SOUTH AFRICAN COMPETITION COMMISSION’S PROPOSED GUIDELINES ON PENALTIES FOR FAILURE TO NOTIFY A MERGER – SOME PREDICTABILITY, SOME UNCERTAINTY

By Sivuyise Lutshiti Saturday, April 14, 2018
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On 17 February 2017, the South African Competition Commission (“Commission”) published, in the government gazette, “Draft Guidelines for the Determination of Administrative Penalties for Failure to Notify a Merger and Implementation of Mergers Contrary to the Competition Act” (the “Guidelines”). The Commission published the Guidelines in response to the growing number of cases of failure to notify mergers and implementation of mergers contrary to Chapter 3 of the Competition No 89 of 1998 (as amended) (the “Act”) and to the Competition Tribunal (“Tribunal”) calling upon the Commission to formulate guidelines in this regard.[1]

The Guidelines thus attempt to provide an approach for determining penalties in instances where parties have failed to notify a merger where it is mandatory to do so or have implemented a merger prior to receiving the required approval from the competition authorities. The Act requires that intermediate and large mergers be notified to the Commission and such mergers may not be implemented until they are approved, with or without conditions, by the competition authorities.

At the time of writing this article, an intermediate merger is one where the value of the target firm’s assets in South Africa or its turnover generated in, into or from South Africa, is between ZAR 100 million and ZAR 190 million, and the combined value of the turnover generated in, into or from South Africa or the assets in South Africa of the acquiring firm and the target firm is between ZAR 600 million and ZAR 6,6 billion. A large merger is one where the value of the target firm’s assets in South Africa or its turnover generated in, into or from South Africa is ZAR 190 million or more and the combined value of the turnover generated in, into or from South Africa or the assets in South Africa of the acquiring firm and the target firm amount to or exceed ZAR 6.6 billion.

The Guidelines provide that for prior implementation of intermediate mergers, the minimum penalty will be an amount equal to double the applicable filing fee for an intermediate merger and the maximum penalty will be ZAR 5,000,000 (five million rand). The Guidelines further provide that for prior implementation of large mergers, the minimum penalty will be an amount equal to double the applicable filing fee and the maximum penalty will be ZAR 20,000,000 (twenty million rand). Although the wording in the Guidelines only refers to “prior implementation”, the Commission has made it clear that these penalty computation methods are also to be used when dealing with cases of failure to notify a merger.

At the time of writing this article, the filing fees payable for an intermediate merger are ZAR 150,000 (one hundred and fifty thousand rand) and the filing fee payable for a large merger is ZAR 500000 (five hundred thousand rand). The current filing fees have been in effect since 1 October 2017.  Prior to 1 October 2017, the filing fee payable for an intermediate merger notification was ZAR 100,000 (one hundred thousand rand) and a filing fee of ZAR 350,000 (three hundred and fifty thousand rand) was payable when notifying a large merger. These filing fees were in place from 1 April 2009 until 30 September 2017 (the higher filing fees were introduced on 1 October 2017).[2]     

While the Guidelines provide for each case to be considered on its own merits, at first glance, the Commission’s proposed methodology on the calculation of administrative penalties for failure to notify or for prior implementation appears very clear. However, as noted above, the Guidelines provide that a minimum penalty (both for failure to notify and for prior implementation) will be an amount equal to double the applicable filing fee for an intermediate or large merger, as the case may be. It is not clear from the Guidelines what is meant by the “applicable filing fee”. Is the applicable filing fee the fee that applied at the time that the failure to notify arose or the prior implementation occurred, or is it the filing fee applicable at the time at which the Commission or the Tribunal identify or consider the failure to notify or the prior implementation? 

From 24 December 1999 to 1 February 2001, the filing fees payable for an intermediate merger were ZAR 5,000 (five thousand rand), ZAR 125,000 (one hundred and twenty-five thousand rand) or ZAR 250,000 (two hundred and fifty thousand rand), depending on the value of the assets or turnover of the merging parties, and the filing fees payable for a large merger were ZAR 500,000 (five hundred thousand rand).[3]

From 1 February 2001 until 1 April 2009, the filing fees payable for an intermediate merger were ZAR 75,000 (seventy-five thousand rand) and the filing fees payable for a large merger were ZAR 250,000 (two hundred and fifty thousand).[4] While the filing fees for mergers increased in 2017, the filing fees have also changed in the past.  For example, between 1 April 2009 to 30 September 2017, the filing fees payable for an intermediate merger were ZAR 100,000 (one hundred thousand rand) and the filing fees payable for a large merger were ZAR 350,000 (three hundred and fifty thousand rand).    These changes to the filing fees over time reflect that the precise meaning of the “applicable filing fee” as used in the Guidelines is of importance, particularly when considering the period of time it may take before the failure to notify or the prior implementation of a merger is detected.

The “applicable filing fee” for an intermediate merger in 2007, for example, would have been ZAR 75,000 (seventy-five thousand rand), while the “applicable filing fee” as at 1 October 2017 is ZAR 150,000 (one hundred and fifty thousand rand). On this basis, the minimum penalty amount payable is not clear from a plain reading of the Guidelines. The Guidelines also provide for a consideration of various factors in mitigation or aggravation of the penalty to be imposed. At this stage, it is still unclear how these factors will be applied in practice. For example, one of the factors which may be seen as mitigating is if the merging parties demonstrate willingness to expeditiously conclude a settlement with the Commission. It remains to be seen, however, if mitigation will apply in circumstances where a firm is willing to reach a settlement but the Commission requires settlement on terms that are unacceptable to the firm, or the firm is only willing to conclude a settlement with a token penalty, so that ultimately a settlement is not concluded with the Commission without protracted negotiations.

Similarly, the Guidelines provide that an aggravating factor will include circumstances in which the merging parties were negligent or deliberate and wilful in their failure to notify the transaction.  It remains to be seen how this factor will be applied in practice.  For instance, if legal advice was sought and this advice was not correct, arguably the parties were not negligent in failing to notify.  However, if the advice sought was not well reasoned or well substantiated, arguably the parties may have been negligent in not interrogating the advice. It may take time, and a number of decided cases, before there is more predictability in relation to the aggravating and mitigating factors.    

Notwithstanding the above uncertainties, the Guidelines provide a good starting point when considering administrative penalties for failure to notify and prior implementation contraventions, since they seek to provide a methodology to be used when considering administrative penalties for failure to notify and prior implementation cases. 

A question that is raised is whether there should be different considerations when dealing with a failure to notify as compared to pre-implementation of a merger. Put differently, is there or should there be a distinction between the failure to notify a merger and the prior implementation of a merger (so-called “gun-jumping”) when it comes to considering an “appropriate” penalty?

In the United States, failure to notify a merger is treated as a more serious offence than prior implementation of a merger or “gun-jumping”.[5] There are arguments that can be presented for and against this distinction. It can be argued that pre-implementation is likely to constitute a contravention for a limited time prior to the relevant approval being granted, while failure to notify could constitute a continuing contravention for a significant period of time. However, in either situation, there may be an element of negligence or even wilfulness to contravene and, if so, this should be taken into account.  Further, failure to notify in certain circumstances may have no adverse effect, for example, where the merger that should have been notified is non-contentious from a competition perspective, such that no competitive harm could have arisen.  Conversely, prior implementation in circumstances where the merger notified is ultimately prohibited, could expose the acquiring firm to competitively sensitive information of the target in circumstances where the transaction will ultimately be blocked in order to prevent harm to competition.

It seems therefore that when considering either the failure to notify a merger or the pre-implementation of a merger, the conduct and the facts surrounding such conduct remain extremely significant in determining an “appropriate” penalty. In my view, an “appropriate” penalty should always be informed by the facts of the specific case, rather than whether the contravention constituted failure to notify or prior-implementation

[1] See for example, The Competition Commission v BB Investment Company (Pty) Ltd, Case No: FTN200Dec15.  In terms of section 79 of the Act, the Commission may prepare guidelines to indicate its policy approach to any matter within its jurisdiction in terms of the Act. 

[2] See Notice 215 of 6 March 2009, under Government Gazette No 31957 and Notice 1254 of 10 November 2017, under Government Gazette No 41245.

[3] See Notice 2889 of 24 December 1999, under Government Gazette No 20752.

[4] See Notice 12 of 1 February 2001, under Government Gazette N. 22025.

[5] See for example Input/Output, Inc. / Laitram Corp case [http://www.justice.gov/atr/cases/f203600/203653.htm], Computer Associates International (CA) / Platinum Technology case [http://www.justice.gov/atr/public/press_releases/2002/11029.htm] and Gemstar / TV Guide case [http://www.justice.gov/atr/public/press_releases/2003/200740.htm]. See also Gun-jumping: Antitrust Issues Before Closing the Merger by Richard Liebeskind, Partner, Pillsbury Winthrop LLP, Washington, D.C.