The rise of Public Interest: Recent high profile mergers

Abstract

Recent merger decisions by the Tribunal have once again highlighted the importance of public interest considerations in merger analysis. The Tribunal’s decisions in the Metropolitan Holdings Limited and Momentum Group Limited and notably the Wal-Mart Stores Inc and Massmart Holdings Limited highlight the resurgence of public interest in merger evaluation. The Tribunal’s approach and the relevance of public interest criteria in merger evaluation using these two case studies are analysed. I firstly outline the Tribunal’s view on public interest evaluation using the Harmony Gold Mining Company Limited and Gold Fields Limited merger are outlines in order to give insights into the relationship between public interest and competitive assessment in merger evaluation. Then recent merger judgements by the Tribunal that have turned on public interest considerations are discussed. The paper by highlighting the divergent views held by various parties on the Tribunal’s approach and recommendations are made for further developments in future research and policy on this subject.

1. INTRODUCTION

The debate sparked by the Tribunal’s recent judgements on mergers that have turned on

public interest indicates differing views on public interest and how it should be applied in

merger analysis. South African competition policy and law recognise the importance of

public interest as part of merger evaluation and provisions are made for these to be

incorporated when mergers are considered. While some are of the view that public interest is

not considered adequately by competition authorities an assessment of Tribunal merger

decisions from 1999 to 2009 shows that public interest has been and continues to be

considered. The Iscor Limited and Saldahna Steel (Pty) Ltd, Metropolitan Holdings Limited

and Momentum Group Limited and the Wal-Mart Stores Inc and Massmart Holdings Limited

merger cases are some of the landmark cases that give insight into how public interest is

dealt with in South Africa. A review of public interest in international jurisdictions shows that

while public interest is considered this is within certain confines and that while South Africa is

consistently considering public interest this is not the case internationally. The paper

concludes by making proposals on how public interest should be considered in South Africa.

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2. PUBLIC INTEREST AND THE LAW

Public interest provisions in the South African competition legislation are found in Section 12

of the Competition Act no 89 of 1998 and forming an important part for the assessment of

mergers and acquisitions. Section 12 A of the Competition Act reads as follows:

(1) Whenever required to consider a merger, the Competition Commission or

Competition Tribunal must initially determine whether or not the merger is likely to

substantially prevent or lessen competition, by assessing the factors set out in

subsection (2), and –

(a) If it appears that the merger is likely to substantially prevent or lessen

competition, then determine

(i) Whether or not the merger is likely to result in any technological,

efficiency or other pro-competitive gain which will be greater than, and

offset, the effects of any prevention or lessening of competition, that

may result or is likely to result from the merger, and would not likely be

obtained if the merger is prevented; and

(ii) Whether the merger can or cannot be justified on substantial

public interest grounds by assessing the factors set out in

subsection (3); or

(b) Otherwise, determine whether the merger can or cannot be justified on

substantial public interest grounds by assessing the factors set out in

subsection (3).

Subsection 3 of the Act reads as follows:

(3) When determining whether a merger can or cannot be justified on public interest

grounds, the Competition Commission or the Competition Tribunal must consider the

effect that the merger will have on –

(a) A particular industrial sector or region;

(b) Employment;

(c) The ability of small businesses, or firms controlled or owned by historically

disadvantaged persons, to become competitive; and

(d) The ability of national industries to compete in international markets.

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The inclusion of public interest in merger policy in South Africa was largely driven by the

need for economic redistributive justice. The government of 1994 sought to level the

economic grounds for all citizens, among other objectives, in order to fulfil its economic and

social obligations, particularly, towards the previously disadvantaged. Lewis (2002), in his

advocacy for the inclusion of public interest considerations in merger evaluation, argues that

public interest considerations weigh more heavily in developing countries than in developed

countries because of the greater use of industrial policy in developing economies. He points

out that a competition statute that simply ignores the impact of its decisions on employment

or on securing or a greater spread on black ownership (in the case of South Africa) would

greatly discredit competition authorities.

Views have been expressed that public interest has not received sufficient attention and

prominence in merger evaluation in the application of the South African competition

legislation1. This suggests that public interest has somewhat been a neglected step-child in

treatment compared to the more attractive and accepted competition evaluation that

competition authorities find comfortable; largely as value judgements can be minimised in

normal and ordinary competitive evaluations. It is further suggested that, albeit indirectly, the

application of public interest provisions embedded in the Act have not been responsive to

the circumstances of the broader developmental needs of society.2 However this paper

concludes that these views are mistaken as a close analysis has shown that public interest,

particularly the employment, competitiveness of small business and industrial sectors and/or

region factors, has been considered3.

In the period 1999 to 2009 the Competition Tribunal has considered approximately 658 large

mergers and although very few turned on public interest over the relevant period various

public interest factors have been considered by the Tribunal. It is worth noting that two of the

cases discussed in the paper are not included in the sample data used as they took place in

20104. Figure 1 shows the percentage of public interest considerations including

employment, regions and/or sector and small business shown as smme as a proportion of all

mergers considered annually. The ability of national industries, commonly referred to as

national champions, to compete in international markets has been excluded because there is

no evidence of that factor being considered by the Tribunal.

1 “Patel punts public-interest bias in competition cases” A. Visser, Business Day, published 04/11/2011.2 “Patel punts public-interest bias in competition cases” and “When state policy erodes competition law” , A. Visser, Business Day, published 04/11/2011, accessed 3 Njisane, Y., (2011). “Factors driving decisions made by the Competition Tribunal of South Africa: Competition analysis vs. Public interest”, Unpublished Masters Dissertation, University of KwaZulu Natal.4 These are the Walmart/Massmart and the Metropolitan/Momentum mergers.

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Figure 1: Public interest considerations in the period 1999 to 2009.

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

Employment considered

regionsector

smme

Year

Publ

ic in

tere

st a

s % o

f tot

al m

erge

rs

Source: Own calculation (Tribunal large merger reports)

It is important to note that the sample data used only includes large mergers presided over

by the Tribunal excluding intermediate or small mergers which are decided upon by the

Competition Commission. This reduces the number of public interest cases considered by

competition authorities as more of these are settled at the Competition Commission level

and may not reach the Tribunal.

Figure 1 above shows that employment consideration accounts for the highest proportion

followed by considerations of impact on competitiveness of small business (including those

owned or managed by previously disadvantaged persons). Consideration of impact on a

particular sector or region has largely followed a declining trend with very few mergers in the

early 2000’s. I now focus on the two public interest factors that have been considered the

most namely employment and the competitiveness of small business.

The consideration of employment also shows a pro-cyclical pattern rising when there are

major challenges in the economy. The peak in steep peaks in 2000/1 and 2008/9 are a case

in point. 16% of mergers in 2001 took employment into account whereas by 2007, at the

height of the commodity price boom, employment issues failed to be mentioned. However,

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as the economy failed employment consideration was once again back on the agenda. The

first spike in the consideration of employment in the early 2000’s coincides with the downturn

in non-oil commodity in prices. The International Monetary Fund notes that a rebound in oil

prices during 1999 – 2000 had a negative impact on other non-oil commodity exports5 and

this would have had serious employment implications for South Africa given that we are

largely a mineral resources based economy. Similarly in 2008 onwards, we see an upward

trend in the consideration of public interest and this coincides with the global economic

recession. Even though not included here, the case law discussed later in the paper shows

that there has been an increase in the consideration of employment in mergers in from 2009

forward.

This shows responsiveness by competition authorities to broader socio-economic needs of

the country.

An assessment of small business considerations, including those owned or managed by

historically disadvantaged persons, largely follows the same trend as employment rising to

approximately 6% in 2001 and declining thereafter. It is indeed interesting to note that this

defence has not been raised in the many mergers considered by the Tribunal. It could also

be said that this shows that while there has been significant merger activity in the relevant

time period firms have not sought to apply BEE imperatives as envisaged by government

and thus could not use this as a defence in merger proceedings. Another alternative

explanation could be that firms are more likely to use this justification if they perceive that a

proposed merger is likely to be prohibited.

I now turn to discuss some of the most recent high profile cases that have turned on public

interest and how public interest in merger proceedings has been applied by the Tribunal.

3. THREE PUBLIC INTEREST CASES

3.1 The Metropolitan Holdings Limited and Momentum Group Limited6

This case is a landmark case as it establishes the principle of connecting job losses and

efficiencies. The Tribunal conditionally approved the acquisition of 100% of the issued

ordinary share capital of Momentum by Metropolitan. The Tribunal first assessed the

competitive effects and concluded that the merger was unlikely to substantially prevent or

5 International Monetary Fund, “World Economic Outlook: Focus on Transition Economies”, page 73, October 2000.6 Case 41/LM/Jul10

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lessen competition in any relevant potential market. Both firms were active in the broader

financial services market including insurance, medical aid, retirement fund administration,

asset management and the provision of rental property. While the post-merger market

shares in many of the identified markets were in the region of 20 -30% it was found that

there were many other sizeable as well as smaller players that would exercise a competitive

constraint on the merged entity.

However, the merger gave rise to one public interest consideration – loss of employment.

The merging parties submitted that the merger may lead to up to approximately 1000 job

losses as a result of redundancies and the need to improve efficiencies in the post-merger

entity. The Tribunal approved the merger subject to a limited moratorium on retrenchments

for two years with terms that clarified the conditions on the merged entity7.

The parties sought to dispel concerns around these potential job losses by submitting that

there was a plan to redeploy, retrain, offers of early retirement for affected staff members;

natural attrition and business growth as mitigating factors. This, according to the parties,

would reduce the number of potential job losses to 1000 from the earlier envisaged 1500 job

cuts.

The Tribunal’s factual assessment reveals the importance of clearly articulating how the

envisaged employment loss figures were determined and how these are linked to expected

public (and not private) efficiencies post-merger. The Tribunal found that the parties were

unable to show ‘a rational connection between the efficiencies sought from the merger and

the job losses claimed to be necessary……’ There was a recognition, however, that this

more considered approach to justifying job losses is only reserved for mergers where

expected losses are of significant magnitude.

It is the Tribunal’s view that any negative impact on public factors cannot be arbitrarily

arrived at without establishing a clear connection between the envisaged negative impact

and whatever claimed efficiencies. Further, the Tribunal emphasised that while a negative

impact on employment may be clearly connected to a particular claimed efficiency this does

not discharge the parties of their duty to show that the employment losses can be justified for

7 The imposed conditions read as follows: MMI Holdings, the merged entity, shall ensure that there are no retrenchments in South Africa

resulting from the merger for a period of 2(two) years from the effective date of the proposed transaction.

The condition in 1 shall apply to the 204 senior management positions set out in the table on page 242 of the record.

Metropolitan and Momentum must circulate the condition in 1 and 2 above to all their employees within 7 days of the date of this order.

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a reason that is public in nature to offset the public interest in preserving jobs as a result of

the merger.

The Tribunal also tackled the issue of a joint and concerted effort between merging parties

and labour unions in addressing employment losses as a result of a proposed merger. This,

the Tribunal considered necessary in merger proceedings given that the Act makes

provisions for special rights granted to labour8. This case has since been used as precedent

in other following cases including the Walmart / Massmart merger discussed below.

3.2 Iscor Limited and Saldahna Steel (Pty) Limited9

The Iscor Limited and Saldahna Steel (Pty) Limited merger gives insight into the Tribunal’s

views on how to assess mergers that may impact on national champions and a particular

sector and region. This merger involved the acquisition, by Iscor Limited, of the remaining

fifty percent shares owned the Industrial Development Corporation in Saldahna Steel. Iscor,

at the time, was a major player in steel production in South Africa. Saldahna was a state-of-

the-art mill that was to supply the export market from the port of Saldahna. This acquisition

entailed a change from joint to sole control by the acquiring firm. This move was brought

about by a number of facts, chief amongst them being that the target firm stood the risk of

failing and consequently implying significant losses for the two shareholders invested in the

firm. The Tribunal’s assessment of the competitive effects of the acquisition concluded that

the failing firm concerns outweighed the loss to potential competition that would arise from

the transaction.

In keeping with its ethos that a public interest analysis ought to be conducted despite the

outcomes of the competitive effects analysis, the Tribunal proceeded to evaluate the impact

of the acquisition on public interest. They found that if the merger was not approved it would

have adverse effects on public interest. Note the different approach taken in this case.

Generally it is observed that the approach taken in assessing public interest carries with it a

negative connotation in that it is to find reasons to prohibit what would otherwise be an

acceptable merger. The impact of a prohibition of the acquisition would have had dire

consequences for the Saldahna Bay region given that most economic activity originated in

the steel mill.

The evidence presented before the Tribunal indeed showed that the Saldahna Steel plant

was a crucial part of the town’s economic life and that its closure would not only affect its

8 See section 13A(2) of the Act9 Case no: 67/LM/Dec01

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employees given the resulting of employment but also all the firms and individuals whose

livelihood depended on its functioning. Given the small size of the region and its dependence

on a small number of industries, the effect of the plant closure, according to the Tribunal,

would be devastating. Furthermore, the Tribunal noted the firm’s contribution to community

development through its social programs that contributed to the upliftment of the region.

Given this, the Tribunal found that indeed the public interest favours the approval of the

acquisition.

The Tribunal proceeded to examine the impact of the acquisition on ‘the ability of national

industries to compete in international markets’ or commonly referred to as national

champions. In assessing this public interest, the Tribunal largely relied on evidence

presented to it by the Department of Trade and Industry, the custodians of industrial and

trade development. This aspect of the merger indeed highlights the issue of competition

policy being part of a suite of economic instruments used by government to achieve its

economic development imperatives.

The DTI’s arguments centred on the acquiring firm being able to expand its productive

capacity in order to better compete with much larger firms in the international market. Further

the DTI argued that were Iscor to become a lower cost producer, this will be to the benefit of

the downstream steel industry thereby making Iscor’s customer competitive as well. While

wary of this argument the Tribunal nevertheless approved the transaction noting that this

was not a subject they ought to make a pronouncement on for the purposes of the merger

before them.

Indeed while acknowledging that the acquisition embodied anti-competitive effects given its

removal of Saldahna as a potential competitor to Iscor, the failing firm defense raised by the

parties outweighed these potential effects. Further the public interest also necessitated the

approval of the merger as a prohibition would have resulted in even dire consequences.

3.3 Walmart Stores Inc and Massmart Holding Ltd10

The Tribunal’s decision to conditionally approve this merger has led to a lot of controversy

and raises critical questions about the future use of public interest in competition policy. The

target firm is Massmart, a local wholesaler and retailer of grocery, liquor and general

merchandise, and the acquiring firm is Walmart, the largest retailer in the world. This

acquisition has raised the ire of organised labour and government given Walmart’s

10 Case no: 73/LM/Nov10

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reputation of antipathy towards labour unions, among other concerns. It has also sparked

criticism of undue government involvement and over-reaching of public policy in competition

matters. It is safe to say that all parties agreed that the merger, in and of itself, did not raise

any competition concerns and therefore would not substantially prevent or lessen

competition in South Africa. The bone of contention really lies with the public interest

implications of the acquisition as various government departments11, labour unions and civil

society12 argued for an outright prohibition or alternatively the imposition of conditions on the

matter.

The public interest factors concerns were the effects on employment, a particular sector or

region and small businesses or firms controlled by historically disadvantaged persons to

become competitive.

In assessing the impact on employment the Tribunal concluded that there was no evidence

of potential retrenchments resulting from the merger but rather that there was likelihood

there may be employment gains achieved going forward. While reaching this conclusion,

based on documentary evidence, may have been appealing, the Tribunal was cautious in

this for two reasons. The first being that documentary evidence and indeed the parties did

not clarify whether the envisaged employment creation would take place locally or in other

markets given the merged entity’s intentions of expanding into other African markets.

Secondly, Massmart’s divisional employment practice meant that while some divisions may

be expanding others may be contracting thus giving a mixed picture of effects on

employment. The Tribunal was comforted by the parties’ undertaking that there will be no

retrenchments in South Africa, arising from the merger, for a period of two years and that

there was very little obvious likelihood of redundancies post-merger. Despite allegations of

pre-emptive retrenchments by the target firm, which the Tribunal found to be unrelated to the

proposed transaction was satisfied that employment concerns were adequately addressed

by the conditions imposed.

The issues considered in relation to employment did not end with the protection of possible

job losses but, for the first time in South Africa, extended to how the merged entity would

engage with organised labour in future. Given Walmart’s reputation of antipathy towards

organised labour and Massmart’s divisional approach to labour negotiations, labour unions

sought additional conditions that would introduce centralised bargaining and a closed shop.

11 These include the Economic Development Department, Department of Trade and the Industry and Department of Agriculture, Forestry and Fisheries.12 These are the South African Commercial Catering and Allied Workers Union, Congress of South African Trade Unions, Food and Allied Workers Union, National Union of Metal Workers in South Africa, South African Small Medium and Micro Enterprise Forum and the South African Clothing Textile Workers Union.

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The Tribunal was satisfied with the imposition of a condition compelling the merged entity to

honour existing labour agreements and acknowledge existing labour unions as such. These

arguments existed pre-merger and therefore would not be affected by merger.

In relation to the merger’s impact on a particular sector or region and small businesses, it

was the concern of various parties that the merged entity would materially divert its

procurement of products from the local market to imports. The argument was that although

pre-merger the target firm had some limited capacity to import; this would change

significantly post-merger given the acquiring firm’s global reach. This, it was argued, would

lead to a decline in demand for products of domestic firms ultimately resulting in closures

and job losses. The theory of harm posited was based on the merged entity increasing its

share of the local market through lower prices offered to customers driven through Walmart’s

superior buying power in sourcing overseas. The condition proposed to alleviate this concern

was an imposition of an import quota on the merged entity. The Tribunal’s finding was that

indeed a change in the merged entity’s procurement process in so far as imports are

concerned was likely, however quantifying its impact was less clear and its applicability was

even more difficult to enforce. It was recognised that the imposition of specific import quotas

would also contravene the conditions of the World Trade Organisation.

Further, the duration of such a condition was also subject to dispute with some interveners

seeking a period of five years. The Tribunal relied instead imposed a three year time period

for the implementation of the conditions imposed arguing that there was no clear rationale

for the time period sought by some of the interveners. Weighing this proposed condition

against the expected benefits to consumers in the form of lower prices made this an arduous

task for the Tribunal. Instead the Tribunal found that the proposal by the merging parties of

an investment remedy aimed at developing local suppliers, to the tune of R100 million, more

attractive. This, Tribunal felt was more appropriate as it sought to make local industry more

competitive and that it was enforceable. While such a remedy had been applied before in

South Africa13 it was the first time that a development fund remedy was imposed in a merger

context.

4. THE TRIBUNAL’S APPROACH AND LESSONS LEARNT

13 A development fund remedy was first implemented in an enforcement case involving a cartel in the bread and milling industry in which R250 million was set aside for an Agro-Processing Competitiveness Development Fund. See Competition Commission v Pioneer Foods (Pty) Ltd, Case no: 15/CR/Feb07 and 50/CR/May08.

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What then do we learn from these cases? The discussion below focuses on the lessons

learnt so far.

The conditionally approved hostile take-over bid of Gold Fields Limited by Harmony Gold

Mining Company Limited14 gives the first insight into the Tribunal’s approach to Public

interest in merger analysis. In that matter, the Tribunal succinctly set out its view on the

relationship between the competitive assessment and public interest factors in evaluating

mergers and how these must be considered.

The Tribunal stated that the fundamental question to be answered in any public interest

enquiry is whether the merger cannot (own emphasis) be justified on public interest grounds.

This however, the Tribunal noted, did not mean that a merger ought to be prohibited unless

there was a demonstrable positive public interest gain deriving from that merger. Indeed this

would have implied that the competition and public interest assessment, as two legislated

aspects of merger evaluation, were not inter-related and/or inter-dependent. It was, and

continues to be, the view of the Tribunal that the wording of the section 12A(i)(b), giving

specific reference to the use of the word ‘otherwise’, implied that the public interest

evaluation must be done regardless of the outcome of the 12A(2) ‘competition’ analysis. In

the Distillers Corporation (SA) Limited and Stellenbosch Farmers Winery Group Limited15 the

Tribunal argued that public interest factors can operate either to redeem an anticompetitive

merger or impugn a merger deemed not anticompetitive.

Essentially, the Tribunal’s application of the Act is that the public interest conclusion is

justified in relation (own emphasis) to the prior competition conclusion. In short, it is the

Tribunal’s view that “all that it needs to establish, having found as we have earlier that it will

not have a likely anti-competitive effect, is that the merger will not have a substantial

negative effect on the public interest16.” As will become clear later, this approach finds

support in many jurisdictions and competition experts.

The Tribunal stressed that the Act required that all mergers must first be subject to a

competition evaluation and then assessed on public interest grounds. This is so because

even if a merger has failed the competition test, it can still be approved on the public interest

test. Similarly, a merger that has passed the competition test can still fail the public interest

test and be prohibited. This aligns with international practice.

The Metropolitan Holdings Limited and Momentum Group Limited merger gives insight into

the Tribunal’s views on assessing employment as a public interest consideration in merger

14 Case no: 93/LM/Nov04 (ibid).15 Case no: 08/LM/Feb02, para 210.16 Harmony Gold Mining Company Limited and Gold Fields Limited, Case no 93/LM/Nov04, para 61.

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analysis as shown in its reasons17. The Tribunal built on its earlier approach to assessing

public interest factors set out in Harmony/Goldfields and noted that when a substantial public

interest concern has been raised, the merging parties bear the burden of justification. This

means that the evidential burden shifts to the merging parties to rebut the net conclusion that

a merger may not be justifiable on substantial public interest grounds. The Tribunal was,

however, careful to point to the confines in which the burden of proof would fall on the

merging parties. This involved a scenario where the employment loss was substantial and

the short-term possibilities of re-employment, for a significant number of the affected

employees, were limited. The Walmart/Massmart matter also shows that the evidentiary

burden on the parties is such that they cannot make claims of potential effects on public

interest that are not substantiated by either documentary or oral evidence. Indeed there must

be sufficient particularity on the claimed potential effects with supporting evidence on how

these were arrived at.

The Tribunal sets the evidentiary test to include proof that a reasonable process has been

followed in determining that number of jobs to be lost and that ‘the public interest in

preventing employment loss is balanced by an equally weighty, but countervailing public

interest, justifying the job loss and which is cognisable under the Act.’ 18

This means that even if the merging parties raise efficiency grounds to counter or explain the

envisaged job losses, this is not sufficient. Rather such job losses must be justified on the

grounds that are public in nature to countervail the public interest in preserving jobs. In other

words, even though the merging parties may demonstrate a rational connection between the

proposed employment losses and a particular efficiency claim such as savings deriving from

the job cuts, this would not be sufficient if the efficiency gain is a private one and not public

in nature. It further argues that Section 12A of the Act is structured such that private

efficiency gains can only be considered as an offset to anticompetitive effects and not public

interest.

This however, added the Tribunal, does not mean that there are no instances wherein

efficiency gains, even at the expense of job losses, could be justified on public interest

grounds. In Distillers Corporation (SA) Limited and Stellenbosch Farmers Winery Group

Limited19 the Tribunal noted that there may be instances where public interest factors may

lead to opposing conclusions. By way of example, the Tribunal averred that a negative

employment effect may be countered by a positive effect on a particular region in that in

17 Metropolitan Holdings Limited and Momentum Group Limited, Case no: 41/LM/Jul10, para 66–118.18 Metropolitan Holdings Limited and Momentum Group Limited, Case no: 41/LM/Jul10, para 70.19 Distillers Corporation (SA) Limited and Stellenbosch Farmers Winery Group Limited, Case no: 08/LM/Feb02, para 214.

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order to keep a factory open may require that substantial jobs be lost. Other instances

include a situation where the merger is required to save a failing firm; in order to be

competitive cost reductions in the form of job cuts are required; and a lower cost base, which

will result in lower prices for consumers, can only be achieved by job cuts. A similar view

was echoed in the Harmony Gold matter where the Tribunal also noted that it is possible that

public interest factors do not point to the same conclusion. By way of example a merger

could give rise to employment losses (negative effect) whilst creating a national champion

(positive effect).

Therefore there is an intrinsic requirement that the Tribunal perform a balancing act of these

conflicting factors before reaching a net conclusion on public interest. The

Walmart/Massmart matter builds on this and pits negative public interest effects against

consumer welfare enhancing outcomes arising from a merger. Indeed there was agreement

by all parties concerned that there were cognizable consumer welfare effects arising from

the merger in the form of lower prices that would affect the most vulnerable of consumers.

What then of these potential consumer welfare enhancing effects when pitted against a

negative impact on public interest? Indeed it seems to me that the balancing act required

necessitates a strict application of the law on the facts of the case and most importantly

raises the issue of merger-specificity as a guiding principle in the assessment of public

interest as applied in the competition evaluation.

This was indeed the opening statement of the Tribunal in setting out its reasons on the

matter. It is worth repeating verbatim the sentiments expressed by the Tribunal on this issue

“Subject matter and substantiality are not the only limitations in considering public interest. A

further consideration is that the public interest must be merger specific. Expressed in less

technical language, unless the merger is the cause of the public interest concerns, we have

no remit to do anything about them. Our job in merger control is not to make the world a

better place, only to prevent it becoming worse as a result of a specific transaction…..”20

This is borne out in its argument regarding the protection of existing labour rights. It is worth

revisiting the Tribunal’s view on this “Whilst in this case protecting existing collective rights is

a legitimate concern that our public interest mandate allows us to intervene on because we

are protecting existing rights from the apprehension that they may be eroded post-merger,

we must be careful how far down this path we go. Protecting existing rights is legitimate,

creating new rights is beyond our competence.”21

20 Walmart Stores Inc and Massmart Holdings Limited, Case no: 73/LM/Dec10, page 11, para 32.21 Walmart Stores Inc and Massmart Holdings Limited, Case no: 73/LM/Dec10, page 34, para 68.

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Lastly, this case sets the bar for intervening parties when proposing conditions to alleviate

any potential negative effects on public interest. As will be discussed below, when setting

their case of harm to public interest, intervening parties must establish merger specificity to

the claimed harm. Second the remedies proposed must be “appropriate, proportional and

enforceable.”22

5. INTERNATIONAL COMPARISONS

A cursory look at public interest in merger regimes internationally shows that a number of

countries do give credence to public interest however this is strictly limited to certain sectors.

A brief overview of public interest consideration in mergers in the United Kingdom shows

that public interest is primarily the domain of the Secretary of State for Trade and Industry

and this is limited to the following:

National security which includes public security;

Plurality of media; and

Stability of the UK financial system.

Competition authorities are limited to assessing competition issues in all mergers and if there

is any ‘relevant or special merger situation’ then a public interest assessment will be done.

This ‘relevant or special merger situation’ arises where the merger may lead to two or more

enterprises ceasing to exist or the creation and/or enhancement of at least a 25% share of

the supply of any good or service or in a substantial part of the UK post-merger23. In such

situations, the Secretary of State issues a notice of intention to intervene specifying the

public interest consideration to be investigated.

Media public interest considerations apply to both newspaper, broadcast and cross-media

mergers and assess specific issues outlined in the Enterprise Act 2002. This assessment is

conducted by the Office of Communication in partnership with the Office of Fair Trading

which largely focusses on the competition effects of the proposed merger. In the case of

newspaper mergers the following has to be ascertained to determine the public interest

impact of the merger:

The need for accurate presentation of news in newspapers;

The need for freedom of expression; and

22 Walmart Stores Inc and Massmart Holdings Limited, Case no: 73/LM/Dec10, page 38, para 121.23 This is also determined by whether the target firm meets the turnover threshold of £70 million.

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The need for, to the extent that is reasonable and practicable, a sufficient plurality of

views expressed in newspapers in the UK.

The broadcasting and cross media test determines whether following are relevant to a

consideration of the merger:

The need for sufficient plurality of persons with control of the media firms serving that

particular audience in relation to every different audience in the UK or a particular

area of the UK;

The need for the availability of a wide range of high quality broadcasting that appeals

to varying tastes and interests; and

The need for people with control of media to have a genuine commitment to the

attainment of the objectives set out in section 319 of the Communications Act 2003

such as due impartiality of news, taste and decency.

Indeed the public interest criteria to be applied in media mergers is clear and gives guidance

on what is to be considered when the relevant body conducts its assessment. It is of great

value for any merger evaluation exercise that there be sufficient particularity on the test to be

met and how this is applied. As the Tribunal observed in the Distell and Stellenbosch

Farmers Winery merger24, “Beyond requiring that public interest grounds be “substantial”

before they qualify for assessment, the legislation offers no criteria as a yardstick for their

evaluation, unlike with the competition evaluation, where criteria are enumerated in section

12A(2).” With the exception of employment, the difficulty really arises from being unable to

quantify these. This lack of guidelines on how public interest criteria are to be evaluated

poses a challenge for the competition authorities as this is determined on a case by case

approach.

The Enterprise Act 2002 gives the Secretary of State power to add new public interest

considerations when the need arises and this is how the ‘stability of the UK financial system’

factor came into being in 2008. This came about as a result of the global financial crisis that

started in that very same year. Having had regard to the importance of the financial services

sector and how instability in this sector could have a damaging effect on the wider economy,

the Act was amended to include this sector as public interest.

Many jurisdictions in the Asia-Pacific also have public interest provisions or at least some

form of public interest consideration in their merger control legislation. Japan and South

24 Distell and Stellenbosch Farmers Winery, Case no: 08LM/Feb02.

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Korea have since amended their merger control legislation to enable special consideration of

cross-border merger that may negatively impact on their domestic markets25.

China has incorporated specific provisions for public interest in their merger control

regulation. These include assessing a merger’s effect on national security26. Similar to Japan

and South Korea, this involves a certain level of protection of domestic firms from

international competition should the international investment be deemed to pose likely anti-

competitive effects. Further, article 27 of the Anti-Monopoly Law provides that the Ministry of

Commerce (MOFCOM), China’s executive agency for competition, must consider a

proposed merger’s effect ‘on the development of the national economy’. This essentially

enjoins the MOFCOM to consider industrial policy factors during merger review.

Australia and New Zealand adopt a more or less similar approach to public interest during

merger review. They have a process of merger ‘authorisation’ which enables firms to apply

to the Australian Competition Tribunal and the Commerce Commission respectively for an

approval of mergers that are deemed anti-competitive if the public benefit outweighs these27.

Both countries do not specify what constitutes a public benefit however the wording of the

New Zealand provision is more telling in that the public benefit must be directly attributable

to the transaction. In relation to banking Australia has adopted an approach that could be

said to amount to an explicit prohibition of bank mergers. This derives from public

dissatisfaction over rising bank fees, branch closures and job losses. Indeed the Australian

government has also intervened in the issue, preventing mergers between the big four banks

until they can show that competition in financial services markets has increased28. While not

legislated, this view and general practice by competition authorities could be read to be

protecting public interest.

In the United States and Canada public interest in mergers has mainly focussed on mergers

in the media and banking sectors respectively. Competition authorities in both countries

25 See http://www.jftc.go.jp/epage/policyupdates/speeches/Cross_border_merger_control_in_Japan.pdf and http://eng.ftc.go.kr/bbs.do?command=getList&type_cd=52&pageId=0201 (hotlink: KFTC announced its 2011 Work Plans, Press Release 272).26 See tp://www.globalcompetitionreview.com/news/article/29833/mofcom-issues-new-regulations-foreign-acquisitions/; http://www.globalcompetitionreview.com/news/article/29748/china-give-foreign-takeovers-greater-scrutiny/. 27 See http://www.accc.gov.au/content/index.phtml/itemld/774442 and http://www.comcom.govt.nz/authorisations/. 28 See http://www.accc.gov.au/content/item.phtml?itemId=179251&nodeId=bcc51a88f51ffdf227184c043fd517e9&fn=jones_bank_tpa_12_04_2002%5B1%5D.pdf and Goddard, G.K., and Walker, G., (2002), “Competition analysis of bank mergers in Australia”, Journal of Law and Financial Management 6.

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have no public interest burden when assessing mergers with the exception of these two

sectors. Even then in the US public interest analysis is the domain of the Federal

Communications Commission (FCC) under section 202 (h) of the Telecommunications Act of

1996.

Public interest in media mergers in the US is underpinned by the notion of freedom of

speech and the press and its importance for democratic rule. As such the Act limits

ownership by any firm of stations that broadcast to more than 39 % of US TV households for

example. Further, the Act requires the FCC, in its periodic review of media ownership

regulation must consider the three public interest goals: competition, diversity and localism.

In Canada public interest consideration in bank mergers, subject to approval by the Minister

of Finance, stems from their potential effects on retail and by extension impact on

consumers in general. While bank mergers are allowed, legislation requires that they be

subjected to a public interest assessment which compels parties to show the following29:

The possible costs and benefits to customers and small and medium-sized

businesses, including the impact on branches, availability of financing, price, quality

and availability of services;

The timing and socio-economic impact of any branch closures or alternative service

delivery measures at the regional level, and any alternative service delivery

measures that might mitigate the impact; and

What remedial or mitigating steps in respect of public interest concerns the banks are

prepared to take, such as divestitures, service guarantees and other commitments,

and what measures to ensure fair treatment of those whose jobs are affected…

The applicants must give rationale for the merger and the steps they will take to mitigate any

potential costs or concern. The Canadian criterion is one of the few that contains detail on

what constitutes public interest.

The above shows that while South Africa may be consistently considering public interest and

that this may be on the increase given recent Tribunal decisions, many jurisdictions are no

longer considering public interest as part of their legislation save for mergers in specified

sectors.

6. SUMMARY AND CONCLUSION

29 See Competition Act, R.S. 1985, c. C-34.

17

The merger decisions discussed above have stimulated debate and controversy regarding

public interest in mergers. I now focus on some of the key questions that have been sparked

by this debate and suggest questions for future debate or research on public interest in

South Africa. There seems to be consensus between various interest groups that there is a

need for public interest consideration in merger policy in South Africa. I concur with this view

noting that the South African competition legislation was designed, by the democratically

elected government of 1994, as part of a suite of policy instruments aimed at the

achievement economic development imperatives and addressing the socio-economic ills

deriving from previous regimes. As such there is a need for a competition policy that is

responsive, as has been demonstrated, to the broader socio-economic needs of society.

However the point of divergence between various interest group is the level at which public

interest ought to be considered in merger proceeding. It is the view of government that public

interest should be given a more prominent placing in merger review and that the Competition

Act “seeks to harness the power of competition to the broader developmental needs of our

society”30.

This view has been met with concern by competition practitioners and agencies alike with

some warning that competition policy alone cannot be used to address the developmental

needs of the country. Similar criticism has been levelled against the Chinese competition

legislation which requires that competition authorities take into account the impact of

proposed mergers on “the development of the national economy”. This is interpreted by

others to mean that merger control may be susceptible to be used to prohibit mergers simply

because they may negatively impact on Chinese companies, the biggest of whom are largely

State-Owned Enterprises. It is important that there ought to be sufficient clarity and

boundaries on what competition policy is expected to achieve to avoid it being stretched

beyond its intended use.

The second issue arising from this debate is that of sufficient particularity in respect of what

constitutes public interest and how this is measured. Most merger regimes internationally do

not give clear definitions as to what constitutes the public interest. This is seen in the

different views in the US media mergers system with some interpreting public interest as

simply “programming that the public wants” while others view it as requiring many

independent broadcasting firms, diverse programme, lots of information and divergent

viewpoints for democratic debate. The Australian and New Zealand regimes are silent on

this. This is not the case in South Africa. Public interest is clearly specified. However what is

lacking is guidance on how these are to be measured and this is left to competition

30 “Patel punts public-interest bias in competition cases” and “When state policy erodes competition law” , A. Visser, Business Day, published 04/11/2011, accessed

18

authorities to determine on a case by case basis. While this system may have worked well

so far, the cases discussed here show that there are different interpretations of the limits to

which public interest can be applied. The Walmart/Massmart merger is a case in point.

The demands by organised labour that the Tribunal attach conditions that would ensure

centralised bargaining and a closed shop, conditions which did not exist pre-merger and

therefore could not have in any way be affected or change post-merger, are a good

example. Indeed it appears that there was the expectation that in the absence of an outright

prohibition of the merger the Tribunal would not only ensure the safety of current jobs, in the

absence of any compelling public efficiency justifications, but also safeguard future jobs

through the proposed conditions. This sentiment finds support in government with

expectation that conditions to the merger should ensure “better protection for jobs in the

Massmart supply chain than what we currently have in place”. To further elucidate this point

it is important to quote representation by government on this matter. “It is within the capacity

of Walmart to agree to a fair and reasonable set of conditions, which will ensure that South

Africa as a whole benefits from the entry of the company into the local market. The failure by

Walmart to agree to such conditions, or offer reasonable or binding commitments, is

regrettable. We have a simple request: Please ensure your entry into the local market results in a net increase in jobs and local production capacity31.”

The Tribunal, whilst acknowledging its duty to safeguard that which existed pre-merger and

therefore could potentially be affected by the merger going forward, baulked at such

demands. Indeed it argued, correctly to me, that it is not empowered by law to create new

rights that did not exist pre-merger. It is important to recognise that the Act does allow for

distributive justice and that the Tribunal is enjoined to consider this element in merger

review. However it is equally important to acknowledge that there ought to be clear

boundaries of how this is applied for purposes of competition policy otherwise there is the

danger of conflating the objectives best left to other economic policies to achieve. It is

therefore important that the objectives of what competition policy is expected to achieve be

clearly articulated and that there be a convergence in understanding how this is to be

applied. This is lacking in the current debate.

The third issue that has arisen relates to the suitability of competition authorities to deal with

public interest. There is an emerging view, in the South African context at least, that

suggests that public interest consideration is best left to other agencies better equipped to

deal with such issues32. The Tribunal dealt with this question in the Metropolitan/Momentum

merger. It contended that the inclusion of employment considerations in a merger, albeit 31 “Minsters say Walmart-Massmart merger poses a risk”, http://mg.co.za/printformat/single/2011-08-02-ministers-saywalmartmassmart-merger, accessed 2011/10/04.

19

secondary to other statutes as was found in the Shell and Tepco33, was essential given that

the task competition authorities are charged with is different from statutes such as the

Employment Equity Act among others. In this, the Tribunal argued that while a labour

tribunal may be tasked with the determination of the operational requirements of a firm and

the fairness of the process in relation to affected employees they, on the other hand, have a

different mandate. This essentially involves determine whether the merger, which will give

rise to the operational circumstances should have been cleared in the first place. This differs

from the considerations made by labour agencies that mainly focus on the fairness of the

process in relation to the affected employees.

To conclude, consideration of all these issues should have, as the underlying principle, the

notion of merger-specificity. Merger-specificity is a sacrosanct principle in the application of

any merger control regime. Indeed it helps separate the wheat from the chaff. In the pursuit

of protecting competition and not competitors competition authorities are enjoined to

consider and deal with that which has a cognizable link to the merger being investigated. In

asking to what extent should public interest be considered in merger evaluation and how

should this be applied? The simple answer is that it is in so far as this is merger-specific.

Indeed we cannot divorce public interest from competition analysis. Similarly we cannot

over-reach in our application of public interest lest this results in unintended consequences.

Indeed the most objective and rational rule of thumb is that consideration of all factors must

be merger-specific.

Parliament’s economic development committee has recently proposed that a statutory body

charged with evaluating foreign direct investment in order to ensure that it is in the public

interest be established34. The establishment of such a body would not only provide certainty

on the regulatory environment for investor but would also assist in so far as it can deal with

all public interest matters that are deemed not merger specific.

32 See “Public interest consideration best left to other agencies?” http://www.polity.org.za/article/concers-about-merger-delays-2010-04-02 accessed on 01 November 2011.33 Shell South Africa (Pty) Ltd and Tepco Petroleum (Pty) Ltd, case no: 66/LM/Oct01, para 58. This conditionally-approved merger involved the acquisition of a failing firm, Tepco. Furthermore the Tribunal found that the merger would not substantially lessen or prevent competition as customers had countervailing power and prices were regulated. However the merger had a negative impact on the competitive position of a firm controlled by historically disadvantaged persons since Tepco was owned and controlled by previously disadvantaged individuals. In addressing proposed remedies, the Tribunal observed that in addressing public interest Competition Authorities ought to give due regard to other existing applicable legislation, particularly where competition is not harmed as a result of the transaction.34 Ensor, L., (23 November 2011). Body needed to ‘evaluate foreign investment’. Available from Business Day: http://www.businessday.co.za/Articles/Content.aspx?id=159362 (Accessed 25 November 2011).

20

REFERENCES

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21

3. Wal-Mart Stores Inc and Massmart Holdings Limited, case no:

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4. Harmony Gold Mining Company Limited and Gold Fields Limited, case no:

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Portland, pg 205 – 216.

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25. Minette, N. (Ed) et al. (2006). A practical Guide to the South African

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459.

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