Briefing on the Competition Second Amendment Bill

Department of Trade and Industry

29th August, 2000

Outline of Briefing

1. The scope of the Bill

No changes in policy

The main amendments

Jurisdiction of the Competition Act

Management of different sizes of mergers

Provision to allow Minister to alter thresholds for merger notification

Introduction of category of small mergers

2. Jurisdiction of the Competition Act

3. Adjustment of thresholds and merger categories

4. Other amendments

Changes to the functions or powers of the Competition authorities


No more "advice letters" regarding applications for exemptions, and no automatic exemptions for intellectual property arrangements

Definition of "parties to a merger" affecting duty to notify

Interim relief for complainants

Process to adjudicate claims of confidentiality

Miscellaneous other changes to tidy up the Act:

Changes consequent on the Public Finance Management Act

Renumbering and reorganising of the Act

Corrections for spelling and punctuation

Minor additions or changes for improved clarity or certainty

Previous regulations now enshrined in Act


1. The scope of the Bill

South Africa’s new competition regime came into being with the passing of the Competition Act in October 1998, and the operational launch of the new regime on the 1st of September 1999, almost exactly one year ago.

By and large, the transition from the old regime to the new regime was remarkably successful and trouble free. The new law and the competition authorities established under this law have been widely praised. This is very heartening, especially in light of the fact that the competition regime plays such an important strategic role in the development of the South African economy, and that the malfunctioning of the system could have had considerable deleterious effects.

However, as is true whenever any bold new system is introduced, it soon becomes evident that some aspects of the rules or the institutions could be rephrased or redesigned to make the system still more effective.

This is what the Second Competition Amendment Bill seeks to do. It does not constitute any substantive change in policy. The policy sections of the Act remain untouched. The policy was endorsed by labour and business in Nedlac, and by all parties in Parliament when the 1998 Act was passed, and there is no intention in the current Bill to question, amend, or revoke any aspect of policy.

Though the Bill appears lengthy and wordy, the changes are limited. The length of the Bill is largely due to the fact that, as a result of the amendments, extensive reordering and renumbering of the Act was required. So, much of the Bill contains technical amendments– this briefing seeks to highlight and explain the main substantive amendments to the existing Act.

The main amendments concern the jurisdiction of the Competition Act and the more efficient management of different sizes of mergers. In addition, there are several smaller amendments of substance, and there are miscellaneous other changes which essentially entail the tidying up of the Act.

We will first deal with what is probably the most widely noted element in the Bill, the change in the formulation of the jurisdiction of the Act.

2. Jurisdiction of the Competition Act

Section 3 (1) of the present Act provides that

"This Act applies to all economic activity within, or having an effect within, the Republic, ....

.......

.......

(d) except acts subject to or authorised by public regulation; or . . ."

That provision has led to uncertainty and confusion about the jurisdiction of the Act with respect to entities that are subject to industry-specific regulation in terms of other legislation.

The intention of the legislature expressed in this subsection is to exclude from the ambit of the Competition Act those acts that, although sometimes manifestly anti-competitive, are specifically sanctioned by public regulation. However, the legislature’s intention was not to oust Competition Act jurisdiction from all activities engaged in by a specific enterprise, much less a specific sector of industry.

Immediately from the inception of the Act this section has created interpretive difficulties, with the Competition Commission frequently having to deal with queries from industry as to its scope and interpretation. A number of public enterprises have advised the Commission that they did not regard themselves as covered by the Act at all because certain of their activities are subject to public regulation.

A recent decision of the Supreme Court of Appeal has led to an interpretation of section 3(1)(d) that ousts the Competition Act’s jurisdiction more widely than the legislature had intended. The effect of this decision is that where mergers require the consent of another regulator, even if that regulator has no competition competence, the jurisdiction of the Competition Act is ousted. Furthermore, the test to ascertain whether the Competition Act’s jurisdiction is ousted with regard to restrictive practices remains complicated and likely to lead to future interpretive controversy and consequent business uncertainty.

These concerns are significantly exacerbated by recent decisions of the High Court which have adopted a strictly literal interpretation of Section 3(1)(d) as opposed to the more purposive intention of the legislature.

By deleting section 3(1)(d), the proposed amendment resolves the confusion by clarifying that the Act generally has jurisdiction over competition matters arising within such industries. The insertion of sub-sections 18(2) and (3) alleviates concerns the banking sector regulators have about the amendment.

This amendment means that both the Competition authorities and the sector regulators need to give their assent for a qualifying merger transaction to proceed. In the banking sector it may be necessary, however to provide for a merger to go ahead in the interests of the stability of the financial system– for example, where a bank is failing or likely to fail. Whilst such a merger is unlikely to be turned down on competition grounds, the banking sector regulators feel that the potential consequences are so drastic that special dispensation should be made in the legislation for these circumstances. For this reason we have introduced new sub-sections 18 (2) and (3) which will enable the Minster of Finance to prevent the Competition authorities from making an order in relation to a merger when it is in the interests of the stability of the financial system.

Section 21(1)(h) of the present Act empowers the Competition Commission to negotiate agreements with any regulatory authority in order to co-ordinate and harmonise the exercise of jurisdiction over competition matters. A reciprocal right has been given to sector regulators by the insertion of the new sub-sections 82(1) and (2) of the proposed amendments.

Chapter 3 of the present Act established a scheme of review and approval applicable to mergers over a certain size as determined by regulation. The threshold initially prescribed appears to be significantly low, resulting in a large volume of reviews of mergers that do not present significant competition policy concerns. Superficially, that concern can be addressed by raising the threshold, which the Commission recommends. However, a higher threshold would exempt some mergers that do present significant competition policy concerns.

The proposed amendments to Chapter Three seek to resolve this issue by

· creating a third category of (small) mergers, which generally are exempt from notification and which may be implemented without approval; and

· authorizing the Competition Commission to review a small merger if it appears to present significant competition policy concerns.

3. Adjustment of thresholds and merger categories

The experience of one year of the implementation of the Act has suggested that the present minimum threshold for notification and approval under section 6 of the Act is too low, resulting in an unnecessary burden on both the public and the Commission. Therefore, a set of amendments is designed to reduce this burden, without risking the possibility of undesirable mergers proceeding.

Introduction of category of small mergers

As mentioned above, a new category of merger has been introduced, to be known as small mergers. In such cases, parties are not required to notify the planned merger to the Commission or obtain its approval for the merger. However, if it is deemed that the merger will or has substantially prevented or lessened competition, or could not be justified on public interest grounds, the parties to the merger could be required to notify the Commission and obtain its approval. The introduction of the category of "small mergers" entails new procedures too.

Provision to allow Minister to alter thresholds for merger notification

The present Act establishes two schemes in terms of which the Minister, by way of regulation, determines thresholds to limit the application of specific provisions of the Act. Section 6 allows for a threshold to limit the application of abuse of dominance provisions, while section 11 does the same for merger control.

As a result of the introduction of the category of a small merger, it becomes possible to reconsider the thresholds at which notification is required. However, in terms of the Act, once a threshold has been established five years must elapse before it can be changed. To reduce the burden to the Commission and the public, it is desirable to change the merger threshold as soon as possible, certainly before the expiry of the current five year period in another four years.

The proposed amendments remove the five year waiting period and allow the Minister to change either threshold at any time, subject to the requirement of: at least six months public notice of a proposed change; and an invitation for public submissions on any proposed change.

It is anticipated that as soon as the new amendments come into operation, the Minister will propose new thresholds with respect to Chapter 3 which may be considerably higher than the current thresholds, while a revision of thresholds for Chapter 2 might be considered in the future.

4. Other amendments

Changes to the functions or powers of the Competition authorities

In order to clear up what may be a legal ambiguity, the Bill seeks to give the Commission express authority to investigate mergers and applications for exemptions. Thought the present Act probably confers such authority implicitly, informal challenges suggest that the lack of express authority ought to be confirmed. The proposed amendments in this respect will place all Commission investigations on a common footing of statutory authority.

The powers and functions of the Tribunal are also clarified, in two respects: firstly, its jurisdiction is now framed in functional terms rather than categorical terms in order to make certain that it is able to consider all appropriate matters rather than accidentally exclude some relevant matters; and, secondly, it allows certain technical or procedural matters to be heard by a single member instead of the full panel.

With regard to the Competition Appeal Court, proposed amendments clarify the right of appeal from decisions of the Competition Appeal Court to the Supreme Court of Appeal or the Constitutional Court, bring it in line with conventional practice in South Africa.

No more "advice letters" regarding applications for exemptions, and no automatic exemptions for intellectual property arrangements

With regard to exemptions of particular practices from the Act, two changes are proposed. The first concerns written letters of advice from the Commission to advise an applicant whether or not a practice might or might not be prohibited under the Act. As such advice letters might be construed as legally binding opinions but may be based on an insufficient factual basis, the Bill removes this option.

Intellectual property rights acquired or protected in terms of various other Acts are no longer protected for an indefinite period. The Bill includes a provision that all exemptions are for a specified term.

Definition of "parties to a merger" affecting duty to notify

The existing Act places procedural obligations on "parties to a merger". That term is presently undefined, leaving it to be determined factually in each case. This has caused confusion as to who bears a duty under the Act. The amendment addresses this by introducing a comprehensive definition of "party to a merger" so that it is clear who has a duty to notify and meet other procedural requirements.

Interim relief for complainants

Under the existing Act, a complainant seeking interim relief from a prohibited practice, pending consideration of the complaint, must wait until the Commission has accepted the complaint before proceeding to the Tribunal for an interim order. This places complainants at a disadvantage resulting from the delay, and it puts pressure on the commission to act too hastily. The proposals resolve this by allowing a complainant to seek interim relief as soon as a complaint has been filed.

Several other matters concerning interim relief orders have been clarified in order to bring them into alignment with prevailing practice in South African courts. It also sets a time limit of one year within which the Commission is required to act on such complaints, though the Tribunal can consent to extending the time limit.

Process to adjudicate claims of confidentiality

The existing Act protects confidential information provided by parties, but does not provide a process determining claims that information is confidential. To avoid abuse of the confidentiality clause, new provisions introduce a process by which the Tribunal adjudicates such claims, subject to appeal to the Competition Appeal Court.

Miscellaneous other changes to tidy up the Act

Previous regulations now enshrined in Act

Changes consequent on the Public Finance Management Act

Renumbering and reorganising of the Act

Corrections for spelling and punctuation

Minor additions or changes for improved clarity or certainty

In conclusion, the amendments to the Competition Act proposed in the Bill before you arise out of the experience of implementing the Act since it was passed in October 1998, and made operational in September 1999. The proposed amendments have been discussed with stakeholders in several forums, and we are satisfied that they are well considered, well targeted, and carefully drafted.