Massive fines for companies that fail to disclose mergers

Massive fines for companies that fail to disclose mergers

The Competition Commission has published its final guidelines on administrative penalties for failing to notify about mergers.

Rosalind Lake, a director at Norton Rose Fulbright, said that, to date, the highest penalty for a failure to notify is R10 million.

However, the methodology in the guidelines could result in much higher figures and may also be imposed on the holding company of an acquirer, seller or target firm, she said.

Furthermore, for each month’s delay in notifying the Commission once it discovers that it has contravened the Competition Act, the penalty to be imposed will increase.

“Despite greater awareness of competition laws there has been an increase in the number of cases where parties fail to notify a merger or implement a merger contrary to the Competition Act (for example, by implementing a merger before approval),” said Lake.

“As such, it has prepared the guidelines which present the general methodology it will follow when determining administrative penalties.

“The Competition Amendment Act signed into law in February 2019 increases the maximum penalty for a repeat contravener of the act from 10% to 25% of annual South African turnover and exports.

“These guidelines will also likely apply to a failure to adhere to the new requirements in the Competition Amendment Act to seek executive approval from foreign investment transactions that may impact national security,” she said.

Contravening the law

Many instances where parties fail to notify the competition authorities or engage in gun jumping (implementation without approval) are not wilful or deliberate but nonetheless result in a contravention of the Competition Act, said Lake.

A common example is where parties are not aware that the acquisition of a minority shareholding coupled with minority protection rights may require approval from the competition authorities if it provides the acquirer with the ability to materially influence the policy of the firm, she said.

“As such, parties must carefully consider the rights that will be acquired in order to establish whether the merger is one that ought to be notified to the Commission,” she said.

“Even if a merger transaction is notified to the competition authorities, parties must be mindful of their conduct prior to the competition authorities’ approving the transaction. For example, interim conduct provisions might give an acquirer the ability to control the direction of the target firm prior to the competition authorities approving such action.”

“The key principle to remember is that the merging parties should continue to operate independently of one another until they have received approval from the competition authorities to implement the deal.”

Failure to do so may result in severe penalties, including divestiture, she said.

Determining the size of the penalty

The guidelines set out a five-step methodology for determining the administrative penalty that a firm will be have to pay for failing to notify and/or implementing a merger in contravention of the Competition Act.

The five steps are as follows:

  • Determining the nature or type of contravention – this involves assessing how the contravention came about. If the conduct is found to be wilful or deliberate, the Guidelines will not apply and the maximum penalty (i.e. 10% of annual turnover) will be sought;
  • Determining of the base amount – the base amount is double the applicable filing fee (i.e. R1 million for a large merger and R330,000 for an intermediate merger);
  • Duration of the contravention (unfortunately the Commission has not specified when the time period of the contravention will stop running, given how long the Commission’s investigations can take, this could have a significant impact on the size of the penalty):
    • For contraventions that lasted less than a year, each month of the contravention will attract an additional amount equal to 50% of the base amount multiplied by the number of months of the contravention.
    • For contraventions exceeding one year but less than two years, the additional amount is 75% of the base amount multiplied by the number of months of contravention; and
    • For contraventions exceeding two years the additional amount is 100% of the base amount multiplied by the number of months of the contravention. (The amount calculated in terms of this formula is added on top of the base amount determined in step 2).
  • Considering mitigating and aggravating factors: the Commission can at its sole discretion offer a discount of up to 50% off the administrative penalty amount determined in step 3 depending on arguments presented by the merging parties;
  • Rounding off if the amount exceeds 10% of turnover.

“This methodology has the potential to result in high administrative penalties, particularly if no discount is allowed by the Commission,” said Lake.

“By way of example, if a party failed to notify a large merger and the penalty such notification was only established after three years, the merging parties may each face an administrative penalty of up to R37 million calculated as follows: R1 million + (100% x base amount i.e. R1 million) x 36 months.

“This is substantially higher than the penalties imposed by the competition authorities to date for failing to notify a merger,”she said.

Read: Why South Africa’s new competition laws are so controversial

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