Re: South Africa s Competition Amendment Bill, 2018

Transcription

1 Via Mrs. EM Coleman, MP Chairperson of tshe Portfolio Committee on Economic Development Attn: Mr. Peter-Paul Mbele P.O. Box 15 Parliament of the Republic of South Africa Capetown, 8000 Re: South Africa s Competition Amendment Bill, 2018 Dear Mrs. Coleman: On behalf of the American Bar Association Section of Antitrust Law, I am pleased to submit the attached comments on South Africa s Competition Amendment Bill, We also attach the Section s previously submitted comments on the December 2017 version of the bill. Please note that these views are being presented only on behalf of the Section of Antitrust Law. They have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and should not be construed as representing the policy of the American Bar Association. We appreciate your consideration of the Section s comments on this important initiative. If you have any comments or questions after reviewing our comments, I will be happy to discuss them. Sincerely, Attachments Deborah A. Garza Chair, Section of Antitrust Law

2 COMMENTS OF THE AMERICAN BAR ASSOCIATION SECTION OF ANTITRUST LAW ON THE COMPETITION AMENDMENT BILL, 2018 September 7, 2018 The views stated in this submission are presented on behalf of the Section of Antitrust Law. They have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and therefore should not be construed as representing the policy of the American Bar Association. The Section commends the Competition Commission, the Minister of Economic Development, and the Parliament of the Republic of South Africa for their open and thoughtful review of South Africa s Competition Law. The Section appreciates the opportunity to comment on the 5 July 2018 Competition Amendment Bill (the Revised Bill ) currently before Parliament and are particularly grateful to Parliament for the special extension granted for us to comment. As requested, our comments focus on new issues raised in the Revised Bill. In particular, they address concerns raised by the new proposal for a national security review mechanism, and then discuss the proposed provisions concerning administrative penalties, price discrimination, the applicability of Guidelines, and the appointment of part-time Tribunal members. We attach the Section s previously submitted comments on the December 2017 version of the bill. We appreciate that some of the suggestions raised in those earlier comments are reflected in the Revised Bill. However, the Revised Bill retains several provisions that we had suggested reconsidering, including with regard to Market Inquiries and Abuse of Dominance provisions. To the extent that Parliament is reviewing any of the issues covered in those comments, it may find the prior comments helpful. We hope that these comments further assist Parliament in meeting the important goal of transparent, fair, and effective competition policy and enforcement in South Africa. National Security Review Mechanism Clause 13 of the Revised Bill calls for a new Section 18A to the Competition Act, 1998 ( Competition Act ) to establish a new regime for the review of acquisitions by a foreign acquiring firm that may have an adverse effect on the national security interests of South Africa. This proposed section provides that the President must constitute a Committee that must be responsible for reviewing the national security implications of transactions involving any acquiror that was incorporated, established or formed under the laws of a country other than South Africa. 1

3 The Section considers the proposed section to be a striking addition to the Revised Bill, both due to the significance of this amendment and its exclusion from the prior round of public consultations. The Section appreciates the importance of national security review and principle and recognize that many other jurisdictions, including the United States, have adopted such national security review regimes. 1 However, we respectfully suggest that the adoption of such significant legislation should follow a comprehensive stakeholder consultation and review of the experiences of other jurisdictions in implementing similar legislation. The Section also believes that, given the substance and significance of the subject matter, and its distinctiveness from competition law, a new national security regime should be enacted via a separate, standalone statute, rather than by inclusion in the Competition Act. The advantages of proceeding in this manner include: emphasizing the significance of the new regime; simplifying any future amendments to the national security regime; allowing for more considered analysis of provisions that might unnecessarily impact other domestic regulatory regimes; and, importantly, preserving the separate analytical standards of the two very distinct regulatory regimes of merger control and national security review, thereby avoiding the confusion of their distinct objectives and review criteria. If South Africa pursues a new national security regime, the Section also suggests that the following aspects of the proposed section 18A of the Revised Bill be amended or clarified: Possibility of Concurrent Reviews. Proposed new sections 18(6) and 18(7) contemplate that transactions requiring a national security review be notified to the reviewing Committee before notification to the Competition Commission for review under the merger control provisions of the Competition Act It is contemplated that the national security Committee review may take up to 60 days, or such further period as the President may unilaterally determine, before the transaction may proceed to review by the Competition Commission. The Section respectfully submits that there is no material regulatory advantage in sequencing the national security and merger control reviews in this fashion, but that this would have a significant detrimental effect on transactions by imposing substantial additional regulatory delay. As the International Competition Network ( ICN ) has observed, regulatory delays in merger transactions impose major costs on transactions, may inject uncertainty into public markets, and may jeopardize the economic efficiencies that drive transactions: 1 See, e.g., Defense Production Act of 1950, as amended, Executive Order 11858, as amended, 31 C.F.R. Part 800 (The Committee on Foreign Investment in the United States (CFIUS), as amended by the Foreign Investment Risk Review Modernization Act of Aug. 13, 2018; Investment Canada Act, R.S.C., 1985, c. 28 (1st Supp.) (Canada); Foreign Acquisitions and Takeovers Act 1975, No. 92, 1975 and Register of Foreign Ownership of Water or Agricultural Land Act 2015, No. 151, 2015 (Australia). The American Bar Association Section of Antitrust Law Report of the Task Force on Foreign Investment Review (hereinafter Task Force Report ), available at authcheckdam.pdf, provides further information on these and other national security review mechanisms. 2

4 merger transactions are almost always time sensitive, and the completion of merger reviews by relevant competition agencies is often a condition to closing either by operation of law or contract. Delay in the completion of such reviews may give rise to a number of risks. Delay may jeopardize the consummation of the transaction itself due to intervening developments and/or other time-sensitive contingencies such as financing arrangements. Delay may also have an adverse impact on the merging parties individual transition planning efforts and on their ongoing business operations due to work force attrition and marketplace uncertainty. In addition, it defers the realization of any efficiencies arising from the transaction. 2 To minimize the costs and delays associated with regulatory review in South Africa, the Section respectfully suggests that the national security regime allow merging parties the option of pursuing the merger control and national security reviews simultaneously. This would be consistent with the advice offered by the ICN s Recommended Practices, and consistent with the approach taken in other jurisdictions, such as Canada, where parties routinely seek parallel approvals of transactions under the Competition Act and the Investment Canada Act. 3 Review Criteria. Although proposed new section 18(4) provides a helpful list of factors that may be relevant to national security reviews, proposed new section 18(3) contemplates that the markets, industries, goods or services, sectors or regions in which a merger involving a foreign acquiring firm must be notified are topics to be clarified in future guidelines. In the Section s view, these are essential subjects that, for purposes of transparency, consistency, and predictability, should be covered by the governing legislation. The Section also suggests deleting the reference in section 18(4)(d) to the supply of important goods or services to citizens because it is unnecessarily vague and potentially duplicative of the Competition Commission s review. In addition, the Section proposes that the reference in section 18(4)(d) to the supply of goods or services to government be amended by the addition of, for example, strategic or vital goods or services to government, as the vast majority of goods or services supplied to the government are not likely to warrant a national security review. Composition of Reviewing Committee. Proposed new section 18(2) provides that the national security review Committee is to be composed of such Cabinet Members and other public officials as may be determined and appointed by the President. The Section anticipates that this structure could lead to questions 2 International Competition Network, Recommended Practices for Merger Notification Procedures, at IV.A, Comment 1, 3 See Task Force Report, supra note 1, for additional best practice recommendations concerning timing and transparency of reviews. 3

5 of actual or perceived political bias in national security reviews. The Section recommends considering an alternative structure that would involve the establishment of a permanent team of government personnel responsible for conducting national security reviews. Such a structure would likely reduce concerns of politicization while also leading to greater consistency and efficiency in the application of the law. A permanent staff would likely gain greater experience with the key issues underlying national security reviews, and conduct reviews more efficiently over time, as has been the case with the Competition Commission s merger reviews. The Section believes that this would benefit both the government of South Africa and merging parties. Administrative Penalties Clause 32 of the Revised Bill seeks to amend section 59 of the Act, which provides for the imposition of administrative monetary penalties ( AMPs ) by the Tribunal. The Revised Bill expands the applicability of AMPs to a range of first-time offences. Currently, AMPs are applicable to first offences only for more egregious, hardcore offences such as price-fixing, market allocation, or bid rigging. The Revised Bill would permit the Tribunal to impose an AMP for first-time contraventions of the Act that constitute a restrictive horizontal or vertical practice, resale price maintenance, abuse of dominance, or price discrimination. AMPs for first-time offences remain subject to a cap of 10% of South African turnover plus exports. The Revised Bill also increases the maximum AMP to 25% of South African turnover plus exports for a repeat offender that engages in substantially the same conduct that the Tribunal previously found a prohibited practice. The Revised Bill provides that both the 10% and 25% maximum AMP thresholds may be further increased to include the turnover of a controlling entity where that entity knew or should have known of the impugned conduct in South Africa. The Section recognizes that competition laws are a critical part of a healthy economy and critical to economic growth. In this respect, fines and sanctions play an important role in deterring violation of the competition laws and promoting compliance. At the same time, fines and sanctions must be effective and proportionate, as otherwise there is a risk that they could deter lawful vigorous competition and hinder economic growth. It is therefore important that the circumstances under which AMPs will be imposed are clear and transparent and that the AMPs are honed to ensure a proportional and effective penalty. This is a delicate and difficult balance, 4 and our comments address suggestions for how the AMP provisions of the Revised Bill might be amended to better meet these objectives. Giving the Tribunal the blanket power to impose AMPs upon finding a violation of any of the prohibited practices under Chapter 2 of the Competition Act is a marked departure from the Tribunal s current power to impose penalties at the first instance only for serious hard-core, anti-competitive practices such as price-fixing, market allocation, and collusive tendering. In the United States, while violations of Sections 1 and 2 of the Sherman Act are subject to both criminal and civil penalties, criminal prosecutions are 4 American Bar Association Section of Antitrust Law, Cartel Sanctions Thought Paper (July 2018). 4

6 typically limited to clear and intentional violations like price-fixing and bid-rigging. The remedies available to the government for civil enforcement of other types of conduct, which are subject to rule-of-reason review, are generally limited to injunctive relief and damages incurred by the United States as a purchaser of goods. 5 This is because the imposition of fines for other types of rule of reason conduct presents important policy considerations, particularly the potential for chilling conduct that is competitively benign or even procompetitive. With respect to the imposition of AMPs for rule of reason practices, the Section respectfully encourages the Parliament to consider whether the current system of remedying these competition concerns through the imposition of cease-and-desist orders already may be effective in deterring the proscribed conduct such that the introduction of AMPs is not necessary. If, following such a review, Parliament nonetheless determines that it is necessary to apply AMPs to such conduct, the Section recommends that, to avoid chilling procompetitive conduct, Parliament carefully consider the factors, including mitigating circumstances, that should be taken into account before an AMP is imposed. We suggest that, to this end, it also aim to ensure that the AMP be based on a thorough analysis of the violation s competitive effects and a quantification of the actual competitive harm that the violation has caused. To further the goals of clarity and transparency in this regard, the Section recommends that Parliament provide for additional Guidelines to amend and supplement the current Guidelines for Determination of Administrative Penalties for Prohibited Practices, elucidating the circumstances under which AMPs would be called for in the context of first-time non-hard-core offences. As to the maximum fine thresholds, for the AMPs to be effective as deterrents while still proportional to the harm caused, they should bear some relation to the economic harm caused by the anti-competitive practice and/or the gains reaped by the perpetrator. By basing the AMP solely on a percentage of the offender s prior year s turnover plus exports, the proposed threshold risks being too low to serve as an effective deterrent (for example, if it takes several years to detect and bring the case, the profits over several years may well exceed annual turnover). On the other hand, where the conduct in question relates to one or more products that constitute a small part of the offender s overall business, the AMP risks being vastly over-inclusive as well as disproportionate to the gains attributable to the conduct. To remedy this imbalance, the Section suggests that Parliament consider alternative standards to produce a more proportionate and effective penalty, for example, that the AMP be based on the value of the offending entity s commerce pertaining to the Republic of South Africa affected by the offence for the duration of the offending conduct. The applicable maximum AMP 5 In the United States, companies also may be subject to civil penalties for violating the pre-merger notification statute or violating final orders issued by the Federal Trade Commission or antitrust decrees issued in cases brought by the U.S. Department of Justice, but they are subject to fines when found liable in civil antitrust cases for engaging in anticompetitive conduct. In addition, companies may be subject to monetary equitable relief, such as disgorgement or restitution. See e.g., Contribution of the United States to the OECD Global Forum on Sanctions in Antitrust Cases, available at: 5

7 thresholds would then apply to this baseline value. 6 For clarity, the Section also suggests that this same baseline value standard also apply when considering the imposition of fines on controlling entities pursuant to the proposed clause 32(e). With regard to repeat offences, the Bill relies on existing language, namely, substantially a repeat by the same firm of conduct previously found by the Competition Tribunal to be a prohibited practice. The Section submits that it is important to specify the time period over which such recidivism will warrant the higher maximum fine. In this regard, the Section recommends that the Revised Bill provide for the higher maximum AMP only for repeat offenders who undertake substantially the same conduct as the Tribunal has been previously prohibited, within a defined period of time after a Tribunal order. In addition, the Section would appreciate additional guidance in the Revised Bill clarifying the pattern of conduct that would be considered substantially a repeat or as substantially the same conduct (e.g., must it apply to the same products and customers, or will the same or similar conduct in respect of different products or customers qualify for the higher maximum penalty?) Finally, the Section notes that, while Clause 32 requires the Tribunal to consider the impact on small and medium businesses when determining an appropriate penalty, it does not include consideration of the impact of an AMP on the viability of the offending firm. Accordingly, the Section respectfully requests that the Revised Bill include this impact as a factor in determining the penalty to the extent that this is not already covered in the existing Penalty Guidelines. Price Discrimination The Section appreciates that the Revised Bill reflects its suggestion to eliminate the original bill s evidentiary burden shifting proposal. Yet in providing for this revision, the Revised Bill makes several amendments on which the Section has further comment. First, Clause 6 of the Revised Bill proposes to amend section 9 of the Competition Act by deleting the word substantially from the test currently applied to price discrimination conduct. Thus, the substantive test would require that price discrimination is likely to have the effect of substantially preventing or lessening competition. The Section respectfully suggests that the revised Bill reincorporate the substantiality threshold. This will ensure that a consistent standard is employed throughout the Competition Act. Moreover, a materiality clause with respect to price discrimination is particularly important given that price differences are a natural and, in many ways, desirable outcome of competition, as they, among other benefits, provide for efficient output enhancement and reduce the risk of collusion. The Section notes that price rigidity created by overly aggressive price discrimination provisions can have significant negative effects on competition that may far outweigh the negative welfare effects of price differences that tend to arise in only rare circumstances. Thus, the Section is concerned that the elimination 6 The Section notes that it is all the more important to arrive at an appropriate baseline value when applying a high maximum fine, such as the 25% threshold specified in section 32(c) for repeat offences. 6

8 of substantially from the standard will lead to uncertainty and a dampening of procompetitive and common commercial practices. The Section notes further that the Revised Bill s proposed Section 9 provides that, when assessing a case of price discrimination, the dominant firm must show that its action does not impede the ability of small and medium businesses and firms controlled or owned by historically disadvantaged persons to participate effectively. However, it remains unclear to the Section how this provision is to be interpreted, and how it will be applied in an objective, pro-competitive manner. For example, it is not clear whether this public interest criterion is intended to be a factor that the authorities are to take into account in determining whether a pricing strategy should be characterized as a form of price discrimination. Nor is it apparent whether a respondent would be entitled to raise additional public interest related arguments in support of its pricing strategies. In addition, the Section submits that it may not be appropriate, in relation to price discrimination prohibitions, to introduce a public interest dimension directed at addressing the effects in relation to a particular segment of downstream customers as opposed to end consumers. Moreover, to the extent that section 9(3) is intended to be a self-standing test against which any alleged acts of pricing differentiation are to be assessed, the Section submits that at a minimum, any such price discrimination should be determined on the basis of detriment to consumers that cannot be justified or outweighed by other procompetitive effects. Given that it will be far easier for complainants to demonstrate detriment to consumers, given their access to such information, than for the dominant firm to prove a negative proposition that small and medium businesses are not impeded from participating effectively in the market the Section submits that the onus should be on the complainant to demonstrate that the price differentiation will be to the detriment of consumers. The Section also notes that the Revised Bill does not clearly define impede the ability and to participate effectively. Thus, the consequences for a respondent engaged in a form of price differentiation of which the net effect does not prevent or lessen competition in the market but that may nonetheless impede the ability of a small firm to participate effectively, remain unclear. The Section notes that the Competition Commission will be obliged to publish guidelines relating to abuse of dominance for purposes of assessing whether the practice set out in section 8(1)(d)(vii), concerning whether requiring a non-dominant supplier to sell at a particular price impedes the ability of a firm which is not a dominant firm, particularly a small and medium business or a firm owned or controlled by a historically disadvantaged person, to participate effectively. This may provide needed guidance pertaining to similar provisions related to price discrimination; however, given the specific focus of that guidance, we believe it will be important to provide additional clarity on the interpretation of this provision as concerns price discrimination. 7

9 Overall, with regard to price discrimination, the Section endorses the views of the Organization for Economic Cooperation and Development, providing that with respect to price discrimination, it is the effect on consumers, and not the fairness of the discrimination, that determines the acceptability of the discrimination. 7 The amendments to section 9 suggest a departure from this principle. The Section therefore submits that, in light of: the low market share threshold applicable to dominant entities (35%) that are subject to section 9 s price discrimination provisions; the uncertainty regarding the threshold that must be met in order to sustain a case of prohibited price discrimination; the evidentiary burden on a respondent to essentially prove a negative in relation to section 9(3); and the threat of an administrative penalty for a first-time offence (potentially on both the South African business and its parent), the proposed amendment to section 9 will likely lead to a number of unintended consequences with a resulting negative impact on business practices that are ordinarily pro-competitive, and ultimately to the detriment of consumers. Guidelines The Revised Bill envisages that the Competition Commission will publish several guidelines, which can provide greater clarity on various aspects of the Bill. However, given that the guidelines have yet to be published, we are unable to comment on related empowering provisions of the Revised Bill. Specifically, the Section recognizes the importance of the Revised Bill s proposed insertion into the Competition Act s section 79, recognizing that while a guideline is not binding, any person interpreting or applying this Act must take it into account. To further emphasize this point and the legitimate expectations created by guidelines, the Section suggests that the Revised Bill also provide that any persons interpreting or applying the Competition Act should be permitted to deviate from the guidelines only if there are compelling reasons to do so. This will ensure greater certainty and predictability in relation to the enforcement of the Revised Bill, and will be consistent with international precedent, including that of the European Union. 8 7 See Org. of Econ. Coop. & Dev., Executive Summary of the Roundtable on Price Discrimination, DAF/COMP/M(2016)2/AN N5, (February, 9, 2018), available at doclanguage=en. 8 Guidelines are considered a form of soft law and the European Commission is required to follow its own guidelines. In this regard, the Grand Chamber of the European Court of Justice held that This means that even if the Guidance Paper is not the law and cannot bind courts, it certainly might bind the institution 8

10 Independence of Decision Making Officials The Section commended the Ministry for recognizing the importance to due process and the credibility of South Africa s competition laws of having a neutral decision maker that investigates and enforces those laws as well as an impartial judicial decision maker that can review enforcement decisions. The Section submits that this principle should also apply to the proposed amendments to section 26(2) on the appointment of part-time Tribunal members. The Section endorses the prevailing views expressed in the United Nations Conference on Trade and Development s Round Table Discussion on the Independence and Accountability of Competition Authorities, as summarized by its Secretariat: the appointment of competition officials by a minister is less conducive to independence than appointment procedures that provide for the participation of representatives of more than one government branch. In addition, it is assumed that competition officials whose terms are not renewable and cannot be removed from office except by legal procedure have less of an incentive to please those who appointed them. 9 The Section is available to answer any questions or discuss any of the issues covered in this submission. which adopted it and committed to apply it to future cases. See Dansk Rørindustri A/S (C-189/02 P), Isoplus Fernwärmetechnik Vertriebsgesellschaft mbh and Others (2005) at paras See United Nations Conference on Trade and Development, TD/B/COM.2/CLP/67 Round Table Discussion on Independence and accountability of competition authorities (14 May 2008) at para. 21, available at See also Abbott B. ( Tad ) Lipsky, Jr. and Randolph Tritell, Best Practices for Antitrust Procedure: The Section of International Law Offers its Model, THE ANTITRUST SOURCE, 3, 8-9 (December 2015), available at hcheckdam.pdf for further detail on independence and procedural due process in competition investigations and review. 9

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25