Understanding Competition Law in South Africa – A Quick Guide

What is competition law and why is it vital in South Africa?

Competition law is a field of law that seeks to maintain competition in all markets by guarding against anti-competitive conduct by companies. It allows for the investigation, control and evaluation of restrictive practices, abuse of dominant positions, and mergers. Competition law is not only focused on competition issues – it includes public interest and social issues such as the promotion of small businesses, the interests of employees and black economic empowerment.

In South Africa, competition law is governed by the Competition Act No. 89 of 1998 (‘Competition Act’), which is enforced by the Competition Commission and the Competition Tribunal. The Act prohibits various forms of anti-competitive conduct, including price fixing, market division, bid rigging, and abuse of a dominant market position.

The Competition Commission is responsible for investigating and prosecuting anti-competitive behaviour in South Africa. It is an independent body that reports to the Department of Economic Development.

Competition law is necessary in South Africa for several reasons. Firstly, it promotes economic growth by encouraging competition, which leads to more efficient markets, lower prices, more choice, and better quality products and services. Secondly, it protects consumers by preventing companies from engaging in anti-competitive behaviour that harms consumers. Thirdly, it encourages innovation and entrepreneurship by allowing smaller businesses to compete on a level playing field with larger ones.

The Competition Act regulates the following types of conduct:

Price fixing: This is an agreement between competitors to fix the prices of goods or services at an artificially high level.

Market division: This is an agreement between competitors to divide up markets, customers or territories among themselves in order to reduce competition.

Bid rigging: This is an agreement between competitors to coordinate their bids on a tender or contract, with the aim of manipulating the outcome in their favour.

Abuse of dominance: This occurs when a dominant firm in a market abuses its position by engaging in conduct that harms competition, such as charging excessive prices or refusing to supply a rival.

Mergers and Acquisitions: These are transactions that may substantially prevent or lessen competition in a specific market.

Collusive tendering: This is an agreement between competitors to manipulate the outcome of a tender or bid process, such as by agreeing on prices or allocating contracts.

These types of prohibited conduct are enforced by the Competition Commission through notifications (of mergers or acquisitions), investigations or in some cases, hearings before the Competition Tribunal. The Commission has the power to impose fines, order divestitures or other remedies, and hold legal action to stay anti-competitive behaviour.

Competition law and M&A

There are a number of frequently asked questions relating to competition law and how it pertains to mergers and acquisitions.

What is a merger in the competition law context?

In terms of Section 12 of the Competition Act, a merger occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or section of the business of another firm. A merger may occur through the purchase or lease of shares or assets, joint ventures and/or pure amalgamation of businesses.

What three criteria must be met in order for a merger to be notified to the Competition Commission?

A merger is notifiable to the Commission if it meets the following three criteria:

a) Jurisdiction test – the merger must constitute economic activity within, or having an effect within, South Africa;

b) Control test – the merger must constitute a ‘merger’ as defined in section 12 of the Competition Act; and

c) Threshold test – the merger must meet the thresholds of assets and turnover values established in the Competition Act.

What jurisdiction test must be met in a merger?

The Competition Act applies to all economic activity within, or having an effect within, South Africa.

What control test must be met in a merger?

A person controls a firm or business if that person:

owns more than 50% of the issued share capital of the firm; and/or has majority votes in general meetings; and/or can appoint or veto the appointment of majority directors; and/or has the ability to materially influence the policy of the firm.

What threshold test must be met in a merger?

A merger must be notified when the following thresholds are met:

Lower threshold: Combined turnover/Asset value R600m: Target turnover/Asset Value R100m;

Higher threshold: Combined turnover/Asset value R6.6b: Target turnover/Asset Value R190m.

The financial threshold analysis considers the higher of the indecent turnovers or improper asset values of:

a) the acquiring group (i.e., the immediate acquiring firm and all firms it controls, firms that control it, and all other firms controlled by its controllers) and the target firm and any firms it controls (Combined Value); and

b) the target firm (including any firms it controls) (Target Value), as recorded in the firms’ most recent year-end financial statements.

What distinction does the Competition Act draw in the size of mergers?

The Competition Act draws a distinction between a ‘small merger’, an ‘intermediate merger’ and a ‘large merger’ as follows:

a) a small merger is where the Combined Value is less than the lower combined threshold of R 600 million in, into or from South Africa and/or the Target Value is less than the lower target threshold of R100 million in, into or from South Africa;

b) an intermediate merger is where the Combined Value equals or exceeds the lower combined threshold of R600 million in, into or from South Africa and the Target Value equals or exceeds the lower target threshold of R100 million in, into or from South Africa; and

c) a large merger is where the Combined Value equals or exceeds the higher combined threshold of R6.6 billion in, into or from South Africa and the Target Value equals or exceeds the higher target threshold of R190 million in, into or from South Africa.

How long does it catch for the Competition Commission to approve a merger?

In the case of a small merger, the Commission has an initial period of 20 business days within which it must investigate and determine on the merger (i.e., approve, prohibit, or conditionally approve the merger). However, the Commission can extend this period for up to (but no longer than) 40 business days. The Commission typically does extend the initial period for the full further period, although it does not follow that the Commission will only design its decision known at the terminate of 60 business days from date of the application being filed (c. 3 months).

In the case of an intermediate merger, the Commission has an initial period of 20 business days within which it must investigate and determine on the merger (i.e., approve, prohibit, or conditionally approve the merger). However, the Commission can extend this period for up to (but no longer than) 40 business days. The Commission typically does extend the initial period for the full further period, although it does not follow that the Commission will only manufacture its decision known at the finish of 60 business days from date of the application being filed (c. 3 months).

In the case of a large merger, the Commission must investigate the merger and produce a recommendation to the Competition Tribunal (‘Tribunal’) within 40 business days. However, the Commission may apply to the Tribunal for one or more extensions of up to 15 business days at a time. Merger parties would usually agree to one or two such applications, after which they might oppose further applications. The Tribunal will allocate a hearing date only after the Commission has made its recommendation. The timing and duration of the hearing will depend on the Tribunal’s roll and the issues that must be considered.

Our team advises on merger control and prohibited restrictive practices, as well as legal and regulatory competition law compliance in South Africa and other African jurisdictions. Set up a meeting with us for advice within this area of law. To find out more about Caveat Legal or to contact the team, please visit www.caveatlegal.com

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