While the vast majority of mergers assessed by South African competition authorities are approved unconditionally, certain trends are evident regarding the types of conditions imposed in conditional approvals.
Since the beginning of 2012, nearly a third of conditionally-approved mergers contained conditions relating to exclusivity clauses in rental retail lease agreements. Conditions aimed at restricting the flow of competitively-sensitive information or dealing with retrenchments were, in turn, imposed in approximately 20% of conditionally-approved mergers during this period.
Because complying with conditions increases merging parties' transaction costs, an awareness of relevant trends in this regard may enable parties to plan for additional time and costs associated with complying with conditions.
When may conditions be imposed?
A "merger" is defined in the Competition Act, No. 89 of 1998 as occurring 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".
Mergers that meet prescribed financial thresholds must be notified to the Competition Commission (Commission), and notifiable mergers may not be implemented until merger clearance has been obtained. When assessing a merger, competition authorities are required to consider the merger's impact on both competition and on public interest grounds, including employment and the ability of small businesses to become competitive. The competition authorities may either prohibit or conditionally or unconditionally approve a merger.
If a merger raises competition or public interest concerns that can be remedied by conditions, the competition authorities usually impose such conditions rather than prohibiting the merger. The conditions are often offered by the merging parties and include both structural and behavioural remedies.
Structural remedies are designed to prevent anti-competitive post-merger structures and include the divestiture of businesses or limitations on cross-shareholdings or directorships in competitors. Behavioural remedies are designed to prevent harmful behaviour. Reporting obligations are often imposed on the merging parties to facilitate monitoring. The authorities rely on information obtained from trustees, relevant trade unions, employees and industry participants to assess compliance with conditions.
Since the Metropolitan/ Momentum merger in 2010, there has been a marked shift in the competition authorities' approach to mergers that give rise to possible retrenchments.
The Commission now consistently requires parties to provide detailed information regarding the exact number and skills-level of any employees that may be retrenched as a result of a merger. It has become common practice for conditions that cap retrenchments, both in respect of number and skills-level, to be imposed, even when the number of affected employees is very low. Conditions limiting retrenchments to as little as 10 or 14 employees have been imposed in recent months.
In addition, in the Primeprac/ Murray & Roberts merger and the Reutech/ SAAB Grintek Defence merger, parties were required to provide practical support to affected employees such as counselling, assistance with administrative issues arising from the termination of employment, and the preparation of curricula vitae. The parties in the Reutech/ SAAB Grintek Defence merger were also required to establish a ZAR 1 million employee training fund. In the Glencore/ Xstrata merger, in addition to imposing a limitation on retrenchments, the parties are required to engage with affected employees and trade unions before announcing any unskilled or semi-skilled retrenchments, and to make ZAR 10 000 available per affected unskilled or semi-skilled employee for training and re-skilling.
Conditions Aimed at Limiting the Exchange of Competitively-Sensitive Information
Mergers that do not give rise to public interest concerns or anti-competitive effects arising from horizontal or vertical integration may nevertheless face conditional approval if the acquiring group is already invested in a company that competes with the target business, even if such investment is a minority, non-controlling investment. In recent months the competition authorities have regularly imposed conditions aimed at preventing the flow of competitively information, such as customer or pricing information.
In the AFGRI/ Senwes merger, which involved the establishment of a farming requisite retail store joint venture between Afgri and Senwes, the Commission was concerned that Afgri and Senwes could share competitively-sensitive information through the joint venture and that this could result in post-merger coordination in respect of their overlapping business activities that do not form part of the joint venture.
To address these concerns, conditions were imposed regulating the constitution of the management committee of the joint venture; ensuring, through the use of confidentiality agreements, that competitively-sensitive information does not flow from the joint venture to its parent companies; and mandating the implementation of an on-going competition compliance programme.
In the Rainbow/ Foodcorp merger the competition authorities were concerned that information exchange between competitors might be facilitated by the merger as Rainbow's controlling shareholder, Remgro, also holds a minority interest in Unilever, a competitor of the target. A condition was thus imposed, requiring Remgro to adhere to a clause in the Unilever shareholders' agreement that prohibits Remgro from appointing a director, who sits on a competitor's board, to the board of Unilever.
During the last year-and-a-half, conditions expressly prohibiting the flow of competitively sensitive information, or prohibiting cross-directorships, were also imposed in mergers involving Clive Theodore Menne/ Matat Wholesalers; Pacorini Metals/ Access Freight; Sasol Oil/ BP Southern Africa; BVI 1623 & 4/ Waco Africa; Industrial Development Corporation of South Africa/ Scaw South Africa; ABSA/ Private Label Store Card Portfolio of Edcon; Actom/ Savcio Holdings; and Industrial Development Corporation of South Africa/ Eerste Flambeau Huur.
Exclusivity clauses in lease agreements
The Commission is currently investigating various major supermarket chains for possible contraventions of the Competition Act arising from the industry practice of including exclusivity provisions in long-term leases between supermarkets and property developers. These exclusivity provisions include product exclusivity (where the lease restricts the product range that other tenants can offer in a shopping centre) and size restrictions (which restrict potential competitors to a specified maximum area).
During the past year-and-a-half, purchasers of rental retail properties have, in at least 17 mergers, received conditional approvals as a result of the fact that the lease agreement in respect of the target property contained exclusivity clauses of this nature at the time of the merger.
The Commission's view was that these exclusivity clauses could have the effect of preventing small businesses, such as butcheries and delicatessen stores, from gaining access to rentable retail space in the respective target shopping centres. This is considered to constitute a public interest concern and the competition authorities were of the view that conditions were warranted to address such concern.
While it is not clear how such a public interest concern, which already exists as a result of an pre-existing lease agreement, can be said to arise from the mergers in question, the competition authorities repeatedly require the purchasers in these mergers, as a condition to obtaining merger clearance, to negotiate with the relevant tenants in order to remove the offending exclusivity clauses when the lease agreements are renewed. Purchasers of rental retail properties should be aware that they are likely to receive similar conditions for as long as the inclusion of exclusivity clauses in lease agreements remains common practice.
The imposition of conditions by the Commission can have serious implications for companies. Taking note of relevant recent trends that can be identified by looking at the conditions the Commission has imposed, may help companies to plan in advance for complying with conditions.
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.