COMPETITION COMMISSION APPEALS UNPRECEDENTED COSTS ORDER IN SEED MERGER
For this reason, the transaction was notified to the South African Competition Commission and the competition authorities in six other affected African jurisdictions in a process which commenced almost two years ago.
Although the parties were given the green light by the competition authorities in all the other affected African jurisdictions – Kenya, Malawi, Namibia, Swaziland, Tanzania and Zambia – the South African Competition Commission prohibited the transaction.
It reasoned that the transaction would reduce the number of competitors in South Africa from three to two, thereby diluting the constraining influence between the remaining competitors and, in turn, would result in maize seed price increases.
While on the face of it, there are only three major competitors – Monsanto, Pioneer and Pannar – in South Africa’s hybrid maize seed industry, the market’s dynamics militate against an analysis of this merger as a simple three-to-two exercise.
Central to the merging parties’ case was that since the introduction of genetically-modified traits and the entry into the South African market of global biotechnology seed companies with access to advanced breeding technologies, Pannar had been declining as a competitive force.
If left to weather market forces alone, without access to advanced breeding technologies, genetically-modified traits and germplasm on competitive terms, the number of hybrid maize seed competitors in South Africa would reduce from three to two, whether or not the merger proceeded.
Worst of all in this scenario would be the loss to South Africa of Pannar’s locally-adapted maize germplasm, created specifically for South African growing conditions.
The solution for Pannar therefore lies in a partnership with Pioneer Hi-Bred, which has access not only to genetic traits on competitive terms as well as advanced breeding technologies, but, most importantly, has a germplasm pool complementary to that of Pannar.
The combination is capable of delivering verifiable and significant dynamic efficiencies and yielding increases to the benefit of farmers and consumers alike.
The merging parties filed a request for consideration – similar to an appeal – with the Competition Tribunal. The request was unsuccessful, upon which the parties approached the Competition Appeal Court,(CAC), which found in their favour.
The CAC’s decision is of particular interest in the context of two questions:
• should the competition authorities consider alternatives to the merger outside the realm of a classic failing firm scenario? And
• what is the appropriate way of quantifying efficiency gains in innovation markets?
Throughout the proceedings, at the Tribunal and at the CAC , the Commission advanced alternative purchasers of Pannar in the form of Syngenta Crop Protection AG and Dow Agro Sciences LLC.
It suggested that such a route would be a more acceptable way of achieving the dual purpose of preserving Pannar’s germplasm pool and maintaining a three-player market. From Pannar’s perspective, however, this approach was not in the best interests of its business.
Ultimately, the CAC rejected the Commission’s approach on the basis that the public interest of maintaining competition could not justify a refusal of the proposed merger between Pioneer Hi-Bred and Pannar.
Further, speculation that Pannar, if not allowed to partner with Pioneer Hi-Bred, could save its business through a partnership with an alternative firm, currently not a competitor in the market, would promote the interests of competitors rather than the interests of competition, a key precept in competition law.
In addition, the CAC declined to permit an argument that an alternative merger between Pannar and a player other than Pioneer Hi-Bred would be preferable from a competition law perspective. Such an argument would impinge on the management and control of private companies and that could not be justified in the public interest.
On efficiencies, and contrary to the manner in which these were assessed by the Tribunal, the CAC found that in considering efficiencies resulting from a merger – and specifically in markets dominated by innovation competition, such as hybrid maize seeds – it was important not to pursue immediate static efficiency gains at the expense of long-term dynamic efficiency improvements.
Pursuing the former at the expense of the latter would have the unfortunate effect of stifling vigorous innovation competition, as well as incentives to innovate, both of which brought long-term benefits to consumers.
The CAC’s decision to approve the merger is subject to a number of conditions proposed by the merging parties, among them:
•a price cap on certain hybrid maize seed products;
• an undertaking to license certain seed varieties to third parties;
• a commitment to establish a regional research centre in South Africa; and
• a commitment to invest significantly in programmes to benefit small-scale and developing farmers in South Africa.
At the end of June 2012, the Commission applied to the Supreme Court of Appeal for leave to appeal against the merits of the CAC’s decision, as well as the costs order awarded against the Commission by the CAC. In an unprecedented costs award, the CAC ordered the Commission to pay the merging parties’ costs of the proceedings at both the CAC and the Tribunal, including the costs of two Counsel and the qualifying fees of their experts. The outcome of these proceedings is yet to be determined.