MERGER CASE STUDY ANALYSED BY COMPETITION LAW EXPERTS AT BOWMAN GILFILLAN AFRICA GROUP’S COMPETITION LAW SEMINAR
An interesting competition law case study exploring the merger conditions imposed on a European company acquiring a South African manufacturing plant was discussed by a panel of competition law specialists at Bowman Gilfillan Africa Group’s Competition Law Seminar in late 2015.
A panel of experts in competition law (including the Competition Commission’s Seema Nunkoo, who is overseeing the production of the Guidelines for the Assessment of Public Interest Provisions in Mergers; Normon Manoim, the chairperson of the Competition Tribunal; and Judd Lurie, senior associate in Bowman Gilfillan Africa Group’s Competition Practice), was asked to advise on the case study and the contentious issues it raised. The panel was moderated by Tamara Dini, partner in Bowman Gilfillan Africa Group’s Competition Practice.
“Of specific interest in this case was the fact that onerous conditions in favour of the public interest were imposed by the Commission, even though there were no negative effects on the public interest as a consequence of the merger. This is in conflict with the approach articulated in the Commission’s draft Guidelines for the Assessment of Public Interest Provisions in Merger Regulation, under the Competition Act. The Competition Commission has been known to be robust in carrying out its public interest mandate in mergers and this case was no exception,” explains Dini.
Panellist Manoim said that the Tribunal’s position was that any conditions ensuring that employees should not be retrenched should be for a limited period.
Dini notes that the South African target company was a manufacturer based in Cape Town and its acquirer was a foreign company. Although the South African company did not foresee any job losses as a consequence of the merger, they did predict declining demand for their product in the years ahead that could impact on the number of employees needed at its factory in the future,” explains Dini.
“One of the trade unions representing employees of the company become involved during the course of the Commission’s review of the transaction and requested that a moratorium on job losses (in excess of 5 years) be imposed as a condition to the merger,” she notes.
Panellist Judd Lurie advised on what the merging parties could expect during the course of the merger process. He noted that there was some uncertainty in the Competition Commission’s stance on retrenchments which are not merger specific, in particular whether the Commission, based on concerns expressed by the trade union, might seek to impose a moratorium on job losses that were not merger related.
Panellist Seema Nunkoo commented that the Commission’s draft Public Interest Guidelines, once finalised, would lend greater certainty to the Commission’s approach, both within the Commission and for the sake of stakeholders. She explained that the Commission is not always given sufficient information to determine whether or not the public interest is likely to be affected as a consequence of a merger.
In the actual case upon which the case study was based, the merger was conditionally approved by the Commission, subject to two conditions. The first was that no retrenchments could be made as a result of the merger for an indefinite period. Secondly, the Commission stipulated that the production capacity of the target company could not be relocated outside South Africa.
“The Commission’s draft public interest guidelines are emphatic about remedying merger-specific problems only, yet it is clear from these conditions that the Commission seems to take a broader approach in respect of its public interest mandate in practice,” says Dini.
While the acquiring company anticipated no synergies as a result of the acquisition and it had no plans to retrench employees, it anticipated a decline in the market in which it is active in the future and, as such, operational job losses in the next 3 – 5 years. It disclosed this to the Commission on a proactive basis. One of the questions Dini posed to Lurie was whether the acquirer was required to make such a disclosure and, strategically, whether it should have.
Explains Lurie, “The competition authorities prefer a full disclosure of all information relevant to the merger and there will often be company documents referring to the relevant industry predictions that may come before the Commission, making it incumbent on the merging parties to explain their expectations.”
“We feel that the public interest conditions in this case perhaps went too far, which could result in discouraging the company from making decisions that could improve its efficiency and allow it to stay in business,” notes Dini.
“The effect of such public interest conditions is likely to impact on a South African company’s ability to compete in international markets. Prohibitive public interest conditions might also lead to the failure of mergers, meaning that the South African company could close in any event, with subsequent job losses being unavoidable,” says Dini.
While public interest guidelines are governed by specific legislation in South Africa they are by no means unique to the country. In southern Africa, the public interest stipulations for mergers has gained a lot of traction in Botswana, Namibia and in various other African countries.