The exceptional nature of this crisis may spark the urge for businesses to collaborate with competitors, or with parties operating at different levels of the supply chain, to ensure long-term solvency or to overcome the effects of the pandemic, says Baker McKenzie's Angelo Tzarevski and Selma Matsinhe
The exceptional nature of this crisis may spark the urge for businesses to collaborate with competitors, or with parties operating at different levels of the supply chain, to ensure long-term solvency or to overcome the effects of the pandemic, says Baker McKenzie's Angelo Tzarevski and Selma Matsinhe

Cautious collaboration for the subsistence of SME's post Covid-19

By Angelo Tzarevski and Selma Matsinhe Time of article published Jun 4, 2020

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JOHANNESBURG - Covid-19 has undoubtedly disrupted business at all levels in South Africa. While some firms are overwhelmed by the rapid increase in demand, others face the reality of closure due to the loss of business as a result of the mandated national lockdown.  

South Africa’s competition policy actively strives for the inclusion and participation of small and medium enterprises (SMEs) and firms controlled by historically disadvantaged persons (HDPs). This is reflected in the recent amendments to the Competition Act.

Although the exact impact on business can only be measured once full economic activity resumes, the post Covid-19 economy will be distressed, and characterised by failing firm acquisitions, insolvencies and, in some instances, market concentration as a result of firms exiting the market. Despite funding initiatives implemented by government, it is likely that SMEs and HDPs will bear the brunt of the pandemic.

The exceptional nature of this crisis may spark the urge for businesses to collaborate with competitors, or with parties operating at different levels of the supply chain, to ensure long-term solvency or to overcome the effects of the pandemic. Globally, governments have recognised that the circumstances caused by the pandemic may necessitate such collaboration. For instance:

• In Canada, the Competition Bureau has issued guidance confirming that it will not scrutinise collaborations between competitors provided that such collaborations are undertaken and executed in good faith, aim to ensure the supply of products and services essential to Canadians, and do not extend beyond what is necessary to address the crisis.

 • The UK Competition and Markets Authority (CMA) issued a statement expressing that it will not pursue competition law enforcement against firms that collaborate to ensure security of supply of essential products and services in the current crisis. The CMA will not take action against collaborations that deal with critical issues that arise as a result of the pandemic, are in the public interest, that contribute to the benefit of consumers and that are limited, appropriate and necessary to avoid shortages and ensure security of supply. Additionally, the UK government implemented measures to temporarily waive the application of competition law in the health, grocery retail and transport sector and to allow for information sharing and collaboration that is necessary for the provision of essential goods.

 • Similarly, the European Competition Network (ECN), which comprises various competition authorities across Europe, issued a joint statement on the application of competition law during the Covid-19 crisis, which states that the ECN will not actively intervene against necessary and temporary cooperative measures implemented in order to avoid shortage of supply.

 The European Commission (EC) has published a temporary framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current Covid-19 outbreak. 

The framework applies to forms of cooperation between undertakings aimed at ensuring the supply and adequate distribution of essential scarce medicinal products and medical equipment (presumably not only medical devices but also personal protective equipment), as well as related services, during the pandemic. The EC has established a dedicated website for companies to request clarification on proposed collaboration with competitors necessitated by Covid-19.

In South Africa, the Minister of Trade, Industry and Competition has introduced regulations that provide block exemptions to the healthcare, banking and retail sectors. These regulations allow for collaborations that would otherwise be in contravention of section 4 (which prohibits cartel conduct between parties in a horizontal relationship) and section 5 (which prohibits anticompetitive practices between parties in a vertical relationship). 

However, collaboration is limited to agreements that take place at the request of, and in coordination with, either the Department of Health, the Minister of Finance or the Department of Trade, Industry and Competition. To this end, businesses in other sectors of the economy have not been given the go ahead to collaborate, either to address demand constraints as a result of the pandemic or to ensure solvency in the months to come.

Certain collaborations during the crisis may result in pro-competitive benefits that could bring about the subsistence of businesses post-Covid-19. 

For instance, joint purchasing or joint production agreements would allow SMEs to save on transactional costs and exploit economies of sales. 

Other initiatives could include: the sharing of know-how and information on best practices to drive efficiency; pooling of resources to mitigate the disruption of supply, to increase utilisation of assets and ensure operation at optimal capacity; and coordination activities aimed at facilitating supplies (for example logistics for input materials). Such collaborations, if approached cautiously, will not give rise to anti-competitive concerns, especially if concluded between firms that do not have a significant degree of market power.

The Competition Act strictly prohibits price fixing, collusive tendering and market allocation agreements between competitors, and the imposition of minimum resale prices on downstream parties. 

The mere existence of such arrangements is sufficient to warrant prosecution by the authorities and no pro-competitive justifications can be advanced to remedy the anti-competitive effects of the conduct. SMEs and HDPs are, therefore, not immune to the application of the Competition Act, even if collaborative efforts result in long-term solvency and market participation.

In the absence of a block exemption, firms looking to undertake cooperative projects must do so with vigilance and first seek professional competition law advice. The following practical guidelines may aid in navigating horizontal and vertical collaborations and may minimise, but not necessarily eliminate, the risk of antitrust prosecution.

Ensure that the collaboration falls within the scope of initiatives that would ordinarily lead to pro-competitive outcomes. Particularly, collaborations must enhance efficiency and consumer welfare in the market. Any agreements designed to raise or stabilise prices, manage output, or allocate markets will attract allegations of cartel conduct.

 Initiatives must be for a limited duration. Short-term collaborations aimed at responding, rather than entrenching market power, are less likely to raise competition concerns.

 Collaboration should not concern the sharing of commercially or competitively sensitive information. Any information regarding pricing, customers or business strategies is regarded as commercially and competitively sensitive and must be kept confidential and not shared.

 Ensure that there are stringent competition compliance measures in place for any communication with competitors or suppliers. This includes drafting a clear agenda and keeping detailed notes of interactions with competitors or suppliers.

 Information shared should be limited to aggregate data such that one cannot identify the source of the data.

 Firms must assess the competition risk associated with any collaboration initiative and implement measures to prevent violations of the Competition Act. In the wake of the pandemic, SMEs and HDPs do not get a free pass to engage in conduct that could result in consumer harm. The recent sprout in Covid-19 related settlement agreements between the Commission and SMEs demonstrates that the competition watchdogs will vigorously pursue action against anticompetitive exploitation of the crisis by market participants, regardless of their size.

Angelo Tzarevski, a senior associate, and Selma Matsinhe, associate, competition & antitrust practice, Baker McKenzie, Johannesburg

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