Master of Laws in Competition Regulation

Advanced Competition Law and Policy

Lecture 4
1) Regulation of mergers: Notification, a. Types of mergers and related business
evaluation and consideration of rationales
public interest consequences of b. Identification of underlying regulatory
mergers rationales
c. Notification of mergers
d. Evaluation of mergers
e. Assessment of public interest consequences of
mergers
f. Exploration of leading SA case law
g. Exploration of leading academic commentaries

REGULATION OF MERGERS: NOTIFICATION, EVALUATION AND

CONSIDERATION OF PUBLIC INTEREST CONSEQUENCES OF MERGERS
Types of mergers and related business rationales
The Act distinguishes between small, intermediate and large mergers
• The Competition Act regulates:
− Horizontal mergers,
− Vertical mergers, and
− Conglomerate mergers

Merger control is aimed at preventing the establishment of anti-competitive structures in a

market through mergers and acquisitions. The Act gives the competition authorities the
jurisdiction to review all transactions that meet the required thresholds for intermediate and
large mergers. Parties may not implement large and intermediate mergers before approval by
the competition authorities. The Act further provides for the voluntary notification of small
mergers.
Merger regulation is an attempt to regulate the structure of the economy and markets to ensure
that the markets function at their best. Merger regulation is an attempt to prevent market
structures from developing that could lead to unilateral or co-operative market power to the
detriment of consumers.
The Commission investigates all notified mergers to determine whether the transaction is likely
to:
• lead to a substantial prevention or lessening of competition; and/or
• if it will have an adverse effect on public interest.

The Commission approves, conditionally approves or prohibits intermediate mergers. For large
mergers the Commission makes a recommendation to the Tribunal to approve, conditionally
approve or prohibit a merger. The Tribunal has jurisdiction to decide on large mergers.

Mergers are regulated by Chapter 3 of the Act. Mergers deals primarily with changes in
the structure of the market
Merger defined
A “merger” is defined in section 12 of the Act as the direct or indirect acquisition or
establishment of direct or indirect control by one or more firms over the whole or part of the
business of another firm. A merger may be achieved in any manner, including in particular,
through:
• the purchase or lease of shares, interest, or assets of another firm; or
• the amalgamation or combination with another firm.
This may occur by consent or a hostile takeover.

The Competition Act was designed to ensure that the competition authorities examine the
widest possible range of potential merger activities, which could result in an alteration of
market structure and, in particular, reduces the level of competition in the relevant market, and
this purpose envisages a broad interpretation of the terms “merger” and “control”.

The Act in section 12(a) sets out the circumstances in which a person is deemed to control a
firm. A person controls a firm if that person:
a) beneficially owns more than half the issued share capital of the firm;
b) is entitled to vote a majority of the votes that may be cast at a general meeting of the
firm, or has the ability to control the voting of a majority of those votes, either directly
or through a controlled entity of that person;
 c) is able to appoint or to veto the appointment of a majority of the directors of the firm;
d) is a holding company and the firm is a subsidiary thereof;
e) in the case of a trust, has the ability to control the majority of the votes of the trustees
or to appoint or change the majority of the trustees or beneficiaries of the trust;
f) in the case of a firm which is a close corporation, owns the majority of members’
interest, or controls directly, or has the right to control the majority of the members’
votes in the close corporation; or
g) has the ability to influence materially the policy of the firm in a manner comparable to
a person who, in ordinary commercial practice, can exercise an element of control
referred to above.

The Act distinguishes between small, intermediate and large mergers. The Minister of Trade
and Industry must, in consultation with the Competition Commission, determine from time to
time the lower and higher threshold levels for intermediate and large mergers on the basis of
combined annual turnover or assets or combinations of turnover and assets in the Republic, in
general or in relation to specific industries. Before making a determination, the minister must
by notice in the Government Gazette set out the proposed threshold and method of calculation
and invite written submissions on that proposal.

A small merger is a merger with a value at or below the lower threshold established by the
minister. A merger will qualify as an intermediate merger if its value falls between the lower
and higher thresholds established by the minister. A merger will qualify as a large merger if its
value is equal to or exceeds the higher threshold established by the minister.

Economically there are three types of mergers:

• Horizontal mergers (direct competitors);
• Vertical mergers (integration of parties in a vertical relationship); and
• Conglomerate mergers (all other types of mergers, parties with no apparent economic
relationship).

- A horizontal merger is between firms selling identical or similar products in the same
geographical area and it eliminates competition between direct competitors. A merger
between direct competitors.
 - A vertical merger results in a combination of activities of parties in a vertical
relationship (manufacturer and distributer). May increased barriers to entry. This result
may also be obtained unilaterally by a firm expanding internally.
- Conglomerate mergers involve parties that do not produce the same product nor do they
operate in the same geographical area. This will include geographic extensions
(common products but no common trading territory) and product extensions (common
trading territory but no common products). There is no reduction in the number of firms
and no change in market structure. Therefore, all other mergers that are not horizontal
or vertical in nature.

Horizontal mergers are most problematic as it results in the elimination of competitors but may
also provide significant efficiencies by combining resources and economics of scale. Could
lead to market dominance.

Merger control therefore requires a balancing of conflicting interests.

IDENTIFICATION OF UNDERLYING REGULATORY RATIONALES

Competition Act Sections 11-18
Merger Notification
12. Merger defined
(1) (a) For purposes of this Act, a merger occurs when one or more firms directly or
indirectly acquire or establish direct or indirect control over the whole or part of
the business of another firm.
(b) A merger contemplated in paragraph (a) may be achieved in any manner, including
through—
(i) purchase or lease of the shares, an interest or assets of the other firm in
question; or
(ii) amalgamation or other combination with the other firm in question.
(2) A person controls a firm if that person—
(a) beneficially owns more than one half of the issued share capital of the firm;
(b) is entitled to vote a majority of the votes that may be cast at a general meeting of
the firm, or has the ability to control the voting of a majority of those votes, either
directly or through a controlled entity of that person;
(c) is able to appoint or to veto the appointment of a majority of the directors of the
firm;
 (d) is a holding company, and the firm is a subsidiary of that company as
contemplated in section 1 (3) (a) of the Companies Act, 1973 (Act No. 61 of
1973);
(e) in the case of a firm that is a trust, has the ability to control the majority of the
votes of the trustees, to appoint the majority of the trustees or to appoint or
change the majority of the beneficiaries of the trust;
(f) in the case of a close corporation, owns the majority of members’ interest or
controls directly or has the right to control the majority of members’ votes in the
close corporation; or
(g) has the ability to materially influence the policy of the firm in a manner
comparable to a person who, in ordinary commercial practice, can exercise an
element of control referred to in paragraphs (a) to ( f ).

Section 12(1) defines what constitutes a merger and Section 12(2) therefore defines what
constitutes control or where a person is deemed to control a firm.

A merger that adhere to the legal definition of a merger and that pass the threshold test for an
intermediate of larger merger must be notified to the Competition Commission.

Notification must take place any time before the transaction is implemented.

NOTIFICATION OF MERGERS
Merger Notification and Implementation
A party to a merger is an “acquiring firm” or a “target firm”. An “acquiring firm” is a firm:
a) that, as a result of a merger, would directly or indirectly acquire or establish direct or
indirect control over the whole or part of the business of another firm;
b) that has direct or indirect control over the whole or part of the business of a firm
contemplated in paragraph (a); or
c) the whole or part of whose business is directly or indirectly controlled by a firm
contemplated in paragraph (a) or (b).

A “target firm” is a firm:

a) the whole or part of whose business would be directly or indirectly controlled by an
acquiring firm as a result of a merger;
 b) that, as a result of a merger, would directly or indirectly transfer direct or indirect
control of the whole or part of its business to an acquiring firm; or
c) the whole or part of whose business is directly or indirectly controlled by a firm
contemplated in paragraph (a) or (b).

Different procedures apply in respect of small, intermediate and large mergers. A party to a
small merger need not notify the Competition Commission of that merger and may implement
it without prior approval. However, a party to a small merger may voluntarily notify the
Competition Commission of the merger at any time.

The Competition Commission retains the power to require notification of any small merger
within six months of implementation if it is of the opinion that the merger may prevent or lessen
competition substantially or cannot be justified on public interest grounds. A party to such a
merger may take no further steps to implement it until it has been approved or conditionally
approved. Within 20 business days after all the parties to a small merger have fulfilled their
notification requirements (or within an extended period not exceeding 40 business days), the
Competition Commission, after considering the merger, must approve it, approve it subject to
conditions or prohibit its implementation if it has not been implemented or declare it to be
prohibited. If the Competition Commission has not reached a decision on the merger upon the
expiry of the 20 business day period (or any extended period), the merger will be regarded as
having been approved. The Competition Commission must publish a notice of its decision in
the Government Gazette and issue written reasons for the decision if it prohibits or
conditionally approves the merger or if it is requested to do so by a party to the merger.

Notification of all intermediate and large mergers is compulsory. The primary acquiring firm
and the primary target firm must notify the Competition Commission of the merger. They must
notify the Competition Commission jointly. Separate notification requires the permission of
the Competition Commission. A registered trade union representing a substantial number of
the employees of any of the merging firms must also be notified of the proposed merger by
both the acquiring firm and the target firm. If there are no such registered trade unions, the
employees concerned or the representatives of such employees must be notified. The
Competition Commission must determine whether the merger falls within the jurisdiction of
the Competition Act and, if so, the category of merger. Such determination is subject to appeal
to the Competition Tribunal. The Competition Commission may direct an inspector to
investigate any merger and may require any party to a merger to provide additional information
in respect of that merger.

Whereas an intermediate merger may be approved by the Competition Commission, a large

merger requires the go-ahead from the Competition Tribunal. Parties to an intermediate or large
merger may not implement that merger until they have received the approval, with or without
conditions, of the Competition Commission, Competition Tribunal or Competition Appeal
Court, as the case may be. To do so would attract severe penalties.

Within 20 business days after all the parties to an intermediate merger have fulfilled their
notification requirements (or within an extended period not exceeding 40 business days), the
Competition Commission, after considering the proposed merger, must approve it, approve it
subject to conditions, or prohibit its implementation. If the Competition Commission has not
reached a decision on the merger upon the expiry of the 20 business day period (or any
extension period), the merger will be regarded as having been approved. The Competition
Commission must publish a notice of its decision in the Government Gazette and issue written
reasons for the decision if it prohibits or conditionally approves the merger or if it is requested
to do so by a party to the merger.

The Competition Commission may revoke its decision to approve or conditionally approve a
small or intermediate merger if the decision was based on incorrect information for which a
party to the merger is responsible, the approval was obtained by deceit, or a firm concerned has
breached an obligation attached to the decision.

If the Competition Commission approves a small or intermediate merger subject to conditions

or prohibits it, a party to the merger may request the Competition Tribunal to consider the
conditions or prohibition. If the Competition Commission approves an intermediate merger or
approves it subject to conditions, a trade union or the employee representative concerned to
whom notice of the merger is required to be given and who had participated in the proceedings
before the Competition Commission, may request the Competition Tribunal to consider the
approval or conditional approval.

Large Mergers
After receiving notice of a large merger, the Competition Commission must refer the
notification to the Competition Tribunal and to the minister. It must also within 40 business
days forward to the Competition Tribunal a recommendation whether implementation of the
merger should be approved, approved subject to conditions, or prohibited. The Competition
Tribunal may, on application by the Competition Commission, extend the period for making
such a recommendation by no more than 15 business days at a time.

If, upon the expiry of the 40 business day period (or an extended period), the Competition
Commission has neither applied for any extension nor forwarded a recommendation to the
Competition Tribunal, any party to the merger may apply to the Competition Tribunal to begin
the consideration of the merger without a recommendation from the Competition Commission.

The Competition Tribunal must consider the merger and must approve the merger, approve the
merger subject to conditions or prohibit the implementation of the merger. Upon application
by the Competition Commission, the Competition Tribunal may revoke its decision to approve
or conditionally approve a merger if the decision was based on incorrect information for which
a party to the merger is responsible, the approval was obtained by deceit, or a firm concerned
has breached an obligation attached to the decision.

If the Competition Tribunal revokes a decision to approve a merger, it may prohibit that merger
even though any prescribed time limit may have expired. The Competition Tribunal must
publish a notice of its decision in the Government Gazette and issue written reasons for the
decision. The decision of the Competition Tribunal is subject to appeal to the Competition
Appeal Court. The appeal must be lodged within 20 business days after the notice of the
Competition Tribunal’s decision. The Competition Appeal Court may set aside, amend or
confirm the decision of the Competition Tribunal. If the Competition Appeal Court sets aside
a decision of the Competition Tribunal, it must approve the merger, approve the merger subject
to conditions or prohibit implementation of the merger.

The Competition Commission, any party to the merger, the trade union or employee
representative concerned, and who indicated to the Competition Commission an intention to
participate, the minister, if he or she has indicated an intention to participate, and any other
person whom the Competition Tribunal recognises as a participant, may participate in a hearing
before the Competition Tribunal. The minister may participate as a party in any intermediate
or large merger proceedings to make representations on any public interest grounds.
EVALUATION OF MERGERS
A proposed merger must be evaluated on:
• Competition, and
• Public interest grounds.

In considering whether a merger should be approved, the initial test is whether or not it is likely
to substantially prevent or lessen competition. See also sections 4, 5 and 6 to 9 of the
Competition Act. This is done by assessing the strength of competition in the relevant market,
and the probability that firms in the market after the merger will behave competitively or co-
operatively. The Competition Commission or the Competition Tribunal must take into account
all factors relevant to competition in the market, including:
a) the actual and potential level of import competition in the market (imported products
that can compete with local markets would result in a less likely domestic firm with
market power);
b) the ease of entry into the market, including tariff and regulatory barriers (would there
be entry into the market as a result of a material price increase);
c) the level, trends of concentration, and history of collusion in the market (the risk of co-
ordinated behavior amongst firms post merger);
d) the degree of countervailing power in the market (balance, acting with equal force);
e) the dynamic characteristics of the market, including growth, innovation and product
differentiation (will indicate if merger will cause problems in market);
f) the nature and extent of vertical integration in the market (may limit access to market
where entity wants to compete on only one level but a firm may only be able to compete
by merging where there is already significant integration amongst competitors);
g) the likelihood of the business or part of the business of a party to the merger or proposed
merger failing (This may be a correction of the market where a firm that is or has failed
is merged to create increased capacity and competition); and
h) whether the merger will result in the removal of an effective competitor (an effective
competitor often puts pressure on other firms to extend the limits of competition).

Merger Analysis
The competition authorities are tasked with establishing whether a merger is likely to
substantially prevent or lessen competition in a market. The factors in section 12(a) only allow
for an educated guess on the likely impact of a merger.
See Mondi Ltd/Kohler Cores and Tubes Case 06/LM/Jan02 - Available at:
http://www.saflii.org/cgi-bin/disp.pl?file=za/cases/ZACT/2002/40.html&query=Mondi
Kohler Cores and Tubes
Para 24
Of course a prediction must be supported by evidence, but no amount of reliable evidence will
remove the predictive or ‘probabilistic’ element in merger adjudication. This is explicitly
recognized in the Act, which enjoins us to determine the ‘likely’ consequences of a transaction
before us. The Act provides explicitly for a regime where the effect of a merger is assessed
prior to its implementation. The necessary implication of this regime is that adjudication is a
priori, not post hoc. Since the merger has not taken place at the time of adjudication and indeed
may not take place at all, an element of prediction regarding what may happen after
implementation is inherent in the statutory design. Fortunately significant advances in
economic theory, particularly in game theory, have eased the task of prediction – based on
observations of past behaviour and on the rational responses of profit maximizing firms to a
given set of incentives we are able to make predictions from a strong scientific basis, one far
from the act of ‘conjuring’ which counsel for the merging parties so rightly disparages. It is
instructive that game theory has its earliest origins in observations of the behaviour of
participants in oligopolistic markets.

The first step is to determine the relevant market or markets affected:

• Horizontal merger – all the markets in which both parties to the proposed transaction
compete must be defined (overlapping markets);
• Vertical merger – an upstream market (supplier) and the downstream market (customer)
must be defined;
• Conglomerate merger – the markets in which the complementary products compete
must be identified. There may be no economic relationship here between the products.

The structure of the identified market must then be analyzed according to number and size of
the firms participating in the markets and the degree of market concentration.

Where there are structural conditions likely to lessen competition after the merger then the
authorities needs to look for mitigating factors that would prevent the merger entity from
exercising either unilateral (where a firm can increase prices without the collusive support of
competitors) or co-operative market power (exercised where independent decision-making
processes of a firm is replaced by co-ordination of decisions between competitors) to the
detriment of consumers.

The Failing Firm Defence

There may be a specific allowance for a failing firm defence. Where a party to a merger is
failing or is deemed to be failing then this could be taken into account where the merger is
likely to have a beneficial effect on the company. Where the merger is not likely to lessen
competition in a market then the failure of one of the parties is not relevant to the adjudication
of the merger. Where the transaction does race competition concerns and one of the parties is
failing then this failure may not in itself save the merger. The failing firm argument is therefore
not a true defence and this would not necessarily lead to an anti-competatitive merger being
approved.

Where the entity has no prospect of survival on its own then the assets will exit the market.
The parties will have to show that good faith efforts have been made to find a buyer whose
acquisition would give rise to less competition concerns or that a unilateral strategy to save the
firm is not possible.
See: Iscor Ltd/Saldanha Steel (Pty) Ltd Case 67/LM/Dec01 - Available at:
http://www.saflii.org/cgi-bin/disp.pl?file=za/cases/ZACT/2002/17.html&query= Iscor
Saldanha Steel
Para 110:
In summary we are saying the following:
1. A failing firm defence should not be invoked if it amounts in substance to another factor
or defence which the Act already provides. In particular we draw attention to the
efficiency defence and the public interest criteria.
2. The merger criteria for a failing firm set out in the tests of other jurisdictions will carry
serious weight in our assessment. Organising ones evidence on the basis of these
criteria would thus be useful and instructive to the Tribunal.
3. A merger would not be regarded as lessening competition if the conditions laid out in
the more stringent EU test can be satisfied.
4. A party falling short of the “market share would have gone to us” requirement, but
that could satisfy the other elements of the test or the standard in the US test, would
have a reasonable possibility of success depending on the degree of the anti-competitive
sting. Thus where the anti-competitive effects of the merger are otherwise slight, then
 the Tribunal might be less stringent in the application of some of the criteria. Here the
party should have regard to evidence that establishes some rationale for the existence
of the failing firm doctrine. We have referred to some of these in our discussion
although we do not suggest that this is an exhaustive list.
5. Evidence of the extent of failure or its imminence, would be weighed up against the
evidence of the anti-competitive effect. The greater the anticompetitive threat the
greater the showing that failure is imminent
6. No leniency would be afforded to the requirement that there be evidence that there is
no less anticompetitive alternative.
The onus is on the merging firms to establish the evidence necessary to invoke the doctrine of
the failing firm.

The Efficiency Defence

If it appears that the merger is likely to substantially prevent or lessen competition substantially,
the merger may nevertheless be approved if it is likely to result in:
• technological efficiency or other pro-competitive gains that will outweigh its anti-
competitive effect, and
• it can be justified on substantial public interest grounds.

The efficiency defence should provide information on:

− Any technological, efficiency or pro-competitive gain that will result from the merger,
− The magnitude of the gains and cost savings,
− The timing of the cost savings,
− An improvement in product quality,
− Evidence that the gains are merger specific and their attainment is only possible by way
of the merger.
See: Trident Steel (Pty) Ltd/Dorbyl Ltd Case 89/LM/Oct00 - Available at:
http://www.saflii.org/cgi-bin/disp.pl?file=za/cases/ZACT/2001/2.html&query= Trident Steel
Dorbyl
Para 83
The merging parties have identified three efficiencies that they associate with the merger.
These are:
(i) Plant scale efficiencies and plant use efficiencies
(ii) Supply production efficiencies
(iii) Volume discounts
Para 91 - 93
The efficiencies the parties have claimed are in our view sufficient to be “greater than and to
offset” any anticompetitive effect. Although we have insufficient evidence to quantify this in
the form of calculations, the efficiencies claimed are so overwhelming, especially in relation
to the plant re-organisation that is entailed and the reduction of the scrap rate that they
suggest, that they will dwarf the anticompetitive effects. We must bear in mind that the merging
firms ability to increase price is only up to the import parity price. Any move on their part to
price above this will lead to customers sourcing overseas. Since this import parity price is not
likely to be much higher than the current market price, the anticompetitive effects whilst real,
are constrained. Had this not been the case, we may have either found the trade off had not
been sufficiently established or we might have considered approving the merger, but subject
to appropriate behavioral conditions.

The efficiencies contemplated could not have been achieved without the merger. Baldwins
produced evidence to demonstrate that its Rosslyn plant had been run at a loss for more than
two years. The firm was not committed to expending any more on the plant and no other buyers
could be found for it. Extracts from Director’s minutes dated 5 August 1999 show that the
company was concerned about its Rosslyn plant’s profitability for some time and was
investigating various options, prior to its ultimate decision to sell. The supply efficiencies from
Iscor required a single firms’ order and could not be achieved by the firms individually.
Although there is no evidence that the efficiencies will be passed through to consumers in the
form of lower prices, the nature of the efficiencies is such that this need not be shown in the
context of this merger if we apply the proportionality test we have adopted above.

ASSESSMENT OF PUBLIC INTEREST CONSEQUENCES OF MERGERS

If the merger proceeds, the parties estimate the number of retrenchments following the
implementation of the merger will not exceed 10 and this will affect only management staff
(general managers, sales managers, debtors clerks and inventory controllers). Thereafter, they
estimate a further 40 employees will leave Trident’s employ at a normal industry rate of
attrition. In contrast if the merger is prevented Baldwins would be forced to close down some
of its plants and scale back at others leading to a greater loss of employment.
Conclusion
In light of the above the Tribunal is satisfied that although the merger does substantially
prevent or lessen competition in the ISF market, the parties have successfully discharged the
onus of proving that such anti-competitive effects are convincingly offset by the efficiency gains
the merged entity, as well as the industry, are liable to experience as a result of the merger.
For this reason the merger is approved.

Mergers: Public Interest Considerations

If it appears that the merger is unlikely to prevent or lessen competition substantially, it may
nevertheless be refused if it cannot be justified on substantial public interest grounds.
Considerations of public interest include the effect 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.

BEE:
Shell South Africa (Pty) Ltd (Shell) / Tepco Petroleum (Pty) Ltd (Tepco) Case 66/LM/Oct01

Ability to Compete in International markets:

Nampak Ltd / Malbak Ltd Case 29/LM/May02

Employment:
Daun et Cie AG / Kolosus Holdings Ltd Case 10/LM/Mar03

EXPLORATION OF LEADING SA CASE LAW

• Distillers Corp SA Ltd/Stellenbosch Farmers Winery 08/CAC/May01
• Trident Steel (Pty) Ltd/Dorbyl Ltd 89/LM/Oct00
• Iscor Ltd/Saldanha Steel (Pty) Ltd 67/LM/Dec01
• Massmart Holdings Ltd/Moresport Ltd 62/LM/Jul05
• Shell South Africa (Pty) Ltd and Tepco Petroleum (Pty) Ltd 6/LM/Oct01
• The Competition Commission Applicant and Edgars Consolidated Stores Limited 1st
Respondent Retail Apparel (Pty) Ltd 95/FN/Dec02
 • Mondi Limited and Kohler Cores and Tubes a division of Kohler Packaging Limited
06/LM/Jan02
• Exxaro Limited Acquiring Firm and Namakwa Sands (a division of Anglo Operations
Limited) Target Firm 13/LM/Feb06
• Absa Bank Limited and The Private Label Store Card Portfolio of Edcon (Pty) Ltd
70/LM/Jun12

EXPLORATION OF LEADING ACADEMIC COMMENTARIES

Sutherland, P Steel and Propane. SALJ Vol 125 Issue 2 pp. 331 – 370 available on Sabinet at
http://0-
search.sabinet.co.za.wam.seals.ac.za/WebZ/images/ejour/ju_salj/ju_salj_v125_n2_a9.pdf?ses
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