The Competition Tribunal has recently considered the question of whether or not an anti-competitive merger can be saved on grounds that a firm is controlled by previously disadvantaged individuals, one of the 'public interest' grounds the Tribunal is enjoined to consider in terms of Competition Act. This issue arose in the hospital sector of the healthcare industry which comprises three main hospital groups: Afrox, Medi-Clinic and Netcare.
The proposed transaction was between Bidco and Afrox Oxygen whereby Afrox Oxygen would sell its 69% shareholding in Afrox Health, its listed healthcare subsidiary, to Bidco. Bidco (as it was then) would be held as to 75% by Mvelaphanda and Brimstone (the BEE entities) and 25% by Medi-Clinic Corporation Limited (Medi-Clinic).
The Commission concluded that Medi-Clinic's 25% shareholding in Bidco would not confer control on Medi-Clinic and thus recommended to the Tribunal that it approve the transaction (subject to certain conditions) whereby Medi-Clinic would indirectly acquire a 25% interest in one of its two chief competitors.
Following this recommendation, Netcare and other smaller competitors in the healthcare market successfully applied to intervene in the Tribunal merger hearing. The central issue at the hearing was the role of Medi-Clinic in the transaction. Medi-Clinic maintained that its role was merely that of a ‘passive minority shareholder’. However, there was doubt cast on this assertion, as proceedings before the Tribunal unfolded:
Evidence revealed that Medi-Clinic had provided Absa with a guarantee of R3,1 billion in order to fund the transaction, Medi-Clinic had secured an agreement from the BEE entities that they would sell some 2 500 beds in a subsequent transaction and Medi-Clinic had paid for all the advisers to Bidco. Furthermore, it transpired at the hearing that Medi-Clinic had originally intended to acquire Afrox Health directly, but anticipated problems with the competition authorities, as the transaction would have effectively reduced the number of participants in the healthcare industry from three to two. To overcome these problems, Medi-Clinic decided to bring Mvelaphanda and Brimstone into the transaction in the form of Bidco, believing that it would be afforded public interest relief as a BEE entity.
The Tribunal was unequivocal in its view of Medi-Clinic's attempts to cast itself as a passive, minority shareholder. The Tribunal stated that Medi-Clinic's attempts were "nothing other than a disingenuous attempt to shield from competition scrutiny the true nature of the transaction, the outcome of which would have had Medi-Clinic thoroughly dominating its competitor, Afrox Health." The Tribunal stated that it was disturbing that Medi-Clinic had sought to achieve these outcomes "by the most cynical manipulation of the government's – and the Competition Act's – support for Black economic Empowerment".
The hearings before the Tribunal in which Medi-Clinic's role in the transaction became more and more apparent led to the merger parties revising the transaction by removing Medi-Clinic from the transaction. Afrox Oxygen retained a minority joint controlling shareholding in a newly constituted Bidco, which comprised the BEE entities, and other entities (the new Bidco transaction). The new Bidco transaction was uncontroversial from a competition perspective, save for minor concerns addressed by the Tribunal approving the merger subject to conditions.
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