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Amendments reduce cartel activities, spur economic growth

Interview with Paul Coetser

5th February 2010

By: Megan van Wyngaardt
Creamer Media Contributing Editor Online

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The amendments made to Section 4 of the Competition Act 89 of 1998 by the Competition Amendment Act 1 of 2009 have been welcomed by government and political parties as a way of reducing the number of cartel activities and boosting economic growth. However, industries are not as keen on the amendments as there are uncertainties in many of the provisions of the Amendment Act, says Werksmans competition law attorney Paul Coetser.

He says that from the industries’ perspective, provisions in the Amendment Act, such as the complex monopoly provision, may result in companies perceiving greater risk in entering a market that is subject, or likely to be subject, to a complex monopoly investigation.

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The Department of Trade and Industry (DTI) explains that a complex monopoly happens when two or more firms act in a cooperative manner to conduct business affairs in a coordinated way without specific contact or agreement, such as parallel pricing, common trading policies and exploitative pricing to downstream players and consumers.

The perceived risks include the legal costs and lost management time, a decrease in profits as a result of structural changes to the market and, in extreme cases, costly administrative penalties should such an investigation take place.

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Another far-reaching change contained in the Amendment Act seeks to send directors and executives to jail for up to ten years for knowingly acquiescing in a cartel. He explains that, in theory, the idea of criminalisation of cartel conduct sounds viable, but it might also have a significant negative impact on industries, as it has the potential to drive cartel activities deeper underground. This would result in difficulties for competition authorities in uncovering such activity and a further hampering of the economy.

“With the implementation of a corporate leniency policy (CLP) by the Competition Commission, a lot of companies have admitted to being involved in cartel activity. Cartels seriously hurt the economy as they result in high prices and inefficiency. One would hope that these cartels have now been abolished. However, this might only be the tip of the iceberg,” he adds.

Coetser says the consensus is that it is still too early to decide whether these amendments are going to be successful, as the promulgation of the date of commencement of the Amendment Act is awaited. He believes, however, that success is definitely not guaranteed, as there are so many potential negative consequences.

Coetser says it is regrettable that the legis-lature did not rather use the opportunity to fix deficiencies and uncertainties in the existing Act, for instance, the way in which joint ventures (JVs) should be approached. “It is very unclear where the dividing line is between a legitimate JV and conduct that reflects price fixing or cartel formation. This should be clarified in the amendments as businesses are reluctant to invest in and form JV’s in fear of the perceived risks,” he says.

Another area of concern is the prohibition against excessive and unreasonable pricing. Coetser explains that companies are not sure about the limitations of this vague provision in the existing Act, which leads to uncertainty in the pitching of prices. This also leaves the consumer in the dark in regard to accept- able and reasonable pricing of goods, as the consumer is not always aware of certain price levels. Ideally speaking, the competition authorities should not be price regulators.

“There have also been suggestions that the whole Act should be reviewed, as this would clarify every aspect and provision of the Act. However, such a review will be taxingly long and strain the process of implementing the new legislation, so these areas of concern will regrettably remain suggestions,” Coetser adds.

Mergers are another controversial area in the existing Act. Companies that want to merge or take an interest in another business require consent from the Competition Commission or Competition Tribunal to continue with the transaction.

“In recent cases, there has been significant emphasis on employees and protecting their occupations.

Traditionally, this was not a major focus of the competition authorities, and yet it has become much more vigilant in this area. In a recent merger case that Werksmans has been involved with, the companies did not think that they would retrench a lot of employees after the merger but, with the declining economy, the merged company later found that it did not have the capacity to retain all the employees of both companies, and needed to retrench more people than initially indicated in the merger approval application,” Coetser explains.

However, the Commission held the companies to their original estimation, which did not include the excessive retrenchments. This, says Coetser, resulted in financial hardship for the merged company.

“Although the shift in focus [was positive] for the employees in this case, I do not believe that the Commission should have such a big focus on employees, as companies cannot always foresee economic slumps and other external factors that might change their initial expectations of the merger. The focus should rather be on the merger efficiencies required for survival during challenging economic times,” he concludes.

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