Q&A: BAKER MCKENZIE - JSE MAGAZINE

Q&A: BAKER MCKENZIE

Vani Chetty, partner and head of the competition practice team of Baker McKenzie, on the conduct of dominant companies in the economy, the importance of public interest considerations and promoting strong market rivalry

Q&A: BAKER MCKENZIE

Q: What are the basic principles of SA’s Competition Act?
A: The Competition Act regulates four primary areas of activity between market participants. These areas govern conduct between competitors, conduct between parties that operate at different levels of the supply chain, the conduct of dominant firms and merger control.

In addition, the Competition Act provides for the establishment of a Competition Commission, which is responsible for the investigation, control and evaluation of the conduct described above (including abuses of dominance and cartel infringements) as well as merger control.

The Competition Act also provides for the establishment of a Competition Tribunal and a Competition Appeal Court, which adjudicates competition-specific cases.

The Competition Act also deals with merger control, prescribing the types of transactions that would constitute a mandatorily notifiable merger and the factors against which mergers are to be evaluated from a competition perspective. Notably, the Competition Act has a public interest focus too, which is as equally important as the competitive assessment of a transaction. As an example and in terms of the Competition Act, the competition authority may prohibit an otherwise pro-competitive merger on the basis of employment losses alone (or other public interest factors).

On the whole, credible competition law and effective structures to administer that law are necessary for an efficient, functioning economy.

Q: How does competition law in SA compare globally?
A: The country’s competition law, in substance, is similar to other jurisdictions internationally. While the principles are largely the same, the manner in which they are applied in a local context must be taken into account, such as the country’s socioeconomic environment.

The advent of competition legislation in 1998 (commencing in 1999) was one of the measures implemented to address past imbalances – it is therefore unsurprising (though unique) that public interest considerations needed to be included.

One such consideration is the impact of mergers on employees, such as retrenchments and redundancies. Others include an enquiry into how the proposed transaction is likely to impact on a sector or a region, small businesses or disadvantaged firms, and the ability to compete internationally. Public interest is the key difference between international and local competition law considerations.

Q: How does competition law promote economic efficiency?
A: The mandate of the competition authorities is to ensure that they promote competition. Accordingly, competition law regulates commercial activity to ensure that conduct that substantially lessens competition in any way is prevented or halted. In this way, competition law seeks to promote strong market rivalry and minimal collusion.

Increased rivalry between market actors inevitably leads to greater efficiencies – including but not limited to the adoption of more cost- and labour-efficient methods of production and service delivery. In addition, ‘economic efficiency’ should be seen in light of the transformative goals of SA’s competition legislation. Accordingly, the promotion of conditions enabling new market entrants and the lifting of market restraints on a diverse range of industry actors (including previously disadvantaged persons) serve to improve efficiency in the SA market more generally.

Q: How have recent Amendments affected markets?
A: The 2009 amendments are being implemented incrementally. To date, those amendments that are in force relate to market inquiries (from 1 April 2013) and criminal sanctions (from 9 June 2016).

Due to the very recent commencement date of amendments introducing criminal sanction, it is not yet possible to assess the impact on markets. However, the introduction of criminal sanction adds an element of deterrence to both corporates, and their directors and officers. It is anticipated that, as in other areas of regulation, this will impact on how firms do business, including the introduction of clear internal policies and care in communicating with competitors.

As directors and senior managers may now be held personally liable if found guilty of contravening the act (which has implications for their ability to take such roles in the future), senior management will have to take greater responsibility to ensure compliance.

To date, the competition authorities have initiated a number of market inquiries, including those in respect of liquefied petroleum gas, banking, grocery retail and private healthcare. Those market inquiries initiated to date appear to have sensitised market participants to the principles of fair competition, the potential for anti-competitive practices in their respective industries and the potential effect of current industry practices on new market entrants, transformative goals and consumers.

Q: How are state-owned enterprises (SOEs) affected by the Competition Act?
A: SOEs are not exempt from competition inquiries and the Competition Act expressly binds organs of state. This has been reinforced by the Competition Tribunal in relation to Telkom.

It is interesting to note that the competition authorities have also acted against former SOEs, such as Sasol, in order to counter the effects of statutory monopolies created under the apartheid regime. In this regard, fines against former parastatals and SOEs have, to date, been significant – and include some of the highest penalties imposed for abuse of dominance.

More generally, it can be noted that it is not only SOEs but also government departments that have made effective use of the Competition Act in lodging complaints against perceived or potential price-fixing and other anti-competitive practices evident in firms bidding for public tenders.

Q: How dominant are oligopolistic industries in SA, and how does the Competition Act impact on those?
A: In a number of oligopolistic industries, there’s evidence of dominance, either by virtue of market share or market power. Dominance per se, however, is not prohibited, but rather the abuse thereof.

The Competition Act defines a ‘dominant’ firm as having at least 45% of a particular market; between 35% and 45% of a particular market (unless it can show that it lacks market power); or less than 35% of a particular market, but market power. Abuse of dominance is present where a firm falling into one of these categories engages in excessive pricing or price discrimination, denies competitors access to an essential facility, induces customers not to deal with competitors and so on.

Proving abuse of dominance is, however, difficult and a number of investigations have resulted in ‘non-referrals’. At the same time, successful prosecution of such cases before the tribunal has resulted in interventions in concentrated markets at both national and local level.

Q: What should companies include in their clauses that relate directly to the competition law?
A: Companies need to ensure that when engaging in commercial dealings, there is always a check to ensure compliance with competition law. This applies to commercial agreements, the process of concluding transactions, and when collaborating with competitors.

In the context of corporate transactions (including sales of business, sales of assets and merger agreements), best practice is for companies to include competition approval as a condition precedent to a notifiable transaction. In addition, firms should consider allocating obligations in respect of payment of filing fees and associated costs and co-operation in respect of competition requirements. More broadly, public interest considerations may be reflected in agreements by including undertakings that a transaction will not result in job losses or will increase job opportunities or otherwise improve opportunities for job creation and local procurement.

It’s also important that transaction documents guard against the exchange of competitively sensitive information and ‘gun jumping’, and that transaction time lines are structured with these considerations in mind.

Q: How does the Competition Act affect consumers directly?
A: Competition regulation is designed to benefit consumers by providing greater choice in goods and services and ensuring that pricing is competitive and rational. A debate has emerged about the extent of direct consumer benefit given that collected fines go to the National Revenue Fund, which in turn goes directly to government. However, competition regulation has intervened in a number of sectors – notably food products and healthcare – to prevent anti-competitive practices that had the effect of driving up costs.

One trend is an increased focus on the intersection between patent law and the high costs of related products. Most recently, this is reflected in the investigation into excessive pricing of cancer medicines. An earlier matter, also concerning patents and excessive pricing of life-saving medicines, resulted in an agreement opening the SA market to the supply and manufacture of generic antiretrovirals.

Q: What is a common issue that you face when working on cross-border competition matters?
A: A question often raised by multinationals that are required to file a merger in SA pertains to retrenchments. Outside of SA, global transactions do not have to justify a positive effect on public interest or on employment in order to obtain merger clearance. In SA, a merger that is pro-competitive can be rejected if it has an adverse effect on employees. This is often hard for investors to reconcile and sometimes will be interpreted as SA not wishing to attract foreign direct investment.

The difficulty is that in other jurisdictions efficiencies may be created by reducing employment costs. This approach cannot be used in SA, so employment issues sometimes cause delays in receiving merger approval.

By Kerry Dimmer
Image: Hanlie Huisamen