Competition Second Amendment Bill: hearings

Meeting report

Morning session:
Briefing on Bill by Department of Trade and Industry
Ms Shalini Rajoo, the Deputy Director of the Department of Trade and Industry, recognised that the Competition Second Amendment Bill appeared lengthy and wordy but assured the Committee that this was due to the various technical and procedural amendments being introduced to ease the application of the Act. There were no changes in policy and the main amendments dealt with the jurisdiction of the Competition Act and the management of different sizes of mergers. Provision was made to allow the Minister to alter thresholds for merger notification. A third category of mergers, small mergers, has been introduced and they are generally exempted from notification. Changes were made to the functions or powers of the competition authorities. Automatic exemptions for intellectual property arrangements would cease. The definition of "parties to a merger" was clarified. Other changes included editing and ordering of the Act to improve clarity. (see Briefing document)

The first change is the deletion of s 3(1)(d), which proposes that the Act have jurisdiction over competition matters arising within these industries. This entails that the competition authorities and the sector regulators need to reach a consensus before a qualifying merger transaction may proceed. It was recommended that in the banking sector it might be necessary for a merger to go ahead in the interests of the stability of the financial system.

The Act previously empowered the Competition Commission to negotiate agreements with any regulatory authority in order to co-ordinate the exercise of jurisdiction over competition matters. The amendment provides that this right also is given to sector regulators.

A third category of small mergers is proposed. This category of small mergers may be implemented without approval. This amendment resulted from the recognition that the threshold prescribed initially appeared to be significantly low. The previous year of implementation had shown that the present minimum threshold for notification and approval under section 6 of the Act is too low. The result was an unnecessary burden on both the public and the Commission. An attempt to reduce this burden suggested the introduction of a category of small mergers and a provision to allow the Minister to alter thresholds for merger notification.

Other amendments included changes to the functions or powers of the competition authorities. Advice letters that previously advised the applicant whether or not a practice might or might not be prohibited under the Act would now assume a legally binding opinion. The existing Act left the term "parties to a merger" to be determined factually in each case. Due to the confusion caused a comprehensive definition has been introduced. The amendments also catered for interim relief for complainants who previously had to wait until the Commission had accepted their complaint.

Questions
Ms Thabethe (ANC) commented that the amendments were too technical and wished that the Competition Commission would unpack them so that they could be better understood.

Ms Hajaij (ANC) asked for a clearer definition of a small merger.

Dr Davies (Chair) wanted to understand the difference that will be made after the implementation of the second amendments. He was concerned that the desired outcomes would not be yielded.

Mr Moosa (Chair - NCOP) wondered to what extent the amendments would serve to usurp the powers of the judiciary. He was also concerned about the broader implications of the amendments beyond competition.

Mr Lockey (ANC) requested clarification on concurrent jurisdiction.

Mr Bruce (DP) commented that the law needs to be more specific and one should be able to shop around for what one needs. He stated that the criteria were so broad and that the regulatory authorities would not be equipped to deal with all the issues.

Ms September (ANC) noted that even though the objective is good, the Bill might result in unintended consequences. She inquired whether there was any certainty of the clean-up process.

Mr Beukman (NNP) was concerned about the over-regulation of small mergers.

Mr Rasmeni (ANC) wondered whether all the stakeholders had been consulted in the process that led to the amendments.

Response
Mr Dave Lewis, Chairperson of the Competition Commission, stated that there are two agencies with different criteria to be dealt with and who would therefore reach different conclusions. This was no deadlock mechanism. He pointed out that the Competition authorities always had jurisdiction and it was not a new procedure for them to follow regarding the mergers. The intention of the amendments was to create a situation that would not be a breeding ground for litigation. He noted that the authority could issue licenses. However there was a particular piece of legislation that will trump another sector regulator and the potential concurrent jurisdiction problems. With regard to the threshold it was only those who were the above, that have to be notified. He noted also that the competition issues decreased the chances of legislation.

Mr Norman Manoin, a full-time member of the Competition Commission, clarified that policy was not different from the previous amendment. The current amendments were in place to avoid technical confusions that may result in litigation in the future. With regard to restrictive practices, Mr Manoin gave an illustration of what he meant: suppose Telkom had a competitor who required Telkom's fixed lines to begin their service. At the same time if there existed legislation drafted ten years previously that granted a license provision only to Telkom; it would be undue discrimination not to allow the competitor a chance to compete on the grounds that only Telkom had access to the fixed lines. It was these practices that the amendments wished to avoid. It allowed the competitor to go to both booths to complain.

Ms Rajoo noted that the resolution of the disputes would fall from both caps, stating that both the Competition Commission and the Sector Regulators would deal with their own portfolios and if either of them were unsatisfied with the outcome, the other party would have to accept a negative decision with regard to mergers.

South African Reserve Bank
Advocate Blackbeard expressed concern over the wording of s 22 (2) of the Bill, which he stipulated would have dire implications for the banking sector and therefore financial stability. He stated that the banks were a special entity and should be treated specially. It was not possible for the banks to have the same legislation applied to them as there were other financial concerns. The SARB objected to the deletion of s 3(1) d and Clause 18. He referred to concurrent jurisdiction with the Competition Commission on matters affecting the banking industry which was unacceptable to the Reserve Bank. The SARB was adamant that banking stability issues are more important than competition issues since the bank was the custodian of the peoples' money.

He highlighted the following problems with the concurrent jurisdiction. The Act is silent on the procedure in a deadlock situation. It does not state whether the Banking Act or the Competition Act takes precedence in a deadlock scenario. A deadlock situation would cause undue uncertainty in an industry where certainty is of paramount importance. He referred to Clause 18, which allows the Minister of Finance to issue a notice regarding mergers, and argued that people will view this action by the Minister as political interference. This will cause a calamitous situation in the market. If the Minister has made a ruling about the merger he has already taken a decision about s54. Clause 18 does not do enough to cater for the banking sector.

He recommended the following: exemption of bank mergers from the Competition Act whilst retaining the consultation requirements in the Banks Act. He proposed the following be inserted in the Bill:
S22 (2) The provisions of Chapter 3 shall not apply in respect of:
(a) A transaction regarding the acquisition of shares in a bank or a bank controlling company in terms of section 37 of the Banks Act, 1990;
(b) A compromise, amalgamation or arrangement referred to in Chapter 12 of the Companies Act and which involves a bank or a bank controlling company as one of the principal parties to the relevant transaction in terms of s54 of the Banks Act;
(c) An arrangement for the transfer of all or part of the assets and the liabilities of a bank to another person in terms of s54 of the Banks Act; or
(d) Any merger between two or more banks or banking controlling companies or the take over by one or more banks or bank controlling companies of one or more banks or controlling companies, save that the Registrar of Banks or the Minister of Finance, as the case may be, shall make a determination in the terms of s37 of the Banks Act only after consultation with the competition commission.

In order to formalise the consultation process and to ensure the confidentiality of information and the speed of the process, especially in urgent matters, the SARB suggested that the consultation process be provided for by means of regulations in terms of the provisions of the banks Act.

Discussion
Mr Bruce (DP) asked what was the basis of Adv Blackbeard's assumption that bank issues are more important than competition issues? He noted that in the US more banks are liquidated without affecting the financial stability.

Advocate Blackbeard responded that the United States Financial Sector was completely different to the South African situation. He stated that there are many more banks in the US and if banks had to be liquidated it would not have as great an impact on the financial sector as if a bank in South Africa had been liquidated due to investors pulling out their money and for a range of other reasons. He was adamant that banks be treated differently because of their special nature.

Mr Beukman (NNP) asked when the SARB had been invited to consultations with the Competition Commission.

Advocate Blackbeard responded that they had not attended a consultation.

The Chairperson stated that there was no reason that between July and August the SARB and the Competition Commission could not have found the time to meet and come to a consensus. He stated that it was a bit late for the SARB to come to the hearing to submit their proposal at this short notice.

Advocate Blackbeard apologised and stated that due to administrative delays there could not be a meeting scheduled between the SARB and the Competition Commission during the time they had available.

Mr Moosa (NCOP) wondered whether a mechanism could be devised for balanced consultation between the regulatory authority and the competition authority. He conceded that banks should be accorded a special status but wanted to know what Adv Blackbeard proposed be the plan of action at this point.

Advocate Blackbeard stated that he would look into the matter but in the meantime he had suggested possible changes that he hoped could be discussed in Parliament during deliberations.

Wattle Bark Industry of South Africa
The removal of Section 3 (1) (d) would place the Wattle bark industry in a very difficult position. This industry comprises a partnership between two co-operative manufacturers and about 2600 growers with the purchase of raw materials, marketing, research and development, distribution of funds handled centrally.

At present the industry is trying to find the best route for deregulation but this will take some time. They suggested that a clause be introduced in the Bill granting an exemption for 24 months only to those who were exempted in terms of the deleted Section 3(1)(d). This period would allow them to seek exemption in terms of Section 10 or to be de-regulated.

After a short discussion, the meeting was adjourned.

Afternoon session:
Law Society of the Transvaal
This submission contained a detailed proposal for amendments and additions. Its main concerns were that the merger notification jurisdiction was too wide. The usual protection given to intellectual property rights is adversely affected by the Bill. The Commission's powers should be extended. The Bill increases the regulatory burden on SMMEs.

Discussion
The Law Society of the Transvaal received one question only, from the Chairperson of the Trade and Industry Committee, Mr Davies. His question was directed to Ms Du Plessis, who had addressed the Bill's implications for Intellectual Property law. He asked about the possibility of the laws that protect intellectual property being abused. Ms Du Plessis agreed that laws that are meant to protect intellectual property can be abused but that most relevant statutes have provisions to guard against this potential abuse. She identified s 3(1)(d), which deals with abuse, as an exclusionary provision and argued that the exclusion should be limited and specific.

Financial Services Board
Mr Wessels presented their submission dealing with the role of competition authorities in mergers. It objects to the deletion of Section 3(1)(d) of the Act as it will impose parallel jurisdiction on the Competition authorities. If it is deleted, FSB suggests that safeguards be built in to ensure that the dedicated regulator has the power to override the competition authorities in certain circumstances in the public interest.

Discussion
Ms September (ANC) asked if there was collusion between financial institutions and also how there could be a problem if there is equal jurisdiction.

Mr Wessels replied that there was no collusion. Second, there is a problem of parallel jurisdictions in that it can result in "two captains on one ship". There was a problem in a small number of transactions, in that competition considerations can block a merger. This is what FSB is trying to avoid.

Mr Davies remarked that the broad interpretation given to s 3(1)(d) by the courts had somewhat blocked the Competition Commission. He said they should require jurisdictional understandings and suggested that, in speaking of "exceptional circumstances", Mr Wessels was chiefly concerned in who had "the last say".

Ms September then asked how competition considerations could stop a merger.

Mr Wessels answered that a merger would be stopped through the interference of the Competitions Commission if a merger were to contravene the Competition Act.

Mr Moosa, Chair of National Council of Provinces Select Committee, reminded the speaker that he had spoken of public interest and asked why can't the Competition Commission also take care of public interest, just as well as the FSB?

Mr Wessels answered that FSB wants competition authorities to assist it in protecting the public interest.

Mr Bruce (DP) said there is a difference between regulation and intervention and noted that, unlike banks, if one insurance company fails, there will be no "run" on insurance companies.

Mr Wessels agreed there would be no "run" on insurance companies, but that long-term interests had to be protected.

Mr Bruce asked what long-term problems insurance companies could face and suggested that these issues be raised with competition authorities.

Mr Wessels responded that insurance companies could have many long-term problems as a result of their obligations.

Mr Bruce asked why these were not discussed with competition authorities?

Mr Wessels answered this would be feasible if there were always a "meeting of the minds", but that the proper way is to have it in the Act, since the regulator has so much power in a proposed merger. There must be specific laws on mergers so that, at the end of the day, the law can be referred to for clarity and certainty. A memorandum of understanding can only go so far; it is preferable to have the rules on mergers spelled out in the law, even if problematic cases are in the minority. Also, a memorandum of understanding cannot go against the law, it cannot be in contravention of the law.