About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Competition Appeal Court
SAFLII
>>
Databases
>>
South Africa: Competition Appeal Court
>>
2022
>>
[2022] ZACAC 6
|
|
Africa Data Centres SA Development (Pty) Ltd v Digital Titan (Pty) Ltd and Others (200/CAC/May22) [2022] ZACAC 6; [2022] 2 CPLR 21 (CAC) (8 July 2022)
REPUBLIC
OF SOUTH AFRICA
IN
THE COMPETITION APPEAL COURT OF SOUTH AFRICA,
HELD
IN CAPE TOWN
Case No: 200/CAC/May22
(1) REPORTABLE: NO
(2) OF INTEREST TO OTHER
JUDGES: NO
(3) REVISED. NO
SIGNATURE DATE: 9 JULY
2022
In
the matter between
AFRICA
DATA CENTRES SA DEVELOPMENT (PTY) LTD Appellant
and
DIGITAL
TITAN (PTY)
LTD First
Respondent
TDE
INVESTMENTS (PTY) LTD
Second
Respondent
COMPETITION
COMMISSION OF SOUTH AFRICA Third
respondent
This
judgment was handed down electronically by circulation to the
parties• and/or parties' representatives by email and by
being
uploaded to CaseLines. The date and time for hand-down is deemed to
be 10h00 on 08 July 2022
JUDGMENT
Nkosi
AJA
(Davis
and
Nuku AJA concurring)
Introduction
[1]
This is an appeal by Africa Data Centres SA Development (Pty) Ltd
(''the
appellant") against a part of the decision and order of
the Competition Tribunal ("the Tribunal") that were issued
on 17 May 2022, in terms of which the appellant was recognised as a
participant in the large merger proceeding before the Tribunal
involving Digital Titan (Pty) Ltd (''the first respondent") and
IDE Investments (Pty) Ltd ("the second respondent"),
albeit
in respect of only two of the three theories of harm it raised as a
concern regarding the proposed merger. The part of the
decision
appealed against is the order in which the Tribunal limited the
appellant's participation in the merger proceedings to
only two of
the three theories of harm which the appellant sought to advance
before the Tribunal.
Factual
Background
[2]
The factual background to the matter, briefly stated, is that the
appellant
is currently one of a few main players involved in the
business of providing the co-location data centre services in South
Africa.
One of its direct competitors in the business is Teraco Data
Environments (Pty) Ltd ("Teraco"), which is a subsidiary
of
the second respondent. It was for this reason that the appellant was
one of the interested parties approached by the Competition
Commission (''the third respondent") for information and comment
during its investigation into the proposed merger.
[3]
At the
conclusion of its investigation the third respondent compiled a
report dated 8 April 2022 in which it stated that,
inter
alia,
it
was of the view that the proposed transaction was unlikely to
substantially prevent or lessen competition in the market for the
provision of data centre services in South Africa. This was disputed
by the appellant, which then proceeded to lodge an application
to the
Tribunal (''the intervention application") in terms of section
53(c)(v) of the Competition
Act
[1]
(''the
Act") to intervene as a participant during the pending merger
proceedings before the Tribunal.
[4]
The appellant's intervention application was based primarily on three
theories of harm. These were, firstly, that the merged entity would
benefit from the network-effects that would lead to the substantial
lessening of competition in the market (''the network-effect theory
of harm"); secondly, that there was a material risk that
the
proposed merger would result in input foreclosure ("the
foreclosure theory of harm"); and, thirdly, that absent the
proposed merger, the first respondent would likely enter the South
African market itself as a provider of co-location data-centre
services, and so the likely effect of the proposed merger would be to
prevent the entry of a new competitor in the South African
co-location and data-centre market ("the new entry theory of
harm").
The
Tribunal decision
[5]
The intervention application was heard by the Tribunal on 12 May
2022.
On 17 May 2022, the Tribunal issued an order granting the
appellant leave to intervene in respect of two of the theories. of
harm
the appellant had raised as its concerns regarding the relevant
merger. These were the network-effect theory of harm and the
foreclosure
theory of harm. On 23 May 2022 the Tribunal issued
reasons for its decision, in which it stated that, in its view, the
appellant
as a competitor could possibly assist it (the Tribunal) in
gaining insights into the nature of competition in the relevant
markets
of its business. Apparently, such view was largely influenced
by the legal arguments advanced on behalf of the appellant at the
hearing of the intervention application.
[6]
Insofar as the new entry theory of harm is concerned, the Tribunal
exercised
its discretion by having regard to the interest of the
appellant and the extent to which it could assist the Tribunal in its
deliberations.
In so doing, it found at para 20 that 'it was less
clear what additional insights ADC (the appellant) could provide on
potential
entry by the acquiring firm (first respondent) absent the
proposed transaction.' It went on to state that when considering an
application
for intervention by a direct competitor, the Tribunal
ought to guard against merger proceedings, where the Commission is
present
and has not identified any competition concerns, being unduly
protracted by the participation of a competitor who might be
incentivised
to delay merger proceeding 'for the reason of protecting
its own market position.
[7]
The Tribunal was critical of what it perceived to be an apparent
attempt
by the appellant to duplicate the role of the third
respondent, which was statutorily tasked with assisting the Tribunal
in its
deliberations on all other matters relating to proposed
mergers. It also mentioned that, in any event, it has inquisitorial
powers
in merger proceedings to call for more evidence or to require
the third respondent to investigate further any aspect of the
proposed
transaction that is sought to be fully ventilated.
Grounds
of appeal
[8]
The appellant was not satisfied with the Tribunal's decision to grant
it leave to intervene in respect of only two of the three
theories of
harm which formed the basis of its application to intervene in the
relevant merger proceedings. Consequently, it appealed
to this
court against the part of the Tribunal's decision which refused its
application to intervene in the merger proceedings
in relation to the
new entry theory of harm. Therefore, it is within the context of the
appellant's concern in relation to the
new entry theory of harm that
the grounds of appeal are formulated.
[9]
The first
ground
is
that the appellant's argument
based on
a new
entrant theory of
harm
is
recognized
in merger
analysis
not
only in South Africa
[2]
but
also
in
numerous
competition
law
jurisdictions
internationally,
including
the
European
Union
and
the
United
States;
the
second
is
that
the
Tribunal
misdirected
itself
in
dismissing
the
appellant's
application
to
intervene
in
relation
to
its
concern
on
the
grounds
that
the
third
respondent
had
already
conducted
'a
thorough
investigation
'
into
the
proposed
transaction
and
had found
that the transaction did not give rise to such concern; the third is
that the Tribunal misdirected itself in finding that
there was no
need for the appellant to duplicate
the role
of the
third respondent
in
relation to the appellant's
concern;
and, the fourth is that the Tribunal
misdirected
itself in
failing to find that the appellant was well placed to assist the
Tribunal in relation to its concern.
[10]
It was further contended by the appellant in amplification of its
grounds
of appeal that the Tribunal ought to have found that, as a
matter of fact, the third respondent
did
not
investigate
its
concern
thoroughly
or
at
all,
despite
its request for it to do
so; that even if the third respondent had investigated such concern,
that should not have been the basis
for the dismissal of its
application to intervene in the merger proceedings in relation
thereto; that given the third respondent's
decision not to advance
its concern to the Tribunal, no other party but the appellant itself
would have the incentive and/or ability
to ventilate such concern in
the merger proceedings before the Tribunal; and, that as a market
participant with several years of
experience in the relevant data
centre market, the appellant would be able to assist the Tribunal
with specific insights into the
nature of, and competitive dynamics
within, the relevant market.
[11]
On the basis of these arguments, the appellant sought an order that
the order issued by the Tribunal in the matter be amended by the
insertion of a new paragraph therein to read as follows:
"that
the proposed
transaction
is likely to lead
to
the
elimination
of
the
acquiring
firm
as
a
competitor
in
the
relevant South African data centre
market,,_
The appeal was opposed by the first and ·- second respondents,
while the third respondent decided to abide the decision
of this
court.
[12]
The issue as to whether the arguments raised by the appellant
were
based on pure speculation as opposed to being grounded in evidence
was central to the debate before the Tribunal. As a consequence,
the
Chief Investment Officer (CIO) of Digital Realty Trust Inc, which is
the parent company of the first respondent, deemed it
necessary to
depose to a brief affidavit, the contents of · which were
keenly analysed by counsel on appeal. The affidavit
read thus:
"L
the undersigned
GREGORY
SCOTT WRIGHT
do
hereby make oath and say that;
1.
I am an adult male and the Chief
Investment Officer of Digital Realty Trust Inc and a Director of
Digital Titan (Pty) Ltd (Digital
Titan) (collectively "Digital").
2.
I am duly authorised to depose to
this affidavit on behalf of (the) Digital.
3.
Unless excluded by the context or
otherwise indicated in this affidavit, the facts to which I depose in
this affidavit are within
my own personal knowledge
and
are
to
the
best
of
my
knowledge
and
belief
both
true and correct.
4.
I confirm that:
4.1
Digital does not have any current
plans to enter South Africa in the absence of the proposed
transactions between Digital Titan
_and TDE Investments Proprietary
Limited; and
4.2
Digital has had no such plans at any
stage in the past three and half years, which is the period I have
been involved in Digital.
GREGORY
SCOTT WRIGHT"
[13]
In response, the deponent to the appellant's founding affidavit,
Michael
Silber, deposed to a supplementary affidavit in which he
challenged as evasive the following statements made by Mr Wright in
his
aforesaid affidavit :
"Digital
does
not
have
any
current
plans
to
enter
South
Africa
in
the
absence
of
the proposed
transaction
between Digital Titan and TDE
Investments
Proprietary
Limited";
and
"Digital
has
had
no such plans
at any stage
in the past three
and half
years,
which
is
the
period
I
have
been
involved
in
Digital".
Mr Silber argued that the effect of the said statements was that Mr
Wright had failed to state categorically that the first respondent
would not enter the South African" market absent the merger with
the second respondent. Therefore, so he argued, Mr Wright's
affidavit, far from "putting to bed" the theory of harm
that the proposed merger would eliminate a potential competitor
in
the South African market, raised more questions than it answered,
which called for careful scrutiny by the Tribunal at the merger
hearing.
The
legal principles
[14]
Against this factual background, I turn to section 53(c) of the
Competition Act (read with the relevant provisions of Chapter 3 of
the same Act dealing with the control of mergers), the provisions
of
which read as follows:
"The
Jo/lawing persons may participate in a hearing, in person or through
a representative, and may put questions to witnesses
and inspect any
books, documents or items presented at the hearing:
(c)
if
the hearing is in terms of Chapter 3
-
(i)
any party to the merger;
(ii)
the Competition Commission;
(iii)
any person who was entitled to
receive a notice in terms of section 13A (2), and who indicated to
the Commission an intention to
participate, in the prescribed form;
(iv)
the
Minister,
if the
Minister
has
indicated
an
intention
to
participate;
and
(v)
any
other
person
whom
the
Tribunal
recognises
as
a
participant.
[15]
In
essence, the provisions of section 53(c)(i) to (iv) of the
Competition Act specify the parties who are entitled to participate
in merger proceedings, while the provisions of sub-section 53(c)(v)
grant the Tribunal the discretion to recognise any other person
who
is not a party to the merger to participate in the merger
proceedings. While the discretion is wide, it was authoritatively
held by this court in the case of
Anglo
South Africa Capital (Pty) Ltd and Others
v
Industrial
Development Corporation of South Africa and Another
[3]
that
such discretion is not unfettered, and must be exercised judicially
in accordance with the rules of reason and justice
[4]
.
[16]
The legal
principles enunciated in the case of
Anglo
South Africa Capital v JDC (supra)
were
endorsed and applied by this court in the case of
Community
Health Holdings (Pty) Ltd and Another v Competition Tribunal
[5]
.
In
the latter case the court held that although the intervention regime
in mergers is more liberal than that provided for in rule
46(1) of
the Rules of the Tribunal, that does not mean that the Tribunal is
obliged to let in any party who knocks on its doors
seeking to
intervene.
The
threshold for admission may not be as high as is the case in
restricted practice cases, but it requires justification based
on
evidence; hence the necessity for the Tribunal to enquire into the
question as to whether the party
applying
to
intervene
will
assist
it
in
its
enquiry
in
terms
of
section
12A of
the
Act.
[17]
This
entails taking into account the likelihood of assistance promised by
the prospective intervener, balanced against the consequences
of the
intervention in terms of the expedition and resolution of the
proceedings. If the likelihood of the prospective intervener
assisting the Tribunal's enquiry is doubtful, while the impact of the
intervention is more than likely to impact on the expedition
of the
proceedings, then the Tribunal should decline the intervention or
curtail its extent
[6]
.
[18]
Within
the framework of the legal principles set out above, the finding made
by this court in the case of
Anglo
South Africa Capital v JDC (supra)
was
that the Tribunal acted judicially when it exercised its discretion
in favour of allowing a party who was in a position to show
that its
participation in the merger proceedings would assist the Tribunal in
fulfilling its mandate in accordance with the provisions
of the
Act
[7]
.
In
essence, the applicant must demonstrate an evidential
basis as
opposed to speculation
by
which it may assist the Tribunal in carrying out its statutory
mandate
[8]
.
Application
to
the
factual
matrix
[19]
I turn to apply the facts of this case, to the law as outlined.
It
was argued by Adv Cockrell SC, who appeared together with Mr Olivier
on behalf of the appellant, that the appellant is well
placed to
assist the Tribunal in its deliberations regarding the proposed
merger between the first and second respondents in relation
to the
new entry theory of harm. As an active participant in the market for
co-location data centre services it can provide the
Tribunal with
detailed and credible information about the competitive landscape,
including the potential barriers to entry which
may confront a new
entrant into the defined market. Therefore, so he argued, the
Tribunal ought to have exercised its discretion
in favour of allowing
the appellant to participate in the merger proceedings in respect of
the new entry theory of harm as well.
[20]
In
response, it was argued by Adv Budlender SC, who appeared together
with Adv Ngcongo and Adv Mhlongo on behalf of the appellant,
that as
a matter of competition
economics,
a potential competition
theory
of harm is essentially a unilateral effects theory of harm, being a
concern that merging parties will, post-merger, find
it unilaterally
profitable to worsen their competitive
offering
as a
result
of
the loss of the rivalry
between
themselves
[9]
.
He added
that it is trite in competition law that to establish such a concern
two prerequisites must be met
[10]
;
firstly,
there must be reasonable certainty that the firm would have entered
the market absent the merger; and, secondly, that the
(new) entrant
would have been considered a formidable competitor in the
market,
or would have significantly altered the competitive dynamics. He.
argued
that the appellant fell short of the threshold because none of the
said conditions were met in the present case.
[21]
Whether there is merit in Adv Cockell's contention that the appellant
is best suited to assist the Tribunal in its deliberations in
relation to the new entry theory of harm elides over the prior
question:
is the new entrant argument based on any justification save
for speculation. The appellant was unable to demonstrate to the
Tribunal
that it had a genuine ability to assist the Tribunal in its
determination as to whether the first respondent would enter the
South
African market as a competitor absent the merger. Without such
evidence, which could only be factual, it was pointless for the
Tribunal to even consider the second prerequisite as to whether the
first respondent would have been considered a formidable competitor
if it entered the South African market on a 'greenfield' basis. I
arrive at this conclusion on the basis that other than the proposed
merger there was no evidence advanced by the appellant to suggest
that a greenfield investment had any basis in evidence. The only
arguments put up by the appellant to gainsay the criticism that it
was not in the realm of speculation was that the CEO OF Digital
Royalty, the holding company of first respondent, publicly stated
that the company saw expansion into Africa as a growth opportunity,
the company appeared to have an African acquisition strategy and that
the South African market is underserviced. It is difficult
not to
classify these arguments as more than speculation when a new entrant
into South Africa is being raised.
[22]
Further, the foreseeable consequence of the appellant's intervention
in the merger proceedings in relation to the new entry theory of harm
would be a possible delay in the resolution of the merger
proceedings, which are now only three weeks away. It was apparent
from the appellant's founding papers that it could not provide
any
additional insights to the Tribunal on potential entry by the first
respondent absent the proposed transaction. That appellant's
offer to
assist the Tribunal was based on mere speculation that its 'specific
insights into the nature of, and competitive dynamics
within, the
relevant market' would enable it to procure additional information
from the first respondent through formal processes,
such as
discovery, only adds to the concern that it hopes to convert its
speculation by way of discovery. That was also apparent
from Adv
Cockrell' s non-committal responses to the questions posed to him by
members of this court about possible delay in the
resolution of this
matter due to procedural steps, such as discovery, if the appellant's
appeal was successful.
[23]
In my view, the statement made by Mr Wright in his affidavit that the
first respondent did not have any current plans to enter the South
African market in the absence of the proposed transaction, nor
had it
had such plans at any stage in the past three and half years of his
involvement with Digital, ought to have been sufficient
to put that
particular concern to rest. Unless the appellant was in a position to
adduce evidence to the contrary, I am at loss
as to how its
intervention in the merger proceedings in relation to such concern
would be of assistance to the Tribunal in its
enquiry in terms of
section 12A of the Act. As Adv Budlender correctly noted, the
statement on oath that first respondent had no
plans to enter South
Africa absent the proposed merger, meant that no papers relevant to a
greenfield entry were available in that
this was not in the plans of
the first respondent.
[24]
Adv
Budlender contended that, the paucity of justification of a new entry
theory of harm regarding the proposed transaction supported
his
clients concern that the appellant had been influenced more by its
own commercial interest than a genuine desire to assist
the Tribunal
in its- deliberations in relation thereto. Such conduct is obviously
not in accordance with the spirit or purport
of the Act. This court
has held that commercial interest or strategic inspirations are
insufficient to warrant participation in
merger proceedings
[11]
,
and that
the founding papers must detail the unique contribution that the
applicant is able to make to the Tribunal
[12]
,
Inference
or speculation will not suffice, which is what the appellant was
offering to the Tribunal.
[25]
Admittedly, a lot was said by both counsel in their legal arguments
about the juristic nature of the discretion which must be exercised
by the Tribunal in terms of section 53(c) of the Act. However,
if the
Tribunal does not consider that a prospective intervener is likely to
assist it in its deliberations, such as it correctly
found in the
present case, the debate as to whether the discretion conferred to it
is a discretion in the strict or narrow sense
or a discretion in the
loose sense is, in my view, of no relevance. It would be pointless
for the Tribunal to allow the appellant
to participate in the merger
proceedings in relation to the said concern if the appellant would
not add any value in those proceedings.
[26]
Let me
emphasize,
it
cannot
be
denied that the appellant
has
a material interest
in
the
first
respondent
entering
the
South
African
market
as
an
independent competitor in the data centre business. However, that in
itself does not necessarily entitle it to intervene in the
merger
proceedings in relation to the new entry theory of harm. unless it
could demonstrate to the satisfaction
of the
Tribunal that there is a reasonable likelihood of the first
respondent entering the South
African
market
absent
the
merger.
In
the
absence
of
any
evidence
to refute
the statement made by Mr Wright in his aforesaid affidavit, the
Tribunal does not appear to be in a position to take the
matter any
further. If the Tribunal decides,
for
whatever
reason,
to obtain
additional
information
or
clarification from the first respondent
or Mr
Wright
himself,
there is nothing preventing it from utilizing its inquisitorial
powers to obtain such information or clarification directly
without
the
appellant's
involvement. It is
not
confined
to
the
submissions or evidence placed before it by the parties
[13]
.
[27]
It was argued by Adv Cockrell that the appellant is well placed,
by
virtue of its· several years of experience in the relevant
industry, to assist the Tribunal in relation to the concern
which
forms the subject of this appeal. However, except for the
unsubstantiated statements that the appellant has 'specific insights
into the nature of, and competitive dynamics within, the relevant
market, Adv Cockrell's submissions were confronted with the
fundamental problem of a basis for entry on the new entrant theory,
and thus as to how the appellant was better placed than the
Tribunal
itself to probe further the likelihood of the first respondent
entering the South African market absent the proposed transaction.
In
fact, that is a determination to be made by the Tribunal, as opposed
to a prospective intervener, in order to avoid the opening
of
floodgates with every prospective intervener claiming to be better
placed than the Tribunal to obtain additional information
in relation
to the merger proceedings in which it applies to participate.
Finding
[28]
In the circumstances, I am not persuaded that the Tribunal
misdirected
itself in dismissing the appellant's application to
intervene in relation to its· concern that the proposed
transaction
is likely to eliminate the first respondent as an
independent competitor in the relevant data centre market in South
Africa.
Order
[29]
Accordingly, I make the following order:
1.
The appeal is dismissed with costs, such costs to include the costs
of only two
counsel.
I
concur
M
ENKOSI
ACTING
JUDGE OF
APPEAL
I
concur
D
DAVIES
ACTING
JUDGE OF
APPEAL
I
concur
LG
NUKU
ACTING
JUDGE OF
APPEAL
Date
of Hearing:
24 June2022
Judgement
delivered:
08 July 2022
APPEARANCES
For
the Appellant:
Adv
A Cockrell SC and Adv Piet Olivier
Instructed
by:
Nortons
Incorporated
For
the First and
Second
Respondents:
Adv
S
Bud.lender
SC,
Adv
P Ngcongo,
Adv
E
van
Heerden and Adv S Mhlongo
Instructed
by:
Bowmans
For
the Third Respondent:
Thabelo Masithulela and
Zanele Hadebe
[1]
No.
89 of 1998
[2]
See
in this connection MIHeCommerce Holdings(Pty)Ltd t/a
OU<
South Africa v WeBuy Cars(Pty)Ltd (LM183Sept18)
[3]
[2003]
1 CPLR 10
(CAC)
[4]
Anglo
South Africa Capital (Pty) Ltd
(supra)
at
p21I
•
J
[5]
2005
(5) SA 175
(CAC) at para 38
[6]
Community
Healthcare Holdings
(supra)
para
39
[7]
Anglo
South Africa Capital
(supra)
at
p22 A - B
[8]
WeBuyCars
{supra} para 27
[9]
Bishop,
S. and Walker, M. (2010). The Economics of EC competition Law:
concepts, application and measurement. London: Sweet &
Maxwell,
p 367
[10]
MIH
eCommerce Holdings (pty) Ltd
t/a
Ql)(
South Africa v WeBuyCars (Pty) Ltd (case no. LM183Sep18) at paras
189; DowDuPont Inc and the Dow Chemlcal Company and Another,
case
no. LM030May16 (3 November 2017) at paras 45 to
46
[11]
Community
Healthcare Holdings (supra) para 32.5
[12]
Community
Healthcare Holdings (supra) para 56
[13]
Ango
v
IDC at
page
17