i Competition authorities
The South African Competition Act, 1998 (Competition Act) establishes three specialised bodies each tasked with distinct functions,2 namely the Competition Commission (Commission),3 the Competition Tribunal (Tribunal)4 and the Competition Appeal Court (CAC).5
The Commission is the body tasked with investigating intermediate and large mergers (and small mergers if these are notified). The Commission must, after considering an intermediate merger, approve the merger, with or without conditions, or prohibit the merger.6 The Commission is not authorised to make a determination in relation to large mergers and must after investigation, refer the large merger together with a written recommendation to the Tribunal and the Minister of Economic Development.7
The Tribunal is an adjudicative body and may hear appeals from, or review any decision of the Commission that may, in terms of the Competition Act, be referred to it.8 When the Tribunal receives a referral of a large merger and recommendation from the Commission, the Tribunal must consider the merger and the recommendation, and approve the merger, with or without conditions, or prohibit the merger.9 The Tribunal can also reconsider a decision of the Commission if a party to the merger requests it to do so.10
The CAC has a similar status to a High Court,11 and may review any decision of the Tribunal, or consider an appeal arising from the Tribunal in respect of any of its final decisions other than a consent order made in terms of Section 63; or any of its interim or interlocutory decisions that may, in terms of the Competition Act be taken on appeal.12
A decision of the CAC can be appealed to the Constitutional Court in South Africa if constitutional issues arise.
ii Pre-merger notification
A transaction is automatically notifiable as a merger to the competition authorities in South Africa if it falls within the definition of a merger in terms of the Competition Act and if it meets the monetary thresholds for compulsory notification.
Section 13A of the Competition Act provides that parties to an intermediate or large merger may not implement that merger, until it has been approved, with or without conditions. If a notifiable merger is implemented without prior approval, an administrative penalty may be imposed on the transacting parties of up to 10 per cent of their annual turnover in, and exports from, South Africa in the preceding financial year.13
In February 2016, the Tribunal imposed the largest administrative penalty to date (10 million rand) on Life Healthcare and Joint Medical Holdings (JMH) for the implementation of a merger without approval.14 The Tribunal has, in previous cases, indicated that it takes the failure to notify a notifiable merger very seriously and intends imposing higher penalties. This stance is evident from the hospital groups case, since the previous administrative penalties imposed for this type of contravention did not exceed 1 million rand.
The Tribunal can also, in terms of Section 60 of the Competition Act: order a party to the merger to sell any shares, interest or other assets it has acquired pursuant to the merger; or declare void any provision of an agreement to which the merger was subject. In the hospital groups case referred to above, the parties agreed, in anticipation of the consent agreement, to Life Healthcare divesting from JMH, and JMH acquiring nearly all of the shares in Life Healthcare by way of a share buy-back arrangement.
The competition authorities are obliged in Section 12A of the Competition Act to consider whether a merger is likely to substantially prevent or lessen competition, and whether a merger can be justified on public interest grounds. Public interest considerations in merger transactions have taken prominence in recent years, due to the high unemployment rates in South Africa and the state of the economy as a whole.15
On 2 June 2016, the Commission published its final guidelines on the assessment of public interest provisions in merger regulation (the Public Interest Guidelines).16
The Public Interest Guidelines have been implemented to provide merging parties with guidance on the approach the Commission is likely to follow, and the types of information the Commission may require when evaluating public interest grounds in terms of Section 12A(3) of the Competition Act.17
The Public Interest Guidelines provide insight into the approach adopted by the Commission in relation to:
- a the effect on a particular industrial sector or region;
- b the effect on employment;
- c the ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive; and
- d the ability of national industries to compete in international markets.
II YEAR IN REVIEW
During the Commission’s 2014/2015 financial year (the most recent reported information), it received 395 merger notifications, and finalised its investigation in relation to 375 of the notified transactions. This demonstrates a 19 per cent increase in merger notifications from the previous financial year and an 18 per cent increase from the 2012/2013 financial year. Of the finalised mergers, 108 were large, 251 were intermediate and 16 were small mergers. During this period, 321 mergers were approved without conditions while 43 were approved subject to conditions. This is a significant increase from the 22 conditional approvals in the previous financial year.18
The Commission also prohibited five merger transactions in the 2014/2015 financial year, which is an increase from one prohibited merger in 2013/2014 and no prohibited mergers in 2012/2013.
i Public interest conditions
The focus on public interest considerations has markedly increased over time. Only four public interest conditions were imposed in the 2010/2011 year, which increased to 22 and 28 in 2011/2012 and 2012/2013 respectively. There was a decrease in 2013/2014, with only 10 transactions being approved subject to public interest conditions but this number increased substantially to 39 for the 12 months ending 31 March 2015.
SABMiller and Coca-Cola19
On 19 March 2015, the Commission received notice of a large merger whereby SABMiller, Gutsche Family Investments Proprietary Limited, and The Coca-Cola Company (TCCC) proposed combining the bottling operations of their non-alcoholic beverages businesses in South Africa under a single entity to be known as Coca-Cola Beverages South Africa Proprietary Limited (CCBSA), which would be a subsidiary of Coca-Cola Beverages Africa Limited. SABMiller would also transfer its Appletiser and Lecol brands to TCCC. Once the proposed transaction consumated, TCCC would own SABMiller’s Appletiser and Lecol brands.20
The proposed merger raised both competition and public interest concerns. In order to address the concerns raised, the merging parties agreed to a number of conditions. The public interest conditions included:
- a maintaining the local procurement of inputs procured by Appletiser SA;21
- b committing to a broad-based empowerment transaction that would increase the current Broad-Based Black Economic Empowerment ownership of CCBSA from 11 per cent to 20 per cent;22
- c divesting 20 per cent equity in Appletiser to a qualifying black company or consortium;23
- d the investment of an 800 million rand fund;24
- e ensuring cooler and refrigerator space for small local competitors in micro and small outlets;25
- f local procurement of all tin and aluminium cans and ends, glass and PET bottles, PET closures, packaging, crates and sugar;26 and
- g no retrenchments of bargaining unit employees as a result of the merger (retrenchments of employees outside the bargaining unit would be limited to 250 employees of Grade 12 education and above).27
A number of the concerns raised were received by the trade unions and the Minister of Economic Development. In relation to employment concerns, the merging parties also entered into separate agreements with the trade unions.
As is evident from the rather extensive merger conditions imposed in this transaction, the competition authorities take the concerns raised by the Department of Economic Development and trade unions very seriously and are able to impose creative and far-reaching conditions to address these concerns. It bears mentioning that this merger transaction took approximately 14 months to reach finalisation.
AB Inbev and SABMiller28
The merger transaction between Anheuser-Busch Inbev (AB InBev) and SABMiller, was notified to the competition authorities on 14 December 2015 and approved subject to extensive conditions on 30 June 2016. The merger contemplated AB InBev acquiring the entire issued and to-be-issued share capital of SABMiller. During its investigation of the proposed merger, the Commission identified several competition and public interest concerns that it proposed to address with the implementation of conditions.29
The public interest conditions proposed are in some respects similar to those imposed in the SABMiller/Coca-Cola merger, but in other respects go further.
The public interest conditions include ensuring that there is cooler and refrigerator space for small local competitors in retail outlets and taverns that are solely supplied by the merged entity;30 continued supply to small beer producers of crucial inputs to endure in perpituity, maintaining the current ratio of local procurement; not entering into new exclusive supply arrangements or renew existing supply arrangements with raw material suppliers, which prohibits those suppliers from dealing with small beer producers;31 the investment of a 1 billion rand fund;32 no retrenchments as a result of the merger, to the extent that any employees of DGB (who distribute AB InBev’s alcoholic beverages in South Africa) are retrenched if the distribution agreement is terminated – the merged entity will employ those employees;33 any apple juice concentrate in excess of 1 million litres per annum must be procured from imports or local sources brought about by investment by the merged entity;34 and an outline of the merged entity’s black economic empowerment plans setting out how it intends to maintain black participation in the company, including equity, with the outline to be submitted to both the government and the Commission no later than two years from the closing date.35
A number of other conditions unrelated to the public interest concerns were also imposed. To prevent the exchange of commercially sensitive information between competitors, SABMiller will divest of its shareholding in Distell,36 and employees involved in bottling operations for Coca-Cola would not also be involved in the Pepsi bottling arrangements.37 To prevent foreclosure as a result of the merged entities’ dominance in the supply of tin-metal crowns in South Africa through its subsidiary Coleus, the merged entity will continue to supply third parties with tin metal crowns on a reasonable, non-discriminatory and market-related basis and not enter into any exclusive agreements with Coleus.38
The conditions relating to the public interest were largely driven through interactions with the Minister of Economic Development, the Minister of Agriculture, Forestry and Fisheries of South Africa and the Minister of the Department of Trade and Industry. A separate agreement that has been confirmed by the Tribunal has been entered into between the merging parties and those government departments. There was also trade union participation in relation to employment concerns.
ii Prohibited mergers
Life Healthcare, Lowveld Hospital and Interstate Clearing (126)39
The Commission prohibited the proposed merger between Life Healthcare, Lowveld Hospital Group (Lowveld), and Interstate Clearing on the basis that the merger would result in an immediate and significant increase in hospital tariffs for the Lowveld hospital, and because it raised a negative effect on the healthcare sector in Nelspruit. The merging parties initially filed an appeal to the Tribunal, but the appeal was ultimately withdrawn.
Nkunzi Milkyway and Clover SA40
In the intermediate merger between Clover SA (Clover) and Nkunzi Milkway (Nkunzi), the Commission was of the view that while the market share accretion that arose from this transaction was not significant, Nkunzi had substantial growth prospects and that a big competing player taking over that capacity would reduce the competitive constraint that Nkunzi exercised over larger players in the market. Competitors of Nkunzi also raised concerns in relation to Clover being in a position to pay suppliers of Ayrshire milk more for their milk, which is in short supply in South Africa. This would foreclose other competitors from gaining access to Ayrshire milk. The Commission therefore prohibited the merger. The merging parties brought a request for consideration to the Tribunal, which, on 27 May 2015, approved the transaction subject to conditions aimed at addressing these concerns.
Hosken Consolidated Investments and the Gallagher Convention Centre41
In the intermediate merger between Hosken Consolidated Investments and Atterbell Investments Proprietary Limited trading as the Gallagher Convention Centre, the Commission prohibited the merger on the ground that it would result in a substantial prevention or lessening of competition in the market for the provision of exhibition venues and exhibition facilities. Given the horizontal overlap between the parties, it was argued that the transaction would reduce the number of competitors from four to three, which would allow the merged entity to raise prices unilaterally post-merger. The Tribunal, however, approved the transaction on 7 May 2015, subject to certain conditions aimed at addressing the Commission’s concerns.
Tsogo Sun and Worcester Casino42
The Commission recommended to the Tribunal that the acquisition of 40 per cent equity interest in SunWest International and Worcester Casino by Tsogo Sun Holdings be prohibited. During its investigation, the Commission found that the merging parties are likely to coordinate their behaviour post-merger. In the Commission’s view, the absence of rivals and no possibility of new entry would provide the acquiring firm and target with the ability and incentive not to invest in innovation, and to offer poor quality services and high prices to the detriment of consumers. The merging parties subsequently abandoned the merger during hearings at the Tribunal.
Ferro Industrial Products and Arkema Resins43
The Commission recommended that the acquisition of Arkema Resins by Ferro Industrial Products be prohibited on the basis that the merger would lead to a monopoly in the mining segment. The Commission also found that not only would the merged firm have high market shares, but the rest of the market consisted of small ineffective competitors. The market was also categorised by high barriers to entry. On 4 August 2014, the Tribunal approved the merger with conditions that include divestment and pricing conditions.
iii Increasing interventionist approach to merger control
From the above cases, it is clear that large international transactions garner significant interest by the Ministers and trade unions and, where appropriate, significant creative conditions are imposed. In past years, employment considerations have been of significant concern, and continue to play a big role. However, in addition to maintaining employment levels, the competition authorities have now imposed far more onerous conditions on merging parties to ensure local procurement, continued promotion of historically disadvantaged individuals through equity shareholding and the creation of large funds. These funds in particular have significantly increased over the years, from a 200 million rand fund in the Walmart/Massmart merger in 2012 to a 1 billion rand fund in 2016 in the AB Inbev merger.
The conditions imposed, while aimed at protecting local industry, place a significant burden on international companies seeking to invest in South Africa.
In addition to the trend to impose extensive public interest conditions, the Commission is also taking a more interventionist approach by prohibiting mergers between competitors that create, or have the potential to create, high-market share accretion or a monopoly position. However, the Tribunal does seem more willing to impose conditions aimed at addressing these concerns.
This interventionist trend is likely to continue, particularly with the implementation of the Public Interest Guidelines, which clearly indicate the Commission’s approach in merger transaction. Considering the current economic climate, the competition authorities are likely to focus on ensuring the protection of local industry and employment.
III THE MERGER CONTROL REGIME
In terms of Section 12(1)(a) of the Competition Act, ‘a merger occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm.’
i Change of control
Changes in indirect, as well as direct, control may give rise to a notifiable merger.44
The Tribunal has previously found that the list mentioned in Section 12(2) of the Competition Act merely lists instances of control and that the list is not exhaustive. The Tribunal stressed that whether or not control is in fact acquired is a factual question. This question cannot purely be answered by examining the shareholding acquired in the relevant target firm. The very fact that a transaction may not give the acquiring firm more than a 50 per cent shareholding in the target firm does not mean that there has not been a change in control. As the CAC noted in the Distillers case:
…the Act was designed to ensure that the competition authorities examine the widest possible range of merger transactions to examine whether competition was impaired and this purpose provides a strong pro-pointer in favour of a broad interpretation of the Act.…For this reason the purpose of merger control envisages a wide definition of control, so as to allow the relevant competition authorities to examine a wide range of transactions which could result in an alteration of market structure and in particular reduces the level of competition in the relevant market.45
This approach is embodied in Section 12(2)(g) of the Competition Act, which refers to a person acquiring control when he or she ‘has the ability to materially influence the policy of the firm in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control referred to in paragraphs (a) to (f)’.
On 25 November 2015, the CAC provided some useful guidance in the Media 24 decision,46 on the interpretation of Section 12(2)(g) of the Competition Act in overturning a decision of the Tribunal. Pre-merger, Media 24 and Lambert Philips Retief (Retief) jointly controlled Novus Holding Limited (Novus) by virtue of a management agreement dated 6 October 2008 (the old agreement). The proposed transaction contemplated the conclusion of a new management agreement (the new agreement) between Retief, Novus and Media 24 to be effective on the listing of Novus on the JSE Limited. The issue that the CAC had to determine was whether the joint control that Retief shared with Media 24 under the old agreement had been diminished by the provisions of the new agreement to the extent that Media 24 acquired sole control.47 In South Africa, parties are required to notify the acquisition from joint to sole control.
It was argued by Caxton and CTP Publishers and Printers Limited (Caxton), an interested party in the proposed transaction, that while Retief retained certain of his former functions under the new agreement, he had been stripped of all power-sharing and accordingly no longer had material influence over the strategic aspects of Novus. The change was largely required as a result of the listing of Novus which then necessitated compliance with Section 66(1) of the Companies Act, 2008. This Section of the Companies Act provides that:
…the business and affairs of a company must be managed by or under the direction of its board, which has authority to exercise all of the powers and perform any of the functions of the company, except to the extent that this Act or the company’s Memorandum of Incorporation provides otherwise.
The Memorandum of Incorporation to be implemented on listing did not refer to either the new or old agreements.
The CAC found that, even though the new agreement did confer certain powers on Mr Retief, those powers were still subject to the intervention and overriding powers of the board of Novus if it prefers a different course of action. Retief was therefore found to no longer have the ability to materially influence the policy of Novus in a manner contemplated in Section 12(2)(g) of the Competition Act because he could be overridden by the board of directors at any time.
The CAC also made some useful remarks regarding the ambit of Section 12(2)(g):
- a the ‘policy’ that is being materially influenced must relate to issues strategy, which is usually guided by the board or the shareholders;48
- b the issue of ‘materiality’ of influence relates to the range of matters over which the power extends rather than the decisiveness of each matter;49 and
- c ‘ability’ refers to both a power to do something and a power to prevent something from being done.50
In the Multichoice case,51 the Tribunal on 11 February 201652 found that an agreement between Multichoice and South African Broadcasting Corporation (SABC) in terms of which SABC agrees that all channel signals in respect of SABC FTA channels, as transmitted by SABC on the SABC DTT platform, shall be submitted on behalf of the SABC by Multichoice did not constitute a notifiable merger.
The Tribunal found that:
- a in ordinary commercial practice, a person enjoys at least an ongoing form of control over the company and not merely a specific aspect of it;53
- b the emphasis of control in terms of the Competition Act is the ability to influence the competitive inclination of a company. This suggests that control should only be inferred when the policy covers a wider ambit not a limited specific aspect, particularly in the context of a target firm whose business covers a range of other activities, which remain unfettered by the influence of the putative controller; 54 and
- c there is a danger in giving this Section of the Competition Act too broad an application since there are many outsiders that may be able to influence a company on one aspect of its business, or at a particular finite moment in time. Accordingly, Section 12(2)(g) of the Competition Act should be given some sensible limitation to both the scope and time of the policy matter in question.55
Based on the above factors, the Tribunal was of the view that the agreement on encryption and access did not constitute control by Multichoice over SABC’s business for the purpose of Section 12(2)(g) of the Competition Act. This decision was, however, taken on appeal. The CAC, in considering the evidence, found that the obligation of SABC to cooperate with Multichoice to ensure that the Minister of Communication’s decision on encryption does not become a burdensome obligation on Multichoice could result in SABC losing its autonomy to decide on and adopt a policy that is consistent with its interests. There was, however, insufficient information to conclude on this issue and the CAC granted the alternative relief sought by Caxton, namely that the Commission investigate whether or not the agreement gives rise to a merger.56 It remains to be seen what the Commission’s investigation will reveal.
ii Part of a business
There is no definition of ‘part of a business’ in the Competition Act, but the Tribunal has previously found that in order to fall within the definition of a merger the acquiring firm must acquire something more than a bare asset that would enhance its competitive position. The Tribunal held that:
…when the acquisition of an asset constitutes the acquisition of a business or part of a business is a question of fact that must be examined in the context of the whole transaction. Is the acquiring firm, by acquiring the asset, acquiring something more than a bare asset that would enhance its competitive position? One example would be where the purchase of an asset enables the acquiring firm to increase its market share or pre-empt a rival from increasing its.57
In the Multichoice case, the Tribunal found that the right to use material from an archive does not amount to productive capacity that could be considered a business.58 There was also no evidence to support the contention that the agreement would transfer market share. In reaching this decision, the Tribunal considered the following facts concerning the entertainment channel:
- a Multichoice has the exclusive right to broadcast the material that comprises the entertainment channel for a period of five years;
- b the material is made up of SABC archives;
- c SABC is entitled to broadcast the entertainment channel on its own services, subject to a minimum time delay from date of broadcast by MultiChoice, and provided further that it must be in the same format and schedule as broadcast by Multichoice;
- d SABC may not authorise any third party to use the material utilised on the Entertainment channel during the course of the agreement;
- e a clause in the agreement restrains SABC from distributing a channel that is ‘substantially similar’ to the entertainment channel;
- f the channel would utilise less than 1 per cent of the archives content;
- g other than the above, the agreement does not confer any control over the archive on Multichoice;
- h the choice of what content goes on the entertainment channel is made by the SABC, although Multichoice has a right to veto content it deems to not conform with the standard; and advertising revenue sold on the channel goes to SABC and not Multichoice.59
On appeal, the CAC came to the same decision but on different grounds. The CAC found that even though Multichoice is given extensive say over the material distributed through the Entertainment channel and SABC is constricted in its ability to reuse the material on its own channels, these two facts do not allow for a conclusion that there has been a change of control over a part of a business. Additional facts would be required to draw this conclusion.60
Mergers are classified as small, intermediate or large, based on the thresholds for notification.
Small mergers are not required to be notified to the Commission and may be implemented without approval unless notification is specifically requested by the Commission. The Commission has issued a Guideline on small merger notification,61 which provides that the Commission will require notification of small mergers where the merging parties are under investigation by the competition authorities in terms of Chapter 2 (the Section dealing with prohibited practices) of the Competition Act, or if the merging parties are respondents to pending proceedings referred by the Commission to the Tribunal in terms of the Chapter 2 of the Competition Act. However, this is simply a guideline and not enforceable by the competition authorities.
Intermediate and large mergers require notification to the competition authorities by the merger parties and may not be implemented until approved.
An intermediate merger is one where the ‘combined figure’ is 560 million rand or more and the asset value in South Africa or the turnover value in, into or from South Africa of the target firm (depending on which is the highest) in the preceding financial year is equal to or more than 80 million rand.
A large merger is one where the asset value in South Africa or the turnover value in, into or from South Africa of the target firm (depending on which is the highest) in the preceding financial year is equal to or more than 190 million rand and the ‘combined figure’ is 6.6 billion rand or more.
The ‘combined figure’ is the combined asset values in South Africa, or turnover values in, into or from South Africa of the acquiring firm and the target firm in their respective preceding financial years or the assets of the one and the turnover of the other, whichever combination reaches the highest figure. Importantly, both legs of the inquiry must be met.
iv Procedures and filing fees
In order to assist merging parties in complying with the requirements, the Commission has issued a practice note: Practitioner Update Issue 6: Complete Merger Filing Requirements.62 This document sets out the documents and information, which the Commission will require merging parties to supply in a merger filing.
The competition authorities charge merging parties a fee for analysing the matter. The filing fee for an intermediate merger is currently 100,000 rand, and for a large merger, 350,000 rand. No VAT is payable.
v Service on trade unions
In terms of Section 13A(2) of the Competition Act, parties to an intermediate or large merger must provide a copy of the non-confidential version of the merger filing to any registered trade union that represents a substantial number of its employees; or the employees or employee representative if there is no registered trade union. In terms of Rule 37 of the Rules for the Conduct of Proceedings in the Competition Commission (the Commission Rules),63 trade unions or employees are entitled to participate in merger proceedings by filing a Form CC5(1) within five business days after the date on which the merger filing was received. In practice, the competition authorities permit participation even if notice of participation is received after the five-day period.
vi Time periods
The Commission has up to 60 business days to review intermediate merger filings.
In terms of the Competition Act, the Commission has an initial 20 business day period to investigate an intermediate merger but this review period may be extended by the Commission for a further period of up to 40 business days subsequent to the issuance of an extension certificate.64
If upon the expiry of the 20-business-day period, or the extended period, as the case may be, the Commission has not issued any certificate evidencing its determination, then the Commission will be deemed to have approved the proposed merger.65
There is no time limit for the review of large mergers.
The Commission has an initial 40-business-day period within which to review the transaction, and make a recommendation to the Tribunal. This period may, however, be extended for up to 15 business days at a time for an unlimited number of times. In the event that the Commission requires an extension however, it must apply to the Tribunal, which almost always grants one.
Once the Commission makes its recommendation to the Tribunal, a pre-hearing must be scheduled within 10 business days, although this period too can be extended.
The Tribunal must then hold a hearing to consider the proposed transaction. During this hearing, interested parties (for example, competitors, customers, or employees) may be granted the opportunity to make submissions and all hearings are public. The timetable for the procedures leading up to and the actual hearing of the matter by the Tribunal will be scheduled at the pre-hearing referred to above.
After the hearing, the Tribunal has to decide whether to confirm or overrule the recommendation of the Commission. The Tribunal must approve, approve subject to conditions or prohibit the merger within 10 business days after the end of the hearing, and within 20 business days thereafter issue written reasons for its decision and publish a notice of its decision in the Government Gazette.
vii Acceleration of review period
Unfortunately, there is not much scope to accelerate the review procedure as the competition authorities are only bound by the legislated time periods. The competition authorities are, however, mindful of merging parties’ need to implement transactions swiftly and accordingly, do work as fast as possible to investigate and decide upon mergers.
The Commission has issued a helpful guideline on these timelines applicable to merger reviews in South Africa, and it aims, where possible, to stick to these timelines. The 2015 Mergers and Acquisitions Service Standards (the 2015 Service Standards)66 set out the maximum number of business days that the Commission anticipates to complete its review of notified transactions. The 2015 Service Standards replace the 2010 Service Standards. The rationale for the revision of the timelines takes into account the anticipated volume of notifications and the increasing complexity of mergers notified.67
The 2015 Service Standards contemplate the following timelines.
Phase I (non-complex)
The Commission aims to review a Phase I merger within 20 business days. These are mergers in which there is little or no overlap between the activities of the merging parties, no public interest issues and a simple control structure.
Phase II (complex)
The Commission aims to review a Phase II merger within 45 business days. These are mergers between direct or potential competitors, or between customers and suppliers, where the merging parties have a combined market share of more than 15 per cent, or where public interest issues arise.
Phase III (very complex)
The Commission aims to review a Phase III intermediate merger within 60 business days and a Phase III large merger within 120 business days. Phase III mergers are likely to result in a substantial prevention or lessening of competition (including any transactions involving ‘leading market participants’ where the combined market share of the transacting parties is more than 30 per cent).
viii Third-party access to the file and rights to challenge mergers
Intervention in merger proceedings is specifically provided for in Section 18 of the Competition Act, albeit only in respect of the Minister of Economic Development68 and the Minister of Finance69 (in relation to transactions falling within the jurisdiction of the Banks Act, 1990). Furthermore, Rule 37 of the Commission Rules permits participation in merger proceedings by trade unions or employee representatives. These rules have been used on a number of occasions, both by the Ministers and trade unions to intervene in merger transactions and extract some benefit, usually for the public interest. These interventions have been used with success in some of the most publicised merger cases in South Africa, namely the Walmart/Massmart merger, the SAB bottling merger and the SABMiller/AB Inbev merger.
In addition to the above rules, ‘any person, whether or not a party to or a participant in merger proceedings, may voluntarily file any document, affidavit, statement or other relevant information in respect of that merger.’70
Rule 46 of the Rules for the Conduct of Proceedings in the Tribunal (the Tribunal Rules)71 indicates that, at any time after an ‘initiating document’ is filed, any person who has a material interest in the matter may apply to intervene in the Tribunal proceedings by filing the prescribed forms that must include a concise statement of the nature of the person’s interest in the proceedings, and the representations the person will make.72 The Tribunal will be required to make an order allowing the applicant to intervene and can place limitations on the intervention.73
If an order is granted permitting the intervention, the Registrar of the Tribunal must send a list of all the documents that have been filed in the proceedings prior to the day on which the intervention application was granted. The intervenor will be permitted access, subject to any order on restriction of access.74
In the Caxton decision,75 Caxton was granted permission on 9 November 2015 to participate in the merger hearing, including the right to:
- a attend pre-hearing conferences;
- b have access to, and inspect any, document filed by the merging parties and other parties subject to confidential information only being available to legal representatives;
- c call for discovery of further documents;
- d request the Tribunal to direct or summon a person to appear at the merger hearing or produce documents;
- e participate in any interlocutory proceedings in respect of the merger hearing;
- f adduce oral and documentary evidence at the merger hearing;
- g cross-examine any of the witnesses; and
- h present an argument at the merger hearing.
Caxton’s participation was limited in certain respects, and in particular to certain key issues.
Intervention by interested parties in mergers has not been prominent over the past year, but it is likely when one considers the competition authorities increasing interventionist approach in approving transactions subject to conditions that interested parties may view merger control as a platform to raise concerns and gain support from the competition authorities to impose remedies. This has been seen most recently in the SABMiller bottling merger and the AB Inbev transactions.
ix Effect of regulatory review
In terms of the Competition Act, it is not possible for a transaction to be considered simultaneously by both the Commission and Tribunal. A merger transaction in terms of the Competition Act can only be investigated by the Commission. If the transaction is a large merger, once the Commission has completed its investigation it will refer the merger to the Tribunal to consider and make a determination.
It is, however, possible for more than one competition authority in multiple jurisdictions to consider the same transaction simultaneously. In these instances, each competition authority considers the effect that the transaction will have on its own jurisdiction. The time periods for consideration of the merger are those set out in each jurisdictions respective competition legislation. Across Africa, the competition authorities are mindful of each other’s processes and try as far as possible to work within merging parties’ time frames to ensure clearance at similar times. Various competition authorities across Africa have also entered into memorandums of understanding (MOU) to govern the relationships between them in dealing with multi-jurisdictional filings.
Iv OTHER STRATEGIC CONSIDERATIONS
i Coordination with other jurisdictions
Coordination with other jurisdictions is predominantly done through MOUs entered into between regulators.
In 2015, the Commission entered into its first MOU with the Namibian Competition Commission. In May 2016, the Commission signed an MOU between the competition authorities of the South African Development Community, and the MOU between the competition authorities of Brazil, Russia, India, China and South Africa (BRICS).
The BRICS and Namibian MOUs do not specifically relate to cooperation in relation to merger control, but record that the cooperation between the competition authorities will improve and strengthen the effective enforcement of competition laws. The MOU does, however, provide for cooperation on any other means agreed upon in writing between the parties.
The Southern African Development Community MOU (of which the Namibian Competition Commission is a party) does provide for the cooperation and coordinating with each other in the investigation of mergers.
As this MOU has only recently been entered into, the extent of cooperation remains to be seen.
ii Financial distress and insolvency
In assessing a merger transaction in South Africa, the competition authorities must determine whether or not the merger is likely to substantially prevent or lessen competition. In making this determination, the competition authorities must assess the strength of competition in the relevant market, and the probability that the firms in the market after the merger will behave competitively or cooperatively, taking into account any factor that is relevant to competition, including whether the business of a party to the merger has failed or is likely to fail.76
The principal case dealing with the test one must satisfy in order to meet the ‘failing firm’ criteria in terms of Section 12 of the Competition Act is the large merger between Iscor and Saldana Steel.77 This case makes it clear that whether a firm is truly ‘failing’ (in the sense of about to exit the market totally) is only one factor among many that should be considered when the competition authorities decide to approve a merger or not. The Tribunal suggests that the merging parties need to show that the target firm would exit the market absent the merger, that its market share would largely accrue to the acquiring firm anyway, and that there were no other potential purchasers who would present fewer competition concerns.
This is an old case (2001), and unfortunately, the rule it lays down has not been extensively applied by the Tribunal in subsequent cases – mainly because merging parties almost always prefer to argue that their merger is not anticompetitive, or even if it is, that it should be allowed on efficiency or public interest grounds.
It is possible, in extreme circumstances, for a merger transaction to receive clearance in record time, if there are compelling financial considerations.
For example, in the merger between Stefannuti Stocks and Energotec,78 the transaction was approved within three days of filing the merger, because the target firm was in provisional liquidation with imminent job losses and prejudice to its customers.79 This is, of course, an unusual course of action, but given the competition authorities’ focus on public interest concerns and in particular job losses, an outcome of this nature is not impossible and is in fact highly persuasive. It bears mentioning, however, that merely indicating that a company is in business rescue will not prompt such rapid clearance. The facts must be sufficient to support such a contention.
This was demonstrated in the merger between CTP and Compact Disc Technologies,80 where the Commission rejected the failing firm defence because the merging parties had not met the necessary requirements of that defence – in particular, proof that there was no other buyer for the target firm.81
The merger filings submitted to the competition authorities must be quite comprehensive, and must make it clear to the Commission that what is contemplated is not anticompetitive.
V OUTLOOK AND CONCLUSIONS
The past year has demonstrated the Commission’s increasing interventionist approach to merger control, both in terms of the number of mergers prohibited and also the conditions imposed in approving the transactions.
The cases dealt with above show the Commission’s developing jurisprudence, and their ability to impose both pragmatic and creative conditions to address concerns raised by interested parties.
The Ministers and trade unions have demonstrated their willingness to participate in mergers, which in their view have significant public interest concerns. The competition authorities pay careful attention to these concerns raised and work pragmatically with the parties to address these concerns.
The most anticipated that was confirmed by the Tribunal on 30 June 2016 is the SABMiller/AB Inbev transaction, which demonstrates the imposition of some of the most onerous conditions on merging parties to date.
The creative conditions imposed in these international transactions show that the scope of interpretation of the conditions that can be imposed to address public interest concerns is continuously broadening. It remains to be seen how wide these conditions may go in the future.
The conditions that have been imposed in South Africa also have a significant impact both on the transaction costs and the timeline for approval. AB Inbev is required in terms of the conditions imposed, to make an amount of 1 billion rand available. This is a substantial amount, and is the most that has been imposed by the competition authorities to date.
The Public Interest Guidelines published in June 2016 will require analysis by merging parties, and it is recommended that in transactions where public interest issues are of concern that the parties proactively assess and address these concerns to avoid unnecessary delays in the approval process and the potential for unnecessarily broad conditions.
What is apparent from the year in review is that public interest considerations will continue to play a large role in merger proceedings, and merging parties should ensure that they are prepared for interactions with trade unions, the ministers and the competition authorities to address any concerns that may arise.
1 Candice Upfold is a senior associate at Norton Rose Fulbright South Africa Inc.
2 See Sections 21, 27 and 37 of the Competition Act.
3 Section 19 of the Competition Act.
4 Section 26 of the Competition Act.
5 Section 36 of the Competition Act.
6 Section 14 of the Competition Act.
7 Section 14A of the Competition Act.
8 Section 27(1)(c) of the Competition Act.
9 Section 16(2) of the Competition Act.
10 Section 16(1)(a) of the Competition Act.
11 Section 36(1)(a) of the Competition Act.
12 Section 37(1) of the Competition Act.
13 Section 59(2) of the Competition Act.
14 The Competition Commission and Life Healthcare Group (Proprietary) Limited and Joint Medical Holdings Limited Case No. 2010Oct5392/2012Feb5781.
15 Paragraph 3.3 of the Public Interest Guidelines.
16 Government Gazette Notice No 39 of 2016.
17 Paragraph 1.2 of the Public Interest Guidelines.
18 See the Competition Commission’s annual report available at www.compcom.co.za/wp-content/uploads/2014/09/COMPETITION-COMMISSION-ANNUAL-REPORT-2015.pdf.
19 Coca-Cola Beverages Africa Limited, a subsidiary to be formed of SABMiller Plc and Coca-Cola Sabco Proprietary Limited, Coca-Cola Shanduka Beverages South Africa Proprietary Limited, Waveside Proprietary Limited and Coca-Cola Canners of Southern Africa Proprietary Limited Case No. 021154.
20 Competition Commission’s recommendation para 4.
21 Non-Confidential Conditions para 4.
22 Non-Confidential Conditions para 5.1.
23 Non-Confidential Conditions para 5.2.
24 Non-Confidential Conditions paras 6.1 and 6.5.
25 Non-Confidential Conditions paras 6.2 and 6.3.
26 Non-Confidential Conditions para 8.1.
27 Non-Confidential Conditions paras 9.1 and 9.2.
28 Anheuser-Busch Inbev SA/NV and SabMiller plc Case No. 2015Dec0690/LM211JAN16 (023283).
29 Conditions to the approval of the merger (Public Version).
30 Conditions to the approval of the merger (Public Version) para 7.3.
31 Conditions to the approval of the merger (Public Version) paras 9 and 10.
32 Conditions to the approval of the merger (Public Version) para 15.
33 Conditions to the approval of the merger (Public Version) para 8.
34 Conditions to the approval of the merger (Public Version) para 11.
35 Conditions to the approval of the merger (Public Version) para 13.
36 Conditions to the approval of the merger (Public Version) para 4.
37 Conditions to the approval of the merger (Public Version) para 5.
38 Conditions to the approval of the merger (Public Version) para 6.
39 See the Competition Commission’s annual report available at www.compcom.co.za/wp-content/uploads/2014/09/COMPETITION-COMMISSION-ANNUAL-REPORT-2015.pdf.
40 Request for Consideration between Clover SA (Pty) Ltd and Nkunzi Milkway (Pty) Ltd and the Competition Commission Case No. IM175Dec14 (020461).
41 Request for Consideration between Hosken Consolidated Investments Limited and Atterbell Investments Proprietary Limited t/a the Gallagher Convention Centre and the Competition Commission Case No. 020578.
42 See the Competition Commission’s annual report available at www.compcom.co.za/wp-content/uploads/2014/09/COMPETITION-COMMISSION-ANNUAL-REPORT-2015.pdf.
43 Ferro Industrial Products (Pty) Ltd and Arkema Resins (Pty) Ltd Case No. 018358.
44 Distillers Corporation (South Africa) Limited and Stellenbosch Farmers’ Winery Group Limited/Bulmer (SA) Proprietary Limited, Seagram Africa Proprietary Limited Case No. 08/CAC/May01.
45 Distillers Corporation SA Ltd v. Stellenbosch Farmers’ Winery Group Limited and Bulmers (SA) Pty Ltd and Seagram Africa Pty Ltd Case No. 08/CAC/May01.
46 Caxton and CTP Publishers and Printers and Media 24 Proprietary Limited and Others Case No. 136/CAC/March 2015.
47 Caxton and CTP Publishers and Printers and Media 24 Proprietary Limited and Others Case No. 136/CAC/March 2015 para 24.
48 Caxton and CTP Publishers and Printers and Media 24 Proprietary Limited and Others Case No. 136/CAC/March 2015 para 46.
49 Caxton and CTP Publishers and Printers and Media 24 Proprietary Limited and Others Case No. 136/CAC/March 2015 para 48.
50 Caxton and CTP Publishers and Printers and Media 24 Proprietary Limited and Others Case No. 136/CAC/March 2015 para 48.
51 Caxton and CTP Publishers and Printers and Others and Multichoice (Pty) Ltd and Others Case No. 020727.
52 The reasons were issued on 11 February 2016 but the hearing took place on 30 September 2015.
53 Caxton and CTP Publishers and Printers and Others and Multichoice (Pty) Ltd and Others Case No. 020727 para 94.
54 Caxton and CTP Publishers and Printers and Others and Multichoice (Pty) Ltd and Others Case No. 020727 para 94.
55 Caxton and CTP Publishers and Printers and Others and Multichoice (Pty) Ltd and Others Case No. 020727 para 95.
56 Caxton and CTP Publishers and Printers and Others and Multichoice (Pty) Ltd and Others Case No. 140/CAC/Mar 16 CT.
57 Competition Commission and Edgars Consolidated Stores Ltd and Others Case No. 95/FN/Dec02 (24 March 2003).
58 Caxton and CTP Publishers and Printers and Others and Multichoice (Pty) Ltd and Others Case No. 020727 para 57.
59 Caxton and CTP Publishers and Printers and Others and Multichoice (Pty) Ltd and Others Case No. 020727 para 49.
60 Caxton and CTP Publishers and Printers and Others and Multichoice (Pty) Ltd and Others Case No. 140/CAC/Mar 16 CT paras 43 and 44.
63 Published under Government Gazette Number 22015 of 1 February 2001.
64 Section 14(1) of the Competition Act.
65 Section 14(2) of the Competition Act.
67 Page 5 of the 2015 Mergers & Acquisitions Service Standards.
68 See Rule 35 of the Competition Commission Rules and Rule 29 of the Competition Tribunal Rules.
69 See Rule 36 of the Competition Commission Rules and Rule 30 of the Competition Tribunal Rules.
70 Section 13B(3) of the Competition Act.
71 Published under Government Gazette Number 22025 of 1 February 2001.
72 Rule 46(1) of the Competition Tribunal Rules.
73 Rule 46(2) of the Competition Tribunal Rules.
74 Rule 46(3) of the Competition Tribunal Rules.
75 Caxton and CTP Publishers and Printers Limited and Media 24 (Proprietary) Limited and Others Case No. 019323.
76 Section 12A(2) of the Competition Act.
77 Iscor Limited and Saldana Steel (Pty) Ltd Case No. 67LMDec01.
78 Stefannuti Stocks (Pty) Ltd and Energotec (a division of First Strut) (Pty) Ltd Case No. 017590.
79 Stefannuti Stocks (Pty) Ltd and Energotec (a division of First Strut) (Pty) Ltd Case No. 017590 para 1.
80 CTP Limited and Compact Disc Technologies (a division of Times Media (Pty) Ltd) and the Competition Commission Case No. IM232Feb16.
81 CTP Limited and Compact Disc Technologies (a division of Times Media (Pty) Ltd) and the Competition Commission Case No. IM232Feb16 para 10.