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Competition Law Trends and the Impact of the New Amendments

16 August 2017

Agenda

1 The latest policy developments in fighting anticompetitive conduct

2 Emerging areas of enforcement

3 The way forward

© 2017 Baker & McKenzie

Overview

3

Cartel criminalisation: Implications for Corporates

Administrative Penalties for failure to notify a merger

Information exchange guidelines

Dawn Raids

Private Litigation in Competition

Tips


Introduction

4

The Competition Act came into effect in 1999

Why does an economy need Competition Law?

South African goals and objectives

Penalties for non-compliance: 10% of firm’s annual turnover and civil damage claims – definitely affects the bottom-line

Managements role in contraventions are important

Amendments: Criminal liability for directors/senior management


Fines

5

Firm Conduct Penalty

Brenner Mills Maize Milling Cartel R25 Million

Inveschem and Akulu Marchon

Price fixing and dividing markets for chemical input products used in detergents, cosmetics and toiletries

R37 Million

Arcelormittal Long steel and scrap metals cartel

R1.5 billion

Pioneer Foods Bread R196 million

Foodcorp Milling and bread cartel R88,5 million and R45,4 million

Tiger Brands Bread cartel R98 million


Fines

6

15 construction firms

Collusive tendering (bid-rigging)

R1,5 billion

Telkom Abusing dominance(“bullying” competitors, excessive pricing, margin squeeze and bundling)

R449 million and R200million

Sasol Fertiliser and fertiliser products (price fixing and information exchange)

R250 million


What is the Competition Act?

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Competition Authorities have far-reaching powers:

Investigation and prosecution

Power to impose sanctions

The Act applies to all economic activity within or having an effect within South Africa

Competition Authorities and sectoral regulator enjoy concurrent jurisdiction

In addition to fines, there is criminal liability


Factors in assessing penalties

8

When considering appropriate penalties the following factors are assessed:

nature, duration, gravity and extent of the contravention Loss or damage suffered due to the contravention behaviour of the respondent market circumstances in which the contravention took place degree to which respondent co-operates with Competition Authorities Level of profit derived from the contravention any previous contraventions


Cartel Criminalisation

9

© 2017 Baker & McKenzie 10

What is a cartel and how does being involved affect you? Fixing a purchase or selling price, or a trading condition related to a

price. Dividing markets Collusive tendering Per se prohibited conduct, i.e. no justification or defences. Examples:

- Sharing information relating to prices, rates, pricing strategies, pricing formulas and price increases;- Agreements to set rental or rates;- Calling a competitor to check its response to government’s tender documents for lease of premises




Criminal liability of directors and managers In April 2016, South Africa became the latest country to criminalise

cartel conduct.

With effect from 1 May, price fixing, market division and collusive tendering between actual and potential competitors can result in criminal liability for directors or managers.



Criminal liability of directors and managers With the coming into effect of the new amendment, any director of a

firm, or person in a position of management authority, could be

subjected to criminal prosecution for cartel conduct engaged by the

firm if they were: involved in the conduct; knew of the conduct; failed to take steps to remediate it; or caused the conduct to take place.



Criminal liability of directors and managers

If successfully prosecuted these individuals could be liable:1. to a fine of up to R500,000 or

2. imprisonment for up to 10 years or both.



The justification for criminal cartel sanctions

Deterrence

An administrative fine is unlikely to deter

cartel activity



The intersection of competition law and criminal justice The new amendments add a new dimension to competition law

enforcement, namely the jurisdiction of the National Prosecuting Authority and criminal courts in the enforcement of criminal sanctions against individuals.

The threat of imprisonment increases the deterrent effect. Criminal prosecution impacts on corporate reputation and may lead to

significant financial loss.

Enforcement & Prosecution

Detection & Investigation



Problematic issues with cartel criminalisation The exact process which has to be followed to intertwine the

Commission and the NPA has yet to be established. The Commission is negotiating a memorandum of understanding with the NPA.

The NPA is yet to prosecute cartelists. ‘Director’ is not defined in the Competition Act and neither is ‘position

having management authority.’ Efficiency of law enforcement remains a concern. The costs involved in detecting, prosecuting and incarcerating individual

cartelists is a concern. The role of the corporate leniency policy in the NPA’s investigation is a

concern.



Criminal liability of directors and managers

New amendment raises questions about whether firms will be willing to voluntarily engage with the Commission in respect of cartel conduct .

Firms’ willingness to apply for leniency

No defined legal basis for a person to insist on being deserving of leniency.


Information Exchange

18


Information Exchange Guidelines

Information sharing refers to exchanging information that is “commercially sensitive” in that it has a particular economic value to a company such as information relating to prices, costs or internal business strategies.

Greater transparency in a market is generally efficiency enhancing for firms and can boost consumer welfare. However, it can also produce anti-competitive effects by facilitating collusion or providing firms with focal points around which to align their behaviour.

Anti-competitive information exchange is the interaction among competitors and an explicit or tacit agreement to set prices, restrict output, divide markets, rig bids or engage in tacit collusion. This cartel conduct.

The challenge for Competition Authorities is to determine the types of information exchanges that would be regarded as having pro-competitive and anti-competitive effects.



This has been done in many countries by providing clear guidelines on what is acceptable and unacceptable information exchange.

In July 2017, the Commission released its draft guidelines on information exchange between competitors for public comment.

It provides a general approach that the Commission will follow in determining whether information exchanged between competitors amounts to cartel conduct.

The draft Guidelines identify a variety of platforms for information exchange between competitors. These include trade associations, industry associations, information provided to government and regulators, information supplied within the context of governmental supplier development initiatives, public announcements, joint venture arrangements, market studies and customer quotation requests.



Paragraph 6.5.1 of the Guidelines state:“As a general rule, a firm expressing its intentions regarding future conduct, or what it anticipates or expects regarding competitors’ future conduct, is anti-competitive, because it facilitates reaching collusive understanding among firms…”

Paragraph 6.5.3, states:“Any communication about future conduct for which it is reasonable to expect that competitors will receive that information may facilitate a collusive understanding.”



Paragraph 6.6.2.1 states:“…The sharing of information through a medium or in a setting, for which the immediate audience is not competitors could be of concern where it is expected that competitors will receive the information. Examples are press-release or standard form letter to customers describing price changes, or a company executive announcing a change in its pricing strategy during an earnings call for analysts. Any communication about future conduct for which it is reasonable to expect that competitors will receive that information may facilitate a collusive understanding”



On public announcements and market signalling, the guidelines state:“Public announcements in the context of competition matters entail, inter alia, announcements to the financial community such as earnings information, public speeches, declarations or articles and notifications through various forms of media, such as the firms’ website, the press, etc. about future business plans of firms”.

“While predictive statements and forecasts about variable that are extensively exogenous to firm’s conduct, such as market demand and input prices, do not run the risk of anti-competitive implications. Predictive statements and forecasts about factors that firms control, such as prices, production, investment, advertising, and capacity, is a concern”.



There may be unintended consequences of the guidelines in its current form.

Listed companies do make public announcements and predictive statements in the form of press releases to their investors. Since it is in the public domain, it is also received by the firm’s competitors.

According to the Guidelines, this may trigger a contravention of section 4, as the Guidelines prohibit any communication regarding future conduct.



The question is, can businesses compete without information being available?

It is accepted that the Commission will only concern itself with information exchange that has the intention or the likelihood of distorting competition in the market. However, legal commentators have raised concern that the use of vague terms like “any” may lead to differences in interpretations of the draft Guidelines, as the word “any” potentially encompasses every piece of information communicated to the market.

The draft Guidelines aim to give competitors direction on the type of information exchange that may be potentially harmful to competition.

With this objective in mind, corporates and their legal representatives are encouraged to make comments to develop the Guidelines and mitigate against unintended interpretations of the provisions.

Comment on the draft Guidelines is invited until 14 September 2017.


Dawn Raids

A dawn raid is a search and seizure operation that is suddenly sprung on a company, generally because relevant competition authorities have a strong suspicion that serious anticompetitive conduct has occurred.

This could include typical cartel agreements (on pricing, volumes, territories). However, inspections are not confined to cases involving cartels. Even the exchange of commercially sensitive information between competitors may trigger a dawn raid.

The Competition Commission has imposed high fines for cartel conduct. In November 2016, Mittal reached a settlement with the Commission to

pay a record-breaking R1.5 billion fine for its involvement in cartel conduct. It is the largest administrative penalty imposed on a single firm to date in the 17-year history of competition law enforcement in South Africa.


Dawn Raids

Dawn raids are increasingly being used as a tool to gather evidence to prosecute companies involved in anticompetitive conduct.

On 3 August 2017, the Commission raided 25 sites of fire sprinkler installers.

In June 2017, meat suppliers in 3 provinces were raided on suspicion of price fixing.

In March 2017, fresh produce market agents (intermediaries between farmers and buyers of fruit and vegetables) were raided on suspicion of price fixing.

The consistency of these dawn raids by the Competition Commission highlights the need for companies operating in South Africa to have a comprehensive plan in place to deal with a search and seizure operation and minimise business disruption.


Administrative penalties for failure to notify a merger

29


When determining an appropriate penalty, the Competition Tribunal considers the following factors:

(a) the nature, duration, gravity and extent of the contravention;(b) loss or damage suffered;(c) the behaviour of the respondent;(d) the market circumstances in which the contravention took place;(e) the level of profit derived from the contravention;(f) the degree to which the respondent has cooperated with the

Commission and(g) Whether the respondent has previously been found in contravention of

the Competition Act

Administrative penalties



Life Healthcare Group Proprietary Limited and Joint Medical Holdings Limited recently settled a case of the prior-implementation of a merger with the Competition Authority for a record fine of R10 million. The R10-million administrative penalty is a record amount for gun-jumping.



Gun jumping: Is the unlawful pre-merger co-ordination between parties to a merger

transaction. For example, where the merging parties are competitors and co-ordinate

their competitive conduct prior to the actual closing of the transaction. This includes the sharing of commercially sensitive information (i.e. strategic and business plans, current and future pricing, profit margins and cost of production).

A further example, where the merging parties fail to notify the competition authorities of the merger triggering merger thresholds. This is a prior implementation of a merger which is punishable by the competition authorities.



In February 2017, the Competition Commission published its Guidelines for the determination of administrative penalties for failure to notify a merger. The draft Guidelines prescribe a maximum administrative penalty of

R5 million for the prior implementation of an intermediate merger and a R20 million penalty for implementing a large merger prior to being granted approval.

The Commission can refer the matter to the Competition Tribunal or conclude a settlement agreement which must be approved by the Tribunal.

It is published in the Government Gazette and on the Tribunal’s website.

Firms ought to be alive to the impact such a contravention will have on its corporate identity and profitability.



Types of transactions that are caught: Joint Ventures or joint investments Sale of assets Partnership arrangements Sale of book debts (NB: penalty imposed on Edcon for not

notifying) preference share funding structures voting pool arrangements “getting involved in operation of the target business” – minority

protections and other covenants concession agreements


Private litigation in Competition

35


Follow on damages instituted by parties injured by anti-competitive conduct

Another trend in the enforcement of competition policy, is the development of private litigation in competition.

Parties that have suffered from firms engaged in anti-competitive conduct can claim compensation or damages from the transgressor.

In South Africa, section 65 of the Competition Act creates separate jurisdiction in respect of civil actions between the Competition Tribunal and Competition Appeal Court on the one hand and the civil courts on the other.

However, only a civil court may award damages to private litigants as a result of contraventions of the Competition Act.

A litigant must bring an action to recover damages in the Magistrate’s Court or High Court. This is known as follow-on damages.

It was most famously used by claimants in the bread-cartel cases.


Follow on damages instituted by parties injured by anti-competitive conduct

There have only been a limited number of civil follow-on damages cases. This is largely due to the substantial difficulties a plaintiff faces in trying to quantify the damages.

Recent developments on follow-on damages arise as a result of the courts ordering an award for damages of $80 Million against South African Airways (SAA) in favour of Nationwide and Comair.

Firms engaging in anticompetitive conduct face a real threat of administrative penalties from Competition Agencies and civil litigation in the form of follow-on damages from affected third parties.

The use of follow-on damages as part of the response to cartel conduct aims to ensure that firms account for their transgressions and that the effect of competition intervention is passed onto consumers.


Tips

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As a compliance officer or legal advisor it is very important to be mindful of the risks.

Implement a competition law compliance programme and designate a person in your company for staff to report concerns

Company directors have a responsibility to be well-informed about their company practices and ensure they comply with the law.

Knowing about anti-competitive practices without taking steps to stop them could be grounds for disqualifying a director.

If you suspect anti-competitive practices you should investigate. Take immediate steps to stop them and seek independent legal advice.

Take advice on submissions to be made to the Competition Authorities, even in the context of a merger investigation.


Tips

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Watch your language Email and voicemail Priviledged and confidential communications Document retention and destruction Dealing with enquiries Commission’s searches and seizures


General Remarks

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Competition compliance is essential Checks and Balances Powers are amplified Now easier to prosecute firms Commission is looking for examples


Thank you

Vani ChettyPartner I Baker & McKenzie Tel: +27 11 911 4303 I Cell: +27 83 680 3879 Email: [email protected] 1Commerce Square, 39 Rivonia Road, Sandhurst

Baker & McKenzie is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.


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