The surge in coordinated effects theories of harm in competition assessments April 2018

By KATHRYN LLOYD AND CATHERINE STARK, Published in Competition Law

In recent years, a trend has emerged of the Competition Commission prohibiting a greater proportion of mergers. Of those prohibited, a large majority has been on the grounds that they increase the potential for collusion.

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Over the past twelve months, the Commission has prohibited (or recommended that the Tribunal prohibit) 12 mergers, eight of those because of coordinated effects.

In contrast, of the 27 mergers prohibited by the Commission between the 2010/11 and 2015/16 financial years, only two were barred because of coordinated effects, and the Tribunal subsequently approved both (Bedrock Mining Support and Mondi, 23/AM/May10; Tsogo Sun Holdings and Gold Reef Resorts, 26/LM/May10).

This surge in coordinated effects theories of harm could be viewed against the background of recent policy developments, most notably the proposed amendments to the Competition Act (89 of 1998), which aim to promote a greater spread of ownership and a diffusion of market power of firms.

Coordinated effects assessments under the Competition Act

Under the merger control provisions of the Competition Act, the Commission or Tribunal is required to assess whether a merger that meets the notification thresholds:

i. is likely to substantially prevent or lessen competition; and

ii. can or cannot be justified on public interest grounds.

When determining the risk of anticompetitive effects arising from a merger, competition authorities traditionally consider whether the merger is likely to substantially lessen competition, either through the merged entity unilaterally exercising market power (unilateral effects) or engaging in anticompetitive coordination with its rivals (coordinated effects).

When the authorities analyse coordinated effects, the inquiry tends to focus on whether the merger has the potential to alter market structure in a way that increases the incentives of the merged entity to directly or indirectly agree with rivals on price, quantity, or which customers to serve. They typically consider a variety of factors in their assessment, including changes in concentration, symmetry of market shares, capacity constraints, barriers to entry, the stability or volatility of supply and demand conditions, buyer power, and the degree of homogeneity of products. However, empirical studies show that even in the presence of these factors, it is difficult to predict cartel formation with a high degree of certainty.

As a result of the complexity of the exercise, the European Commission Horizontal Merger Guidelines emphasise the need to conduct a robust assessment of all available economic evidence, rather than completing a simple "checklist". Similarly, the Guidelines in the United States require that there be a "credible basis" on which to conclude that a merger will enhance a market's vulnerability to coordinated conduct.

These high evidentiary standards have meant that coordinated effects have been decisive in only a handful of mergers internationally (for example, Glencor/Lonrho, European Commission Decision, Case No. IV/M.618; Airtours/First Choice (Case No IV/M.1524) OJ [2000] L 93/1, overturned on appeal).

Increased focus on coordinated effects – towards unchartered territory
The high number of prohibitions on the grounds of coordinated effects is significant relative to previous years – for example, the Commission prohibited a single merger in the 2013/14 financial year (and then because of unilateral effects).

A factor that the Commission frequently cites for prohibition is the history of collusion in the market, interpreted broadly to mean ongoing cartel investigations in the market, and prior cartel conduct in the same, or adjacent markets, in South Africa or other parts of the world (such as, K2014202010 and African Star Grain and Milling, Louis Dreyfus Company Africa and AM Alberts, Nippon Yusen Kabushiki Kaisha, Mitsui OSK Lines and Kawasaki Kisen Kaisha). While it is often stated that past behaviour is the best predictor of future behaviour, if collusive conduct has already been uncovered and sanctioned, it might have been effectively deterred. Further, the merger might itself do little to increase the risk of coordination in a market. From the information available, the Commission does not seem to have reflected on these possibilities.

Other factors that the Commission lists are an increase in symmetry and multi-market contact. For example, in two mergers in which Corruseal intended to purchase Boxlee and Pride Packaging, the Commission found that vertical integration in the industry would create symmetrical positions between firms and make it easier to agree on the terms of coordination. Further, it raised concerns about multi-market contact between firms, market transparency and high barriers to entry. The parties opted to abandon the mergers rather than appeal to the Tribunal. While the factors listed by the Commission are relevant to a traditional coordinated effects inquiry, it is not always evident that the Commission is presenting adequate and robust evidence to show it is doing more than engaging in a simple checklist exercise, or that the merger is likely to change the status quo.

Trends towards de-concentration of markets

Viewed simplistically, mergers between firms in the same market or industry could have the effect of bringing a greater portion of economic resources under the control of fewer entities and people.

These types of prohibitions could, depending on the facts, be a policy tool for achieving the deconcentration and a diffusion of ownership that is contemplated in the Competition Amendment Bill, which was published by the Minister of Economic Development on 1 December 2017.

The trend could also be viewed against the backdrop of recent policy developments worldwide that are aimed at scrutinising patterns of ownership and concentration.

The shifting nature of the Commission's merger inquiry demonstrates the need for practitioners to identify potential theories of harm related to coordinated effects early on in the merger notification process, particularly in concentrated industries where there has been a history of collusion.

It would benefit practitioners to have a thorough understanding of the structural characteristics of the relevant industry, and to keep abreast of past and current coordination allegations, with a view to effectively anticipating the Commission's concerns and proposing potential remedies.

Taking a well-prepared, proactive stance will allow practitioners to prepare their clients better for the merger assessment process.

In the event that the Tribunal reconsiders other mergers prohibited by the Commission in 2018, greater clarity will be forthcoming about its stance on coordinated effects theories of harm.

Lloyd is a Senior Associate and Stark a Candidate Attorney with Fasken (South Africa).