Competition v promoting small business and black economic empowerment – an evaluation of South African competition law and its enforcement

Tuesday 22 June 2021

Lesley Morphet

Abstract

The South African Competition Act 1998 has from the outset reflected a clear focus on both competition law and public interest issues, the latter including provisions to enhance small business and overcome historical discrimination wrought by apartheid. Interpretation and implementation of these provisions has developed over time, culminating in the introduction of amendments to these provisions in the Competition Amendment Act 2018, which came into force in 2019. This article reviews the applicable legislative provisions and how they have been interpreted by the competition authorities in practice and through case law, and considers whether they have been effective.

Introduction

Since South Africa’s transition to democracy in 1994, the country’s economic policy has sought two inter-related and sometimes conflicting objectives. The first is to harness the advantages of free and competitive markets to achieve economic growth, with its concomitant benefits of increased employment and national income. The second is somewhat of a counterweight – empower a developmental state to intervene in the economy to ensure that market outcomes are equitable, and that economic growth is inclusive, correcting the distortions created by the historical discriminatory laws of apartheid. The tensions and complementarities between these two powerful forces frequently play out in the arena of South Africa’s unique and rapidly developing competition law regime.

From the outset, when the Competition Act 1998 (the ‘Act’) was first passed, it was clear that a focus of the South African government under the legislation would be historically disadvantaged persons and small business. This focus was understandable, given the fact that South Africa was emerging from an apartheid era of concentrated large enterprises and exclusion of many, particularly historically disadvantaged persons, from the economy.

Against that background, in the preamble to the Act, it was noted that the ‘economy must be open to greater ownership by a greater number of South Africans’. In section 2 of the Act, it is stated that the purpose of the act is to ‘promote and maintain competition’ in South Africa to achieve several objectives, including ‘to ensure that small and medium-sized enterprises [SMEs] have an equitable opportunity to participate in the economy’; and ‘to promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged persons [HDIs]’.

These objectives are reflected in various provisions of the Act, which we shall unpack below, and have been enhanced through recent amendments to the Act.

In 2019, the Competition Amendment Act, No 18 of 2018 (the ‘Amendment Act’), was passed. When it was still a bill, in a presentation to Parliament in 2019 (the ‘Presentation’)^[1], it was indicated that the objectives were to:

• ‘Open up the economy for greater investment in new businesses, with a focus on opening up space for SMEs and black-owned business
• Provide the competition authorities with the tools to investigate and address high levels of economic concentration
• Strengthen the public interest objectives of economic transformation and inclusion
• Maintain the basic architecture of the Act, but align the operations with the stated Purpose particular [sic] with regards to the public interest (employment, small and medium business, ownership by Black South Africans).^[2]’

In the preamble to the Amendment Act, it was stated that the objectives included:

‘to introduce greater flexibility in the granting of exemptions which promote transformation and growth; to strengthen the role of market inquiries and merger processes in the promotion of competition and economic transformation through addressing the structures and de-concentration of markets; to protect and stimulate the growth of small and medium businesses and firms owned and controlled by historically disadvantaged persons while at the same time protecting and promoting employment, employment security and worker ownership’.

This legislation introduced the definition of ‘medium-sized business’, and provisions relating previously to small businesses only were expanded to include medium-sized businesses.

We shall consider these provisions and relevant case law where applicable, and draw conclusions regarding their necessity or effectiveness, in South Africa’s social and economic context.

The provisions of the Act

Mergers

In terms of the Act, parties engaging in M&A activity are required to notify and obtain approval for their transactions if they meet the merger definition as well as the relevant thresholds, which are based on the assets and turnover of the parties. The competition authorities are required to analyse a notified transaction to determine whether it is ‘likely to substantially prevent or lessen competition’^[3] by assessing factors such as barriers to entry, countervailing power, market concentration and the like, and if it can nevertheless be justified on technological, efficiency or other pro-competitive grounds. However, they are also required to consider the transaction from a public interest perspective, including the effect that the merger will have on ‘the ability of small businesses or firms controlled or owned by historically disadvantaged persons, to become competitive’.^[4]

The competition and public interest assessments are equally important, and it is possible that an otherwise anti-competitive merger could be approved because it is overwhelmingly in the public interest. Similarly, an unproblematic merger from a competition perspective could theoretically be prohibited on public interest grounds.

Amendments

Although one would have thought from these examples that SMEs and HDIs were well catered for, the Amendment Act has introduced further public interest provisions relating to mergers. Although it is questionable if this was necessary, the provisions were amended to make it crystal clear that public interest issues are as important as competition concerns when assessing mergers. The public interest provisions themselves were amended to cater for medium-sized businesses, and not only small businesses, considering whether they can ‘effectively enter into, participate in or expand within the market’. A new public interest provision was inserted, being ‘the promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers in firms in the market’.

It would appear from these amendments that the competition authorities and the Department of Trade, Industry and Competition (DTIC) will remain highly active in the arena of merger control to ensure the promotion of their public interest objectives.

Prohibited practices

From a prohibited practice perspective, agreements between parties in a horizontal relationship (ie, competitors) and parties in a vertical (ie, supplier or customer) relationship are prohibited if they have the effect of substantially preventing or lessening competition in a market, unless a party to the agreement can prove that any technological, efficiency or other pro-competitive gain resulting from it outweighs that effect.^[5] Although not explicitly stated, these provisions would work against any party seeking to behave anti-competitively with respect to small businesses or businesses controlled by historically disadvantaged persons.

If an entity is dominant in a market, it may not engage in various anti-competitive conduct, including: engaging in a general ‘exclusionary act’^[6] or certain specific exclusionary acts such as requiring or inducing a supplier or customer to not deal with a competitor; refusal to supply scarce goods to a competitor; or buying up scarce inputs.^[7] A dominant firm may also not engage in price discrimination.^[8]

Amendments

The abuse of dominance provisions were amended to expand the refusal to supply provisions to customers as well as competitors, and, relevant to this discussion, provisions were included precluding dominant firms in designated sectors from engaging in buyer power by imposing unfair prices or other trading conditions on suppliers that are small and medium businesses or firms controlled or owned by historically disadvantaged persons.^[9] Such dominant firms are also prohibited from refusing to purchase or avoiding purchasing from such suppliers to circumvent the aforementioned provisions. If there is a prima facie case against the dominant firm, the onus of proof rests on the dominant firm to prove that their action did not impede the ability of such firms to participate effectively in the market.

The price discrimination provisions were also amended to prohibit a dominant firm from engaging in this practice if it is likely to have the effect of ‘impeding the ability of small and medium businesses or firms controlled or owned by historically disadvantages, to participate effectively’.^[10] If there is an allegation against a dominant firm in this regard, the dominant firm faces the burden of proof to show that its conduct did not impede those firms from participating effectively.

Exemptions

Parties that are engaging in prohibited conduct may apply to the Competition Commission (the ‘Commission’) for exemption from the application of the Act, but the grounds for an exemption are narrow. The agreement or practice in question must be required to attain and contribute to four objectives, one of which is ‘promotion of the ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive’.

Amendments

The qualifying criteria for an exemption have been amended to make it clear that one objective is the promotion of small and medium businesses and historically disadvantaged persons. One of the objectives has been amended to read ‘promotion of the effective entry into, participation in or expansion within a market by small and medium businesses, or firms controlled or owned by historically disadvantaged persons.’ Another criterion that related only to stability of an industry has been amended to read ‘economic development, growth, transformation or stability of any industry’. A new objective has been inserted, being ‘competitiveness and efficiency gains that promote employment or industrial expansion’.

Market inquiries

The Commission has for some years been authorised to conduct market inquiries into ‘the general state of competition in a market for particular goods or services’ where it has concerns that there are features in the market that may distort or restrict competition, without a prohibited practice taking place.^[11]

Amendments

The market enquiry provisions have now been amended to allow the Commission to conduct an enquiry into levels of market concentration, employment, transformation and market structure. The amendments make clear that the Commission is required to consider any adverse impact on competition, and the adverse effect of conduct or market structures on small and medium businesses, or firms controlled or owned by historically disadvantaged persons. The amendments also allow the Commission to take action to remedy, mitigate or prevent the adverse effect on competition. In this regard the Commission may issue binding recommendations, including recommending divestiture.^[12]

It is anticipated that the Commission will, subject to capacity constraints, use the market enquiry provisions extensively in its efforts to promote transformation and deconcentration of the South African economy.

Other new provisions

The amendments have also included a section to allow for the Commission to conduct impact studies regarding the effect of ‘any decision, ruling or judgment of the Commission, the Competition Tribunal or the Competition Appeal Court.’

In addition, when considering appropriate penalties to impose in respect of prohibited practices, the Competition Tribunal (the ‘Tribunal’) must consider ‘the market circumstances in which the contact took place ‘including whether, and to what extent, the contravention had an impact upon small and medium businesses and firms owned or controlled by historically disadvantaged persons’.

Application of these provisions by the authorities

Mergers

The competition authorities have considered these provisions in numerous merger cases. Redress for historically disadvantaged persons is generally viewed through the prism of so-called Black economic empowerment (BEE).

An early case in which this was considered was the Shell/Tepco merger.^[13] In this matter Thebe Investment Corporation (Pty) Ltd, an investment company controlled and owned by historically disadvantaged persons, was selling its subsidiary, Tepco, to Shell South Africa (SSA). SSA was seeking to buy Tepco to enhance its empowerment credentials, whereas Tepco was struggling and, in the absence of alternative funding solutions, Thebe decided to sell Tepco to SSA.

The Commission was evidently concerned that a company owned and controlled by historically disadvantaged investors was being sold to SSA, a historically ‘white’ company, and that a Black-owned brand would disappear from the market. It therefore recommended that the Tribunal impose conditions including the requirement that Tepco continued to exist in the market jointly controlled/owned by Thebe and SSA. The Tribunal agreed with the merging parties that this effectively discriminated against Thebe, precluding it from concluding agreements that suit its commercial interests. As the Tribunal stated, the ‘Commission’s role is to promote and protect competition and a specified public interest. It is not to second-guess the commercial decisions of precisely that element of the public that it is enjoined to defend’.

The Tribunal went further and stated that:

‘The role played by the competition authorities in defending even those aspects of the public interest listed in the Act is, at most, secondary to other statutory and regulatory instruments – in this case the Employment Equity Act, the Skills Development Act and the Charter itself immediately spring to mind. The competition authorities, however well-intentioned, are well advised not to pursue the public interest mandate in an over-zealous manner lest they damage precisely those interests that they ostensibly seek to protect.’^[14]

BEE has been used as an argument to approve otherwise problematic mergers. For example in the Sasol/Engen merger,^[15] in which Sasol sought to acquire the business of a big competitor, Engen, it was argued that the transaction should be approved because of the public interest benefit of BEE. Sasol was committing to sell a share of the merged entity to a BEE group. The merger was complex, and was ultimately prohibited by the Tribunal on competition grounds. As regards the BEE argument, the Tribunal held that this was not merger-specific, in that the possibility of empowering a Black shareholder owed nothing to the merger. It was therefore not persuaded to approve the merger on this public interest ground.

Parties have sought to take an ambitious approach to public interest to promote BEE since shortly after the Act was enacted. For example, in Anglo American/Kumba Resources,^[16] where a large mining house, Anglo American, was seeking to acquire Kumba, a relatively newly formed mining entity, the Industrial Development Corporation intervened in the proceedings and tried to persuade the Tribunal that Kumba should be prohibited or approved subject to conditions that would allow for joint control by historically disadvantaged persons. The Tribunal did not accept these arguments, considering it not necessary in the circumstances.

In Vodafone Group/Venfin,^[17] when objections were raised to the acquisition of a South African company by a foreign shareholder, and it was argued that the stake should rather be sold to a BEE acquirer, the Tribunal stated that:

‘it would take an enormously ambitious reading of this provision to contend that it empowers us to require parties to sell the interest, which is the subject of the merger, not to their chosen acquirer but to a person, or class of persons, of our making. We have also previously expressed a deferential view to public interest issues in our interpretation of the Competition Act, where other instruments of regulation deal with issues.’

Despite this, as the years have passed merger regulation has been extensively used to promote small business and BBE, frequently by imposing conditions to approval of mergers.

A movement in the direction of increased government intervention happened about ten years ago, when Ebrahim Patel became a minister in charge of the so-called economic cluster. Patel recognised the capability of competition law to be used as a tool for promoting developmental objectives, and initiated a more interventionist approach. The first significant case in this regard arose when Walmart, the American giant, sought to acquire control over Massmart, a local group.^[18]

The case, although uncontentious from a competition perspective, was hotly contested on public interest grounds. Two government ministers, the Minister of Economic Development (Patel) and the Minister of Trade and Industry, along with a number of trade unions,^[19] intervened in the process. Most of the contentious issues related to employment, but there were also concerns relating to procurement.

The matter was ultimately decided by the Competition Appeal Court, which, among other conditions, required the establishment of a supplier development fund to enhance capacity of local suppliers. In monitoring compliance with those conditions, the Commission emphasised that ‘any supplier development must lead to sustainable improvements, with a bias towards small enterprises, those owned by historically disadvantaged individuals, and those with labour-intensive practices’.^[20]

In mergers in the agriculture sector, such as Pioneer/Pannar,^[21] Dow/duPont^[22] and Bayer/Monsanto,^[23] conditions have been imposed to try and protect and aid small farmers. A high-water mark in this respect occurred when ABInbev acquired SABMiller, a rival beer manufacturer.^[24] This mega transaction was approved subject to extensive public interest conditions, including those imposed to: maximise local production and sourcing of inputs; support and promote small beer producers; invest in capacity development of new emerging and commercial farmers; and invest in enterprise development.

Patel is now in charge of the DTIC, and the competition authorities fall under his responsibility. It is noteworthy that the DTIC frequently plays an active role in securing public interest conditions. Indeed, in the aforementioned Presentation to Parliament in 2019, the following points were made:

‘Ground-breaking conditions have been included in merger approvals, South Africa is leading the field internationally. These included mergers involving Wal-Mart, Coca-Cola, Anheuser-Busch InBev, Kansai, Edcon, Clicks, Chevron, Old Mutual and others:

• Protection of employment agreements covering more than 65,000 workers (since 2014) and new job creation (7,400 jobs)
• Support for Black farmers in supply-chains
• Improving rights of spaza-shop owners to stock competitor products (Coca-Cola, SA Breweries)
• Mandating R4,5 billion in special Funds (since 2010) for jobs, new economic opportunities and small business development
• Commitments to new investment (R6 billion)
• BEE shareholding in companies: multi-billion rand impact
• Local procurement by companies and use of local labour
• Location of African HO in South Africa (4 to date)
• Investing in new industrial capacity in SA’.^[25]

Since then, public interest conditions aimed at promoting BEE or small business development have been imposed in other high-profile mergers, including the establishment of funds to promote and protect SMEs and HDIs. For example, conditions imposed on the acquisition by PepsiCo Inc of Pioneer Food Group Ltd,^[26] a local food company, included the implementation of a Broad-Based Black Economic Empowerment ownership plan, whereby a portion of PepsiCo’s common stock would be issued to a broad-based workers’ trust, with the requirement that after five years this be converted into a direct shareholding in Pioneer of up to 13 per cent.

In addition to local procurement commitments, the merging parties committed to expand and maximise local production, and a development fund was required for investment in programmes with respect to education, SMEs, enterprise and agricultural development. This included a requirement to invest ZAR 300m of the ZAR 600m fund in developing the capacity of emerging farmers and expanding emerging from a participation in the supply chain of the merged company; the portion reserved for education would include funding scholarships for historically disadvantaged engineering, agronomy and nutrition science students.

The DTIC continues to seek similar conditions, particularly in high-profile mergers and foreign takeovers of South African businesses. Until now, merging parties have acceded to these requirements by the DTIC, possibly because of a need to complete transactions as expeditiously as possible, and ensure collaborative relations with government beyond their transaction. These deal dynamics may mean that pushback from parties will not take place, but there is no way of knowing if this approach has harmed investment in the country and deterred parties from engaging in acquisitions involving South African companies.

Prohibited practices

Case law in this regard has been limited. The most well-known case involved alleged price discrimination. Nationwide Poles cc, a small business owned by a Mr Foot, took on a large supplier, Sasol Oil (Pty) Ltd, a major subsidiary of the Sasol Ltd, a global integrated energy and chemical company based in South Africa.^[27] In that case, Nationwide Poles, which is a small producer of treated wooden poles, complained that Sasol, which supplied creosote to it, discriminated against it by charging it a higher price than its rivals. It argued that Sasol was dominant and was abusing that dominant position by engaging in price discrimination.

In considering the concept of price discrimination, the Tribunal stated:

‘The Act is clearly concerned to promote market access for SMEs and an important mechanism by which it seeks to do so is by ensuring “equitable treatment” […] In short, the legislature proscribed price discrimination perpetrated by dominant firms because of the threat it poses to its victims, these being a competitive and accessible market structure and the small firms that animate it, potentially robust, though still slender, saplings that will not take root in the face of treatment that is manifestly inequitable relative to that accorded their better resourced competitors. This then is why Section 9 has been carved out of the general abuse of dominance provisions: it is uniquely concerned with the structural impact of abuse of dominance and it is recognised that its victims are most likely to be small customers.’^[28]

The Tribunal found that Sasol had indeed engaged in prohibited price discrimination. However, the Tribunal’s decision was overturned on appeal to the Competition Appeal Court, which concluded on the facts that, while there may have been harm to Nationwide Poles, the requirements for a finding of prohibited price discrimination had not been met as it had not been shown that there was a negative effect on competition overall.

Interestingly, the competition authorities have sought to include public interest provisions in settlement agreements concluded with parties accused of engaging in prohibited practices. For example, the first large cartel investigation in South Africa, involving bread producers, led to a settlement with Pioneer Foods.

The settlement related not only to its activities in relation to the so-called bread cartel, but also settled the Commission’s investigation into complaints in respect of Its activities in the maize milling, wheat milling, baking, poultry and egg industries. In the consent and settlement agreement between the Commission and Pioneer Foods, in additional to paying an administrative penalty, Pioneer Foods committed to reduce its pricing in respect of a selection of flour and bread products; to increase its capital expenditure by ZAR 150m; and to pay ZAR 250m to create an Agro-processing Competitiveness Fund, the aim of which was to promote competitiveness, employment and growth in food value chains.

In a similar vein, when ArcelorMittal, a steel producer, settled six separate complaints of both collusive and unilateral pricing conduct with the Commission, in addition to paying an administrative penalty, it agreed to a pricing remedy whereby it capped its earnings before interest and taxes and committed to additional capital expenditure.

After an industry-wide investigation into cartel conduct in the construction industry which resulted in numerous fines, in October 2016 the six leading companies at the time signed an agreement with government in settlement of outstanding potential claims against them relating to a number of infrastructure projects. The settlement, known as the Voluntary Rebuild Programme, included financial contributions collectively amounting to ZAR 1.5bn for developmental projects, and commitments to promote transformation and ownership by black South Africans in the sector.^[29]

The Commission has recently issued guidelines regarding the application of the buyer power and price discrimination provisions, and has continued its advocacy efforts to enlighten SMEs of these provisions and their rights in terms of buyer power and price discrimination provisions. These recognise explicitly the legislative intent to enable investigation and prosecution of conduct that impedes participation by small firms, even if competition overall is unaffected.

Market inquiries

The Commission has conducted a number of market inquiries over the past few years. Its focus on small businesses has been one of the driving forces in its more recent inquiries. For example, it conducted a market inquiry into the grocery retail sector, where it was found that exclusive lease agreements denied SMEs the opportunity to position themselves in malls and convenient centres where most consumers do their shopping, which had detrimental effects on historically disadvantaged entrepreneurs. The Commission also found that SMEs are discriminated against in respect of trading practices. Pursuant to that enquiry, the Commission has reached settlements with a number of retailers terminating exclusive lease agreements and is pressing hard for the conclusion of a code of conduct for landlords and grocery retailers to prevent exploitation of SMEs.

Although no market enquiry was held into the automotive parts sector, the Commission played an advocacy role with the industry, which is culminating in the commission of a code of conduct aimed at ensuring that small independent repairers have access to spare parts to enable them to participate effectively in the industry.

The same dynamic was at play when the Commission conducted an impact study into the forestry sector. The study made several recommendations aimed at ensuring entry and competitive this of SMEs and HDI firms and claimant communities in the sector. At the upstream plantation level, the Commission sought to ‘facilitate the long-term expansion of production through allocation of land parcels and development finance to SMEs, HDI firms and claimant communities to facilitate plant acquisitions and mills upgrades’. At the processing level, the recommendations sought to ensure security of log supply for SMEs, HDIs and claimant communities.

The Commission is intending to use the amended market inquiry provisions extensively to advance the public interest objectives outlined above. As it was put to Parliament in the aforementioned Presentation: ‘The Bill expands the use of Market Inquiries most significantly to deal directly with economic inclusion and economic concentration; and it provides the competition authorities with the power to take action to remedy the adverse effects.’

An important change in the market inquiry provisions allows the Commission to recommend divestitures to the Tribunal, a mechanism by which large companies could be broken up in the interests of promoting competition.

Have the public interest provisions been effective and are the amendments necessary?

The competition authorities, encouraged by the minister in charge, have been very active in their efforts to promote public interest objectives, particularly over the past ten years or so. However, it cannot be said that SMEs and businesses controlled by HDIs are thriving. The crucial question is why this is so, and does it require the further use of competition policy as has been done through the enactment of the Amendment Act. There may be other causes for the lack of progress – there is anecdotal evidence that SMEs are constrained by excessive red tape, for example. The country’s economy is not growing sufficiently to encourage the establishment and success of SMEs.

As for the likely effectiveness of the amendments, some scepticism has been voiced. For example, in a press article^[30] Philippa Rodseth, Executive Director of the Manufacturing Circle, voiced concerns with the provisions regarding breaking up concentrated businesses. As she said, this provision was informed by ‘a structuralist view that market concentration is to blame for the lack of economic transformation. Some believe this has led to artificial barriers for SMEs that could provide cheaper, diversified and innovative products and services to consumers.’

She disagrees, noting that new market entrants do not always benefit competition, whereas large-scale manufacturing can be beneficial to consumers. Furthermore, continually introducing legislation to address identified shortcomings is often counterproductive and deters investment. Instead, South Africa should rather leverage off its established industrial base, and use it to aid new entrants, citing the automotive industry as showing the possibilities for promotion of small business and transformation.

Others have also expressed concerns that this interventionist approach, with the discretion and powers accorded to the competition authorities, creates uncertainty and could deter investment.^[31] If so, this could diminish rather than increase competitiveness.

Conclusion

It appears that the government and the competition authorities have become impatient with the perceived lack of progress in transforming the economy, and thus wide-ranging amendments to the Act have been introduced.

As mentioned, there is some scepticism that these amendments will have the desired outcome. It could legitimately be argued that the more interventionist powers and their implementation tip the scales unduly in favour of government’s developmental objectives, and blunt the ability of free markets to kick-start economic growth. It is difficult to mount evidence for this position – transactions that do not happen and investments steered to other countries are not reliably measured. However, developmental interventions, by contrast, can be counted and reported as success stories.

The risk in this trend is of drift towards single-minded interventionism, at the expense of investment, market-dynamism and international competitiveness. It is critical that authorities do more than simply pay lip service to the benefits of investment. Advancement of small firms and transformation should, quite rightly, be prioritised, but with a balanced and holistic appreciation for trade-offs that may result, and with sufficient care to preserve and promote competitiveness.

Both policymakers and the enforcement authorities should be applauded for the progressive and innovative way in which the Competition Act has been used to date, to achieve a range of meaningful social and economic outcomes. The coming years will be critical in ensuring the legislation continues to benefit both competition and the public interest.

Author bio

Lesley Morphet co-heads the competition, marketing and foreign investment practice in the Fasken South African office. As a leading competition lawyer in South Africa, she advises on all aspects of competition law, including merger notifications, leniency applications, exemption applications, managing dawn raids and compliance. With thanks to Neil MacKenzie for his input.