The Competition Commission has published an invitation to comment on its amended guidelines on small merger notification. The guidelines extend the notification of small mergers to those taking place in digital markets, where at least one of the stipulated criteria is met.

In its reasoning for the amended guidelines, the Commission highlighted the increasing risk to competition and innovation posed by the rising number of acquisitions of digital players, particularly where these companies act as gatekeepers in multiple markets. The concern on the part of the Commission is that these potentially anti-competitive acquisitions are escaping regulatory scrutiny where they take place at an early stage in the life of the target, before it has generated sufficient turnover that would trigger merger notification. This supports the Commission’s stated intentions in its report on “Competition in the Digital Economy”.

Background

In terms of the Competition Act, 1998, large and intermediate merger transactions (which meet the merger thresholds designated from time to time by the Minister of the Department of Trade, Industry and Competition) require mandatory notification and approval by the competition authorities prior to lawful implementation. Small mergers do not require mandatory notification, but in terms of section 13(3) of the Act, the Commission has the discretion to require the parties to a small merger (within six months from the date of its implementation) to notify the Commission if the merger may substantially prevent or lessen competition or cannot be justified on public interest grounds.

Guidelines

The Commission will require the voluntary notification of all small mergers which meet any of the following criteria (this is already reflected in the Commission’s current small merger guideline):

• at the time of entering into the transaction any of the firms, or firms within their group, are subject to an investigation by the Commission in terms of Chapter 2 of the Act;
• at the time of entering into the transaction any of the firms, or firms within their group, are respondents to pending proceedings referred by the Commission to the Competition Tribunal in terms of Chapter 2 of the Act.
  
  

Furthermore, the Commission will require that it be informed of all small mergers and acquisitions where either the acquiring firm, the target firm, or both, operate in one or more digital market(s) provided at least one of the following criteria is met:

• the consideration for the acquisition or investment exceeds ZAR190-million provided the target firm has activities in South Africa,
• the consideration for the acquisition of a part of the target firm is less than ZAR190-million but effectively values the target firm at ZAR190-million (for example, the acquisition of a 25% stake at ZAR47.5-million) provided the target firm has activities in South Africa and, as a result of the acquisition, the acquiring firm gains access to commercially sensitive information of the target firm or exerts material influence over the target firm within the meaning of section 12(2)(g) of the Act,
• at least one of the parties to the transaction has a market share of 35% or more in at least one digital market, or
• the proposed merger results in combined post-merger market share at which the merged entity gains or reinforces dominance over the market, as defined by the Act.
  
  

The criteria proposed present a number of potential complexities which will need to be resolved before the guidelines enter final form. For example, what would be the notification requirement in relation to an international transaction where the target firm has very limited activities in South Africa but a far larger presence internationally? Would such a transaction now require notification if the firm operates in digital markets and the purchase price exceeds ZAR190-million, even though almost all of the value lies outside of South Africa, or does the ZAR190-million have to relate to the South African portion of the purchase price? These and other questions will need to be answered before the guidelines are successfully adopted.

Procedure

As with other guidelines, the small merger guidelines are non-binding.

The proposed format for voluntary notification will be by way of letter to the Commission’s mergers and acquisitions division containing sufficient detail on the parties, the proposed transaction and the markets in which the parties operate. The Commission will reply to the parties and inform them whether or not they would be required to formally notify the small merger.

Stakeholders and interested persons have until 6 June 2021 to submit any comments that they may have.

For further information, please contact our Competition/Anti-trust team.