Introduction and Legislative framework
The Competition Act No. 89 of 1998 (Act) came into effect on 1 September 1999 and has been amended in terms of the Amendment Act of 2009 and the Amendment Act of 2018. The 2018 amendments have largely been brought into effect. However, there are a few amendments that are not yet operational, most notably, the "national security" provisions that contemplate a separate, parallel notification process for transactions involving foreign acquiring firms.
The Act applies to all economic activity within, or having an effect within, South Africa. It regulates mergers, restrictive vertical and horizontal practices, dominant firm conduct and market inquiries. The enforcement agencies are the Competition Commission (Commission), the Competition Tribunal (Tribunal) and the Competition Appeal Court (CAC). The Commission is responsible for the investigation and evaluation of mergers, prohibited practices and exemptions, and conducting market inquiries and impact studies. The Tribunal is empowered to adjudicate large mergers, prohibited conduct and to impose penalties. The Tribunal hears appeals and reviews in respect of the Commission's decisions. The CAC has final jurisdiction over the merits of competition cases and hears appeals against Tribunal decisions. Parties also have limited rights of appeal to the Constitutional Court.
The Act has always made provision for "traditional" competition, and socio-economic objectives, distinguishing it from "traditional" competition legislation in many other jurisdictions. The recent amendments have heightened the emphasis on socio-economic objectives aimed at advancing the inclusion of small and medium-sized enterprises (SMEs) and firms owned by historically disadvantaged persons (HDPs) in the economy. The current Minister for Economic Development (Minister) has indicated that the overarching objective of the amendments is to foster a new deal for economic transformation and inclusion.
The amendments include provisions concerning conduct by dominant firms – specifically buyer power, price discrimination and excessive pricing, exemptions from the application of the restrictive practice provisions of the Act, factors in the substantive assessment of mergers, and the treatment of confidential information. The amendments also grant additional powers to the Minister, introduce detailed provisions and additional powers for the Commission in respect of market inquiries and impact studies, and increase the administrative penalties that may be imposed under the Act.
Highlights of recent amendments to the Act
The main objective of the amendments is to address high levels of concentration and the skewed ownership profile of the economy that are a result of the imbalances created by the apartheid regime.
Accordingly, the most significant changes relate to the dominance provisions of the Act. These provisions introduce a different standard of assessment for dominant firms' treatment of SMEs and firms owned or controlled by HDPs. Significantly, these assessments do not follow the traditional tests to assess the substantial lessening or preventing of competition, but are instead focused on whether certain dominant firm conduct impedes or prevents smaller players, or firms owned by HDPs from participating effectively. The changes introduced place the burden of proof on dominant firms in relation to these particular types of entities. In the words of the Minister:
It is . . . 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 introduce a new "buyer power" provision prohibiting a dominant firm from imposing an unfair price or trading condition on a supplier that is a SME or owned by an HDP. An anti-avoidance provision is included to prevent dominant firms from ceasing to deal with SMEs or firms owned by HDPs in an effort to circumvent the new provision. The buyer power provision applies only in respect of the grocery, wholesale, retail, agro-processing and e-commerce sectors. The Minister has issued regulations that set out the relevant factors and benchmarks for determining whether prices and other trading conditions imposed by a dominant buyer are unfair, these include an assessment of:
- the prices paid to other suppliers of like goods or services (and the magnitude of any differential);
- whether reductions in the purchase price are directly or indirectly required from, or imposed on, the supplier;
- whether reductions to existing purchasing prices are retrospective, unilateral or unreasonable;
- whether costs are directly or indirectly imposed on or required from the supplier that reduce the net price received by the supplier;
- whether the direct or indirect imposition or requirement of costs is retrospective, unilateral or unreasonable;
- whether the trading condition unreasonably transfers risks or costs onto a firm in the designated class of suppliers;
- whether the trading condition is one-sided, onerous or not proportionate to the objective of the agreement); and
- whether the trading condition bears a reasonable relation to the objective of the supply agreement.
In line with the buyer power regulations, the Commission published buyer power guidelines that set out the Commission's interpretation of the new provision for enforcement purposes and provides the Commission's perspectives in respect of the screening and assessment of complaints laid in terms of the new provision.
Price discrimination by a dominant firm is prohibited if it is applied in respect of equivalent transactions and (i) is likely to result in a substantial lessening or prevention of competition or (ii) is likely to impede the ability of SMEs or firms controlled or owned by HDPs, to participate effectively (the latter was introduced by the 2018 amendments to the Act).
Where the assessment considers that there has been a substantial lessening or prevent of competition, the discrimination may be justified on certain grounds, including:
- reasonable allowances for differences in cost or likely cost of manufacture, distribution, sale, promotion or delivery resulting from – differing places to which goods or services are supplied,
- methods by which goods or services are supplied or quantities in which goods or services are supplied;
- meeting price competition; and
- in response to changing market conditions (actual or imminent deterioration of perishable goods, the obsolescence of goods, sale pursuant to a liquidation or sequestration procedure or sale in good faith in discontinuance the goods or services).
Where the assessment considers the ability of SMEs or firms controlled by HDPs to participate effectively, the discrimination may be justified on the same grounds as above, except that different quantities or volumes cannot be used to justify the price discrimination.
As with the buyer power amendments, the price discrimination amendments introduce a separate test specifically applicable to SMEs and firms owned by HDPs. This test requires a complainant to make out a prima facie case of price discrimination by showing that it has been impeded from participating effectively in a relevant market. If such a case is made, the dominant firm must show that its action does not impede the complaining firm from participating effectively. However, (as noted above) in presenting its defence, the dominant firm may not rely on differences in volume to justify the differences in price.
The Minister issued regulations to give effect to the above provisions, including the benchmarks for determining their application to firms owned and controlled by HDPs and factors and benchmarks for determining whether a price discrimination impedes the participation of SMEs and firms controlled or owned by HDPs.
The regulations indicate that the provision only applies to firms owned and controlled by historically disadvantaged persons who purchased less than 20% of the relevant good or service supplied by the dominant seller over the same time period as the price discrimination occurred (the designated class). The regulations set out the following factors to be taken into consideration when considering whether a dominant firm's price discrimination is likely to impede effective participation by the designated class:
- the extent of the price difference;
- the significance of input in the cost structure of the purchaser or as a driver of sales in the downstream market for the purchaser;
- the duration and timing of the price difference; and
- the likelihood that difference would result in purchaser in designated class:
- facing decreased demand for its goods or services; and
- decreasing investment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.