South Africa: The Commission's View On Public Interest

Last Updated: 10 June 2015
Article by Justin Balkin and Kirsty van den Bergh

Most Read Contributor in South Africa, September 2016

Public interest considerations in merger proceedings have become a focus area in recent years. In addition to assessing the competitive impact of a proposed transaction, the competition authorities are also mandated to consider its impact on (i) a particular industrial sector or region, (ii) employment, (iii) the ability of small businesses or those controlled or owned by historically disadvantaged persons to become competitive, and (iv) the ability of national industries to compete in international markets.

Whilst certain other international jurisdictions touch on similar public interest goals in their competition / antitrust legislation, South Africa is one of the few merger regimes where public interest considerations play such an important role.

In an effort to give parties guidance on the Competition Commission's approach to public interest in its investigation of mergers, and to indicate the information that the Commission would like parties to provide in their merger notifications, the Commission published public interest guidelines earlier this year.

In the guidelines, the Commission outlined a broad 5-step analysis which it will undertake in respect of all proposed transactions with a public interest dimension. Firstly, the Commission will determine the likely effect of the transaction on the public interest, followed by a determination as to whether or not that alleged effect is merger specific. Then, the authorities will assess whether this effect is substantial and, if so, whether the merging parties can justify the likely effect on the public interest. Lastly, any possible remedies to address the negative public interest effect will be evaluated.

To the extent that the effect of a proposed transaction on the public interest is found not to be merger-specific (i.e. there is not a sufficient causal nexus between the anticipated public interest harm and the transaction under consideration), the Commission's inquiry will stop here. Furthermore, if an effect is found to be merger-specific, but insubstantial, the public interest assessment will not continue further.

Ultimately, the Commission will weigh the results of its public interest inquiry against its assessment of the competition impact of a proposed transaction. Importantly, a transaction may be approved if its public interest benefit outweighs its anti-competitive effect or vice versa.

Notably, in accordance with the 5-step analysis discussed above, the guidelines also set out specific factors which the Commission will consider in respect of each of the listed public interest grounds.

Insofar as "employment" is concerned, the Commission will firstly assess the effect of the proposed transaction on employment generally. This analysis, done on a case-by-case basis, requires the merging parties to disclose all contemplated retrenchments (whether due to the merger or for operational reasons) having regard to the effect of these retrenchments on the employees of the merged entity.

Insofar as the type of information which the Commission requires to be submitted to it, the Commission has indicated that it will consider, inter alia, (i) the number of employees affected, (ii) their skill levels, (iii) the likelihood of those employees finding alternate employment, (iv) employment trends in the relevant sector, and (v) the nature of the primary acquiring firm's business (for example, whether it employs seasonal workers). All of these factors will be taken into account when determining the overall effect of the proposed transaction on the employees. According to the guidelines, this information must not be "arbitrary, random or a guess estimate".

The Commission will assess the whether the proposed transaction will have an impact on the number of jobs in existence pre- and post-merger, duplication of positions, cost-cutting measures, relocation of operational premises, the cancellation and / or implementation of supply / distribution agreements, and whether the retrenchments would have occurred absent the transaction.

Importantly, the Commission has confirmed that it will assess the merger-specificity of retrenchments only if parties to a transaction claim that these retrenchments are not related to the merger. Furthermore, to the extent that any retrenchments take place shortly before (or shortly after) a proposed transaction is notified, the Commission wishes to be made aware of this. In fact, the Guidelines set out that parties will be required to notify the Commission of any retrenchments which are considered from the date of initiation of merger discussions and for a period of one year after approval for a proposed transaction is received.

The guidelines do indicate, however, that the Commission will consider an effect on employment to be "substantial" only if a large number of unskilled / semi-skilled employees are retrenched who have no short-term prospects for re-employment. In this regard, to the extent that the competition authorities are of the view that a transaction does raise employment concerns, it may impose conditions which, inter alia, restrict the number of job losses, stagger the job losses over a period of time, place a moratorium on retrenchments, require funding for the re-skilling of affected employees, require career counselling to affected employees, require preferential re-employment terms for the affected employees, introduce a training layoff scheme and / or introduce employee shift rotations.

In addition to their analysis of the affected employees, the Commission's analysis will broadly include, if necessary, a determination of the effect of the proposed transaction on employment in a particular industry or region. No further guidance is provided as to when and under what circumstances such a secondary line of inquiry will be undertaken.

Insofar as the effect of a proposed transaction on a "particular industrial sector or region' is concerned, the guidelines indicate that the Commission will consider the relevant sub-sector and the likely impact of the proposed transaction of the value chain therein. Whilst not limited in this regard, the assessment will consider an evaluation of import substitution as well as domestic production.

As regards the "ability of small businesses, or firms controlled or owned by historically disadvantaged firms, to become competitive", the guidelines confirm that the Commission should consider, inter alia, whether the proposed transaction will affect the ability of SMEs and HDIs to compete by (i) raising existing barriers to entry, (ii) preventing access to key inputs, (iii) result in unfair pricing, (iv) denying access to suppliers, (v) preventing training, skills upliftment and development, and (vi) denying access to funding.

Insofar as the last public interest ground is concerned, namely the "ability of national industries to compete in international markets", the guidelines indicate that this is applicable only when merging parties are looking to justify an anti-competitive merger on public interest grounds. The onus is on the merging parties in this regard and the Commission will not automatically assess this ground unless requested to do so.

Whilst the aforementioned guidelines provide merging parties with insight into the Commission's position on issues of public interest, they do reflect only the Commission's view. They remain to be tested before the Competition Tribunal and the Competition Appeal Court. However, parties would do well to take cognisance of the guidelines when dealing with the Commission as this will no doubt determine the manner in which the Commission will consider these issues in its investigation of mergers notified to it.

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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