Reg­u­la­tion makes head­lines

CEOs need to un­der­stand what can and can’t be said when the me­dia come knock­ing for com­ment on a com­pany’s merger plan

Business Day - Business Law and Tax Review - - FRONT PAGE - EVAN PICK­WORTH

ANY­ONE who has done a man­age­ment course will be hard pressed to for­get Porter’s five forces that are pop­u­larly used to de­ter­mine the com­pet­i­tive in­ten­sity of an in­dus­try.

But forces such as ri­valry, bar­gain­ing power of sup­pli­ers and of buy­ers, as well as the threats of sub­sti­tute prod­ucts and of new en­trants only get you so far. One ma­jor ad­di­tion to the com­pe­ti­tion land­scape has been the in­creas­ing threat of reg­u­la­tion and re­lated lit­i­ga­tion. An­other ma­jor force that is gain­ing in promi­nence is meted out by the court of public opin­ion when a com­pany is found to have col­luded on price, or been part of a car­tel.

The Com­pe­ti­tion Com­mis­sion pub­lished draft guide­lines on the as­sess­ment of public in­ter­est pro­vi­sions in merger reg­u­la­tion un­der the Com­pe­ti­tion Act ear­lier this year. In an ex­cel­lent re­view of the guide­lines, Lee Men­del­sohn from ENSafrica’s com­pe­ti­tion depart­ment says the com­mis­sion feels par­ties to merger pro­ceed­ings reg­u­larly pro­vide in­suf­fi­cient in­for­ma­tion in re­spect of public in­ter­est considerations. As such, the draft guide­lines are in­tended to pro­vide guid­ance on its likely fu­ture ap­proach and the in­for­ma­tion it is likely to re­quire from par­ties. Im­por­tantly, how­ever, the draft guide­lines will not be bind­ing (even when they are fi­nal) and will not fet­ter the dis­cre­tion of the com­pe­ti­tion au­thor­i­ties to con­sider public in­ter­est is­sues as they deem ap­pro­pri­ate.

There is there­fore lit­tle cer­tainty, which is why so many CEOs feel they have so lit­tle con­trol when it comes to com­pe­ti­tion mat­ters and why reg­u­la­tion has be­come such a pow­er­ful new force in the world of com­pe­ti­tion. The chal­lenge has been set for com­pa­nies to be more open and trans­par­ent to en­sure the proper de­ci­sion can be made.

But it’s a fine line — com­pa­nies are quite con­cerned about what they feel is se­cret in­for­ma­tion be­ing dished out to their com­peti­tors.

Men­del­sohn points out that public in­ter­est fac­tors can be used to per­mit an an­ti­com­pet­i­tive merger, or to pro­hibit a pro-com­pet­i­tive merger. In other words, where a merger is found to be an­ti­com­pet­i­tive, the com­mis­sion will con­sider whether any public in­ter­est fac­tors out­weigh its an­ti­com­pet­i­tive ef­fects. Con­versely, where it is found that a merger is not an­ti­com­pet­i­tive, the com­mis­sion will con­sider whether there are any sub­stan­tial neg­a­tive public in­ter­est grounds re­quir­ing the prohibition of the merger or the im­po­si­tion of con­di­tions.

In terms of sec­tion 12A(3) of the Com­pe­ti­tion Act, the com­pe­ti­tion au­thor­i­ties must con­sider the ef­fect that a merger will have on i) a par­tic­u­lar industrial sec­tor or re­gion; ii) em­ploy­ment; iii) the abil­ity of small busi­nesses or firms con­trolled by his­tor­i­cally dis­ad­van­taged per­sons to be­come com­pet­i­tive; and iv) the abil­ity of na­tional in­dus­tries to com­pete in­ter­na­tion­ally.

In terms of the draft guide­lines, the com­mis­sion will adopt a five-step process in analysing each of the public in­ter­est grounds, namely: 1. De­ter­mine the likely ef­fect on the public in­ter­est; 2. De­ter­mine whether the al­leged ef­fect is “merger-spe­cific” (ie that there is a suf­fi­cient causal nexus be­tween the merger and the al­leged ef­fect), and where an al­leged ef­fect al­ready ex­ists, whether the merger ex­ac­er­bates it; 3. De­ter­mine whether the likely ef­fect is sub­stan­tial; 4. Con­sider whether the merg­ing par­ties can jus­tify the likely ef­fect (the onus be­ing on the merg­ing par­ties to do so); and 5. Con­sider pos­si­ble reme­dies ad­dress any likely neg­a­tive ef­fect.

While changes like th­ese are giv­ing CEOs sleep­less nights, it is of­ten mis­un­der­stood what CEOs and com­pa­nies can say to the public (me­dia


Reg­u­la­tion has be­come a pow­er­ful new force in the world of com­pe­ti­tion

and other stake­hold­ers in­cluded here) when they are in the mid­dle of an in­ves­ti­ga­tion. Too of­ten com­pa­nies sim­ply refuse to speak.

A com­pe­ti­tion in­ves­ti­ga­tion is not sub ju­dice — it’s not a court of law — so the is­sue is more that big­ger listed com­pa­nies feel they are vul­ner­a­ble when th­ese in­ves­ti­ga­tions begin. But there is no prohibition against com­ment­ing. Com­pe­ti­tion law direc­tor at Cliffe Dekker Hofmeyr, Chris Char­ter, is not so sure keep­ing quiet is al­ways the best ap­proach.

“When there is a public in­ter­est el­e­ment it may be bet­ter, depend­ing on the cir­cum­stances of each case, for the com­pany to say some­thing to con­trol the story and thereby pre­vent spec­u­la­tion. But this comes with the pro­viso that you don’t want ex­ec­u­tives say­ing dif­fer­ent things to the case that was pre­sented,” he says.

Af­ter all, the com­mis­sion is able to keep cer­tain in­for­ma­tion, like their in­ter­nal com­mu­ni­ca­tion or le­niency ap­pli­ca­tions, con­fi­den­tial. The com­mis­sion wants merg­ing par­ties to trust the process, so they are nat­u­rally wary about what they make avail­able and try to strike a bal­anc­ing act to pre­vent peers from nos­ing into in­for­ma­tion. They won’t usu­ally be will­ing to be the source of con­fi­den­tial in­for­ma­tion, but there have been a num­ber of chal­lenges by re­spon­dents to have in­for­ma­tion pre­vi­ously viewed as “se­cret” made avail­able.

The mod­ern CEO and ex­ec­u­tive team is un­der im­mense scru­tiny and pres­sure from a com­pe­ti­tion stand­point. Many of th­ese CEOs will feel ille­quipped to deal with the chal­lenge. Porter him­self al­ludes to this in an ar­ti­cle he co-au­thored with Jay W Lorsch and Nitin Nohria in the Har­vard Busi­ness Re­view in 2004, called Seven Sur­prises for New CEOs. One work­shop par­tic­i­pant quoted in the story re­called that he was stunned by the re­al­i­sa­tion he would have to rely on oth­ers in ar­eas like op­er­a­tions, where he had pre­vi­ously thrived, and would have to mas­ter as­pects of the com­pany such as in­vestor re­la­tions and reg­u­la­tory af­fairs, where he had lit­tle ex­pe­ri­ence.

While South African com­pe­ti­tion au­thor­i­ties ap­pear more likely to lis­ten, CEOs need to be more open to en­gage­ment too. Bu­reau­cratic hur­dles re­main a chal­lenge, but get­ting a late af­ter­noon call from a jour­nal­ist with a dif­fi­cult ques­tion about an up­com­ing merger re­mains an­other.

The chal­lenge with get­ting th­ese calls is that a CEO has lit­tle con­trol over the ques­tions he will be asked. It is im­por­tant to un­der­stand what can and can’t be said — and to be well pre­pared. The me­dia is an im­por­tant stake­holder, but also an out­side threat to sta­bil­ity if not han­dled prop­erly.

Some­times, the best ap­proach is to en­gage with the me­dia and de­clare what the com­pany aims to achieve. It is far bet­ter than let­ting spec­u­la­tion mount to such a de­gree that it be­comes even more dif­fi­cult to man­age than if it was han­dled prop­erly when the phone rang the first time.


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