Penalties for jumping the merger gun

There are a number of different triggers to filing a merger, not just the acquisition of more than 50% of the shares in an entity (so called “bright line” control). Acquiring the ability to materially influence the policy of a firm in a manner comparable to the other forms of commercial control is sufficient to trigger an obligation to file a merger (for example, the right to veto the budget, forecast or business plan of a firm or the appointment of key executives – such as CEO, CFO or Managing Director). This means that some deals may unwittingly lead to an obligation to file a merger.

In 2017, the Commission published the Draft Guidelines for the Determination of Administrative Penalties for Failure to Notify a Merger and Implementation of Mergers Contrary to the Competition Act (Guidelines). In terms of the Guidelines, the Commission states that the minimum penalty will be double the filing fee payable (ie R300,000 or R1 million for intermediate and large mergers respectively) subject to a maximum penalty of R5 million for intermediate and R20 million for large mergers. In arriving at an appropriate penalty in terms of the Guidelines the Commission also proposes that the following steps are taken:

• Step 1: Determination of the nature or type of contravention;
• Step 2: Determining the range of the administrative penalty;
• Step 3: Considering factors that might mitigate and/or aggravate the amount reached in step 2; and
• Step 4: Rounding off this amount if it exceeds the statutory cap of 10% of turnover provided for in the Act.

Recently in the Macsteel matter, the Commission sought to make a consent agreement an order of the Tribunal in a case which we discussed in our last alert. The prior implementation of that transaction attracted a R1 million penalty. The administrative penalty imposed was based on the merger filing fee (being R100,000 at the time the merger ought to have been filed) multiplied by five (for reasons that are not clear) and then multiplied by two (given the number of respondents) to arrive at the penalty payable.

While the Tribunal confirmed the consent agreement, it sought to interrogate the basis for using the filing fee as the starting point for the calculation of the administrative penalty. At the hearing the Tribunal voiced its concern that this approach could lead to the penalties being an insufficient deterrent to parties who failed to notify mergers.

In defending its approach, the Commission relied on the Guidelines and on previous Tribunal case law, specifically the Caxton and Natal Witness Printing and Nine Others (FTN190Dec15) dated 21 July 2017. In the Caxton case, the Commission relied on other decisions, mentioned below, which used the merger filing fee as the proxy for ‘affected turnover’ and to serve as the basis upon which to calculate the appropriate administrative penalty. For example, in Competition Commission v Deican Investments (Pty) Ltd and New Seasons Investments Holding (Pty) Ltd (FTN151Aug15) and Competition Commission v Dickerson Investments (Pty) Ltd and Nodus Equity (Pty) Ltd (FTN127Aug15) , the Tribunal stated that the filing fee provides a rational base or a minimum floor from which to compute an appropriate penalty. This was reiterated in the Competition Commission v Standard Bank of South Africa Ltd (FTN228Feb16) case, where the penalty imposed was equivalent to the filing fee at the time.

The Tribunal sitting at the hearing of the Macsteel matter seemed unconvinced by this approach and asked whether the Commission had given consideration to the approach in other jurisdictions. The Commission said it had not but rather sought to rely on the Guidelines and the case law.

It seems that the Tribunal, while reluctant in this specific instance to accept the merger filing fee as the starting point for the penalty, has in fact accepted this approach in previous cases.

Parties concluding commercial transactions must be aware that in terms of the Guidelines (which are still in draft format) the penalties for failing to notify transactions or gun jumping are at least twice the merger filing fee. When concluding a commercial transaction, care must be taken to interrogate whether a change in or acquisition of control has occurred and accordingly, whether the transaction ought to be notified to the Commission for approval prior to implementation.