22 Feb 2019

The Competition Amendment Act

by Louise Cleland, Partner, Johannesburg, Jennifer Finnigan, Partner, Durban,
Practice Area(s): Competition / Antitrust |

On 14 February 2019 the President assented to the Competition Amendment Act, 18 of 2018 (Amendment Act).  The Amendment Act will begin on a date to be proclaimed by the President in the Government Gazette.  And this is not just another amendment act.  The Amendment Act radically changes the face of South African competition law and will have far reaching effects on business.  The Amendment Act envisages a host of new regulations and guidelines to be published by the Minister or the Competition Commission.  These too will affect business.  For now, here are some of key changes brought about by the Amendment Act.

  1. The cartel offence of market division now includes allocation of market shares between competitors.
  2. The Amendment Act places enormous emphasis on protecting small and medium businesses and firms owned and controlled by historically disadvantaged persons (Protected Firms) and in particular the ability of Protected Firms to participate effectively and sustainably in the market.
  3. Dominant firms have to be particularly careful about how they do business with Protected Firms and even more careful when deciding not to do business with them.  The new section 8 (4) abuses of dominance prohibit dominant firms in designated sectors from imposing “unfair prices or other trading conditions” on suppliers which are Protected Firms. Dominant firms in these sectors are also not allowed to avoid or refuse to buy goods or services from Protected Firms in order to circumvent the unfair pricing prohibition. It will be interesting to see how the concept of equity introduced by section 8 (4) works in practice.  We are still waiting for the Minister to designate the sectors in which these prohibitions apply.
  4. When the margin between the price at which a dominant firm sells an input to a competitor and the price at which the dominant firm sells its downstream product is too small to allow the competitor to participate effectively in the market, the dominant firm commits the new abuse of “margin squeeze”.  This abuse of dominance was previously prosecuted in terms of section 8(c) but has been separately identified as a specified exclusionary act in the Amendment Act.
  5. The definition of excessive price has been deleted from the Competition Act, but it is still an abuse of dominance for a firm to charge an excessive price. Section 8 (3) requires the person determining whether a price is excessive to consider whether the “price is higher than a competitive price and whether such difference is unreasonable” and provides some guidance in this regard by setting out a long shopping list of potentially relevant factors.
  6. Prior to the Amendment Act, it was an abuse of dominance to refuse to supply scarce goods to a competitor when doing so was economically feasible. That abuse of dominance has been expanded to include scarce services and now applies to a refusal to supply any customer and not just any competitor. Dominant firms will have to think very carefully before refusing to do business with any customer.
  7. Echoes of the long running Media 24 case are clearly evident in the new definition of “predatory prices” and the corresponding change to section 8 (1)(d)(iv).  It is now an abuse of dominance for a dominant firm to sell goods or services below their average variable cost or their average avoidable cost (the total of all fixed and variable costs which could have been avoided by not engaging in predatory pricing).
  8. As soon as proof on the face of it exists that a dominant firm is engaging in excessive pricing, unfair pricing to Protected Firms or avoiding buying from Protected Firms to circumvent the unfair pricing prohibition, the dominant firms will have to prove that they did not commit these abuses of dominance.
  9. Price discrimination has been extended to differences in prices and trading conditions which impede the ability of Protected Firms to participate effectively in the market. Firms cannot argue that cost differences incurred when supplying different quantities of goods justify price differences when supplying Protected Firms. The burden of proving its innocence also shifts to the dominant firm in the context of this abuse of dominance.  The application of this extended price discrimination prohibition is subject to regulations which have yet to be published.
  10. The penalties for prohibited practices (which include collusion, minimum resale price maintenance, concluding other anti-competitive agreements and abuses of dominance) are significantly strengthened by the Amendment Act.  The “yellow card” for certain first-time offences has been removed and all offences are now punishable immediately by way of an administrative penalty of up to 10% of the firms’ turnover.  The penalty for repeat offences is 25% of a firm’s annual turnover in, into or from South Africa.  Group turnover can be included in a penalty calculation as the Amendment Act includes provisions permitting the turnover of firms that control a guilty firm to be taken into account when calculating a penalty if the controlling firms knew, or should have known, about the offending conduct. Controlling firms can also be made jointly and severally liable with a guilty firm for payment of its penalty.
  11. In the merger space, the Competition Commission will assess mergers specifically taking account of their impact on Protected Firms and whether a merger promotes a greater spread of ownership within the affected market, including broad-based ownership by firms’ employees.  The Amendment Act vests the Competition Commission with a transformation mandate in addition to its role as antitrust regulator.
  12. Merger investigations have never been easy, but they are likely to be a much more complex affair under the Amendment Act.  In addition to the factors already considered by the Commission in relation to mergers, it is now required to consider, amongst other things, whether a proposed merger removes an effective competitor from the market, the impact of the merger in related (not only directly affected) markets, previous mergers by the firms involved, whether the merger promotes a greater spread of ownership by historically disadvantaged person and whether it promotes participation by employees in the ownership of firms.  In addition, a special category of mergers is created involving foreign acquiring firms where the transaction may affect national security interests.  These mergers have to be notified to a special parliamentary committee before they can be considered and approved by the Competition Commission or the Competition Tribunal. The President must publish a list of national security interests in due course and we will only know the extent of the impact of this extra layer of red tape on mergers when that list is published.
  13. The Amendment Act provisions dealing with market inquiries make the Competition Commission both investigator and judge and jury in relation to the markets and conduct being investigated. The Competition Commission in the Competition Tribunal have not always seen eye to eye and the market inquiry provisions of the Amendment Act give the Competition Commission a way of avoiding the Tribunal’s involvement in its investigation and hearings. The Amendment Act essentially gives the Commission the same powers given to the Competition Tribunal in relation to market inquiries, that is the power to issue summonses, powers in relation to hearings, to make procedural rules and to call witnesses.  It does not, however, require the Commission to ensure that it includes specific expertise on a panel chairing a market enquiry nor to ensure that such a panel is independent. At the conclusion of a market inquiry the Commission may take any remedial, mitigating or preventative action or recommend that a regulator takes such actions, recommend that the Tribunal order certain divestitures (without the approval of the Competition Appeal Court as is usually required for divestitures), recommend policy changes, initiate complaints, refer complaints to the Tribunal for hearing or take no action.  Essentially, the Amendment Act allows the Commission to initiate, conduct and decide a market inquiry without having to bother about fairness and independence.  It is not clear whether a recommendation by the Commission that the Tribunal make a divestiture order forcing a firm to sell shares, interests or assets will be preceded by a hearing or whether the Tribunal’s powers in that regard are limited to hearing appeals.
  14. The Amendment Act allows the Commission to conduct impact studies to determine the effect of any competition law decisions, rulings or judgments.  During these impact study investigations, the Commission may request information from any firm.  Firms have to direct any objections to those information requests to the Tribunal.  Under current competition law firms respond to information requests on a voluntary basis unless those requests are included in summonses or warrants.  It is not clear whether the provisions dealing with information requests relating to impact studies will change this.
  15. The Amendment Act includes new grounds on which the Commission may exempt certain conduct under the Competition Act, again in order to promote entry, participation and expansion by small and medium firms as well as firms controlled by historically disadvantaged individuals and allows the Minister to exempt certain categories of agreements similar to the block exemptions that still exist in Europe (although the European Commission has largely stopped using them).  It also sets a time limit of 1 year within which exemption applications must be finalised.  These provisions may streamline the exemption process and allow the Commission or Minister to recognise that the economic or practical benefit of certain conduct which contravenes the Competition Act outweighs its negative effect. The somewhat draconian flavour of the Amendment Act may result in an increase in exemption applications.

Over the years, the Competition Commission has made headlines as the champion of the consumer against big bad business, particularly in relation to cartel cases.  Its already extensive powers have been significantly increased by the Amendment Act and it now also has a clear transformation, social engineering role to play. Whether the somewhat draconian changes to the Competition Act made by the Amendment Act will result in extensive economic growth, particularly of small and medium firms and firms owned by historically disadvantaged individuals, remains to be seen.