Penalties for failing to notify mergers will increase in South Africa
In March 2019, the Competition Commission published its latest guidelines for the determination of administrative penalties for failure to notify mergers and implementation of mergers contrary to the Competition Act, 1998.
The highest penalty to date for a failure to notify is R10 million (c. US$715,000). The methodology in the new guidelines could result in much higher figures and the penalty may also be imposed on the holding company of an acquirer, seller or target firm. Furthermore the penalty will increase for each month’s delay in notifying the Commission once it discovers that it has contravened the Competition Act.
Despite greater awareness of competition laws there has been an increase in the number of cases where parties fail to notify a merger or implement a merger for example, by implementing a merger before approval.
The Competition Amendment Act which was signed by the President in February 2019but is not yet in force, increases the maximum penalty for a repeat contravener of the act from 10% to 25% of annual South African turnover and exports. These guidelines are also likely to apply to a failure to adhere to the newly enacted requirements in the Competition Amendment Act to seek executive approval for any foreign investment transactions that may impact national security.
Contravening the law
Many instances where parties fail to notify the competition authorities or engage in “gun jumping” (implementation without approval) are not wilful or deliberate but nonetheless result in a contravention of the Competition Act. A common example is where parties are not aware that the acquisition of a minority shareholding coupled with minority protection rights may require approval from the competition authorities if it provides the acquirer with the ability to materially influence the policy of the target firm. Parties must carefully consider the rights that will be acquired in order to establish whether the merger is one that ought to be notified to the Commission.
Even if a merger transaction is notified to the competition authorities, parties must not take control or behave as a single firm prior to the competition authorities approving the transaction. For example, interim conduct provisions might give an acquirer the ability to control the direction of the target firm prior to approval being given for the merger. The key principle to remember is that the merging parties should continue to operate independently of one another until they have received approval to implement the merger. Failure to do so may result in severe penalties, including divestiture.
Determining the size of the penalty
The new guidelines set out a five-step methodology for determining the administrative penalty that a firm will be have to pay for failing to notify the Commission and/or implementing a merger in contravention of the Competition Act:
- Step 1: The nature or type of contravention – this involves assessing how the contravention came about. If the conduct is found to be wilful or deliberate, the guidelines will not apply and the maximum penalty (i.e. 10% of annual turnover) will be sought.
- Step 2: The base amount – the base amount is double the applicable filing fee (i.e. R1 million (c. US$71,500) for a large merger and R330 000 (c. US$23,600) for an intermediate merger).
- Step 3: The duration of the contravention. Unfortunately the Commission has not specified when the time period of the contravention will stop running, and given how long the Commission’s investigations can take, this could have a significant impact on the size of the penalty.
- For contraventions that lasted less than a year, each month of the contravention will attract an additional amount equal to 50% of the base amount multiplied by the number of months of the contravention.
- For contraventions exceeding one year but less than two years, the additional amount is 75% of the base amount multiplied by the number of months of contravention; and
- For contraventions exceeding two years the additional amount is 100% of the base amount multiplied by the number of months of the contravention. Please note that the amount calculated in terms of this formula is added on top of the base amount determined in step 2.
- Step 4: Mitigating and aggravating factors: the Commission can at its sole discretion offer a discount of up to 50% off the administrative penalty amount determined in step 3 depending on arguments presented by the merging parties.
- Step 5: Rounding off if the amount exceeds 10% of turnover (or 25% in the case of a repeat offender once the new Competition Amendment Act is in force).
This methodology has the potential to result in high administrative penalties, particularly if no discount is allowed by the Commission. By way of example, if a party failed to notify a large merger and the penalty for such notification was only established after three years, the merging parties may each face an administrative penalty of up to R37 million (c. US$2.6m) calculated as follows: R1 million (c. US$71,500) + (100% x base amount i.e. R1 million (c. US$71,500) x 36 months. This is substantially higher than the penalties imposed by the competition authorities to date for failing to notify a merger.
Can the contravention become time-barred?
The Competition Act contains a special kind of time bar that provides that a complaint cannot be brought more than three years after the conduct ceases. Unfortunately with a failure to notify a merger, the conduct is ongoing until it is notified.
What to do?
It is tricky to ascertain when a merger is notifiable or when an acquirer may be stepping into the shoes of the target. The Guidelines provide some assistance to merging parties but, given the hefty consequences (which can also include unbundling/divestiture) any transactions where a party acquires any form of control over all or a part of another business or assets must be assessed from a competition law perspective to determine whether a notification is required. If you suspect that any transactions did require notification, it is imperative to seek competition law advice as soon as possible, as each month’s delay will add to the penalty.