Merger Regulations Post-COVID-19

The competition authorities, being the Competition Tribunal (“the Tribunal”) and the Competition Commission (“the Commission”), are already in the thick of it when it comes to regulating markets and competition in the COVID-19 world afflicted by lockdowns and economic restrictions amongst other considerations. We have previously written on the active role of the competition authorities and the Department of Trade and Industry (“the DTI”) in regulating the economy by ensuring fair competition, non-exploitation of consumers, and sector specific exemptions.

However, as we hurtle toward the end of the currently stipulated lockdown period, the focus of the competition authorities will begin to shift, and the question then becomes more about economic regulation and more specifically, merger regulation in a devastated economy.

Merger activity has virtually ceased during the national disaster, with only business rescue/failing firm mergers being considered. What will the competition authorities expect to face in terms of merger regulation post the national disaster? What tools are at their disposal to assist them?

The Commission is expecting an increase in merger activity once the lockdown is lifted and business resumes. It is anticipated that the firms with larger reserves will be in a position to purchase  smaller competing firms who would have been significantly weakened by the lockdown.

The Competition Act, 89 of 1998 (“the Competition Act”) defines “merger” in section 12 as:

12(1)(a) For purposes of this 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.

(b) A merger contemplated in paragraph (a) may be achieved in any manner, including through-

(i) purchase or lease of the shares, an interest or assets of the other firm in question; or

(ii) amalgamation or other combination with the other firm in question.

The Commission will assess each merger on its own merits but has a number of powers in terms of the Competition Act at its disposal.

In assessing a merger the Commission will initially determine whether or not the merger is likely to substantially prevent or lessen competition, by first assessing the factors set out  in section 12A(2).[1]

If it appears that the merger is likely to substantially prevent or lessen competition based on any of the factors in section 12A(2), the Commission is then to determine—

  • whether or not the merger is likely to result in any technological, efficiency or other pro-competitive gain which will be greater than, and offset, the effects of any prevention or lessening of competition, that may result or is likely to result from the merger, and would not likely be obtained if the merger is prevented; and

(b) whether the merger can or cannot be justified on substantial public interest grounds by assessing the factors set out in subsection (3).

In other words, even if the Commission finds that a merger is likely to have an anti-competitive effect, it may still find the merger to be justifiable on the basis of efficiency, technology or other pro-competitive gains that are shown to outweigh any anti-competitive effect.

Despite this, the Commission or Tribunal must also determine whether the merger can or cannot be justified on substantial public interest grounds by assessing the factors set out in subsection 12A(3).[2]

In principle , a merger with no anticompetitive effect could be prohibited on public interest grounds. However, to date, the competition authorities have dealt with public interest concerns by way of remedies. These remedies have been mostly behavioural in nature and often relate to moratoriums on merger related retrenchments or remedies related to developing the local economy (such as supplier development funds).

The public interest leg of the assessment is where we believe the competition authorities will have a crucial role to play. It is also where we believe the most jurisprudence around merger regulation in South Africa will be developed.

With the economy taking a COVID-19 induced beating, the competitive landscape after the national disaster could look very different. The competition authorities will have a trying time balancing business merger activity where bigger firms buy up the weakened smaller competing firms with the extensive public interest considerations such as (i) protecting the ability of small and medium businesses, or firms controlled or owned by historically disadvantaged persons, to effectively enter into, participate in or expand within the market;

(ii) employment (iii)the ability of national industries to compete in international markets; and (iv) 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.

We recommend that firms adopt a pro-active approach in any merger considerations post the national disaster and seek legal advice before doing so.

Our Competition Team is available to assist you in navigating the revised competitive landscape,and invite you to contact us (jac.marais@adams.africa) if you have any questions.

Footnotes

[1] These factors include:

(a) the actual and potential level of import competition in the market;

(b) the ease of entry into the market, including tariff and regulatory barriers;

(c) the level and trends of concentration, and history of collusion, in the market;

(d) the degree of countervailing power in the market;

(e) the dynamic characteristics of the market, including growth, innovation, and product differentiation;

(f) the nature and extent of vertical integration in the market;

(g) whether the business or part of the business of a party to the merger or proposed merger has failed or is likely to fail;

(h) whether the merger will result in the removal of an effective competitor;

(i) the extent of ownership by a party to the merger in another firm or other firms in related markets;

(j) the extent to which a party to the merger is related to another firm or other firms in related markets, including through common members or directors; and

(k) any other mergers engaged in by a party to a merger for such period as may be stipulated by the Competition Commission.

[2] The effect a merger will have on:

(a) a particular industrial sector or region;

(b) employment;

(c) the ability of small and medium businesses, or firms controlled or owned by historically disadvantaged persons, to effectively enter into, participate in or expand within the market;

(d) the ability of national industries to compete in international markets; and

(e) 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.

Jac Marais
Partner | Commercial Attorney
Misha van Niekerk
Senior Associate | Attorney
Mia de Jager
Associate | Litigation Attorney