Sensible exemptions in competition policy
STEVE Jobs famously said that “(t)hings don’t have to change the world to be important”. Although the recent changes to the Competition Commission’s policy on risk mitigation transactions may not have been announced to much fanfare, the expansion of the exemption from having to notify the commission of certain risk mitigation transactions to include state-owned institutions and not only registered banks, is an important step in the right direction.
Risk mitigation transactions consist of agreements which allow a finance institution to gain security or collateral in the course of providing funding. These include, among other things, the general exercise of a security interest; sale and leaseback transactions; and government concessions in infrastructure development. All of these transactions involve a financial institution acquiring an asset or interest of a debtor as security for an underlying obligation.
The complexity and difficulty with these commonplace financial transactions is that they fall within the remit of the merger regulation provisions set out in the Competition Act, 1998. When assessing whether a particular transaction triggers merger notification obligations, the Competition Act does not require an interrogation of the rationale behind that transaction. Provided that relevant monetary thresholds are met, a transaction which involves the acquisition of direct or indirect control over the whole or part of a business must be made known to the commission in the prescribed form. In risk mitigation transactions, a finance institution will often take control over a particular asset, which constitutes the whole or part of a business, in the process of exercising its security interest in that asset.
This transition of control from a debtor to the finance institution often triggers the merger control provisions in the act and, as such, subjects that transaction to the statutory merger regime. In the early 2000s, the commission accepted that if all of these transactions triggered notification obligations, the commission would run the risk of being inundated with filings which were unlikely to give rise to any potential competitive or public interest concerns.
Moreover, the commission believed that it could not have been the intention of the legislature to require financial institutions, in the ordinary course of business, to notify such transactions.
Consequently, the commission released Practitioner’s Update 4, which provided that the commission would not require registered banks to notify a risk mitigation transaction, which would otherwise constitute a “merger” under the act, provided that after the acquisition of control of an asset in such circumstances, the registered bank had disposed of such asset within 12 months. If the registered bank had not disposed of the asset within 12 months, however, then the transaction would be deemed to be immediately notifiable.
Despite this practical and welcomed concession, Practitioner’s Update 4 has been subject to criticism. The most penetrating revolves around the question: why does the exemption only apply to registered banks? This is despite the fact that myriad institutions from private equity firms, general lenders and state-owned institutions carry out the same risk mitigation transactions. The rationale, at the time, had been that banks were more closely regulated than other institutions and could be closely monitored to prevent the banks abusing the exemption to simply avoid merger notification obligations. A second criticism was that the 12-month limit was often unworkable for many banks and they would regularly ask for an extension of that time limit to give themselves further time to dispose of an asset that they had acquired through a risk mitigation transaction.
In response to these concerns, the commission has recently decided to expand the scope of Practitioner’s Update 4. It has done so by not requiring notification of a risk mitigation transaction which would be considered a “merger” under the act if that transaction is effected by a state-owned institution. Further, it has increased the time period required for a financial institution to dispose of an asset from 12 to 24 months.
It is of interest to note that the commission has only opted to extend the exemption to stateowned institutions and not to other firms which engage in risk mitigation transactions. This is particularly relevant considering that the commission at the same time chose to update Practitioner’s Update 5, which deals with asset securitisation schemes.
In the previous exemption on asset securitisation schemes, the commission stated that it did not require registered banks to notify the commission of such a scheme. The update, however, extends this exemption to all non-banking institutions engaged in asset securitisation schemes, provided that those schemes are compliant with South African Reserve Bank regulations.
While the developments will come as welcome news to stateowned institutions, they will probably be met with disappointment from other financial institutions which engage in such transactions on a regular basis.
Given that the need to notify a merger, particularly in cases where an asset is only temporarily acquired and held as security, is a time-consuming and costly exercise, the continued exclusion of nonbanks and non-state-owned institutions from the ambit of Practitioner’s Update 4 may well have the unintended consequence of unfairly advantaging the parties to whom the revised policy applies, at the expense of the firms to which it does not.
New measures governing risk mitigation transactions could be seen as advantageous to some
Mark Garden is a director and Kevin Minofu a candidate attorney in ENSafrica’s competition department.