Block exemption regulations for small, micro and medium-sized businesses

The purpose of the Regulation, Gazette Number 50746, Regulation 2538 dated 03 June 2024, is to exempt a category of agreements or practices among SMMEs contained in the Schedule from the application of sections 4(1) and 5(1) of the Act to enable collaboration among SMMEs that otherwise would contravene the Competition Act No. 89 of 1998.

These categories of agreements or practices are exempted for the sole purpose of stimulating the growth and participation of SMMEs in the economy.

SMMEs have also been negatively affected by the pandemic as value chains were severely disrupted and consumers shifted to online purchases. The Commission’s recent study on Measuring Concentration and Participation in the South African Economy: Levels and Trends also shows that the share of SMMEs in the country’s aggregate income is comparatively low and declining.

Legal framework

The legal framework for assessing horizontal agreements between firms is section 4(1) of the Act, which states as follows:

“4. Restrictive horizontal practices prohibited

(1) An agreement between, or concerted practice by, firms, or a decision by an association of firms, is prohibited if it is between parties in a horizontal relationship and if:

(a) It has the effect of substantially preventing, or lessening, competition in a market, unless a party to the agreement, concerted practice, or decision can prove that any technological efficiency or other pro-competitive gain resulting from it outweighs that effect; or

(b) it involves any of the following restrictive horizontal practices:

    (i)     directly or indirectly fixing a purchase or selling price or any other trading condition;
    (ii)    dividing markets by allocating market shares, customers,suppliers, territories, or specific types of goods or services; or
            (iii) collusive tendering."

The legal framework for assessing vertical agreements between firms is section 5(1) of the Act, which states as follows:

“5. Restrictive vertical practices prohibited (1) An agreement between parties in a vertical relationship is prohibited if it has the effect of substantially preventing or lessening competition in a market, unless a party to the agreement can prove that any anytechnological, efficiency or other pro-competitive gain resulting from that agreement outweighs that effect.”

Categories of agreements or practices exempted

Subject to regulations 10 and 11, the Minister hereby exempts the following categories of agreements or practices among SMMEs from the application of sections 4(1) and 5(1) of the Act:

1. Research and development (R&D) agreements which include outsourcing R&D to third parties or cooperation agreements to conduct R&D.
2. Production agreements for the production of a good or the provision of a service, or toll manufacturing by one firm for another (standalone or on a reciprocal basis) which do not result in the removal of a competitor from the market.
3. Joint purchasing agreements which may include collective purchasing by a subset of firms in a market.
4. Joint selling of goods or services to and through intermediaries or other business customers by a subset of firms in a market.
5. Commercialisation agreements which include cooperation between firms relating to the selling, distribution or promotion of their products.

Agreements may cover all commercial aspects or may be limited to one specific function, such as distribution, after-sales service, or advertising.

6. Standardisation agreements which include setting the technical or quality requirements with which current or future products, production processes, services or methods may comply. These agreements may cover technical
   specifications, environmental performance, grades or sizes of products, or the terms of approval by a regulatory body.
7. Collective negotiations with large buyers or suppliers on the terms and conditions for purchasing or supply.

Prior approval by the Commission

SMMEs that wish to enter into agreements or engage in practices covered by the exemption contained in these regulations must apply in writing to the Commission for approval of the agreement or practice before implementation.

The Commission may:

1. Grant approval in writing if the agreement or practice falls within the scope of these Regulations with or without conditions necessary to ensure that the collaboration among SMMEs is limited to the agreements or practices contemplated in regulation 9; and 
2. Decline approval in writing if the agreement or practice does not fall within the scope of these regulations. 

No agreement or practice contemplated in these regulations may be implemented unless approved by the Commission in terms of sub-regulation 11.

The Commission must make the decision contemplated in regulation 11 within 30 business days of receipt of the application for approval of the agreement or practice.

If the Commission has not made a decision within the period contemplated in regulation 13, the application shall be regarded as having been approved.

Revocation of approval

15. The Commission may revoke the approval granted in terms of regulation 11 if:
    1. There is a breach of conditions made in terms of sub-regulation 11.2;
    2. The collaboration among SMMEs exceeds the scope of the exemption granted in terms of these regulations;
    3. The approval was granted on the basis of false information; and
    4. The reason for granting the approval no longer exists.

Exclusions

These regulations exclude:

1. The fixing of the selling prices of goods or services to consumers; and
2. Collusive tendering.

The areas of collaboration exempted in these regulations may be expanded or reduced, following a notice and comment procedure, by the minister by notice published in the Government Gazette in terms of these regulations.

These regulations came into effect in June 2024 and endure for a period of 10 years, which period can be extended by the minister by notice in the Government Gazette.

Naturally, these agreements or practices exempted for SMMEs have a knock-on effect for BEE and taxation as they deal with commercial agreements, including sales and purchasing as well as taxation linked to research and development. Previous articles have been published on www.fincor.co.za in this regard.