South African Competition Law in the new world August 2020

By NEIL MACKENZIE, Published in COVID-19 Competition Law

The South African Competition Tribunal recently found a firm guilty of abusing its dominance. The firm was a small trader with a market share of 4.7%. The illegal conduct comprised excessive pricing of face masks for a period of just over one month. The investigation, prosecution and adjudication took less than three months. The fine was R76 040.

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This case illustrates that we live in strange times. COVID-19 has caused commercial enterprise to be reinvented overnight. Competition regulation has been running to catch up, applying novel analysis to the novel environment.

But lifting our eyes from the present whirlwind, what does South African competition enforcement look like post-COVID for authorities, practitioners and firms? This article speculates on what we might expect in the medium term from each major tenet of antitrust – mergers, restrictive agreements, abuse of dominance and market inquiries.

Mergers

Many predict a surge in mergers after the national lockdown. First, small businesses without the financial reserves to tide them over the economic trough may surrender themselves to investment by larger, more resilient firms. Second, large multi-product firms may divest non-core assets or poorly performing divisions.

Acquirers best placed to restore struggling start-ups and distressed assets to profitability will often be existing industry participants, including competitors. This means that the anticipated increase in the volume of merger notifications is likely to be accompanied by enhanced complexity in the competition assessment. The authorities will need to grasp the trade-off between the survival of distressed businesses, which increases competitive vitality in the short term, against tilting the structure of markets towards increased concentration, which is generally consistent with reduced competition (and increased barriers to entry for small local firms) in the longer term.

In many instances, the acquirers will be foreign-based multinationals and, more than ever, merging parties will be focused on reducing costs and improving efficiency. This may magnify a tension already inherent in the South African system – enable investment and ensure firm survival, but, at the same time, protect jobs and promote the spread of ownership by South Africans.

Loosening the protection of employment would risk undoing the authorities' admirable work in this area over many years. However, often, addressing public interest issues requires acquiring firms to make significant commitments to invest, to retain headcount, and to procure locally. In a recessionary climate, imposing restrictive conditions on much needed investment may be particularly damaging if the appetite for M&A activity is suppressed as a result.

To compound the difficulty the authorities may face, merger control is an inherently time-sensitive endeavour. In the post-COVID-19 world, where survival will often be at stake, the urgency for distressed businesses to implement transactions is likely to be acute.

These circumstances will require the merger investigators to work with increased rigour, speed and vigilance. Prioritisation will be key. Reliable screening criteria will need to be put in place to ensure scarce resources are allocated to the most high-stakes, complex and time-sensitive cases. Purpose-built analysis will be required to marshal the trade-offs mentioned – short term survival vs long term concentration, and short term public interest protection vs long term investment incentives. Discipline will also be required to manage the scope for opportunistic third party objections which delay investigations and distort outcomes, while ensuring that the investigators have access to the material facts.

Firms and their advisers should be cognisant of these pressures and complexities. Where possible, parties to complex transactions should consider providing information proactively, to put the Commission in the best position to conduct this challenging assessment effectively, rather than closing their eyes and hoping for a straightforward review.

To the extent possible, realistic timelines should be built into transaction schedules, which recognise the complexity created by the economic environment and the unavoidable resource constraints within the authorities that are likely to arise.

Restrictive agreements

The post-COVID economy is likely to be highly conducive to coordination between competing firms, for a number of reasons. Many markets will face reduced demand and excess supply. Firms may be increasingly tempted to coordinate in order to avoid the potentially destructive price wars that these conditions invite. In addition, increased merger activity combined with increased attrition amongst smaller firms is likely to result in more concentrated markets. Fewer firms in a market generally makes collusion easier to achieve and maintain.

In past economic downturns, competition authorities have been unsympathetic to so-called "crisis cartels". The Competition Commission's usual zero tolerance approach to cartels should, therefore, be expected. Firms should not be under any illusion that tough times present an excuse to coordinate. Industries which have enjoyed temporary block exemption from certain provisions of the Competition Act during the lockdown, often under government supervision, should disband any cooperation immediately once those exemptions cease to operate.

Abuse of dominance

The enforcement of South Africa's abuse of dominance laws is also likely to increase after the COVID-19 crisis subsides. The reasons for this expectation are two-fold.

First, if the anticipated spate of mergers and insolvencies materialises, large firms will become even more powerful. Many smaller firms that previously may not have been considered dominant may (perhaps unwittingly) find themselves with substantial market power. Axiomatically, increases in the degree and incidence of dominance are likely to foster conditions for more frequent complaints of abuse of dominance.

Second, South Africa has recently brought into effect a range of amendments to the Competition Act which (1) amplify the consequences of abuse of dominance (all abuses now carry a fine of up to 10% of turnover) and (2) introduce new prohibitions aimed at assisting small and medium businesses and firms owned or controlled by historically disadvantaged persons (SMEs) to participate in markets. These new provisions comprise contraventions for dominant firms imposing unfair prices or trading terms on SME suppliers and discriminating in the price charged to SME customers (even if the differential is based on different purchase volumes). The aim of the amendments is to ensure that there is a level playing field for SMEs, and the Commission will stick very closely to this narrative.

Even without the COVID-19 crisis, the recent amendments to the Competition Act set the stage for increased abuse of dominance enforcement. In the aftermath of the pandemic, SMEs are likely to face the brunt of the economic headwinds. Where dominant firms create additional hurdles for SMEs through their pricing and procurement terms, the reaction from the authorities is likely to be unforgiving.

Large firms would, therefore, be well advised to acquaint themselves with the abuse of dominance portions of the Competition Act, including the new provisions, and ensure that their relationships with SME suppliers and customers are managed to avoid the possibility of complaint and dispute.

Market inquiries

It is difficult to speculate on the role of market inquiries in the post-COVID world. The likely fluctuations in most markets during the next period might militate against the use of inquisitorial and resource-intensive market inquiries, which may reach conclusions that are quickly outdated.

Until markets settle into some pattern of normality, it may be most prudent for the personnel of the authorities to be dedicated to the influx of complex mergers, and increased enforcement of the prohibited practice provisions.

Once the dust has settled, however, market inquiries will become one of the most useful tools available to the competition authorities. The recent amendments to the Competition Act allow the Competition Commission to impose binding conditions following the market investigation. The Competition Commission will, therefore, be well placed to investigate key markets which they believe may not be working efficiently, and to impose conditions to assist in remedying competition in those markets.

In light of COVID-19 and the likely economic recession to be experienced in South Africa and around the world, it will be interesting to see how competition authorities, practitioners and firms change their approach to interpreting and applying competition laws. Competition authorities will, in particular, lead the charge on what approach is taken. This could be a decision to allow markets to self-correct, or a decision to increase intervention in markets to try to guide efficient outcomes. Either way, competition law enforcement will play an important role in determining how South African markets develop in the wake of the pandemic.

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MacKenzie is a Partner with Fasken (South Africa).