The primary competition law concern for merging parties has always been whether the merger will receive approval from the competition authorities. The Competition Commission has released new guidelines for merger filings which expose merging parties to further risks regarding prohibited practices.
Sasol's fingers were badly burned when a European company it had acquired was fined a whopping R3.7 billion for anti-competitive conduct of which Sasol was not aware when it bought the company. A proper due diligence can determine whether the target company has infringed any competition laws.
Carrying out of such a due diligence does, however, have both advantages and disadvantages.
A real problem facing an acquiring firm is the cost and time associated with competition law due diligence. Competition law infringements, particularly cartel infringements, are not usually contained in contracts or documents put into a data room. A proper due diligence of that nature would require an extensive audit of the sales and marketing practices of the firm, including interviews of key personnel, which many sellers would be reluctant to allow.
If the investigation does reveal that the target company has engaged in anti-competitive conduct, the acquiring firm is then faced with further difficult choices. Do you forge ahead with the acquisition regardless? If so what are the risks?
The Commission has always used merger analysis as an opportunity to explore the particular industry in which the merger is occurring. To further improve their efficacy in doing so, it is required in terms of the new guidelines that any due diligence reports, particularly in relation to investigations into the target companies' competitive position, be provided for the purposes of merger analysis.
Therefore, if the due diligence uncovers that the target firm has engaged in anti-competitive conduct and the acquiring firm nevertheless wishes to pursue the acquisition, the merger will not be approved without the additional risk of exposing the contraventions identified through the due diligence. No doubt the submission of this information will result in the immediate initiation of a complaint against the target company.
Also because the acquiring firm will not yet have any control over the actions of the target firm, and any exercise of control before merger approval will constitute a separate offence under the Act, the acquiring firm cannot force the target to admit to its contravention and settle or to apply for leniency in the event that cartel conduct is uncovered. If it becomes apparent that the firm has engaged in cartel conduct, legal advice should be sought immediately to ensure that a leniency application can be made if appropriate. Early detection and 'coming clean' to the Commission can also result in reduced penalties and lenient treatment.
That does not mean you are in a better position if you do not perform the competition law due diligence. Companies are strongly advised to resist the temptation to avoid investigating the possibility of competition law infringements when considering an acquisition in the hope that if there are anti competitive skeletons in the target's past, they will not be discovered. The Commission is becoming increasingly vigilant and effective at rooting out anti-competitive conduct. You do not want to find yourself in Sasol's position of having acquired a firm that sometime down the line is liable for enormous penalties and the associated legal and reputational costs. This would certainly push up the price of the acquisition.
Be aware of these hidden risks and indemnify against costs. It is important to factor in the costs of performing a competition law due diligence, possible penalties and to insist on comprehensive and water-tight warranties in relation to competition law infringements by the seller when making the commercial decision of whether to proceed with an acquisition.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.