South Africa: Competition Commission Publishes Draft Public Interest Guidelines For Public Comment

Last Updated: 6 February 2015
Article by Lee Mendelsohn

Most Read Contributor in South Africa, September 2016

On Friday 23 January 2015, the Competition Commission (the "Commission") published its Draft Guidelines on the Assessment of Public Interest Provisions in Merger Regulation under the Competition Act (the "Draft Guidelines"). According to the Commission, parties to merger proceedings regularly provide insufficient information in respect of public interest considerations and, as such, the Draft Guidelines are intended to provide guidance on its likely future approach and the information it is likely to require from parties. Importantly, however, the Draft Guidelines will not be binding (even when they are final) and will not fetter the discretion of the competition authorities to consider public interest issues as they deem appropriate. The deadline for submission of comments on the Draft Guidelines is 23 February, 2015.

Public interest factors can be used to permit an anti-competitive merger, or to prohibit a pro-competitive merger. In other words, where a merger is found to be anti-competitive, the Commission will consider whether any public interest factors outweigh its anti-competitive effects. Conversely, where it is found that a merger is not anti-competitive, the Commission will consider whether there are any substantial negative public interest grounds requiring the prohibition of the merger or the imposition of conditions.

In terms of section 12A(3) of the Competition Act, the competition authorities must consider the effect that a merger will have on i) a particular industrial sector or region; ii) employment; iii) the ability of small businesses or firms controlled by historically disadvantaged persons to become competitive; and iv) the ability of national industries to compete internationally (collectively, the "public interest grounds").

In terms of the Draft Guidelines, the Commission will adopt a five-step process in analysing each of the public interest grounds, namely –

  1. determine the likely effect on the public interest;
  2. determine whether the alleged effect is "merger-specific" (i.e. that there is a sufficient causal nexus between the merger and the alleged effect), and where an alleged effect already exists, whether the merger exacerbates it;
  3. determine whether the likely effect is substantial;
  4. consider whether the merging parties can justify the likely effect (the onus being on the merging parties to do so); and
  5. consider possible remedies to address any likely negative effect.

Although the foregoing approach applies generally to the assessment of each public interest ground, the specific considerations at stake differ depending on which public interest ground is at issue.

The effect on a particular industrial sector or region

In determining the likely effect on an industrial sector or region, the Commission may consider, inter alia, whether a South African owned firm is being acquired; whether the termination of local production would have far-reaching consequences; and whether the merger results in the substitution of locally produced goods with imports. The substantiality of the effect turns on the strategic importance of the product to the sector, or of the sector to the economy; the extent of the consequences for the sector and the broader economy (where the ramifications flow beyond the primary market or sector, the effect is more likely to be substantial); and whether the merger impedes any public policy goals.

The Commission will consider any public interest argument in justification of a substantial effect on the industrial sector or region. As far as remedies are concerned, although emphasising the case-by-case nature of the imposition of remedies, the Commission provides examples such as: requiring investment into the local supply chain; maintaining or expanding local production facilities; and requiring the continued supply to local producers or sourcing from local suppliers.

The effect on employment

In determining the likely effect on employment, the Commission's primary focus will be on employment within the merging parties and it will require the parties to declare all contemplated retrenchments (whether the parties regard them as merger-specific or not). Its secondary focus will be the likely effect on the general level of employment in the relevant industrial sector or region, and whether the merger will impact upon job-creation and duplications more broadly.

In order to determine whether retrenchments are merger-specific, the proximity of the retrenchments to the merger is important: parties will bear the onus of proving that retrenchments carried out from the initiation of merger discussions to the date of filing, and within a period of one year following the approval, are not merger-specific. In determining merger-specificity, the Commission will consider whether the proposed retrenchments are linked to the intentions, incentives or management style of the acquiring group and whether, but for the merger, the retrenchments would have in any event occurred.

Determining the substantiality of the effect on employment involves a consideration of, inter alia: the number of affected employees; the affected employees' skill levels; their likelihood of finding alternative employment; the nature of the sector (for example, its unemployment rate and trends of retrenchment); and the nature of the acquiring firm's business (for example, whether it employs seasonal or permanent staff). Generally speaking, the more unskilled and semi-skilled employees with no short-term prospects of re-employment are retrenched, the more substantial will be the effect.

As far as justification is concerned, the parties need to meet each of three requirements, namely to: i) demonstrate the rationality of the process followed at arriving at the number of retrenchments and the rationality of the link between the number of jobs lost and the reasons therefor; ii) justify the job losses with an equally weighty and countervailing public interest argument under the Act (such as the need to save a failing firm; the need to ensure the efficiency and competitiveness of the firm by lowering its costs; or the necessity of the retrenchments to bring about lower costs and thus lower knock-on prices for consumers); and iii) demonstrate that they have provided full and complete information to the Commission and employees, to enable them to consult fully on all issues.

Examples of appropriate remedies where employment concerns arise include, inter alia, restricting the number of job losses; staggering them over a period of time; placing a moratorium on job losses for a period of time; and requiring the parties to fund the reskilling of affected employees.

The ability of small businesses ("SMEs"), or firms controlled or owned by historically disadvantaged persons ("HDIs"), to become competitive

Here, the Commission will determine whether the proposed merger gives rise to any of the following effects on SMEs or HDIs, namely, inter alia: raising or creating barriers to entry; preventing access to key inputs; denying access to suppliers; and denying access to funding for business development and growth. In order to determine whether the effect on the ability of SMEs and HDIs to compete is substantial, the Commission will consider whether the affected SMEs or HDIs are impeded from competing in the market; whether they constrain larger players, such that their impediment restricts dynamic competition and growth; whether the restriction in growth and competition limits growth and expansion of SMEs and HDIs and their participation in adjacent sectors; and whether the effect has an impact on other public interest grounds.

Possible remedies to address a negative effect on the ability of SMEs and HDIs to compete include establishing a supplier development fund for technical and financial support; requiring the merging parties to provide favourable discounts and prices; and obligating parties to continue access and supply.

The ability of national industries to compete in international markets

The Draft Guidelines suggest that this ground applies only when a party wishes to sanction a merger that is anti-competitive or gives rise to other negative public interest concerns. The onus is on the party relying on this ground to advance arguments in its support. The Commission will consider arguments in respect of, inter alia, the efficiency benefits for the economy; whether such benefits arise from the merger or could not be achieved in its absence; and whether such benefits outweigh any anti-competitive effects or negative public interest concerns brought about by the merger.

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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