dispose of its controlling interest after 12 months of it acquiring control of the firm.14 Put differently, the obligation to notify arises immediately upon the expiry of the 'grace period'.

On the facts, Standard Bank had previously asked for but was denied an extension of the disposal period by the Commission. On denying the permission, the Commission indicated its intention to investigate Standard Bank for gun-jumping. The Commission and Standard Bank subsequently entered into settlement negotiations in which the Commission sought an administrative penalty of 1 million rand. Standard Bank contested this amount on the grounds that the transaction had no negative effects on competition or the public interest, there was no indication that Standard Bank received any financial gains from the transaction and the contravention was technical in nature and of a limited duration (lasting nine months). Standard Bank was also cooperative and helpful in providing the Commission with information during the investigation. Lastly, Standard Bank had never before been found to be in contravention of the Act. The Tribunal agreed with Standard Bank's submissions and as in previous cases, held that the six-step penalty methodology typically used for calculating cartel penalties was not appropriate for imposing penalties for merger contraventions.15 It therefore used a filing fee-based methodology to calculate the appropriate penalty and imposed a penalty of 350,000 rand, which was the amount of the filing fee for large mergers at the time.

V OUTLOOK and CONCLUSIONS

South African competition legislation has been pivotal in ensuring economic integration of previously disadvantaged persons who were prejudicially affected by apartheid. Merger activity is carefully regulated by the Commission and Tribunal to address the high levels of concentration and skewed patterns of ownership of the South African economy. From a merger control perspective, the regulations underpinning the national security provisions are still under review and it will be interesting to see how these provisions (including the expanded public interest provisions) will be tested by the enforcing authorities and the courts.


Footnotes

1 Xolani Nyali and Shakti Wood are partners at Bowmans.

2 The original grounds include the impact of the merger on a particular industrial sector or region, employment, the ability of SMEs or firms controlled or owned by historically disadvantaged persons to become competitive and the ability of national industries to compete in international markets.

3 Annual Report 2017-18 Competition Commission of South Africa.

4 (2019) ZACC 2.

5 [2019] ZACAC 1 (17 May 2019).

6 Section 18.

7 Section 13B(1).

8 Section 14(1)(i)-(iii).

9 Section 14A(1)(b).

10 Section 15(1).

11 Section 15(1)(b).

12 Section 15(1)(c).

13 Section 16.

14 The previous version of the Practice Note provided for a 12-month grace period but at the time of the hearing of the matter by the Tribunal, the extended 24-month grace period was in effect.

15 Competition Commission and Aveng Africa Limited t/a Steeldale and Others, Case No. 84/CR/Dec09 and 08/CR/Feb11. Contrite v. Competition Commission, Case No. 106/CAC/Dec2010.