The Competition Commission is likely to take a much more interventionist stance to the public interest factors set out in section 12A(3) of the Competition Act in the wake of the decisions by the Competition Tribunal and the Competition Appeal Court on the Wal-mart/Massmart merger.
Merging companies will need to give proper consideration to issues such as job losses and changes to workers conditions of employment at an early stage of planning their transactions, and if necessary, tender appropriate conditions which address any negative effects on a much wider range of public interest issues.
The Commission’s approach to these public interest factors has shifted significantly since the inception of this legislation. Until fairly recently, the majority of cases in which section 12A(3) proved contentious focussed on employment issues, and specifically, whether the merger would lead to job losses in the target and/or acquiring firms. In the recent Kansai/Freeworld and Wal-mart/Massmart mergers, however, the focus shifted to the wider impact of the proposed acquisition on the local supply chain and domestic manufacturing. First, the South African Small Business and Micro Enterprises Forum alerted the Commission to the fact that the Wal-mart merger would impact negatively on a number of its members who were suppling products or logistics services to the Massmart retail stores in South Africa. Then, the Economic Development Department, The Department of Trade And Industry and the Department of Agriculture, Forestry and Fisheries raised concerns that Walmart would significantly increase imports and harm small and medium South African suppliers, particularly in already vulnerable industries like agro-processing, furniture, electronics, plastics, household goods, clothing and textiles. In addition, trade unions SACCAWU, FAWU, NUMSA and COSATU were concerned about Wal-mart’s alleged global reputation for union bashing and using labour brokers, sourcing from suppliers using child labour, and discrimination against women, African Americans and Muslims. They argued that the merger was likely to discourage union participation in the Massmart stores and would lead to a significant deterioration in the conditions of employment enjoyed by Massmart employees. However, the Commission recommended the merger without any conditions, apparently on the basis of various assurances given by the merging parties during the course of the investigation.
The three Ministers intervened in the Tribunal proceedings and sought extensive discovery from the merging parties, some of which the Tribunal accepted should be produced. As a result, evidence about Wal-mart’s plans to import products and expand its product lines in South Africa came to light. This evidence differed in material respects from that considered by the Commission during its investigation of this transaction, and the Tribunal accepted that acquisition raised significant public interest concerns. However, the Tribunal emphasised that the scope of the public interest issues it is entitled to consider in terms of section 12A(3) of the Act is fairly narrow, and only concerns which are merger specific can be addressed:
“the Act recognises only a limited set of public interest concerns as specified in the Act. Second, the public interest concerns must be merger specific…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 transaction.”
The Tribunal accepted that section 12A(3) does require it to consider whether jobs outside of the merging firms themselves may be threatened by a merger. It further accepted that the Act requires it to consider whether a merger is likely to have adverse effect not only the total number of jobs, but also worker’s conditions of employment. However, in view of certain conditions tendered by the merging parties (on the last day of the hearing), the Tribunal limited its analysis to whether these undertakings adequately remedied the merger specific public interest concerns which had been raised - it did not reconsider the jurisprudence adopted in the Harmony case. The Tribunal approved the merger subject to the conditions tendered by the merging parties.
The Competition Appeal Court, on the other hand, placed a much greater emphasis on the role of section 12A(3) and the public interest inquiry which it requires the Tribunal to undertake. Davis JA noted that “viewed holistically, there is merit in the argument that the Act should be read in terms of an economic perspective that extends beyond a standard consumer welfare approach. By virtue of an embrace of the goals of a free market and effective competition together with an incorporation of uniquely South African elements, including the need to address our exclusionary past, which need is reflected expressly in the preamble together with s 2 of the Act, the legislature imposed ambitious goals upon the competition authorities created in terms of the Act”. The Court recognized the difficulty inherent in balancing benefits to competition with negative effects on the broader public interest: “an evaluation of whether societal welfare, as envisaged in the Act increases in circumstances where the price of a product reduces to realise a benefit for consumers but takes place at the expense of job losses is extremely difficult to determine; even more so within the context of South African competition law and the scarce technical resources available to the competition authorities, let alone the broader economic tools available.”
However, Court held that “while this exercise may, by its nature and for the reasons set out above, never be precise, it is what the Act appears to require in respect of mergers...”. Sufficient evidence is required in order to permit a proper balance to be struck between the competing issues of consumer welfare employment and small business. The Court upheld the appeal against the Tribunal’s decision on the basis that the conditions approved by the Tribunal has simply reflected an offer made by the merging parties, without sufficient interrogation of precisely how the programme would be implemented, and the consequences for dealing with the potential difficulties which may be encountered by local manufacturers, the effects on employment and the ability of small and medium sized businesses to operate within a competitive global environment.
The South African competition authorities were clearly concerned at the prospect that merger hearings might become the battleground for a wide range of political and ideological disputes, and it comforting that both the Tribunal and the Court stressed that only merger specific issues which are expressly envisaged by section 12A(3) of the Act can legitimately be investigated in the course of merger review. However, the generous interpretation given to the public interest factors and their relationship to the competition considerations in this case means that a far wider range of public interest issues will have to be considered by merging parties and their competition lawyers, as well as the competition authorities, in future. This will impact on the investigation and clearance of a wide range of merger transactions in South Africa, not only high profile ones involving a foreign giant.
In particular, the scope of the employment-related issues which now require consideration have been considerably widened. Trade unions can now raise concerns about possible changes to the benefits enjoyed by workers and the conditions of employment of workers as a result of any merger – even pro-competitive ones - and seek conditions from the merging parties which address these. There is already considerable forum shopping by trade unions, who frequently rely on the competition process to extract concessions from merging parties they could not hope to win in the CCMA or the Labour Courts. This is likely to become a more common feature.
Not only trade unions and government may potentially raise these public interest issues - any parties who seek to obtain a strategic advantage through participating in merger investigations – including competitors and customers of the merging parties – may do so. The Commission will have to investigate these concerns, regardless of who raises them. This is likely to place an additional burden on the Commission’s already stretched merger division. Merger investigations may potentially become more protracted.
The Commission should issue guidelines on the information which merging parties are required to provide in their merger filings in order to speed up reviews. Until then, merging parties who need swift clearances will need to anticipate these issues well in advance of lodging their filings, and deal with them appropriately. This could include offering appropriate conditions at an early stage of the investigation.
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