The Competition Appeal Court (CAC) recently reversed the Competition Tribunal's decision to conditionally approve the merger between Momentum Group Limited (Momentum) and African Life Health (ALH), in which Momentum acquired the entire share capital of ALH.
Momentum is a wholly owned subsidiary of FirstRand Limited (FirstRand), which also holds 65,6% of Discovery Holdings Ltd (Discovery). Being part of the FirstRand group, Momentum and Discovery have common non-executive directors on their respective boards. Momentum and Discovery compete in medical aid administration. The Competition Commission had assessed the merger on the basis that Momentum and Discovery form part of a single economic entity and notionally combined Momentum's and Discovery's market shares (31,2%), with ALH’s (3,3%) and concluded that, in a 'worst case' scenario, the merged entity would have a market share of 34,6%. The Competition Commission accordingly recommended approval of the merger without conditions.
The Tribunal found that the merger raised no competition concerns absent the link between ALH, via FirstRand, to Discovery. The Tribunal's concern was that the common directorships could lead to an exchange of sensitive information at board level where a market division strategy could conceivably be entertained between Discovery and Momentum. While the Tribunal accepted that pre-merger Discovery and Momentum competed vigorously, it found that there was nothing preventing FirstRand from changing its strategy from a competitive to a collaborative one, thereby reducing competition. The Tribunal approved the merger on condition that the common directorships on the Discovery and Momentum boards were eliminated.
The CAC overturned this decision on the basis that the conditions provided no safeguard for competition. It noted that Momentum and Discovery, being part of the FirstRand stable, were considered by the Tribunal to be a single economic entity (although this issue was not analysed by the Tribunal in any detail). Accordingly, the elimination of cross-directorships would be an ineffectual measure to safeguard competition as Discovery and Momentum were ultimately controlled by the same entity. The court also found that the cross directorships were not merger specific as they existed pre-merger and that there was no evidence that post-merger there would have been an enhanced incentive to co-ordinate rather than compete.
The question of whether or not Momentum and Discovery form part of a single economic entity was of considerable importance in this case, yet it was not properly examined by any of the authorities considering the merger.
If it is accepted that Momentum and Discovery are part of a single economic entity, and could legitimately change their competitive strategy to one of non-competitive coordination, then there was no basis for the Tribunal imposing the condition of director resignations as AHL would form part of the pre-existing single economic entity post-merger. If, however, the firms were not part of a single economic entity, and provided there was a substantial lessening or preventing of competition as a result of the merger, the conditions could arguably be considered apposite as the merger would bring a third competitor (AHL) into the FirstRand stable with the potential for the exchange of competitively sensitive information and co-ordinated conduct which did not exist before.
The differing decisions in respect of this merger from the competition authorities indicate the complexity and the importance of balancing the economic and legal issues that relate to competition regulation. One is left to ponder what the fate of the merger would have been had the all important issue of whether or not these firms formed part of a single economic entity been given greater consideration.
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