Trends in South African Competition Law

Source: Webber Wentzel Bowens

Throughout the world, competition policy has established itself as a major instrument of economic policy and regulation. South Africa is no different and with its economic system based upon the principles of a free market economy, South Africa’s Competition Legislation has become a pivotal piece of legislation in the country’s economic landscape. 

On the one hand, the Competition Act, 89 of 1998 (“the Act”), envisages promoting traditional competition policy, while at the same time, requiring the authorities to promote the public interest through considerations such as employment, black economic empowerment and the advancement of small businesses.

South Africa has made considerable strides in developing a competition jurisprudence in the short period of time the Act has been in place.  South African competition law exists in a fluid and dynamic economic environment which is developing and expanding at a rapid rate, demanding more sophisticated investigation by the Authorities into competition issues and an in-depth knowledge by local practitioners not only of South Africa Law but also foreign jurisprudence and practice. 

Since the enactment of the competition legislation in South Africa in 1998, there has been an increasing evolution and sophistication in competition law in general.  Although, the South African Competition Authorities have made great strides in developing their own unique jurisprudence, the Competition Authorities have also derived a great deal of assistance from their competition or anti-trust colleagues in other parts of the world. 

Explicit recognition is given to the assimilation of foreign jurisprudence in the South African Act, which provides that any person interpreting or applying the Act may consider appropriate foreign and international law. The South African Competition Authorities have been astute in relying upon decisions of the US, Canadian and European Competition Authorities and have thus developed our own competition law jurisprudence swiftly. 

As foreign investment into South Africa increases and South African business expands, an increasing number of international transactions have qualified for notification to the South African competition authorities. Similarly, as the South African economy strengthens, large South African companies have expanded into the global economy. This has required a broad and in-depth knowledge, by South African practitioners, of not only South African law, but also European, American and to an ever increasing extent, African law.

South Africa is seen as the gateway into Africa, and as South African business expands, Africa will become more and more important requiring practitioners to acquire an in-depth understanding of the competition law regimes in various African countries. This has and will continue to require interaction with correspondent attorneys, which in itself presents many challenges, particularly in relation to language variations.

A comprehensive understanding of the applicable foreign legislation is becoming increasingly important and keeping abreast of international practices and developments has become a major part of legal practice in South Africa. 

Competition law in South Africa is clearly no longer a simple affair.  Increasingly we are seeing a number of complex issues coming before the South African competition authorities which will challenge both the authorities and practitioners to achieve levels of sophistication seen in jurisdictions such as England and the United States. 

In this regard South African authorities have been tasked with an increasing number of multi-national hostile take-over bids such as the Alcan Inc / Pechiney, Sanofi / Aventis, BASF/Engelhard, Saint Gobain/British Plaster Board and most recently Mittal Steel Company N.V / Arcelor SA transactions, which have required notification in South Africa. 

The rules prescribed under the South African Competition Act provide for special procedures to be followed in relation to hostile take-overs, which require the acquiring or target firm to apply to the Commission for permission to file a separate notification of a merger.  Typically, parties to a merger are required, in terms of the Competition Commission's Rules of procedure, to submit a joint notification to the Competition Authorities. 

However, the rules also provide for a procedure for dealing with hostile take-overs or other situations where a joint filing is not appropriate.   The Rules allow a filing party to request special filing directions from the Commission if the circumstances justify a departure from the normal joint notification requirements.  Unfortunately it is a cumbersome and slow process with significant procedural loopholes which can adversely impact on the timing of hostile transactions the net effect of which is that there will be delays in obtaining an outcome in these types of mergers. 

It is common practice in the course of a hostile take-over for the target firm to attempt to delay the implementation of the merger, and the Competition Act is often seen as a statutory refuge by target firms.  It is common to see lawyers for target firms relying on technical interpretations of the Act to attempt to delay the process for as long as possible in the hope of thwarting the acquirer's bid.  As timing is often of the essence in transactions of this nature, particularly with listed companies which have certain stock exchange requirements that they are required to meet, as well as rigid time tables within which the transaction is supposed to occur, lawyers for the acquirer often have to be particularly astute to avoid these delaying tactics.

In general, Competition Lawyers are often at the end of the queue of commercial advisers when it comes to negotiating or implementing transactions.  Competition laws have now emerged as a recognised species of law and should serve to change the competition lawyer's position in the queue and alter his role to approximating a strategist in hostile and other complicated transactions. 

The reason for this recent change in role is that competition law considerations now often determine whether a transaction will indeed take place, due to the fact that competition law regulators are increasingly showing their teeth.  The days of corporate attorneys dabbling in competition law are a thing of the past.   

As the Competition Commission garners experience and acquires increased confidence, it will be even more difficult to conclude corporate deals, which have competition law implications, without a thorough understanding of competition law issues, rigorous preparation prior to filing the transaction with the authorities and the resources to complete the filing within the prescribed time limits. In modern commercial transactions, the competition lawyer should be one of the first to be consulted, since the structure of the deal and the manner in which it is carried out may be critical in determining whether it ultimately sees the light of day.

Transactions which may raise competition law concerns should be carefully planned from the outset and, if necessary, a team consisting of a competition lawyer, an economist and a marketing or industry specialist may be required.  Ultimately the team will have to work hand in hand with the merging parties to ensure that the filing with the competition authorities is thorough, professional and addresses all relevant concerns, ranging from the impact of the transaction on competition in the relevant market to efficiency gains and public interest issues. 

Parties considering transactions which have competition law implications, hostile or otherwise, should therefore assemble a competent team and be prepared to spend the necessary time and money in ensuring a thorough and well thought out filing.

In this regard, economic analysis plays a major role in every area of competition law today.  In fact, its contribution to a comprehensive examination of a variety of business practices has dramatically shaped and, in some cases, reformed the practical application of competition policy and enforcement over the years.  The widespread influence of economics is demonstrated by the fact that it is now commonly accepted that the primary goal of competition policy is to encourage and promote economic efficiency.

As a result, competition authorities and the courts now routinely rely on an economic analysis of a challenged merger or practice in determining whether or not that practice should be proscribed.  With the increased emphasis on economic analysis, the role of the economist in competition cases has grown over the years.  Economists are now used in a wide variety of cases.  Key areas in which economic analysis has proved to be particularly useful have been in defining relevant markets, examining the competitive effects of mergers and other challenged practices, and determining the efficiency-enhancing benefits of a particular merger or business practice.  Similarly those in the legal profession have found that a working knowledge of economics is an invaluable tool, particularly in the practice of competition law.

Consider, for example, the insight that an economist can provide in defining the relevant market - a concept that is fundamental to any merger assessment, abuse of dominance case or prohibited practice investigation - and that is used to define the boundaries of competition between firms. Delineation of the relevant market represents an essential first step in assessing the competitive effects of a proposed merger, and whether the merger is likely to yield market power. An appropriate definition of the market is the critical underpinning for the calculation of market shares and the evaluation of `substantial lessening of competition'. In abuse of dominance cases, the Competition Act specifically refers to conduct occurring in a particular market.  Therefore, in contrast to an economic market which is determined in order to identify an equilibrium price, a market for competition law purposes is determined in order to identify the existence or absence of market power.

Determining the relevant market is in some cases no easy matter. It is important to stress that defining relevant markets has never been a quantitative or exact discipline. 

There are always elements of subjective judgement and qualitative criteria that have to be relied on.  However, competition authorities are increasingly relying on more thorough economic analysis and empirical verification.  This is due partly to the increased influence of economists in the field of competition law and also presently to the nature of case analyses, which have become increasingly demanding in terms of supporting economic and factual evidence.  There are a number of quantitative tests that help support a particular market definition.  Some of these tests are based on an analysis of price trends, correlations and elasticity, while others focus on more sophisticated tests of demand.

In merger analysis, drawing the line between what is considered effective competition today and likely anti-competitive outcomes tomorrow is often, in practice, a difficult process.  Market conditions tend to be in a state of continual change and any economic analysis needs to take cognisance of the dynamic nature of a particular market.  This is particularly relevant to industries that undertake high levels of research and development and are subject to continual innovation, such as the pharmaceutical and information technology industries.  A closer analysis of the potential welfare-enhancing effects of product and process innovation on competition in an industry and ultimately on consumers is important as economic progress is often dependent on technological progress, which improves products, reduces their costs, and ultimately generates new products.

Another significant area, in which economic analysis in competition law has come to the fore, is in the assessment of economic efficiencies and pro-competitive gains arising from a particular transaction or type of conduct. Where applicable, the Competition Act aims to balance the anti-competitive effects of conduct against the pro-competitive or efficiency benefits associated with that transaction or conduct.  Economists have long recognised the crucial role of efficiency analysis as part of competition policy, as even relatively small efficiency gains resulting from a transaction can be sufficient to offset concerns about market power.  However, efficiency claims will not be considered if they are vague or speculative or cannot be reasonably verified. 

It is clear that the practical application of competition law in South Africa has been influenced by a constantly increasing and ever more incisive use of economic theory.  As competition law ties fact to theory and vice versa, economics will continue to play an important and necessary role in both analysing and characterising certain business practices and transactions within the South African economy. The increasing economic sophistication with which competition authorities have approached case analyses has also precipitated the more robust and complex manner with which the legal profession approaches these cases.  As a consequence an integral part of this approach is the application of economic analysis.