The failing firm doctrine in South Africa

Abstract

The financial and economic crisis has put businesses all over the world in danger of going out of business leading to the biggest industry restructuring in decades. measures may not be sufficient to ensure a firm's survival and competitiveness. Mergers and acquisitions can be one of the options at the disposal of the distressed firm. The failing firm doctrine or defence allows failing firms to merge or be acquired by a profitable firm in a transaction that would normally be regarded as anti-competitive in a merger review. The legislative framework that incorporates and applies the failing firm doctrine in South Africa is set out in section 12A(2)(g) of the Competition Act. It lists the failing firm doctrine as one of the factors to be considered when determining whether a merger will result in the substantial prevention or lessening of competition. Under the failing firm defence in South Africa, a merger that would be prohibited due to its anti- competitive effect could be permitted if the alleged failing firm (a) is unable to meet its financial obligations, (b) there is no other offer from a firm that would result in less anti- competitive effects, and (c) its assets would exit the market in the absence of the merger. This dissertation considered the failing firm doctrine in respect of merger evaluation and discussed the objectives set out in the Competition Act 89 of 1998. It has evaluated how the failing firm doctrine is formulated in South Africa aligns with the interpretation and application thereof in foreign jurisdictions such as the United States of America, the European Union, and Canada. It has taken into consideration a variety of case law and secondary sources to explore first, how the defence is approached and applied, and second, whether it is necessary to reconsider the defence in light of the pandemic. Furthermore, while the defence in general is taken into consideration, the pandemic has highlighted the importance of the defence's role in accomplishing goals in achieving public interest objectives. This dissertation argued that the substantive assessment test in section 12A of the Competition Act 89 of 1998 is capable of preserving a competitive market structure by treating the doctrine as a factor, that the flexible approach that competition authorities currently take, is capable of taking into consideration any economic crisis.