South Africa: Supplier Development Fund Condition Finalised

Last Updated: 11 October 2012
Article by Justin Balkin, Mark Garden and Kirsty van den Bergh

Most Read Contributor in South Africa, September 2018

Judge Dennis Davis, President of the Competition Appeal Court (the “CAC”), today handed down judgment detailing the final condition applicable to the Massmart Holdings Limited (“Massmart”) and Walmart Stores Inc. (“Walmart”) merger (namely the condition relating to the establishment of a supplier development programme).

Earlier this year, the CAC dismissed an appeal by the Minister of Economic Development, the Minister of Trade and Industry and the Minister of Agriculture, Forestry and Fisheries (the “Ministers”) to review and set aside the decision of the Competition Tribunal (the “Tribunal”) to approve Walmart’s acquisition of a 51% shareholding in Massmart.  At the same time, the CAC partially upheld the appeal application launched by the South African Commercial, Catering and Allied Workers Union (“SACCAWU”) against the Tribunal’s decision. 

In its earlier decision, the CAC imposed three conditions on the merged entity, namely that –

  • there be no merger-related retrenchments in South Africa for a period of two (2) years from the effective date of the transaction;

  • existing labour agreements must be honoured for three (3) years from the effective date of the transaction (and that Massmart must not challenge SACCAWU’s position as the representative Union of Massmart’s employees); and

  • 503 employees who were retrenched by Massmart in 2009 and 2010 had to be reinstated.

As regards the fourth condition (namely that the merged entity must establish a programme for the development of local South African suppliers, including SMMEs), the CAC required further information and thus ordered that a study be commissioned by the merged entity (to be prepared by three experts, appointed by each of the Ministers, SACCAWU and the merged entity).

The merged entity appointed Professor Mike Morris, the Ministers appointed Professor Joseph Stiglitz and SACCAWU appointed James Hodge.   Two expert reports were filed, one by Morris and the other jointly authored by Hodge and Stiglitz.

There were significant differences in the two expert reports, particularly in relation to the duration, quantum, scope and control of the supplier development fund.  In this regard, the CAC assessed the differing viewpoints of the expert panel.

At the outset, the CAC pointed out that the public interest aspects of the Competition Act should not be seen as a substitute for a comprehensive policy designed by the State to deal with the challenges of globalisation.  The public interest factors are, in the view of the CAC, limited to addressing the direct and specific risks posed by the transaction under scrutiny.  The CAC cannot thus usurp Government’s prerogative of formulating and developing economic policies to address broader challenges within the South African economy.

Against this background, the CAC reiterated its earlier decision that the benefits flowing from Walmart’s entrance (through lower prices) outweighed the possible negative effect that may arise (through the displacement of local suppliers and the knock-on effects on employment).  Thus, the CAC held that there was no evidential basis to prohibit the merger.  Notwithstanding this, the CAC determined that there remained a need for the supplier development condition to minimise the risk of the negative effect on local suppliers.

In this regard, the CAC ordered that the supplier development programme will operate as follows -

  • the focus of the programme will be on skills development, rather than cash hand-outs to local producers.  Thus, although the CAC ordered Massmart to contribute a maximum amount of R200 million to the programme over its duration, being 5 (five) years, it was made clear that it may not be necessary to expend the entire amount in achieving the programme’s objectives;

  • the administration and management of the programme will vest in the merged entity;

  • Massmart shall determine the amounts to be spent each year, after consultation with the advisory board;

  • the fund will be used to defray expenses and costs incurred in the implementation of the programme;

  • the focus of the programme should be on the most vulnerable enterprises, namely SMME’s.  The fund is intended to assist both highly focused clusters of micro enterprises in upgrading their capabilities and by providing them with access to the merged entity’s supply chain, as well as existing and potential local suppliers who fall within and outside of Massmart’s priority supply chain development;

  • the programme should seek to incentivise the merged entity to purchase products from local producers over and above the kind of products that would in any event be purchased by it;

  • the programme will be audited by external auditors; and

  • the merged entity will report annually to the Competition Commission. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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