By Lerisha Naidu, Partner, and Ryan Mckerrow, Associate, Competition Practice,  Baker McKenzie, Johannesburg

The Competition Commission of South Africa (commission) is renowned for being one of the most active regulators on the African continent. Having said that and in the context of its unprecedentedly vociferous pursuit of excessive pricing complaints (largely a result of new regulations in response to the COVID-19 national disaster), it appears that the commission has surpassed even its own reputation. Commissioner Bonakele has remarked that intervention by the commission is necessary to protect cash-strapped consumers from price hikes in relation to life-saving products during arguably the worst time in our history. Against this backdrop, commissioner Bonakele has assured the public that the commission will spare no effort in its drive to protect consumers from exploitation.

This is undoubtedly a laudable intention, particularly in the context of ensuring the prevention of prejudice to consumers arising from the sometimes-unequal bargaining power that inhibits their ability to demand products from dominant firms at fair prices and on fair terms.

There can be little argument that the commission’s recent focus should be situated within the four corners of the empowering legislation and regulations to have complete legitimacy. To this end, it bears emphasising that the Competition Act’s (act) prohibition on excessive pricing is one that applies only to firms that are dominant players in the markets in which they operate. Yet, the commission has recently demonstrated a keen interest in pursuing complaints against small, largely unknown firms – firms that may even struggle to secure the necessary specialist legal advice to defend themselves before the competition authorities.

Excessive pricing in terms of the Competition act

The act prohibits a dominant firm from charging excessive prices for its products to the detriment of consumers or customers. A host of factors are to be taken into account when assessing whether a firm’s prices are excessive, including, inter alia, its profit margins, its return on capital, its prices for other products, the prices charged by its competitors for similar products, and the structural characteristics of the market.

Assessing whether a firm’s prices are excessive for the purposes of the act is a notoriously complex task. However, the recently issued Consumer and Customer Protection and National Disaster Management Regulations (regulations), which apply during the COVID-19 national disaster, simplify the assessment when the impugned prices relate to basic food and consumer items; emergency products and services; medical and hygiene supplies; and emergency clean-up products and services. The regulations do so by providing that, in respect of these categories of essential products, a price will be presumed to be excessive if it results from an increase that:

1. a)    does not correspond, or is not equivalent, to an increase in the costs associated with the product; or
2. b)    raises the net margin or mark-up on the product to a level that is above the average margin or mark-up for that product for the period from 1 December 2019 to 29 February 2020.

It is important to note that the regulations simply streamline the assessment as to whether price levels are excessive. They do not oust the crucial prerequisite for embarking on that assessment, namely the requirement that the impugned firm be dominant in its particular market.

Without dominance being established, the excessive pricing prohibition does not apply, even if exorbitant profits are being extracted. This does not, however, mean that such prices are automatically legally permissible. They may well fall within the ambit of the unfair pricing prohibition contained in the Consumer Protection act – a prohibition that does not depend on dominance for its application. They may even be the result of collusion between firms through coordinated, concerted conduct, which is prohibited in terms of competition law. What it does mean though, is that the competition authorities should not pursue excessive pricing cases in the absence of dominance, regardless of the public outrage that such prices may cause, bearing in mind that there are other legal avenues to chastise and deter such pricing behavior.

A firm is dominant, for competition law purposes, if it has a market share of at least 45%, or its market share is less than 45% but it has market power. Market power is, inter alia, the ability of a firm to control prices independently of its competitors, customers or suppliers.

A dominant firm that is found to have engaged in excessive pricing may be liable for a penalty of up to 10% of its annual turnover in, and exports from, South Africa during its preceding financial year. This penalty cap is increased to 25% of the offending firm’s annual turnover and exports in circumstances where the alleged pricing practice is substantially a repeat of previous conduct that was determined by the competition authorities to have amounted to excessive pricing.

Prosecutions and settlements

The first excessive pricing case to be instituted since the passing of the regulations was heard by the Competition Tribunal (tribunal) on 23 April 2020. The respondent firm was Babelegi Workwear and Industrial Supplies (Babelegi), a Pretoria-based firm accused of charging excessive prices for face masks in the lead-up to the declaration of a national state of disaster. The commission has submitted that, between December 2019 and March 2020, Babelegi hiked prices by at least 888%. In an unprecedented move, the commission requested an award of treble damages against Babelegi — an onerous punitive measure that has been adopted in the United States but has not found its way into South African law. The Tribunal’s decision in this matter is imminent.

On the same day that the Babelegi case was heard, the commission announced its referral of a second COVID-19-related excessive pricing complaint to the tribunal – this time against Dis-Chem Pharmacies (Dis-Chem), a national pharmaceutical wholesale distributor and retailer. According to the commission, its investigations revealed that Dis-Chem was another firm to have exploited customers in respect of face masks, increasing its prices by as much as 261% between February and March 2020. The case was argued on 4 and 6 May 2020, with the commission seeking the maximum possible penalty against Dis-Chem. Again, a decision by the Tribunal is imminent.

The commission has recently announced its referral of two further COVID-19-related excessive pricing complaints to the Tribunal. This follows its finding that Sicuro Safety and Hennox Supplies increased their prices for face masks by more than 969% and 956%, respectively. It is anticipated that further details will be released in the lead up to the Tribunal hearings.

In tandem with the above prosecutions, the commission has been active in investigating and reaching settlement agreements with other firms accused of COVID-19-related excessive pricing. The first of these agreements was confirmed as an order of the Tribunal on 20 April 2020. The counterparty was Centrum Pharmacy (Centrum), a Boksburg-based firm alleged to have excessively priced face masks. The commission found that Centrum had, during March 2020, levied an average mark-up of 150% on the face masks it sold to customers. As part of the settlement, Centrum agreed to donate essential products to the value of ZAR2 5410 to two old-age homes in Boksburg.

The second settlement agreement in the context of COVID-19-related excessive pricing was confirmed as an order of the Tribunal on 23 April 2020. The counterparty here was Main Hardware, a firm operating a Johannesburg-based hardware store that is alleged to have inflated the prices of surgical gloves sold to its customers in March 2020. The commission found that, during this period, Main Hardware had levied a mark-up of 96.53% on its surgical gloves — representing an increase of 19.75% on its mark-up prior to the COVID-19 national disaster. As part of the settlement, Main Hardware agreed to refund all of its customers that purchased surgical gloves at inflated prices the amount paid in excess of a 10% margin.

On 1 May 2020, the Tribunal announced its approval of a third settlement agreement in the context of COVID-19-related excessive pricing. This follows investigations by the commission into Evergreens Fresh Market (Evergreens), a supplier of fresh produce in Kempton Park, which revealed that Evergreens had earned an average margin of approximately 33.4% on hand sanitizers during March 2020. The commission found this to be unreasonable, taking the view that a reasonable margin on hand sanitizers would be between 20% and 25%. As part of the settlement, Evergreens agreed to donate hand sanitizers to the value of ZAR1 800 to a provincial hospital.

The fourth settlement agreement to be confirmed by the Tribunal in respect of COVID-19-related excessive pricing was announced on 6 May. This time, the implicated firm was Matus, a distributor of personal protective gear with its major branches in Johannesburg, Cape Town and Durban. Matus was accused of excessive pricing in respect of face masks. The firm admitted to having increased its gross profit margins during February and March 2020, but did not admit to having contravened any law by doing so. The stated reason for settling with the commission was to avoid protracted litigation. In terms of the settlement agreement, Matus agreed to pay a fine of nearly ZAR6 million and to make a ZAR5 million contribution to the Solidarity Fund for COVID-19.

In a media release announcing its settlement with Matus, the commission indicated that it had also concluded further excessive pricing settlement agreements with numerous small independent retailers – mostly pharmacies and hardware stores. It is anticipated that further details of these settlements will be made public once confirmed by the Tribunal.

Most recently, on 7 May, three further settlement agreements in respect of COVID-19-related excessive pricing were announced as being confirmed by the Tribunal. The first two involved the Nelspruit and Pretoria branches of the Van Heerden Pharmacy Group (Van Heerden Pharmacy), which were found by the commission to have hiked their prices for face masks and hand sanitizers, respectively, during February and March 2020. In terms of the settlement relating to its Nelspruit branch, Van Heerden Pharmacy agreed to pay a fine of ZAR30 000. The Pretoria branch settlement, on the other hand, requires Van Heerden Pharmacy to donate ZAR3 875 to the Solidarity Fund for COVID-19.

The third of the 7 May settlements involved Mandini Pharmacy, a KZN-based operator that is alleged to have inflated the prices of the face masks it sold during March 2020. In terms of the settlement, Mandini Pharmacy agreed to donate essential goods amounting to ZAR 300 to a local child welfare organisation.
The nature and, in particular, the amounts of the recent settlements by the commission are certainly out of line with what one would expect when there has been an alleged abuse of dominance. Abuse of dominance settlements ordinarily entail exponentially larger fines against much larger firms. This raises the question of whether this departure from the norm is a justifiable response to the unprecedented circumstances we are currently experiencing, or whether it is perhaps an indicator that the commission’s attack on price gouging has been a misdirected one.

The details of further settlement agreements confirmed by the Tribunal are expected to be released in the coming days and will no doubt be of great interest to the legal and business communities.

A question of dominance

The commission’s approach to market power

In the Babelegi and Dis-Chem cases, the commission argued that the respondent firms were dominant in the market for the sale of face masks by virtue of their temporary market power demonstrated by their high pricing. The firms responded by, inter alia, denying that they were dominant or that they possessed market power.
Similarly, in the Centrum, Main Hardware and Evergreens settlement agreements (being the only agreements of those mentioned above to be made publicly available at the time of the writing of this article) it was recorded that:

“…the mere ability to raise prices is indicative of market power as it demonstrates a lack of constraints such that there is an ability to control prices and/or behave independently of competitors or customers … States of disaster often provide the conditions for temporary market power to be held by market participants that may not otherwise have market power outside of the disaster period. The removal of constraints may occur for several reasons, many of which are conceptually related to a narrowing of the geographic market for products as a result of disruptions to the normal functioning of markets. Due to the national lockdown, the scope of the geographic market is narrow as citizens’ movements are heavily restricted.”

In essence, the commission’s stance is that the charging of high prices as a result of market narrowing is, in and of itself, indicative of an ability to act independently of competitors, customers or suppliers. Accordingly, high prices demonstrate market power, which, in turn, gives rise to dominance.

The COVID-19 national disaster has, of course, resulted in commercial disruptions; and these have certainly had a narrowing effect on many markets. With restrictions on travel, markets that rely on conventional distribution methods have shrunk geographically. Similarly, restrictions on the operation of certain businesses have reduced the number of participants in particular markets. Nevertheless, it is questionable whether this, coupled with high prices, is indicative of market power.

Market power requires that a firm is able to behave independently of its competitors, customers or suppliers. Accordingly, competitor, customer and supplier dynamics can each serve as a separate basis for market power. The question to be asked, however, is whether high prices alone provide sufficient insight into these dynamics to enable a firm’s independence from its competitors, customers or suppliers to be assessed. The commission argues in the affirmative, but its approach is vulnerable to scrutiny.

Competitor dynamics

With well over 1000 COVID-19 complaints having already reached the commission, the apparent evidence, albeit largely untested, is that suppliers of essential products are elevating prices in relative unison. Accordingly, they are acting in concert rather than independently of each other. This means that they cannot, at least on the basis of high prices insofar as they are purported to be a signal of competitor dynamics, be regarded as having market power. For market power to be established on the basis of competitor dynamics, it must be shown that the impugned firms would have been able to elevate their prices even in the absence of their competitors doing so. This requires an analysis that extends beyond prevailing prices and that accounts for the particular market conditions within which each firm operates.

There will, of course, be circumstances where markets are indeed constrained and the firms operating within them may even have large market shares, but this does not necessarily mean that they can charge elevated prices in the absence of a similar approach by their competitors. If within a particular market there is sufficient supply, a firm charging significantly higher prices than its competitors will fail to attract customers and will be unable to sustain those prices. Of course, this relies on supply being sufficient relative to demand, which will not always be the case, particularly in times of national disaster. However, in the current circumstances, providers of essential products are encouraged to continue operating and markets for essential products are therefore materially constrained mostly from a geographical perspective. What this means is that different geographical markets for the same product may experience very different supply and demand conditions. These conditions need to be considered on a case-by-case basis in order to determine whether a firm has market power.

Customer dynamics

Similarly, high prices do not, in and of themselves, demonstrate an ability to act independently of customers. Independence, in this context, must be assessed by reference to the response of a firm’s customers to its price increases. A price hike may result in a firm losing a significant portion of its customer base. Customers may be lost not only in respect of the products that have become more expensive, but possibly also in respect of complementary and other products sold by the firm. Losses of this kind will likely arise where price hikes reduce foot traffic in stores. In such circumstances, high prices are certainly not indicative of market power on the basis of customer dynamics.

Supplier dynamics

Competitor and customer dynamics define a firm’s pricing abilities and inform its decisions on the supply side of its business. This explains their overlapping influences on firm behavior. Supplier dynamics, on the other hand, feature more prominently on the buying side. Typically, one considers a firm to have market power on the basis of supplier dynamics if it has buyer power, which is the ability to influence the price, quantity or other characteristics of the products it purchases. With supplier dynamics being a buying-side factor, it is conceptually difficult to establish a link between a firm’s ability to charge high prices and any alleged independence from suppliers. Accordingly, high prices are not a reliable indicator of market power on the basis of supplier dynamics.

An augmented approach to market power

The above considerations reveal that a blanket approach to market power underpinned by the notion that high prices are a result of constrained markets and must, invariably, be indicative of market power should simply not suffice.

A firm charging high prices may well be dominant in the market in which it operates. Nevertheless, while market dominance enables a firm to charge high prices, high prices are not necessarily indicative of market dominance. The commission’s approach to excessive pricing in the context of the COVID-19 national disaster falters insofar as it fails to acknowledge this. And by doing so, it advocates a superficial approach to the dominance analysis, which neglects to account for broader market conditions.

A failure to properly consider the nature of the particular market within which each impugned firm operates may lead to a finding that a firm that, in reality, has no market power is dominant. This, from a legal perspective, is untenable. This is not to say that the firm in question is necessarily acting lawfully. As mentioned above, the firm may well be in violation of the Consumer Protection act’s prohibition on unfair pricing, or even the competition law prohibition against anti-competitive concerted practices. But it does mean that prosecuting the impugned firm on the basis of an abuse of dominance is an inappropriate line of attack.

Accordingly, dominance must be assessed robustly. This requires a methodology that is not misdirected due to assumptions that may not necessarily accord with the features of the particular market under study. In line with this approach, market power must be considered in the context of the supply and demand conditions characterising the market and not simply the prices charged by the impugned firm.

Conclusion

With the onset of the COVID-19 national disaster and the consequent passing of the regulations, the commission has zealously pursued firms implicated in alleged excessive pricing of essential products. The first prosecutions are already underway and numerous settlement agreements with other firms have been reached. Surprisingly though, it appears that the commission has been targeting small operators rather than the large firms the excessive pricing prohibition was intended to restrain.

This is concerning on two fronts. First, an important part of the commission’s mandate is to enable small firms to effectively participate in the South African economy, rather than hindering their ability to do so. Secondly, with the country facing a recession and the world experiencing an economic crisis, small firms that are already struggling financially may well collapse should they face financial penalties. This, in turn, will of course impede rather than improve competition. This is not to say that small firms should be permitted to opportunistically exploit the COVID-19 national disaster for selfish commercial gain against the interests of the everyday consumer in desperate need of essential products. However, the punitive outcomes should not only fall within the ambit of the empowering law but should also avoid crippling small businesses during potentially calamitous economic times.

The commission’s pursuit of small operators is based on the assumption that all firms charging high prices must, by virtue of their ability to do so, be dominant in their respective markets. However, this is not necessarily the case and a more detailed analysis, taking account of the particular market conditions within which a firm operates, is required in order to determine whether it is dominant. Again, this does not mean that elevated prices by non-dominant firms are morally acceptable or even legally permissible. This article simply advances the point that the act’s prohibition on excessive pricing is an inappropriate tool for dealing with potentially exploitative small businesses and the commission should revise its approach to such cases, if it is to have one at all.

Dion Shango, CEO for PwC Africa

As governments in Africa start to ease lockdown restrictions and reopen local economies, CFOs are focusing on plans to provide a safe working environment for their employees and ensure that this safety can be sustained throughout the COVID-19 crisis and recovery. This is according to PwC’s latest COVID-19 CFO Pulse Survey: Africa findings.

PwC is tracking sentiment and priorities about the COVID-19 outbreak among finance leaders. We surveyed 867 CFOs from 40 countries during the week of 4 May 2020, including 55 CFOs from nine countries in sub-Saharan Africa (SSA). This survey is the fifth in a rolling series and the first to include a report on findings in Africa. We continue to add territories and companies to offer a robust view of how the crisis is affecting people and businesses worldwide.

Even as restrictions slowly continue to lift in some countries and territories, the economic fallout of the crisis is widespread. The International Monetary Fund (IMF) projects that economic activity in SSA will decrease by 1.6% this year, with oil-exporting countries in the region expected to contract by an average of 2.8%.

Dion Shango, CEO for PwC Africa says:

“As finance leaders adapt to the changes and challenges that have emerged as a result of the COVID-19 pandemic, they are beginning to shift their focus to a more prolonged recovery period. Ensuring a safe workplace is taking precedence as economies reopen and stabilising the supply chain remains critical to ongoing business continuity.

 As they manage this process, business leaders will be faced with a series of decisions that will have a far-reaching impact: on their own financial future; on the wellbeing of their employees, customers and other stakeholders; and on society at large. As new recovery milestones are reached, we’ll continue to monitor how CFOs react and respond.”

Key findings from the survey relating to Africa include:

Revenues: Times are tough for business and few envisage the coming months will be much easier, with most African CFOs (89%) expecting a reduction in revenue this year. Nearly two-thirds (65%) of African CFOs predict a decline of at least 10% in their company revenue and/or profit this year. Just like their global counterparts, more than half of CFOs expect a decrease of up to 25% in revenue as a result of COVID-19.

Cost containment: Businesses are actively dealing with the effects of a sharp decline in economic activity and even temporary closure of their operations. In this environment, it is no surprise that African CFOs are taking decisive action to safeguard their financial positions, with 85% (compared to 81% globally) saying that businesses are implementing cost containment measures or deferring or cancelling planned investments (Africa: 60%; Global: 60%).

Business recovery:  Although 38% of African CFOs believe their company could return to ‘business as usual’ within three months if COVID-19 were to end today, there is a growing sentiment in many territories that recovery may take much longer. Overall, 42% of African CFOs expect it to take more than six months, while almost one in ten (9%) expect it will take more than a year to restore their businesses. Overall, global respondents are more optimistic than African CFOs about how quickly they can re-establish ‘business as usual’ in their organisations.

Supply chains: When it comes to changing supply chains, 51% of CFOs cite developing alternate sourcing options as the most pressing area, led by Africa (64%) and Turkey (63%).

Cost containment: African CFOs clearly favour a strategy of cost containment, with the majority focusing on facilities and general capital expenditure (Africa: 82%; Global 83%) followed by investments in the workforce (Africa: 52%; Global: 49%) and operations (Africa: 36%; Global: 53%). CFOs in Africa say they are less likely thank their global peers to be considering cancelling or deferring investments in operations, IT, R&D and customer experience. In addition, only 15% of African CFOs (Global: 16%) are considering deferring or cancelling investments in digital transformation.

Protection for employees: African CFOs (Africa: 91%; Global: 76%) are considering workplace safety measures and requirements such as masks and testing, and 65% (Global: 65%) say they’ll reconfigure work sites to promote physical distancing.

Responding to changing needs: As companies and employees take action to respond to the pandemic, nearly half (45%) of African CFOs expect productivity loss due to lack of remote work capabilities, compared to an overall average of 33%. More than a third (35%) of African CFOs expect changes in staffing due to low demand and are considering temporary leave or furloughs. Compared to an overall average of 29%, 18% of African CFOs also expect to conduct lay-offs in the next month.

Reimagining the workplace: It is notable that more African CFOs (62% vs 48% globally) say they will be accelerating automation and new ways of working once they transition back to ‘normal’. Given the need to limit the number of people in close contact, 60% (compared to 49% globally) are considering making remote work a permanent option where feasible.

Keeping customers and employees safe: Overall, CFOs in Africa are more optimistic than the overall average, with more than three-quarters saying they are very confident about meeting customers’ safety expectations (Africa: 76%; Global:75%); providing a safe working environment for their employees (Africa: 76%; Global: 70%) and retaining critical talent (Africa: 78%; Global: 61%).

All over the world, the COVID-19 pandemic has elevated the importance and the need for new skills, including empathetic leadership, resilience and agility, collaboration and digital skills, and technical and trade skills such as design, manufacturing, and cyber and supply chain management.

By Lerisha Naidu, Partner, and Ryan McKerrow, Associate, Competition & Antitrust Practice, Baker McKenzie, Johannesburg

A Virtual Approach to Competition Law

The Competition Commission in South Africa is renowned as one of the most active regulators on the continent. Accordingly, competition law compliance is essential for businesses operating in, or producing effects in, South Africa. Those businesses implicated in the recent spate of COVID-19-related excessive pricing complaints brought by the Commission can attest to this. And with indications that competition authorities across the globe are preparing for an uptick in collusive practices as a predicted response to a challenging economic environment, competition law compliance is necessary perhaps now more than ever. Law firms will therefore be increasingly called upon to provide clients with high quality and dependable competition law support. This call must, of course, be answered within the framework of our new, virtual, reality.

Compliance Training and Advisory Solutions

To ensure that businesses are adequately equipped to deal with an actively-regulated competition law environment, tailored virtual training programmes will need to be rolled out, creating an awareness among key employees of compliance risks and the steps necessary to mitigate them. Law firms will also need to continue providing their clients with advisory support on all competition-related issues, with a particular emphasis on those arising from changing economic circumstances.

Merger Control

In merger work, law firms are already engaging with the Commission on a virtual basis: pre- and post-merger consultations are carried out telephonically and by video conferencing; analyses are facilitated by virtual data rooms; and merger notifications and follow-up submissions are processed electronically. In the case of large mergers, which are considered by the Competition Tribunal, physical hearings are no longer the order of the day, with proceedings now being conducted by way of web-based video conferencing.

Prohibited Practices

In respect of complaint proceedings, parties are able to serve pleadings electronically. Additional trial documents may also be shared with the Commission and the Tribunal electronically. As alluded to above, hearings before the Tribunal are already being conducted virtually, and on the basis of this progressive precedent, it is expected that appeals before the Competition Appeal Court will soon follow suit. Remote hearings will be particularly welcomed in respect of proceedings before the Appeal Court, which have in the past been heard in Cape Town, despite the Commission and the Tribunal being situated in Pretoria and respondents more often than not being situated outside of the Western Cape.

Looking Forward

Most importantly, law firms will need to keep an eye on the horizon, constantly looking for new ways to support their clients. As a case in point, recent reports from abroad indicate that the competition authorities are now using data mining, algorithms and machine-learning as tools for identifying competition law infringements and mounting cases against respondent firms. Dynamic law firms will respond to such threats by harnessing these and other technologies to improve compliance efforts and to defend prosecutions.

Conclusion

With modern business being characterised by an ever-shifting environment, such that change really is the new normal, there is an increased need for law firms to be versatile in their ways of thinking and working. Those that embrace change are more likely to survive, and indeed thrive, while those that remain static will certainly fare less well.

Nick Altini, Leana Engelbrecht, Sandhya Foster (with research assistance from Lauren Paxton) Competition, Regulation and Trade Practice, Herbert Smith Freehills, Johannesburg

Competition, Regulation and Trade Practice, Herbert Smith Freehills, Johannesburg
It is clear that the COVID-19 pandemic is already having a far-reaching impact on local, regional and global economies, with many firms facing severe financial constraints due to the limitations and government interventions introduced to tackle the global pandemic.

As humanitarian efforts are, generally, being placed ahead of commercial economic interests some firms are severely impacted by the economic slowdown and it is likely that the financial and economic impact of these interventions will have a long-lasting impact on businesses.

In the wake of this, it is probable that many firms will be placed in a distressed position and will explore merger opportunities as a means of avoiding business rescue, or even liquidation. Similarly, firms with more robust balance sheets will doubtless seek acquisition targets in friendly or hostile takeovers. Consolidation in many sectors is inevitable and will take place through a blend of attrition as a result of the lockdown and mergers where either or both firms seek to merge in order to survive in a far more Spartan market than that which existed before.

The question that then arises is how mergers involving one or more distressed firms will be dealt with by the South African competition regulators. During the nationwide lockdown, the focus of competition regulators has not been on regulating merger activity (although this duty was by no means abandoned by the regulators), but rather competition concerns that are arising from the pandemic (such as addressing unwarranted price increases and unfair practices in respect of essential goods).

It is beyond dispute that any post-lockdown mergers will have to be assessed by the competition authorities through the lens of the economic apocalypse that is already taking hold in many sectors and will inevitably spread. Merger assessment will not be “business as usual” when it comes to assessing both the competition and public interest effects of mergers involving distressed firms and where at least a substantial part of the merger rationale is corporate survival following the pandemic. That said, the existing legislated framework for merger assessment will remain in place and will be the starting point. The Competition Act already makes provision for merger assessment where the target of a merger transaction is a so-called failing firm.

The competition authorities have on several occasions considered the failing firm doctrine or “defence”. The Competition Tribunal has held that the failing firm doctrine is not used as a “defence” to a merger that has been found, on an initial market analysis, to be likely to yield anti-competitive outcomes but is rather recognised as one of the list of “factors” that is taken into account to determine whether a merger is anti-competitive. Nonetheless, a successful reliance on the failing firm doctrine may result in the approval of a merger that might otherwise be prohibited as anti-competitive because the exit of the firm from the market would leave the market with less productive capacity, and thus more inefficient, while the supply-demand balance shifts which may place upward pressure on prices. The Tribunal has noted that the underlying rationale for the approach adopted in assessing mergers involving failing firms lies in the fact that the post-merger state of the market should not be less competitive because the acquiring firm would gain a greater market share on acquisition of the failing firm than it would have if the latter exited (see Iscor Limited and Saldanha Steel Proprietary Limited, CT Case No: 67/LM/DEC01).

The Tribunal developed a flexible approach to assessing the failing firm doctrine under South African competition law, which can be summarised as follows:

The merging parties should not invoke the failing firm doctrine if it amounts in substance to another factor which the Competition Act already provides. In particular, it should not amount to an efficiency justification or a public interest argument;

The Tribunal confirmed that a merger involving a failing firm would not be regarded as one likely to lessen competition if (i) absent the acquisition the target firm would have exited the relevant market; (ii) if the target firm were to exit the market, the acquiring firm would gain the former’s market share; and (iii) no less anticompetitive alternatives are available for the target (which means that it is necessary for the merging parties to show that there are no other viable purchasers of, or merger partners for, the target);

Where a party falls short of these requirements, the failing firm doctrine may still succeed if the merging parties are able to show that (i) the target firm is unable to meet its financial obligations in the near future; (ii) the failing firm would be unable to successfully reorganise its affairs through business rescue (or similar) processes; (iii) the failing firm has unsuccessfully made efforts to obtain reasonable alternative offers for the acquisition of its assets which would keep the assets in the market and present a less severe danger to competition than the proposed merger; and (iii) absent the acquisition, the assets of the failing firm would exit the relevant market. Whether these factors would be sufficient to uphold the failing firm doctrine will be dependent on the degree of the anti-competitive effect. Where the anti-competitive effects of the merger are insignificant, then the Tribunal might be less stringent in the application of some of the criteria. In respect of this, evidence that demonstrates the rationale for the application of the doctrine must be provided.

The Tribunal will weigh up evidence of the extent of failure or its imminence against the anti-competitive effect. The Tribunal has found that “the greater the anti-competitive threat, the greater the showing that failure is imminent.”

The Tribunal further held that no leniency would be afforded to the requirement that there be evidence that there is no less anti-competitive alternative; and

The onus is on the merging firms to establish the evidence necessary to invoke the doctrine of the failing firm.

It is clear from the above that merging parties will have to be in a position to show an actual imminent probability of the failing firm leaving the market and leaving the competitive dynamics of the market in a worse off position than if the ostensibly anti-competitive merger were to be consummated. This doctrine is, accordingly, not one that can be relied upon in all circumstances where distressed firms are being acquired and the Tribunal has made it clear that it will apply the strict tests to apply this doctrine in line with its own and international jurisprudence. In this respect the Tribunal has noted that “[w]e must stress that in the case of an anticompetitive merger the private interests of firms cannot ever trump the broader public interest consideration of a substantial lessening or prevention of competition, with concomitant negative effects on consumers.” (see Pioneer Hi-Bred International Inc & Others v The Competition Commission, CT Case No: 81/AM/DEC10 at para 229 and CAC Case No: 113/CAC/NOV11 at para 22).

But these words may have a somewhat different application in the pale light of the economic dawn that will follow in the immediate aftermath of the pandemic. The Commission and Tribunal will both have to forecast the effects of mergers on competition in markets making assumptions about the levels of competition in markets that will have indelibly changed in a very short period of time. Pre-lockdown competitive dynamics may be of very little relevance in predicting how a merger will impact competition post-lockdown, simply because competition in that market will not be the same as before. But in the case of horizontal mergers, mere concentration should not be a basis for prohibition without a forward looking prediction (as far forward as possible) as to the likely longevity of either firm absent the merger. This is not necessarily the exercise mandated by the Tribunal in respect of the failing firm doctrine. Rather, this would entail taking into account the need to ensure that in the future healthy industry participates will emerge to play an ongoing role in, and make a contribution to, an economy in a state not seen before. This will require both deftness of action and a willingness to accept that any dogmatic orthodoxies of the past are simply not appropriate and may be even destructive. It goes without saying however, that the baby cannot be thrown out with the bathwater. Transactions involving distressed firms must still be subject to pragmatic scrutiny to ensure that the claims of distress are not opportunistic shams to achieve clearance for mergers that should not be permitted in any circumstances.

Effects of mergers on the public interest will likely ascend to become the more prominent feature of assessment (relative to competition effects) when regulators consider transactions involving financially unhealthy firms short on other options. It is often a misconception that the failing firm doctrine can be relied upon in instances where, absent the proposed merger, the target firm may have to rationalise its business and retrench employees. Naturally public interest considerations, especially whether a transaction would result in job losses, are incredibly important in merger assessment in South Africa, but this factor cannot be relied upon in support of a failing firm doctrine to allow an otherwise anti-competitive merger. This does not mean however that public interest considerations could not otherwise be highly persuasive factors – since recent amendments to the Competition Act our competition authorities are obliged to accord equal weight to competitive effects and public interest considerations in merger assessment. A merger that presents a likelihood of chilling competition may nevertheless be approved (with appropriate conditions) if it is also likely to guarantee or enhance employment levels.

Public interest factors have been relied upon to ensure the expedited approval of merger transactions. For instance, a merger involving a company that was placed in provisional liquidation with resultant imminent job losses was assessed by the Commission in 4 business days and heard by the Tribunal on the same day that the Commission’s recommendation was submitted to it, resulting in more than 600 jobs being saved (see Stefanutti Stocks (Pty) Ltd and Energotec (a division of First Strut) (Pty) Ltd (017590)). Another merger was assessed by the Commission and heard by the Tribunal on an urgent basis and concluded in 12 business days in order to prevent a target firm from going into provisional liquidation which would have resulted in approximately 4,200 job losses (see Pamodzi Gold Ltd / President Steyn Gold Mines (Free State) (Pty) Ltd [2007] 2 CPLR 417 (CT)).

Even prior to the COVID pandemic, the competition authorities emphasised the importance of saving jobs, particularly in our socio-economic circumstances. For instance, in 2018, the Tribunal noted that “South Africa is currently experiencing low economic growth and high levels of unemployment. Where possible, jobs must be saved, particularly in areas where poverty is rife” (see K2014202010 (Pty) Ltd / Noordfeld (Pty) Ltd; AM Alberts (Pty) Ltd (in business rescue) t/a Progress Milling [2018] 1 CPLR 260 (CT)). This is even more imperative in current circumstances and the competition authorities are likely to look to protect jobs even more so than they have previously done.

Where a merger involving a distressed firm may result in jobs being saved, the merging parties should be able to rely on this public interest benefit to obtain approval of the merger. That being said, other public interest factors, such as ensuring the promotion of economic participation by previously disadvantaged persons will also be assessed and if the merger results in further concentration in the market that could be viewed as detrimental to transformation objectives, these factors may be relied upon to argue that the merger should not be approved. In our view, however, the promotion of employment and protection of jobs would likely carry more weight in assessing a merger involving a distressed firm as the public interest benefits in approving such a merger are clear and have an immediate impact.

One of the amendments to the Competition Act that is not yet in effect is the provision that requires approval for foreign investments where issues of national security are concerned by a special committee established by the President. This provision, once in force, can conceivably be used as a tool to prevent investments by foreign companies where those transactions could be viewed as a run on the South African economy in light of the aftermath of the pandemic. It seems improbable now however that any foreign direct investment would be turned down in the foreseeable future and once this provision comes into effect (if indeed it does), unless there was a very clear and present danger to national security.

Although time will tell how the South African competition authorities deal with this inevitable result of the pandemic, it is interesting to note that other competition regulators have already had to deal with cases of this nature. The UK Competition and Markets Authority (CMA) has already provisionally approved the acquisition by Amazon of Deliveroo (an online food delivery service) relying on the failing firm doctrine. The CMA’s press release states that the CMA has been “considering this new evidence as a matter of urgency”, in light of the “wholly unprecedented circumstances” resulting from the current crisis. It has provisionally concluded that the transaction will not be expected to result in a substantial lessening of competition, on the basis of the so-called “failing firm” defence: Deliveroo is likely to exit the market unless it receives the additional funding available through the transaction, and the loss of Deliveroo as a competitor would be more detrimental to competition and to consumers than permitting the Amazon investment to proceed. Further information on the CMA provisional clearance can be obtained here.

It should be hoped that our authorities will similarly be willing to redefine the parameters of the failing firm doctrine or, absent that, be willing to readily accept that there must be a “new normal” for merger assessment before COVID-19 notches up a higher corporate mortality count than can be prevented through a revised perspective.

By Jordan Rittenberry, Edelman Africa CEO

 For business leaders, this is uncharted territory – yet the responsibility to quickly adapt and guide their organisations through these difficult times is immense.

More than ever, employees are looking to their leaders for information and for inspiration. Edelman’s 2020 trust data reveals that employees trust communications from their employers more so than from government or the media. Survey respondents also believe their employers are better placed to deal with a crisis than the government, and that business leaders should take the lead on change rather than waiting for government to impose it.

If ever there was an opportunity for CEOs to showcase their leadership, empathy and strength, it is now.

Protect employees and communities

It is no surprise that employees want to understand the impact that Covid-19 will have on their organisations, what the crisis means for job security, and what structural changes may lie ahead. To build trust, transparent and constant communication with employees is key, and employers should assure their colleagues that their health is of paramount importance. Of course, this needs to be backed up with action.

Those companies that can are enforcing work-from-home policies, in line with the guidance of governments and the World Health Organisation (WHO). For most, this is a first and teething problems are likely. For remote working to be successful, employees need to be well equipped to work in their new environments, and communication lines should be open and used regularly to keep employees engaged and motivated as they adjust to new systems and ways of working.

Beyond the workplace, there is an expectation that organisations and leaders do what they can to support local communities. It is encouraging to see that many organisations in Africa are stepping up by investing time and resources in the Covid-19 fight and in relief efforts. In South Africa, executives are foregoing large portions of their salaries and directing the savings towards a national relief fund. In Kenya, 15 media companies have donated advertising space to the government-led Emergency Fund, despite their heavy reliance on advertising revenue. Across the continent, clothing factories are developing medical masks – providing factory workers with guaranteed incomes – while beverage producers are now making sanitisers.Empathetic engagements with all stakeholders

As the crisis unfolds, organisations need to ensure they are communicating with every stakeholder group, rather than a select few. Frequent and transparent engagements with suppliers, employees, regulators, consumers and shareholders, among other stakeholders, is crucial.

Detailed scenario planning, which informs business strategies and decisions based on possible outcomes, not only makes commercial sense – it also displays an organisation’s agility and preparedness and boosts the confidence of other stakeholders.

The reality of the crisis we are in is that it is dynamic and evolving fast. Governments are mostly doing what they can to contain the virus through lockdowns and curfews. While necessary, social distancing and restrictions on movement may well impact on the mental wellbeing of employees, while also increasing the responsibilities of parents. Business leaders need to be cognisant of these challenges and should show support to their employees wherever possible. By demonstrating compassion and empathy, organisations will foster trust amongst their employees and build their own reputations – both internally and externally.

The bottom line – communication is a top priority

Employees are drowning in information – much of which is unreliable or contradictory. In times like these, they want to hear from their employers, who they regard as reliable filters of important news and facts. To do this, organisations need to develop structured internal communication plans and leaders should dedicate time toward engagements with colleagues.

Above all, business leaders should stay authentic, drive a culture of positivity – while remaining honest and transparent – and ensure that they are accessible. Taking the time to listen to employees and respond to their concerns is the best way to build trust.

We believe that the actions that business leaders take in the weeks and months ahead could well determine their reputations for years to come.