Tech start-ups face merger scrutiny

On 11 May 2021, the Competition Commission invited public comment on proposed amendments to its Small Merger Guidelines (Government Gazette No.44545). Significantly, the Guidelines propose that, if certain criteria are met, the Commission must be informed of all small mergers and acquisitions where the merger parties operate in digital markets. Small mergers are transactions that do not meet the prescribed intermediate or large merger thresholds. This proposal substantially expands the scope of potentially notifiable mergers and could create regulatory hurdles for firms engaging in transactions in this space.

The proposed amendments indicate that the Commission is seeking to rapidly advance its recent enforcement initiatives in the digital market. A few weeks ago, the Commission launched a market inquiry into online intermediation platforms and finalised its digital paper on Competition in the Digital Economy. In the Digital Paper, it was proposed that specific technology companies that dominate different digital markets in South Africa inform the Commission of all small domestic acquisitions, including investments in start-ups and global acquisitions of targets with some local presence.

Will the proposed amendments change the approach to small mergers in other markets?

The approach to all other small mergers is likely to remain the same. The Guidelines still state that, if at the time of entering into the transaction, any of the firms (or firms within their groups) are subject to a prohibited practice investigation by the Commission, or are respondents following a referral by the Commission of a prohibited practice investigation to the Competition Tribunal, then the Commission will require the notification of the small merger.

Are the amendments to the Guidelines already in effect?

No, not yet. Stakeholders and interested parties are invited to submit comments on the proposed changes by 11 June 2021.

When will firms operating in digital markets need to inform the Commission about proposed transactions?

The Commission will require that it be informed of all small mergers and acquisitions where either the acquiring firm, the target firm, or both, operate in one or more digital market(s) provided at least one of the following criteria are met:

• the consideration for the acquisition or investment exceeds ZAR190 million, provided the target firm has activities in South Africa
• the consideration for the acquisition of a part of the target firm is less than ZAR190 million but effectively values the target firm at ZAR190 million (provided the target firm has activities in South Africa and, as a result of the acquisition, the acquiring firm gains access to commercially sensitive information of the target firm or exerts material influence over the target firm within the meaning of section 12(2)(g) of the Competition Act)
• at least one of the parties to the transaction has a market share of 35% or more in at least one digital market
• the proposed merger results in a combined post-merger market share of the merged entity to gain or reinforce dominance over the market, as defined by the Competition Act.

There are many aspects of the Guidelines that will require clarity – for example, how broadly digital markets will be defined, what is meant by the term ‘operate’, and whether there will be any consequences for firms involved in mergers that meet the relevant criteria and fail to inform the Commission. This new approach to mergers in the digital market will also have to be carefully balanced against the need to foster investment in smaller, innovative technology firms. It is hoped that this proposed additional administrative and regulatory obligation will not serve as a deterrent to growth in this space.

We will continue to keep you updated on the status of these amendments. Any interested stakeholders wishing to submit comments on the proposed amendments are welcome to speak to us. For further information, please do not hesitate to contact the Competition / Anti-trust team.