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
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
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.
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