Jumping the gun into the spotlight
On 1 April 2019, the Guidelines for the determination of administrative penalties for failure to notify mergers and implementation of mergers contrary to the Competition Act No. 89 if 1998, as amended (GN 473, GG 42337) (“the Guidelines”) became effective. The purpose of the Guidelines is to provide ‘transparency, certainty and objectivity’ in to the manner in which the competition authorities will calculate penalties to be levied when the merger control provisions of the Competition Act 89 of 1998 (“the Act”) are contravened.
The merger control provisions under the Act provide that parties to an “intermediate” or “large” merger may not implement their transaction until it has been approved by the competition authorities. Parties to a “small” merger may not implement their transaction if requested by the competition authorities to notify it for approval. Implementation without the requisite approval which is more commonly known as “Prior Implementation” may render the merging parties liable for an administrative penalty of up to 10%, or 25% for repeat offenders, of their annual turnover in, into or from the Republic.
Despite having the ability to levy penalties of up to 10% of turnover, to date, prior implementation offences have only attracted nominal fines ranging from R1 to R1 500 000 (and in one exceptional case R10 000 000). However this will most likely change with the publication of the Guidelines as they introduce a five-step methodology that will be followed by the competition authorities when determining the penalties to be imposed.
The methodology outlined by the Guidelines is as follows:
Step 1: the competition authorities will look at the nature of the conduct which gave rise to the failure to notify. In this assessment, if the competition authorities find that the parties acted collusively, or that the parties’ contravening conduct was wilful, then the Guidelines will apply.
Step 2: the competition authorities will determine a base amount for the calculation of the penalty, which will be equal to double the filing fee applicable to the merger.
Step 3: the competition authorities will consider the duration of the contravention and for each month of the contravention it will add to the base amount an amount calculated in accordance with the below:
Contraventions not exceeding year: (50% of the base amount) x (number of months in contravention)
Contraventions exceeding a year but less than 2 years: (75% of the base amount) x (number of months in contravention)
Contraventions exceeding 2 years: (the base amount) x (number of months in contravention)
Step 4: the competition authorities will adjust the figure arrived at after the third step, either upwardly or downwardly, based on the relevant aggravating and mitigating factors as contemplated in section 59(3) of the Act. Such aggravating factors may be whether the parties were merely negligent in their failure to notify; whether such failure was done to exploit a time-bound merger deal, and/or whether the parties were trying to avoid scrutiny of their deal. Such mitigating factors may include whether the parties were bona fide in their contravention; whether the parties sought competition law advice, and/or whether the parties willingly assisted the competition authorities in their subsequent investigations.
Step 5: the competition authorities will consider the statutory limitations put on it by the Act in terms of administrative penalties. Section 59(2) of the Act stipulates that an administrative penalty may not exceed 10% of the Firm’s annual turnover in South Africa for the preceding year, and its exports from South Africa in preceding year. If the calculation of the penalty in terms of steps 2 to 4 above exceeds the 10% threshold, then the competition authorities will apply the maximum allowable penalty. Should the penalised party be a repeat offender, the maximum applied will be 25%.
It is worth noting that the Guidelines specifically state that only in exceptional circumstances will the competition authorities consider the firm’s ability to pay the administrative penalty and that the mere existence of a ‘loss making financial situation’ may not suffice for the purpose of obtaining a special discount.
Whether or not the Guidelines will provide more certainty on what a potential penalty may be for jumping the gun, remains to be seen. In the past, the competition authorities adopted a more relaxed approach when it came to levying penalties for this category of offence. With the introduction of the Guidelines, there is now a clear checklist to follow when calculating the penalty. Not only is it a straightforward process to arrive at a figure, but the formula based approach makes it likely that the penalties will be higher than they were in the past.
Owing to the severity of the penalties that can be imposed for prior implementation, parties to a merger have always had to carefully consider what the competition law ramifications of their deal may be. The importance of such considerations has only grown with the publication of the Guidelines.
Parties concluding transactions in South Africa should thus ensure that their transaction is not notifiable prior to implementation if they wish to avoid penalties for failing to notify.