The Merger Control Review: South Africa

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 in South Africa, 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 adjudication and a final decision. Requests for consideration, reviews and appeals of small and intermediate mergers are decided by the Tribunal and those relating to large merger decisions are decided by the CAC.

A transaction is required to be notified to the Commission if it: (1) constitutes a merger (as defined in the Act); (2) meets the 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 these requirements are met, 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 merger control provisions of the Act provide 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 twofold: (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 target and acquirer 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 transferred) firm is defined narrowly, referring to the actual business (or assets) being acquired.

In the ordinary course, only intermediate and large mergers require 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. Such a request may be made if the Commission is of the view that the merger may substantially prevent or lessen competition or cannot be justified on public interest grounds. The Small Merger Guidelines issued by the Commission further set out that the Commission 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 Chapter 2 of the Act (dealing with prohibited practices). Merging parties may not take further steps to implement their merger until it has been approved or conditionally approved. Parties to a small merger may also voluntarily submit a merger notification, and in such circumstances, must await clearance before implementing the merger.

On 7 May 2021, the Commission issued revised draft guidelines on small merger notifications, which highlight the risk that 'the growth of digital players through the rising number of acquisitions of new, innovative companies may have a detrimental impact on innovation'. The revised guidelines on small mergers propose that the Commission should be informed of small mergers where either the acquiring firm or the target firm, or both, operate in one or more digital markets, and where particular criteria (concerning the consideration for the transaction and the parties' market shares) are met. The draft guidelines' reference to 'digital markets' is notably broad in scope; however, the guidelines are still subject to comment and revision.

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 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 applies a filing fee-based methodology for penalties for failure to notify mergers, unlike the turnover-based methodology for determining administrative penalties in cartel cases. The penalty imposed may not exceed 10 per cent of the merging parties' turnover derived in, into or from the Republic.

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, not all the amendments are 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 applicable to merger assessments. Relevant considerations will now include the ability of small or medium-sized enterprises 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 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 separate 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, this provision is not yet in effect and 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 notice of a large merger notification to allow the Minister to decide whether to make representations on public interest grounds.

Year in review

According to its 2019/20 annual report, the Commission considered 302 mergers and finalised 318 of these (including mergers that were notified in the preceding financial year but finalised in the 2019/20 financial year and excluding mergers that were abandoned or withdrawn).3 Of the 318 mergers reviewed, 33 were approved with conditions and seven were prohibited.

i Small merger notifications

On 22 December 2020, the Commission advised that it approved the proposed merger involving Google LLC (US) as the acquiring firm and Fitbit Inc (US) as the target firm. The merger was called to be notified by the Commission despite not meeting the thresholds in South Africa for a compulsory notification and in circumstances where Fitbit did not have a physical presence in South Africa, on the basis that it was likely to result in a substantial lessening or prevention of competition. In particular, the Commission was concerned that as a result of the proposed merger, Google would be able to: (1) exclude competing suppliers of wrist-worn wearable devices from accessing its Android operating system for smartphones; (2) acquire the database maintained by Fitbit to provide an advantage in respect of online advertising; and (3) restrict potential competitors from accessing health data collected by Fitbit.

The merger was approved in South Africa subject to conditions, including conditions relating to access to the Android application programming interface (API), advertisements (specifically, Google Ads) and web API access. These conditions broadly align with the conditions imposed by the European Commission.

Notably, the revised draft guidelines on small merger notifications, referred to in Section I, were issued subsequent to the decision.

ii Proposed amendments to the merger notification forms

The Commission has proposed certain amendments to align the merger notification forms with the amendments introduced by the Amendment Act, specifically in respect of the public interest considerations. In particular, the proposed updates to the notification forms would require applicants to summarise the effect of the merger on all public interest considerations outlined in the Amendment Act, and notably, would introduce a requirement on merging parties to describe how the merger will impact public interest outcomes. Previously, the merger notification forms required the parties to only summarise the effect of the merger on employment. Moreover, the Commission proposes to include that parties disclose the extent of ownership by a party to a merger in another firm or firms in related markets, the extent to which a party to the merger is related to another firm or firms in related markets, including through common members or directors, and any other mergers engaged in by a party to a merger for such period as may be stipulated by the Act.

iii Public interest

In October 2020, in the IRL (South Africa) Resources Investments (Proprietary) Limited and Mapochs Mine (Proprietary) Limited case, the Tribunal approved the acquisition of Mapochs Mine, which had been placed under provisional liquidation, by IRL, subject to several public interest conditions. The merger had been notified as a small merger, and the Minister of Trade, Industry and Competition intervened in the merger, with three primary concerns – to revive the Mapochs Mine and associated job opportunities, to revive the Highveld beneficiation plant (the existing beneficiator of ore from the Mapochs Mine) and to ensure that future beneficiators have access to the ore generated by the Mapochs Mine. In terms of the conditions, IRL committed to create a minimum of 200 direct employment opportunities and indirect employment opportunities within the Mapochs Mine and the surrounding area within three years of the merger approval date. Further, IRL confirmed its willingness to sell the ore of the Mapochs Mine to local beneficiators, including Highveld and any future new entrants, on fair and reasonable terms, once the volume commitments in terms of the existing agreement with Highveld were met. Notably, local beneficiators (as opposed to international beneficiators) would be afforded a right of first refusal to access the ore or output of the Mapochs Mine.

Previously, in 2018, the Commission prohibited the merger on the basis that it was likely to lead to foreclosure of a customer (Vanchem) in respect of vanadium. That customer had since been purchased by another entity (which also supplied vanadium) and consequently the Commission's concerns regarding the supply of vanadium were no longer at issue. The merger had been taken on reconsideration to the Tribunal, by which point the Commission no longer opposed the merger.

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 hearing of the matter or for a pre-hearing conference (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 of the end of the hearing, and within 20 business days thereafter, issue written reasons for its decision.

The Commission has published service standards that set 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 following timelines are contemplated.

Phase I (non-complex)

The Commission aims to review a Phase I merger 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 interest grounds.4 Employee representatives and trade unions also have locus standi to intervene in respect of employment-related matters, as per Section 13A of the Act and Rule 37 of the Commission Rules.

Section 13B(3) of the Act 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 merging 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 to, among others, 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.5 Upon investigating a notified small or intermediate merger, the Commission can unconditionally approve the merger, approve the merger with conditions or prohibit the merger.6 Large mergers are investigated by the Commission and decided on by the Tribunal.7 If the Commission or the Tribunal identify competition or public interest concerns during the merger assessment, they 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.8 Revocation may be applicable if the approval was based on materially incorrect information provided by the parties to the merger,9 if the approval was obtained by deceit,10 or if the firm concerned has breached a condition attached to the approval.11

Intermediate or small mergers considered by the Commission can be referred to the Tribunal for reconsideration by an aggrieved party.12 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.

Other strategic considerations

i How to coordinate with other jurisdictions

South Africa is a member of the Southern African Development Community (SADC) and BRICS (Brazil, Russia, India, China and South Africa), and the Commission is a member of the African Competition Forum and the International Competition Network and regularly participates in activities of the Organisation for Economic Co-operation 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: the International Finance Corporation; the Eswatini Competition Commission; the Administrative Council for Economic Defence of Brazil; Competition Authority of Kenya; the Competition Commission of Mauritius; the Namibian Competition Commission; the 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 Africa13 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. Finally, 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.

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 the 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 and, in particular, the promotion of a greater spread of ownership to increase the levels of ownership by historically disadvantaged persons and workers) will be tested by the enforcing authorities and the courts.

Footnotes

1 Xolani Nyali and Shakti Wood are partners, and Kathryn Lloyd is a senior associate, at Bowmans.

2 The original grounds include the impact of the merger on a particular industrial sector or region, employment, the ability of small or medium-sized enterprises 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 2019/20 Competition Commission of South Africa.

4 Section 18 of the Act.

5 Section 13B(1) of the Act.

6 Section 14(1)(b)(i)–(iii) of the Act.

7 Section 14A(1)(b) of the Act.

8 Section 15(1) of the Act.

9 Section 15(1)(a) of the Act.

10 Section 15(1)(b) of the Act.

11 Section 15(1)(c) of the Act.

12 Section 16 of the Act.

13 FTN228FEB16 [2016] ZACT 56 (5 July 2016).

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, Cases Nos. 84/CR/Dec09 and 08/CR/Feb11; Contrite v. Competition Commission, Case No. 106/CAC/Dec2010.

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