South Africa: South African Competition Law And Public Interest

Last Updated: 17 May 2007
Article by Lesley Morphet

South African competition law was transformed in 1999, with the coming into effect of the current Competition Act, 1998 ("the Act"). This statute introduced into competition law a somewhat unusual element, namely public interest. The concept of public interest is woven into the fabric of the Act. Even in the preamble, it is noted that, given the injustices of the past, the objectives of the Act include providing all South Africans equal opportunity to participate fairly in the economy and regulating the transfer of economic ownership in keeping with the public interest. This is reaffirmed in s2 which states that the purpose of the Act is to promote and maintain competition in the Republic in order inter alia to promote employment and advance social and economic welfare of South Africans; to enable small and medium sized enterprises to participate in the economy; and to promote a wider ownership spread, particularly in relation to historically disadvantaged persons.

The concept of public interest is carried through into the prohibited practices provisions, where one of the grounds for exempting otherwise anticompetitive conduct from the provisions of the Act is that it promotes the ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive.

But it is in relation to merger control that the concept of public interest comes into its own. The first and most important step of a merger analysis is to determine whether a merger is likely to substantially prevent or lessen competition. This is done by assessing a number of factors, all of which are commonly accepted tools of competition analysis. The competition authorities must then determine whether the merger can or cannot be justified on substantial public interest grounds, by considering the effect that the merger will have on the following: a particular industrial sector or region; employment; the ability of small businesses, or those controlled by historically disadvantaged persons, to become competitive; and the ability of local industries to compete internationally. (See Section 12A(3) of the Act.)

Thus, in analysing a merger and determining whether it should be approved, prohibited, or approved with conditions, the competition authorities are required to balance the competition factors which are commonly accepted by competition authorities worldwide, against the less commonly considered public interest factors mentioned above. In this balancing process, it is conceivable that a transaction that has been found to substantially lessen or prevent competition may be approved because the anti-competitive effect is outweighed by the positive impact of the merger in respect of one or more of the public interest factors. Alternatively, an otherwise unobjectionable transaction from a competition perspective could be prohibited because it has a negative public interest impact. The Act does not provide guidance in balancing the competition and public interest assessments except insofar as it states that the public interest grounds to be taken into account should be "substantial".

Public interest issues must always be taken into account when analysing a proposed merger, and therefore must be adequately dealt with in the merger filing. However, one should not conclude that everything always turns on the public interest issues. If one has regard to the many cases which have come before the competition authorities since 1999, one notes a mere handful of decisions in which public interest factors have been relevant, and in none of those cases has a transaction been prohibited.

For example, public interest issues came to the fore in the merger between Shell South Africa (Pty) Ltd ("SSA") and Tepco Petroleum (Pty) Ltd ("Tepco") (Case No. 66/LM/Oct01). In that case, Thebe Investment Corporation (Pty) Ltd ("Thebe") was selling its subsidiary Tepco SSA, and Thebe was to acquire a minority shareholding in Shell SA Marketing. It was clear that the transaction raised no competition law concerns. However, the Competition Commission recommended to the Competition Tribunal that the transaction be approved subject to conditions because it was concerned that the transaction had a negative impact on the competitive position of a firm controlled by historically advantaged persons.

The Tribunal analysed these proposed conditions, and concluded that they were not appropriate. Indeed, the Tribunal warned the Commission that it "should be extremely careful when, in the name of supporting historically disadvantaged investors, it intervenes in a commercial decision by such as (sic) investor" (see paragraph 49 of the decision). The Tribunal concluded that the conditions constrained not only SSA as the acquirer, but also the historically disadvantaged target. To the extent that it constrained their capital raising options, it could condemn firms controlled by historically disadvantaged persons to the margins of the economy.

The Commission argued that it had to be guided by the public interest and enforce public policy, and what might be good for Tepco might not be good for South Africa and its empowerment objectives. The Tribunal rejoined that

"the role played by the competition authorities in defending even those aspects of the public interest listed in the Act is, at most, secondary to other statutory and regulatory instruments – in this case the Employment Equity Act, the Skills Development Act and the Charter itself immediately spring to mind. The competition authorities, however well intentioned, are well advised not to pursue their public interest mandate in an over-zealous manner less they damage precisely those interests that they ostensibly seek to protect" .

The Tribunal therefore saw no need to impose conditions to secure a public interest objective, and approved the transaction unconditionally.

Another significant case in which public interest issues came to the fore was Anglo American Holdings Ltd ("Anglo") and Kumba Resources Ltd ("Kumba") with the Industrial Development Corporation ("IDC") intervening (Case No. 46/LM/Jun02). This was a long-running case, in which competition and public interest issues were exhaustively examined.

In its decision the Tribunal first analysed the competition effects of the transaction, and concluded that the transaction would not substantially lessen or prevent competition. It had some concerns regarding information sharing, which it found could be solved by the imposition of a condition.

Insofar as public interest issues were concerned, the intervener, the IDC, argued forcefully that the merger should be prohibited on public interest grounds. Referring to the section dealing with the purpose of the Act, the IDC argued that the merger would not be compatible with the purpose set out in s2(f) of the Act, being "to promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged person." The IDC argued that Kumba was a strategic asset, and that were Kumba to fall under the sway of Anglo, one would not only not be promoting a greater spread of ownership, as set out above, but one would be doing the opposite, given that Anglo already had a large share of the economy.

Without accepting the IDC’s interpretation of the Act, the Tribunal concluded that there was insufficient evidence to suggest that if the merger went ahead it would preclude the growth of ownership in Kumba by historically disadvantaged persons. The Tribunal therefore concluded that the transaction was not against the public interest, nor was it anti-competitive, and therefore approved the merger subject to the condition mentioned above.

Another case which is instructive regarding public interest issues is Harmony Gold Mining Company Ltd ("Harmony") and Goldfields Ltd ("Goldfields") (Case No. 93/LM/Nov04). It will be recalled that Harmony made a hostile takeover bid for Goldfields, which was vigorously opposed on all fronts by Goldfields, including in the competition arena. Goldfields, who were trying to oppose the merger with every weapon in their arsenal, argued firstly that the merger was anti-competitive. This did not find favour with the Tribunal, which found that the transaction would not substantially prevent or lessen competition.

The focus therefore shifted to the question of public interest. Goldfields interestingly argued that, because the Act talks of whether a merger "can or cannot be justified on substantial public interest grounds …", that even if a merger raises no competition problems and no negative public interest issues, it must still be prohibited if there is no evidence that it can be justified on public interest grounds. Although this is an interesting legal argument, the Tribunal found that such an approach "would render a good measure of the mergers which come before us daily, susceptible to prohibition" (at paragraph 35). The Tribunal concluded that the words were relevant when a merger involved public interest factors which could lead to opposing conclusions. For example, if in examining public interest concerns the Tribunal found that it might lead to employment losses, but could lead to the creation of a national champion, they would then have to weigh-up those opposing public interest issues in order to come to a net conclusion on public interest. Goldfields argued strenuously that the transaction would impact negatively on public interest both in relation to the effect of the merger on the gold mining sector, and also in relation to employment. The Tribunal was far from convinced with the argument in relation to the effect of the merger on the sector. Insofar as employment was concerned, the Tribunal merely imposed a condition regarding the number of retrenchments, and therefore approved the merger.

Public interest grounds have not thus far saved an otherwise anti-competitive merger either. For example in the merger of JD Group and Ellerines (Case No. 78/LM/Jul00), whilst the merging parties did not concede that the proposed merger was anti-competitive, they raised as a public interest benefit an argument that the merged entity would increase their ability to offer financial services to customers, thus helping to bank the "unbanked". Although the Tribunal found these objectives to be laudable, they did not consider that these strategies could only be implemented pursuant to the merger, and were therefore not persuaded that this was a public interest ground to approve the merger. The parties also suggested that they would involve themselves in franchising, presumably with the intention of promoting employment and the ability of small businesses and businesses owned by historically disadvantaged persons to become competitive. Again, the Tribunal did not find this merger specific, or that it was being embarked upon to promote public interest. The public interest arguments raised by the parties did not therefore persuade the Tribunal to approve the merger.

If one looks back at the body of case law since 1999, it is apparent that the competition authorities have applied the public interest test with good sense, despite attempts by parties to persuade the Tribunal either to approve or prohibit a merger on ingenious public interest grounds. The focus, quite correctly, has been on the impact of the transaction on competition, where again the competition authorities have applied a reasoned approach to the evidence before them. Although as David Lewis, Chairperson of the Competition Tribunal, remarked in September 2002 in a speech to the International Competition Network Merger Working Group, "I readily concede that public interest considerations weigh more heavily in developing countries than they do in developed countries" for a number of reasons, including firstly that "it is widely accepted that there is a greater role for industrial policy, for targeting supported strategically selected sectors or interest grounds, in developing that in developed countries". He continued that "The primacy of the competition evaluation is secured by the structure of the Act which provides that the competition evaluation is completed as the prior step in the decision making process and, hence, that the public interest test is conducted through the filter of a completed competition finding". The competition authorities have, in my view, succeeded in striking a balance between public interest and competition, and have not fallen prey to seductive arguments in relation to public interest issues.

The author, Lesley Morphet, heads Deneys Reitz's Competition Law Department.

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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