The year of 2013 provided further opportunity for development of South Africa’s competition policy, law and practice. The year’s highlights included the conclusion of the Competition Commission’s Fast Track Settlement process involving bid rigging in the construction sector; some important merger decisions; developments in the law on pursuit of private damages; and clarity on numerous procedural matters in enforcement actions. These are elaborated upon further below.
Merger Regulation Trends
324 mergers were notified to the Competition Commission in the period April 2012 to March 2013. This represents an increase of around 10% to the 291 mergers notified in the previous year. Most of these transactions were in the manufacturing 23%, property 27% and mining sectors.
In this most recent period, 85% of mergers were approved unconditionally. 11% were approved subject to conditions (28 behavioural remedies aimed at public interest issues and seven structural remedies); and 4% were withdrawn or dismissed for lack of jurisdiction. No mergers were prohibited.
The Commission continued with a trend we identified last year in protecting and advancing public policy considerations (most notably protection of employment) in its merger analysis. The case of Stefanutti/Enorgotec gave rise to the fastest decision yet by the authorities (reportedly made within four hours of filing of the Commission’s recommendation to the Tribunal) was based largely on the need to protect employment in a firm under severe financial distress.
In Glencore / Xstrata, the Competition Tribunal confirmed an agreement between the merging parties and the National Union of Mineworkers that the number of skilled employees retrenched as a result of the merger would be limited to 80, and the number of semi-skilled and unskilled employees retrenched would be limited to 100. Greater protection was provided for semi-skilled and unskilled workers, who may only be retrenched after two years following a 90 day review period, during which the necessity of the potential retrenchments had to be considered in consultation with the trade union.
Recognition of the importance of employment is welcomed but we query the on-going tendency to seek to impose behavioural conditions regarding post-merger employment in more rather than exceptional cases.
We suggest what might develop as a trend that government departments may become more involved in pursuit of public interest policy goals and seek to participate in merger matters. The Act clearly allows for the Minister to make representations on public interest grounds, however we would not favour using merger intervention as a policy tool, where direct industry intervention may be preferable.
An interesting decision was handed down in February 2013 in the Nestle/Pfizer matter where the Tribunal approved the first transitional re-branding condition. This decision endorsed a remedy offered up by the merging parties to address anticipated anti-competitive effects in South Africa from the global acquisition by Nestle of Pfizer’s infant milk formula business. The remedy provided for the out-licensing of the Pfizer brands to a third party to be approved by the Commission for a 10 year period, during which the licencee would be entitled and required to re-brand the products and to be followed by a further 10 year period during which neither Nestle nor the licencee may use the identified brands. The endorsement shows the authorities’ flexibility and willingness to accept creative solutions to merger issues alongside developments in other global agencies, such as Australia and in Latin America which faced similar challenges.
Abuse of Dominance
The Competition Tribunal heard a number of high-profile abuse of dominance cases in 2013.
In Commission / Sasol, the highly contentious issue of excessive pricing was revisited for the first time since the May 2009 judgment of the Competition Appeal Court in Mittal Steel SA / Harmony Gold. In the Sasol case, the Tribunal has been asked to interpret and apply the puzzling test for excessive pricing test for excessive pricing laid down by the CAC in Mittal Steel. If the Tribunal succeeds in establishing a clear and practical path for future excessive pricing cases, this may be an area of South African competition law which attracts substantial attention. The Tribunal’s determination is awaited.
South Africa’s first case of predatory pricing proceeded before the Tribunal during 2013 in Commission / Media 24. The competition law community will wait with anticipation to see how the Tribunal traverses the numerous conceptual and practical difficulties with enforcing predatory pricing rules, particularly having regard to the unique and formalistic wording of section 8(d)(iv) of the South African Competition Act, which prohibits predatory pricing. The hearing will continue in early 2014.
The Tribunal also completed the high-profile hearing of Commission / South African Breweries, which was interrupted during 2012 by a challenge to the procedure followed in bringing the before the Tribunal. The Commission alleges margin squeeze and price discrimination by SAB.
Following an administrative penalty of R449 million imposed in 2012 on South Africa’s dominant fixed line telecommunications operator, Telkom, the Commission reached a ground-breaking settlement with Telkom during 2013 for a number of complaints of exclusionary abuse of dominance in July 2013. The settlement included a number of wholesale and retail pricing obligations (including scheduled percentage price reductions over a defined period), payment of an administrative penalty of R200 million, and an obligation upon Telkom to functionally separate its wholesale and retail businesses. This final condition included a range of transfer pricing and non-discrimination obligations.
This settlement shows the Commission’s desire and ability to implement creative solutions following a highly sophisticated analysis of a complex case. Telkom’s pragmatic approach and amenability to change its behaviour to support the outcomes sought by the Commission, and avoid litigation should also provide a valuable lesson for the competition law compliance policies of other South African businesses.
Clearly the most significant achievement of the Commission in 2012 was the finalisation of the two year process initiated in February 2011 in regard to bid rigging in the construction industry.
Fifteen firms concluded settlement agreements with the Commission involving penalties exceeding R1,4bn. The settlements which have been endorsed by the Tribunal sparked a public outcry in regard to the industry with the potential for affected parties to pursue private damages claims (see below).
Although the construction industry matters overshadowed other work by the Commission, further and continuing investigation and prosecution of cartel activity was pursued in a variety of industries. The Commission has settled numerous cartel cases in a range of industries including gas, bricks, bicycles, glass, poultry and air cargo.
A notable decrease is observed in the number of leniency applications received, interviews and interrogations conducted and referrals made to the Tribunal, which is attributable to the Construction Fast Track Settlement Process.
During the period under review, April 2012 to March 2013 the Commission only received 15 leniency applications. This represents a decrease of 94% in comparison to the 244 leniency applications received in the previous year.
53 leniency applications were carried over during this period which represents an increased 21% carried over in the previous period.
There was a significant decrease of 76% in the number of interviews and interrogations that were conducted in the current period.
During the period of review 33% less referrals were made and 100% more applications were rejected for failing to meet the requirements for leniency.
As per the previous period, no corporate leniency applicants received total immunity from prosecution.
The decision of the Competition Appeal Court in Vulcania effectively confirms how administrative penalties should be calculated following contraventions of section 4(1)(b) of the Competition Act. In short, the Tribunal’s six-step formula was upheld by the CAC. This involves a process of determining a firm’s turnover affected by the conduct, application of a factor to that turnover based upon discretionary determination of the seriousness of the conduct, a sense check review and capping, application of mitigation and a final sense check and capping to ensure the outcome does not exceed 10% of the firm’s total turnover.
The fining methodology is adapted from the European Commission and we do not expect further challenge or change in the near future. The application of the methodology will of course be subject to challenge on a case by case basis.
For some time, the Commission’s policy has been to focus its resources on specific industrial sectors where competition law interventions may have most significant impact – food and agro-processing, intermediate industrial products, and construction and infrastructure. In line with this approach, in 2013 the Commission concluded cartel settlement agreements in poultry, sheep breeding, glass, bricks, piped-gas and, most notably, construction.
It will be interesting to see whether the Commission shifts its enforcement cross-hares during 2013.
Notable developments during 2013, which are expected to impact the Commission’s enforcement work include:
Access to Leniency Documents
In 2013 the Supreme Court of Appeal ruled that a leniency application is generally covered by ‘litigation privilege’, which means that it is restricted, and the Commission cannot be compelled to disclose it to third parties (or even their lawyers, subject to confidentiality undertakings).
However, in an important caveat, the SCA held that by making expansive reference to a leniency application in the document referring the matter to the Competition Tribunal, the Commission implicitly waives that privilege. in the particular case, which involves Scaw Metals, ArcelorMittal South Africa Limited and Cape Gate, the Commission was ordered to provide a copy of Scaw’s leniency application to the other respondent companies, subject to practical arrangements to deal with confidentiality.
Section 6 of the Competition Amendment Act came in to effect 1 April 2013 which paved the way for the announcement of the much anticipated market inquiry into the private healthcare market.
In November 2013 the Commission published and invited comment on Draft Terms of Reference for the Market Inquiry into Private Healthcare.
Following receipt of comment from the industry, the Commission published the final terms of reference in November 2013, which included a broadening of the scope of the inquiry. The inquiry which was due to commence in January 2014 has faced an initial procedural challenge but the final report, which may include recommendations, is due to be completed by 30 November 2015.
The remaining controversial provisions including those relating to imprisonment for cartel activity remains likely to suffer constitutional challenge.
Changes in Personnel at the Commission
The year has ended with a number of the Commission’s key positions changing. These include the position of the Commissioner himself, as well as appointments of managers of the Enforcement and Exemptions, Policy and Research and Merger portfolios.
Hopefully the new incumbents will continue the good work carried out by their predecessors which has resulted in the Commission retaining a consistently encouraging peer and stakeholder review rating.
South African law on the requirements for claiming damages following competition law violations continues to progress slowly. 2013 saw the Constitutional Court clarify a number of prerequisites for instituting class actions, and remitting claims by bread consumer and distributors to the High Court for class certification.
The potential for damages claims against firms that participated in the fast track settlement process in the construction industry has enjoyed significant media attention, although we are not aware of any claims having been instituted. This may a possibility during 2014.
The High Court also this year clarified that a cartel participant that blows the whistle on the cartel by applying under the Corporate Leniency Policy may be ‘certified’ by the Competition Tribunal – a formal process under the Competition Act which enables third parties to claim damages against the certified firm.
Competition Law in Africa
COMESA (Common Market for Eastern and Southern Africa) is a regional body established to foster economic development within its 19 member countries. In January 2013 the COMESA Competition Regulations came into effect.
The Regulations require notification of mergers to the COMESA competition authority at a regional level. Filing requirements are triggered if a merger involves parties operating in two or more member countries, and the prescribed financial thresholds are exceeded. Currently, the thresholds are zero, so all such transactions are notifiable in theory.
Failure to notify exposes the merging parties to the risk of a maximum penalty of 10% of their turnover within the common COMESA market during the preceding financial year.
There has been considerable debate during 2013 about how the COMESA Regulations should be interpreted. Significant uncertainty in a number of areas has meant that the regulations have not yet been successful/ COMESA is in the process of seeking third party consultants to make necessary changes to improve the efficacy of the regulations.
Firms doing business within the COMESA (and broader Africa) region should continue to be mindful of the possibility of their merger transactions requiring COMESA approval.