The overarching objective of the Competition Amendment Bill is to foster a “new deal for economic transformation and inclusion”, but Economic Development Minister Ebrahim Patel also notes that the proposed legislation introduces greater flexibility for collaboration by large firms.

Speaking at the fourth Annual Competition and Economic Regulation Week, in Johannesburg, Patel said flexibility had been increased to allow large companies to work together in pursuit of legitimate industrial policy objectives, such as the expansion of industrial output and employment.

“This has been done through clearer and expanded exemption provisions in the law, greater requirements for the regulator to publish guidelines on restricted or prohibited practices and the introduction of an advisory opinion service in the legislation itself.”

The Minister indicated that the flexibility package emerged from a series of discussions with organised business over the past several months after a draft Bill was published for comment in December last year.

More than 60 submissions were made, including submissions from local and international business, and there had also been a series of consultations under the aegis of the National Economic Development and Labour Council.

“These public consultations enriched the final Bill, which was presented to Cabinet [in July], and which has been introduced to Parliament.”

However, Patel stressed that, taken together, the changes were targeted at increasing economic inclusion, which he described as the “defining issue of our times”.

“It is therefore key that our competition statute ensures that concentration does not present unacceptable barriers to market entry and does not lead to economic stagnation, where firms with significant market power use their power to capture rents while preventing entry of innovative small and medium-sized firms or those owned by black South Africans.”

The amendments sought to provide the competition authorities with greater powers to address structural barriers to inclusion, primarily through the market inquiry instrument.

The Bill expands the Competition Commission’s use of market inquiries and also allows for findings to be binding. However, appeals can be made to the Competition Tribunal, while tribunal findings can be appealed before the Competition Appeal Court.

The proposed legislation also tightens up on definitions for concepts such as excessive and predatory pricing, as well as margin squeeze, and dramatically increases penalties for repeat offenders to 25% of turnover. The maximum penalty for first-time offenders is 10% of turnover, but the fine can be extended to the turnover of a holding company in an instance where it had knowledge of an offence by a subsidiary.

Security Veto
Controversially, the Bill also makes provision for a national security veto of acquisitions by foreign companies of South African firms, as well as products or know-how in sensitive sectors. Critics believe the provision is too broad and extends too much discretion to government in adjudicating foreign mergers.

Patel said the provision for a national security veto was in line with the constitutional responsibility of the executive for national security, as outlined in Section 198 of the Constitution.

A national security committee would be convened only in those instances where an acquiring firm was located in a sector, or region, listed for a national security review. The President would publish the list of affected sectors in the Government Gazette.

The committee would be empowered to approve the merger unconditionally, impose conditions on the transaction, or prohibit the merger on national security grounds.

However, the committee would have no say over competition and public-interest considerations, which would be adjudicated separately, and independently, by the competition authorities.

Possible triggers for a national security review included:

• any deal involving the use or transfer of sensitive technology or know-how outside South Africa;
• deals impacting on the security of infrastructure essential to the health, safety, security or economic wellbeing of citizens and the effective functioning of government;
• the supply of important goods or services to citizens, or the supply of goods or services to government;
• transactions where South Africa’s international interests, including foreign relationships, could be affected;
• where the economic and social stability of South Africa could be affected;
• instances where a merger could enable foreign surveillance or espionage, or hinder current or future intelligence or law enforcement operations; and
• instances where an acquisition could enable or facilitate the activities of illicit actors, such as terrorists or organised crime.

The committee, which had 60 days to determine if a merger was justifiable on national security grounds, could also consider other relevant factors, including whether a foreign government might control the acquiring firm.

Patel said international investors were unlikely to be put off by the provision, as national security reviews were common internationally, including in the US, the European Union, Canada, China and Australia.

In some of those countries, the issue of national security had been more broadly framed to include everything from impacts on cultural heritage to land ownership. “So, by the standards of what investors have seen elsewhere in the world, they will see this as a very tightly codified set of issues from which they can draw a very direct link to national security.”

However, in a note on the Bill, Herbert Smith Freehills partner Jean Meijer described the list of national security interests contemplated as “extremely broad” and going “beyond traditional public interest factors that have been the focus of legitimate Ministerial intervention to date”.

Meijer argued that the committee’s broad discretion, together with the potentially far-reaching consequences of its decisions, could create additional risk for foreign entities considering investment into South Africa.

“In South Africa today, where the fight against corruption is a priority, it is of concern that a politically appointed committee will wield this power over foreign investment. This is particularly so in circumstances where there is no clear guidance as to what standard the committee will have to apply in making its decision to block or impose conditions on foreign investment.”

She added that, although public-interest issues had played a role in merger control in South Africa for years, there were numerous checks and balances in place. “There are no similar checks and balances imposed in relation to the power of the committee, making the potential for corruption far greater.”

However, Patel argued that the risk for foreign investors was higher where legislation was not in place for sensitive sectors, as legislation could be imposed retrospectively. “So, when you have a clearly defined provision in your law, and foreign investors are entitled to come into the country subject to that, they know that their investment is more secure.”

The Bill also stipulates that, once the committee makes its determination, the decision should be gazetted for the public record. In addition, a report should be tabled for consideration by the National Assembly.

“So, we have gone the route of transparency even in a difficult area such a [national security]. This is because we simply want to make the point that it is an important function in any democracy for the national executive to be responsible for national security, but, in a democracy, you also want to have a good balance between that imperative and transparency to ensure that decisions are taken in the national interest.”

Competition Tribunal chairperson Norman Manoim agreed that national security issues were better handled by a political body than a competition adjudicator, who was not competent to assess whether a transaction posed a security threat.

“That is within the province of the national security authorities,” Manoim said, adding that the competition authorities could also not be asked to assess whether a particular country was hostile to the interests of South Africa.

“So, I think the division of labour, as designated in the Bill, and what is left with the competition authorities, [are] appropriate to the different functions that they serve.”

Lawmakers would consider the Bill in the coming months and were expected to return it for President Cyril Ramaphosa’s signature before year-end. Patel described the amendments as the most significant piece of economic legislation that Parliament would consider during 2018.

However, he also described the amendments as necessary, but insufficient, to facilitate greater economic inclusion and transformation. Therefore, the changes should be accompanied by improvements in the way government issued licences, procured goods and services and incentivised and supported small and medium-sized firms.

“We need the full suite of industrial policy tools to be used in combination with the new provisions in the Bill to realise a new deal for economic transformation and inclusion.”