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Decision Comment

Complying with the Competition Act:

Why companies can no longer afford to

continue ignoring the important role of

In-House Legal Counsels

 

Introduction

 

This article is intended to highlight the important role of In-House Legal Counsels in ensuring compliance with the requirements contained in the South African Competition Act of 19981 ("the Act").

 

Why should compliance be a priority for companies?

 

The SA competition law regime has undoubtedly changed the way business should be done. It poses many challenges for business, and the snail's pace with which business is responding to this challenges is not helping the situation. The sooner companies realise that it is not a question of whether one wants to comply or not, the better. No company is immune to the scrutiny of the competition authorities.

 

The increasing risks of non-compliance, which may include fines of up to 10% of turnover, or actions for damages by third parties, do not only have financial implications for companies, but may damage a company's image and reputation.

 

Compliance failure has led to crippling actions and damaged reputations of many companies - such as Microsoft2 - thus no responsible management can afford to ignore this. Though companies are, generally speaking, aware of the inherent risks of non-compliance, competition laws are based on very broad legal concepts that require extensive interpretation. Thus, a common sense approach to this issue is not sufficient.3

 

Effective mechanisms to ensure compliance must be developed. This involves reviewing business processes, cooperation agreements, contracts with suppliers, etc, and the development of effective compliance programmes. Companies must demonstrate willingness to comply with the Act through action.

 

How can your In-House Legal Counsel assist your company?

 

Ideally, in-house advisors should be responsible for advising on compliance matters and be able to make companies aware of actions that may expose them to potential liability.

 

It is often a difficult task for management to focus on maximising profit and return on investments while ensuring that processes are compliant with regulatory requirements. The employment of In-House Legal Counsels will not only reduce the risks of non-compliance, but will also ease the burden of compliance from management and ensure that compliance receives the attention it deserves. A Counsel is best placed to understand the company's operations, processes and business strategies. Management may discuss sensitive information such as prices with competitors without realising that this may constitute price fixing. The Counsels must monitor such discussions and any agreements drafted for competition issues that may arise. Overlooking these issues may cost the company dearly.

 

Does your company comply with merger provisions?

 

An example could be all those outsourcing, sale and lease transactions that need to be finalised urgently. Remember, all mergers that meet the threshold must be notified to the Commission prior to implementation. This guide should assist you in preparing your notification to the Commission.

  • Determine jurisdiction upfront. Is it a merger within the meaning of the Act?

  • Calculate the threshold for notification by using financial statements for the immediate previous financial year4.

  • Check where (else) the transaction must be notified by looking at the location of companies; for instance, an offshore merger may be notifiable in South Africa if parents have subsidiaries in South Africa. Also check other regulatory authorities such as the Security Regulatory Panel (SRP) or the Registrar of the Reserve Bank. Timely notification with all relevant authorities will save you time delays.

  • Highlight the benefits and reasons for the merger. What will the advantages of the merger be if it is allowed? Why is it happening?

  • Define the relevant market of the parties as narrowly as possible, taking into account interchangeability and substitutability of products and services5. Are there any overlaps in the products or services offered by the parties? Assistance from an economist is recommended where possible.

  • Identify potential competition concerns such as potential dominance, bundling of products, vertical integration, increased market power, creation of barriers to entry, etc.

  • Where a transaction raises competition concerns, identify efficiencies and weigh them reasonably against anticompetitive effects.

  • If there are competition concerns, indicate how the parties intend minimising the negative impact of the proposed merger. Proposed remedies may be structural, e.g. divestiture of certain parts of the business, or behavioural, e.g. an undertaking to refrain from certain conduct or behaviour.

  • Outline the impact of the merger on public interests irrespective of whether the merger is pro-competitive or anticompetitive, which includes employment and black businesses.6

  • Answer all questions on the forms7 fully. Incomplete information will delay the process.

  • Time the effective date of your transaction to coincide with Commission decisions8. Ask about the Commission's fast-tracking procedures. However, this is dependent on the type of merger and relevant information being supplied in time.

 

Is your company's conduct risk-free?

 

The following outlines some of the everyday issues in-house Counsels should be concerned about. If these questions are addressed, companies can manage to be good citizens and continue to make the desired profits.9

  • Does your company discuss prices with its competitors? Price-fixing is prohibited per se, thus any discussion of such and any other trading conditions with competitors are not allowed.

  • Does your company have an agreement with a competitor to stay out of each other's market? It is illegal for competitors to agree not to compete.

  • Is your company dominant in a market? All activities of the company must be scrutinised for potential abuse of dominance, but dominance per se is not prohibited. Companies are encouraged to compete vigorously for success, as long as such is achieved through legal methods.

  • Is your company engaged in exclusive arrangements or joined forces with other competitors to the disadvantage of a few others? Activities of your company must be examined against the provisions of the Act, as some may constitute collusive behaviour. While research and development cooperation between competitors is permissible, there is a thin line between collusion and such efficiency enhancing cooperation.

  • Does your company price products or services below their marginal or variable costs? This is known as predation, normally done with the intention to drive a competitor from the market.

  • Does your company dictate resale prices to dealers? Recommendations on prices to dealers are permitted.

  • Does your company engage in tying of products or services? While it may seem like a good business practice, bundling products may be a contravention of the Act, particularly if such products or services are unrelated.

  • Does your company have exclusive dealing arrangements? These exclusive dealing arrangements are not per se prohibited. However, they need to be justifiable either on technological, efficiency or other competition grounds.

  • Does your company sell similar products to different customers at different prices or terms? No price discrimination is allowed for a dominant company. Good faith action can serve as a justification for difference in price.

  • Is your company a member of an association consisting of competitors? Companies should feel free to join associations and to participate in their activities as long as such activities do not involve price fixing or agreements to reduce the intensity of competition among such competitors.

Clearly all companies, big and small, regulated and unregulated, profit making and non-profit making are in some way or another vulnerable to competition law violations. It is, therefore, in their best interests to develop mechanisms to avoid and prevent these violations. As the saying goes; "prevention is better than cure".

 

It's your choice, comply or face the consequences!


1 Competition Act 89 of 1998, as amended, which replaced the Maintenance and Promotion of Competition Act of 1979

2 Article on Lessons Learnt From Microsoft, Antitrust and Unfair Competition Bulletin, February 2000

3 See comments by Eugene V. Lipkowitz, former senior trial attorney at the Antitrust Division of the United States Department of Justice; Article on Gene Lays Down the Law, Comments from a Former Regulator, Antitrust and Unfair Competition Bulletin, February 2000

4 Notice 254 of 2001

5 See Tribunal decision on market definition in Bidvest Group Limited and Paragon Business Communications Limited (Case 56/LM/Oct01)

6 See Shell South Africa (Pty) Ltd and Tepco Petroleum (Pty) Ltd (Case 66/LM/Oct01) for the Tribunal decision on black empowerment, http://www.comptrib.co.za/

7 Form CC4 (1), CC4 (2)

8 20 days for intermediate merger and 40 days to recommend a large merger to the Tribunal

9 Common Sense Guidelines by John H. Shenefield and Irwin M. Stelzer, The Antitrust Laws, A. Primer,

3rd Edition, AEI Books, 1998 on http://www.antitrust.org/aei/Guidelines.htm

Zodwa Ntuli

Corporate Compliance

With our compliments. 

Nationwide Poles & Jim Foot

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Disclaimer: This site does not profess to offer legal assistance or interpretation.  Itís content reflects the view and experience gained by of the author during a hearing at the Competitions Tribunal of South Africa.  It may help you to figure out what happens & why.