Tuesday, February 12, 2013

Is this approach justified? When is government entitled to intervene in merger proceedings? And what is the role of government in the broader context of competition law in South Africa?
At present, government is seen to be increasingly active and interventionist in its approach to mergers where labour interests and economic and public policy objectives are affected. Whilst critics argue that growing state involvement in complex transactions undermines the powers of the competition authorities, practitioners voice concerns about their ability to provide consistent and reliable competition law advice to clients.
This article explores the extent to which the Competition Act, 89 of 1998 requires government to intervene when public interest concerns arise and whether this growing visibility of state actors in merger proceedings
is justifiable on legal grounds.
Whilst the CAC appears to have been even-handed in balancing conflicting interests in Walmart, critics argue that it should have been more robust in challenging government’s decision to intervene.
Commentators also suggest that the CAC’s decision is indicative of an emerging trend in remedies that favours pragmatism and deference to government and stakeholder interests as opposed to more traditional remedies.
A History of intervention in Walmart
Following an inquiry into the purely competitive concerns of a proposed transaction, the Act requires a further inquiry to take place to determine whether or not a merger is justified on substantial public interest grounds.
Furthermore, section 18(1) of the Act empowers the Minister to participate in proceedings involving an intermediate or large merger to make representations on any public interest ground referred to in section 12A(3).
Clearly, these provisions envisage a limited role for government in merger proceedings and restrict its right to intervene to those instances where one or more of the grounds stated in section 12A(3) are present.
In terms of the proposed large merger, Walmart Stores Inc, a company incorporated and listed on the New York Stock Exchange, would acquire 51% of Massmart Holdings, a company incorporated in South Africa and listed on the JSE.
Following an initial investigation, the Competition Commission concluded that the merger raised no competition or public interest concerns and recommended that the Competition Tribunal approve the merger unconditionally.
Dissatisfied with the Commission’s recommendation, three government departments intervened, alongside SACCAWU and other stakeholders, requesting that the Tribunal prohibit the merger on public interest grounds.
The Tribunal conditionally approved the merger – a decision that was subsequently challenged in the CAC by government on review (which was dismissed) and by SACCAWU on appeal (which was upheld in part).
In its review, government argued that the Tribunal’s discovery and scheduling decisions had precluded the opposing parties to the merger from having a proper opportunity to ventilate their concerns. Importantly, government’s reliance on these technical and formalistic grounds raises doubts about whether it had sufficient evidence or data to prove its case for the public interest in order to justify intervention.
On appeal, SACCAWU argued that the Tribunal had failed to adequately consider the likelihood that the merger would result in an increased reliance on imports by the merged firms; a reliance that would adversely affect the ability of small businesses to compete with the lower import prices, and which would in turn result in the closure of small businesses and subsequent job losses.
Government also argued that the firm’s entry into South Africa had the potential to alter the local retail and manufacturing landscape and that on that basis alone it was obliged to intervene to secure the long-term interests of the economy.
To address these concerns, the merging parties at the Tribunal stage had proposed the creation of an investment fund in terms of which the merged firm would invest R100 million over three years to build local manufacturing capacity and train local producers on becoming suppliers to Walmart.
On appeal, SACCAWU sought to have the capital injection in the fund increased to R500 million. Whilst the CAC agreed that these concerns were valid, it also agreed that they were not applicable to Walmart, specifically due to the presence of considerable consumer benefits in the form of lower prices to the benefit of low income consumers.
In its findings, the CAC criticised the Tribunal for its failure to adequately interrogate the implications of the growth of global value chains in the context of economic globalisation as well as the effect of the Walmart model on small and medium sized firms in South Africa.  It also criticised the Tribunal’s failure to scrutinise the terms and conditions upon which the fund would operate.
Importantly, the CAC highlighted a clear deficiency in evidence permitting an analysis of the actual effect that Walmart’s entry into South Africa would have on our economy.
Considering this paucity of evidence, one would have expected the CAC to refer the matter back to the Tribunal. Instead, in  an unprecedented move, the CAC ordered that new evidence be submitted to it to remedy the evidential deficiencies in the Tribunal.
The CAC stipulated that a study be commissioned by government, business and the unions to investigate the implications of the merger for small and medium sized businesses and to present the CAC with greater detail on how the fund would operate.
The resultant report was presented to the CAC which ordered that the capital amount of the fund be increased to R200 million to be spent over a five year period. The CAC emphasised that the quantum of the fund would not be the yardstick for assessing its success, but rather, success would be measured by the extent to which small and medium sized businesses benefit as a result of the work of the fund.
Interestingly, notwithstanding the dismissal of government’s application for review, the CAC afforded it a prominent role in the context of the study. This raises a crucial question: should government have been permitted to feature so centrally in Walmart given the absence of any actual legal basis for it to do so?
Should Government have intervened?
In recent months, government has invoked the public interest provisions of the Act as a way of extracting undertakings from the merging parties in support its own developmental goals. While the importance of the public interest grounds cannot be understated, the presence of these elements does not give government carte blanch to intervene in pursuit of its own policy agenda.
Essentially, in exercising its remedial powers, the competition authorities will have to strike a balance between undue deference to government and the proper application of  the public interest provisions of the Act.
As Judge Davis remarked: “Manifestly, competition law cannot be a substitute for industrial trade policy...hence this court cannot construct a holistic policy to address the challenges which are posed by globalisation. But the public interest concerns set out in s12A demand that this court give tangible benefit to the legislative ambition.”
In summary, rather than referring the matter back to the Tribunal, the CAC attempted to cure the deficiency in evidence before the Tribunal by creating a remedy of its own. It also dismissed government’s review application whilst still affording it a significant role in the economic study.
If mediatory strategies are to be more frequently invoked in future transactions like Walmart, then greater clarity is needed regarding the circumstances in which government will intervene where public interest considerations arise.
While the CAC’s decision may be a practical way to mediate conflicting business and policy objectives, does it set good legal precedent? Ultimately, for investment to take place and for practitioners to advise clients from a legal perspective, greater certainty and predictability are needed.