Draft guidelines for the assessments of mergers on public interest grounds published
13 February 2015
In terms of section 12A of the Competition Act, the competition authorities, in deciding whether or not to approve any particular merger transaction, must, in addition to assessing the impact of the merger on competition, assess the effect it will have in relation to certain specific public interest considerations. These are:
- The effect on a particular industrial sector or region.
- The effect on employment.
- The ability of small businesses or firms controlled or owned by historically disadvantaged persons, to become competitive.
- The ability of national industries to compete in international markets.
As a result of this requirement, mergers are often approved subject to conditions, with obligations being imposed on the parties to address these concerns, or may even be prohibited. The way in which the public interest assessment is carried out has become at times controversial and has resulted in the approval process of mergers, which raised no concerns from a competition point of view, being protracted while negotiations in respect of the public interest effects of the merger were being addressed.
In recognition of the difficulties experienced, on 23 January 2015, the Competition Commission published Draft Guidelines on the Assessment of Public Interest Provisions in Merger Regulation under the Competition Act (the Guidelines) for public comment. According to the Commission, the Guidelines are necessary because parties to mergers often provide insufficient information in respect of public interest considerations that may affect the Commission's assessment of the merger. The purpose of the Guidelines is to provide merging parties with guidance as to the information required and how the Commission will approach its assessment of the merger. Notably, however, the Guidelines will not be binding and will not fetter the discretion of the competition authorities (the Commission and the Competition Tribunal) to consider public interest issues as they deem appropriate.
In terms of the Guidelines, the Commission will adopt a five-step process in analysing the public interest effect of any merger, as follows:
- Determining the likely effect on the public interest.
- Determining whether the alleged effect is “merger-specific”, and where an alleged effect already exists, whether the merger exacerbates it.
- Determining whether the likely effect is substantial.
- Considering whether the merging parties can justify the likely effect (the onus being on the merging parties to do so).
- Considering possible remedies to address any likely negative effect.
The Guidelines go on to detail the way in which the Commission will approach and analyse each of the listed public interest grounds:
The effect on a particular industrial sector or region
The Commission may consider, among others, whether a South African owned firm is being purchased; whether termination of local production as a result of the merger would have far reaching consequences for the economy; whether the termination of contracts with local suppliers would have a negative effect on the sector, region or the economy; whether the merger will result in the substitution of locally produced goods with imports; and/or whether the merger will result in the movement or diversion of local resources to international markets with detrimental consequences for local markets, sectors and regions.
In considering the substantiality of the effect, the Commission will take into account the strategic nature and importance of the products affected by the merger to the sector concerned, or the sector to the economy, whether the merger impedes any public policy goals, and the importance of any firm involved in the merger to the region.
The types of remedies the Commission may require the merging parties to implement might include investment into the domestic supply chain, maintaining or expanding local production facilities, restricting the diversion of resources to overseas markets, and undertaking to continue to supply local producers or purchase from local suppliers.
The Commission has, however, stressed that the remedies imposed will be specifically appropriate to each case.
The effect on employment
In determining the likely effect on employment, the Commission will focus on employment within the merging parties and will require the parties to declare all contemplated retrenchments (including both those that are the result of the merger and those that were contemplated for other reasons). Secondly, the Commission will consider whether the merger will impact upon job creation and duplications more broadly.
In considering whether contemplated retrenchments are merger-specific, the Commission will have regard to the closeness in time of the proposed retrenchments to the date of the merger; any retrenchments that the merging parties propose between the time negotiations in relation to the merger commenced and a year after the merger is concluded will be presumed to be merger-specific and the parties bear the onus of proving the contrary. In assessing whether retrenchments are merger-specific, the Commission will consider whether the proposed retrenchments are in any way linked to the intentions, incentives or management style of the acquiring group. The Commission will also investigate whether the retrenchments would have occurred in the absence of the merger.
Determining the degree of the effect on employment involves a consideration of the number of affected employees, the affected employees’ skill levels, the likelihood of their finding alternate employment, the affected sector and the nature of the acquiring firm’s business. As a rule, the Commission's approach is that the more unskilled and semi-skilled employees are affected by retrenchments, the more substantial the effect will be.
In order to justify retrenchments, the parties will need to:
- Demonstrate that a rational process was followed in arriving at the number of retrenchments having regard to the reasons given for the retrenchments.
- Justify the job losses with an equally weighty and countervailing public interest argument (such as the need to save a failing firm, the need to ensure the efficiency and competitiveness of the firm by lowering its costs or the necessity of the retrenchments to bring about lower costs and thus lower knock-on prices for consumers).
- Demonstrate that they have provided full and complete information to the Commission and employees to enable them to consult fully on all issues.
The ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive
In analysing this consideration, the Commission will determine, among others, whether the merger will affect small businesses (SMEs) and historically disadvantaged persons (HDIs) in any of the following ways:
- Creating or raising barriers to entry.
- Preventing access to key inputs.
- Creating unfair pricing and supply conditions.
- Denying access to suppliers.
- Preventing training or skills upliftment and development.
- Denying access to funding.
Where the merger will have any of these effects, the Commission will consider the appropriate remedy on a case-by-case basis. These could include, among others, the following:
- Establishing a supplier development fund for technical and financial support and assistance of SMEs and HDIs.
- Requiring merging parties to provide favourable discounts and prices.
- Establishing skills development and training programmes.
- Obligating parties to continue access and supply to persons who may be adversely affected.
The ability of national industries to compete in international markets
The Commission will consider relevant information advanced by the parties in relation to factors such as, but not limited to, the efficiency benefits to be realised by the domestic economy, whether those benefits are created by the merger or cannot be attained without it, whether the benefits presented are substantial enough to justify any anti-competitive effects or negative public interest concerns resulting from the merger.
In justifying a merger in terms of this consideration, the parties may adopt a similar approach as to when efficiency arguments are submitted in support of an argument that the competitive effects of a merger outweigh any anti-competitive effects resulting from it.
Interested parties wishing to submit comments on the Guidelines can do so until 23 February 2015.