Under South African competition law, public interest factors can be used to permit an anti-competitive merger, or to prohibit a pro-competitive merger. The inclusion of a public interest test has long been the subject of controversy. It seems to us that in recent years the competition authorities have given undue prominence to public interest considerations in their analysis of mergers, particularly where the public interest concern is that of employment.
The fundamental principle underlying competition regulation is the enhancement of consumer welfare through the competitive process. This is based on the theory that rivalry between competitors achieves benefits to consumers through lower prices, expanded output and enhanced innovation. This, of course, ultimately benefits the broad "public interest".
But this is not the sense in which "public interest" is used in the Competition Act. The closed list of public interest factors set out in the Competition Act comprises: the impact of the merger on a particular industrial sector or region; employment; the ability of small businesses or firms controlled by historically disadvantaged persons to become competitive; and the ability of national industries to compete internationally.
As a point of departure, it must be emphasised that there is good reason for the inclusion of the public interest criteria in the Competition Act, particularly in a developing economy such as ours, where industrial policy has an important role to play, in which unemployment is rife, and in which the distribution of wealth and ownership is so unequal.
However, despite their importance, the inclusion of these factors in the Competition Act leads to a paradox, in the sense that they are often divorced from and, at times, directly at odds with the primary objectives of competition law and policy. For example, a focus on the protection of employment, particularly where job losses are the result of efficiency-enhancing synergies between two merging firms, can often prevent a merged entity from being as efficient as it otherwise would be, resulting in less competition and knock-on effects of higher prices and less innovation. In other words, giving priority to the specified public interest categories can serve to undermine the primary competitive analysis in mergers, thus harming the broad "public interest" that competition policy aims to promote.
The competition authorities' public interest mandate is not divorced from their competition analysis: the factors are analysed with regard to one another, in a holistic inquiry, in which the competition assessment has relevance to the question of justification in respect of the public interest inquiry. But section 12A itself does not provide any guidance on balancing the competition and public interest assessments, other than requiring that countervailing public interest grounds must be "substantial" before they can constitute a valid basis upon which to prohibit a merger or impose conditions.
In our view, two inter-related questions arise in this context. First, are the competition regulators the correct authorities to determine public interest issues, such as employment? And, if so, have they applied the "substantiality" test correctly?
Are the competition authorities the correct forum?
Some argue that the competition authorities are the incorrect forum for the evaluation of public interest issues, because their objectives are not aligned with those of competition policy, and the exercise required by competition regulators requires a consideration of contradictory principles.
These concerns are not without merit. However, with all its flaws, it is surely preferable to allow for the simultaneous consideration of competition and public interest issues by the competition authorities in the course of analysing a merger. As David Lewis noted in May 2002, for one authority to take a decision on competition grounds, and another to take the public interest decision, would invite massive lobbying, and would lack the openness and transparency of our unified process. The single, unified forum, and the holistic inquiry that accompanies it, allows for the imposition of conditions – either to protect the public interest where a pro-competitive merger would otherwise be prohibited due to its negative impact on public interest, or to protect competition where an otherwise anti-competitive merger is approved due to its positive public interest impact. The alternative would be a bifurcated, disjointed and uncoordinated consideration of these issues.
What is crucial, however, is to ensure that public interest concerns only enter the competition fray when they are substantial.
Substantiality: assessing the major cases
In our view, the pendulum has swung too far in the direction of public interest. Parties that have been involved in a merger notification to the competition authorities in the last three years will have learnt that even one retrenchment will protract an investigation, and may even result in the imposition of a condition. Two recent examples of the imposition of conditions aimed at protecting employment are particularly noteworthy.
In AON / Glenrand, the merging parties estimated the retrenchment of a maximum of 220 out of approximately 1 500 employees due to a duplication of roles. Some of the employees were highly skilled, and it was common cause that their prospects of finding alternative employment were good. Notwithstanding this, the Commission recommended the approval of the merger subject to the imposition of a cap on retrenchments of any employee earning below R30 000 per month. Such a condition would have made the merged entity uncompetitive, because it forced it to maintain an inefficient employee base at a much greater cost than its rivals. Following a request for consideration, the Competition Tribunal (the "Tribunal") narrowed this to only 24 employees, earning between R15 000 and R30 000 per month, and prohibited the retrenchment of any employees earning below R15 000, for a period of two years. Whilst the merging parties themselves tendered this as a settlement offer, on AON's forecasts, a mere 54 employees in total were affected.
In Glencore / Xstrata, the Tribunal approved the transaction subject to the condition that no more than 80 retrenchments of semi-skilled and unskilled workers took place within 90 days of the last antitrust approval date, and a maximum of 100 retrenchments as a result of the merger forever (where the additional retrenchments could take place only two years after the effective date).
Were the public interest concerns in the above decisions "substantial"? The answer to this turns ultimately on whether substantiality is assessed in the context of each transaction (measured by reference to the proportion of the merging parties' employees affected), or whether it is assessed in the context of the economy as a whole. The approach adopted by the Court in Wal-Mart / Massmart was to determine total societal welfare; that is, to balance the positive effect on consumer welfare brought about by the merger against the potential public interest harm arising therefrom. In our view, it stands to reason that, just as consumer welfare is measured across the whole relevant market, so too must the job losses against which the trade-off is determined.
Consider, for example, the decision in Glencore / Xstrata, where the Tribunal protected 100 jobs in a sector where thousands of jobs are lost every month through market conditions. Whilst any employee who loses his or her job as a result of a merger deserves great sympathy, for the competition authorities to impose public interest conditions, there must surely be a substantial impact in the context of the South African economy. For every merger to be hamstrung by the possibility of only a few retrenchments is, in our view, irreconcilable with broader competition objectives, and cannot be said to meet the threshold of substantiality. Those employees that are retrenched are not without remedy; their protection simply lies elsewhere: they are protected by South Africa's extensive labour laws, which ensure the substantive and procedural fairness of every dismissal.
The question whether the competition authorities provide the correct forum for the ventilation of public interest issues is inexorably bound up with the question as to whether the correct test is applied. That is to say, the competition authorities are (at least in our view) the appropriate forum for the consideration of public interest issues provided that they apply the correct test, and thus limit themselves to public interest concerns that are substantial. Insubstantial public interest issues (such as retrenchments that affect only a few employees) are better dealt with in other fora, and by other regulatory regimes.
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