When the sins of the fathers come knocking on the door
09 Sep 2016
The Competition Commission (“Commission”) has reached a settlement agreement with ArcelorMittal South Africa Limited (“AMSA”) in terms of which all pending investigations and prosecutions against AMSA will be finalised. This settlement agreement awaits approval by the Competition Tribunal.
In terms of the settlement agreement, AMSA agreed to pay an administrative penalty of R1.5 billion together with certain other agreed undertakings for a period of 5 years and specifically in relation to a limitation of its earnings before interest and tax (“EBIT”) margin to 10% for flat steel products sold in South Africa. In addition, AMSA has committed to a R4.65 billion capital expenditure over the next 5 years in terms of which AMSA will aim to retain the overall investment level required to contribute to the retention and creation of jobs within the steel industry.
Of the 6 matters that have been pending before the Commission, AMSA has admitted guilt in respect of two matters that being the long steel matter, relating to allegations of price fixing, allocating customers and sharing commercially sensitive information; and the scrap metal matter relating to allegations of price fixing by the company as a buyer of scrap.
THE COMMISSIONS INVESTIGATION
The Commission, over an almost decade long period, investigated various alleged contraventions of the Competition Act, 1998 (as amended) against AMSA. These investigations, some of which were concluded and referred to the Competition Tribunal for prosecution, related to the long steel cartel in terms of which collusion took place for the fixing of prices and discounts, allocating customers and the sharing of commercially sensitive information through the South African Iron and Steel Institute and the South African Reinforced Concrete Engineers Association by various parties. The Commission also investigated and referred to the Competition Tribunal for adjudication the cartel of scrap metal in terms of which the Commission alleged that various firms collectively negotiated and agreed a standard formula, which was used to determine the purchase price of scrap metal. In addition to these matters, AMSA was under investigation for price discrimination as well as a complaint alleging AMSA charged excessive prices for its flat steel products. The settlement agreement brings to an end an all investigations and attempted prosecutions by the Commission.
The long steel cartel investigation and referral for prosecutions against AMSA covers a period prior to AMSA taking over a controlling stake of more than 50% in Iscor Limited (“Iscor“). AMSA admitted that it (while still being Iscor) engaged in the long steel cartel and was a participant in the long steel cartel.
AMSA will also have to report to the Commission on regular intervals as to their adherence to the EBIT margin cap, pay in annual instalments of not less than R300 million the administrative penalty (which will attract interest at the prevailing interest rate on debts owing to the State prescribed by the Minister of Finance in terms of the Public Finance Management Act, No 1 of 1999, as amended). Also, AMSA will have to report to the Commission on its capital expenditure plan in order to inform the Commission of progress or any changes to the capital expenditure program at least every 6 months. The competition watchdog will indeed look over AMSA’s shoulder every 6 months.
The settlement agreement reached between the Commission and AMSA can be applauded as it presents a balanced outcome in the interest of the overall South African economy by not only providing for an administrative penalty to deter anti‑competitive behaviour but also in providing for future investment in the steel industry, which will contribute to economic growth desperately needed in South Africa. The settlement agreement also concludes numerous prosecutions which would have tied up the competition authorities as well as AMSA in lengthy litigation which would have come at a significant cost. Clearly, companies found to have engaged in cartel conduct cannot escape prosecution once found out by the competition authorities and the cost of defending a prosecution before the Competition Tribunal can take its toll.
This settlement highlights the importance of understanding, when considering investing in any company, what competition law risks a company (in the current instance, Iscor when AMSA invested), was willing to take and what possible behaviour existed that could create a risk for new owners or investors going forward. A risk that will remain and for which reprimand and retribution will not be escaped.(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)