In depth

On 23 September 2022, the Commission published revised, small merger guidelines to assist it in identifying small mergers and acquisitions involving digital markets. The guidelines will come into effect on 1 December 2022.

The small merger guidelines have been revised due to an increased concern by the Commission regarding potential anti-competitive acquisitions in the digital or technology markets, which are potentially able to escape regulatory scrutiny.

Generally, small mergers (which are mergers that do not meet the monetary thresholds for notification) do not require mandatory notification, but in terms of the Competition Act, the Commission may require, up to six months after the small merger has been implemented, that such mergers be notified and approved by the Commission.

In the context of digital markets, the Commission identified a recurring trend of acquisitions taking place at the start of the life of the target when it has not generated sufficient turnover to trigger a mandatory merger notification in terms of the merger thresholds. According to the Commission, such conduct has the potential to substantially lessen future competition by increasing the portfolio of dominant companies, regardless of whether the acquiring company operates in the digital market. The revised guidelines were published to hinder the acquisition of companies in the digital market and to assist the Commission to identify small mergers that may require notification.

Not changed in the revised guidelines is the provision that the Commission must be informed in writing of all small mergers if, at the time of entering into the transaction, either party is subject to investigation by the Commission or have pending proceedings referred by the Commission to the Competition Tribunal.

The revised guidelines contain new information about the criteria for small merger notifications, namely that the Commission is required to be informed of mergers and share acquisitions where the acquiring firm's turnover or asset value alone exceeds the "large" merger combined asset/turnover threshold of ZAR 6.6 billion (as of 23 September 2022) and at least one of the following criteria are met by the target firm:

• The consideration for the acquisition or investment exceeds the target firm asset/turnover threshold for large mergers (currently ZAR 190 million).
• The consideration for the acquisition of a part of the target firm is less than ZAR 190 million but values the target firm at ZAR 190 million or more. 

In the event that parties of a small merger meet the above criteria, they are advised to inform the Commission in writing of their intended transaction. The Commission provides that it will inform the parties in writing within a period of 30 business days of whether or not they would be required to formally notify the small merger in terms of the Competition Act.

The Commission had signaled its intention to introduce amendments to the merger thresholds in the context of digital markets at least as far back as September 2020 in its policy paper entitled "Competition in the Digital Economy". At the time, the Commission had indicated that it intended to issue a guidance note which clarifies the valuation of assets for digital companies. The intention was to cater to the manner in which data, intellectual property and staff assets could be assessed for determining whether mandatory notification is required in terms of the current legislation and, thereby, allow the Commission to exert jurisdiction over additional categories of transactions.

The 2020 proposal would have opened the door to significant difficulties in interpretation and practical application. In contrast, the current revised guidelines seek to capture small mergers in digital markets by reference to turnover and asset values (for the acquiring firm) as well as the transaction consideration, which are comparatively easier to determine or compute although not without difficulty. The Commission's decision not to proceed with the 2020 approach, at least for the time being, is welcome.

There is, however, uncertainty surrounding the interpretation and application of the revised small merger guidelines. For example, it is not clear exactly how the new thresholds are to be interpreted or computed or what the consequences of non-compliance would be. In addition, the guidelines themselves do not expressly define what it means by "digital" or "technology" markets. This will likely create uncertainty in some cases and differing interpretations as to whether a party operates in a "digital" or "technology" market and whether the guidelines apply to it.

Guidelines issued by the Commission are not binding law and it is, therefore, doubtful whether non-compliance would have any material consequences, although this issue has not been pronounced upon by the Competition Tribunal, Competition Appeal Court or another adjudicative body. Having said that, the guidelines do provide a useful indication of how the Commission will approach the notifiability of small transactions in digital markets.

This article was written by Angelo Tzarevski, Director Designate, and Clara Hansen, Candidate Attorney, Antitrust & Competition Practice, Baker McKenzie Johannesburg.