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[2012] ZACAC 3
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Pioneer Hi-bred International Inc and Another v Competition Commission and Another (113/CAC/NOV11) [2012] ZACAC 3 (28 May 2012)
IN
THE COMPETITION APPEAL COURT
OF
SOUTH AFRICA
In the matter between:
CAC CASE NO.:
113/CAC/NOV11
CT CASE NO: 81/AM/DEC10
PIONEER HI-BRED
INTERNATIONAL INC.
…....................
1
st
Appellant
PANNAR SEED (PTY) LTD
….............................................
2
nd
Appellant
and
THE COMPETITION
COMMISSION
….............................
1
st
Respondent
AFRICAN CENTRE FOR
BIOSAFETY
…...............................
2
nd
Respondent
JUDGMENT 28 May 2012
_________________________________________________________
SWAIN A J A
Introduction
[1] Pioneer Hi-Bred
International Inc. (Pioneer), the first appellant and Pannar Seed
(Pty) Ltd. (Pannar), the second appellant,
appeal against the order
of the Competition Tribunal (the Tribunal) prohibiting the proposed
merger between the appellants under
Section 16 (2) (c) of the
Competition Act 89 of 1998 (the Act). The application to the
Tribunal, arose from a decision of the Competition
Commission (the
Commission), being the first respondent, to prohibit the proposed
merger. The African Centre for Biosafety (A C
B), being the second
respondent, was granted leave to intervene in the proceedings before
the Tribunal, as an interested third
party, on the basis that it
represented the interests of small scale commercial and subsistence
farmers in South Africa, who would
be affected by any potential maize
seed price increases, as a result of the proposed merger.
[2] The present appeal
presents a unique factual situation against which the proposed merger
must be assessed. It is common cause
that Pannar is in decline as a
competitive force in the hybrid maize seed breeding market in South
Africa. It is also common cause
that this decline has been occasioned
by a lack of adequate access, on competitive terms, to advanced
breeding technologies, germplasm
and genetically modified traits,
which are vital to ensure that Pannar maintains its competitive
position. In order to secure access
to this technology, it was also
common cause, that Pannar would have little choice but to combine
with an international breeder
of hybrid maize seed,. It was this need
on the part of Pannar, which was advanced by Pannar and Pioneer as
the primary justification
for their proposed merger.
[3]
It is accordingly in the application of the requirements of Section
12 A of the Act to the facts of this case, namely whether
the merger
is likely to substantially prevent or lessen competition, that
difficulties arise. On the one hand, the merger will
reduce the
number of major competitors in the hybrid maize seed market, which at
present are Monsanto South Africa (Pty) Ltd. (Monsanto),
Pioneer and
Pannar, from three to two, being Monsanto and Pioneer (merged with
Pannar). On the other hand, if the demise of Pannar
as a competitor,
in the absence of a merger is inevitable, then a reduction in
competition to such an extent will occur in any
event. This case
cannot however be disposed of in terms of the concept of a failing
firm, as it was accepted by all of the parties,
that Pannar did not
fall into this category.
[4] The solution advanced
by the Commission to this problem, and which found favour with the
Tribunal, was that Pannar’s salvation
lay in a possible merger
in the future between Pannar and an international seed breeder with
the requisite technology. Representatives
of two international seed
breeding companies, namely Syngenta Crop Protection AG (Syngenta) and
Dow Agro Sciences LLC (Dow) gave
evidence before the Tribunal and
were identified as likely suitors to fulfil such a rôle. The
Tribunal found:
“
Both
Syngenta and Dow have also had specific discussions and negotiations
in that regard with Pannar in the past. There is no reason
why those
negotiations would not be renewed absent the proposed merger, and
every reason to believe that they would, especially
having regard to
the erosion of market strength that Pannar says it is experiencing.
Furthermore,
the factual witnesses agreed that access to adequate germplasm, well
adapted to the relevant agro-climatic conditions,
is a key to
commercial success in the South African maize seed business. Not
surprisingly access to Pannar’s locally-adapted
germplasm pool
is also one of the main reasons for this proposed transaction, and
Pioneer is paying a very substantial sum of money
to acquire this. A
locally-adapted germplasm pool is furthermore a fundamental barrier
to entry into maize hybrid seed breeding.”
The Tribunal held that it
was “
unlikely that
Pannar’sgermplasm would become obsolete as opportunities exist
for it to be commercially exploited through strategic
partnerships
with one or more other global seed companies”
It
is the correctness of this conclusion, which lies at the heart of any
assessment of whether the merger should be approved. If
this
conclusion is found to be wrong, with the inevitable consequence that
Pannar’s demise as a competitive force in the
hybrid maize seed
breeding market in South Africa is likely, with the resultant loss of
its germplasm, this must weigh heavily
in favour of the proposed
merger being approved.
A merger with
Syngenta?
[5] Mr.Unterhalter S C,
who together with Mr.Gotz appeared for the appellants, submitted that
a vital component for the successful
commercial exploitation of
Pannar’sgermplasm by a strategic partnership, whether with
Syngenta or Dow, was that any postulated
partner would have to
possess germplasm, which was complementary to the germplasm possessed
by Pannar. This requirement was not
considered by the Tribunal, in
its assessment of the likelihood of a successful merger, between
Pannar and either Syngenta, or
Dow.
[6]
Mr Unterhalter referred to the evidence of Mr van Rooyen, the
managing director of Pannar as to the likelihood of a successful
merger between Syngenta and Pannar. When asked about the
complementarity of the germplasm of these two companies, van
Rooyensaid
they did not obtain any promising results from their
extensive tests. He told the Tribunal that:
“
From what we
know there is not a great prospect of complementarity. The companies
that they took over in the US, particularly the
Golden Harvest Group,
I think were fairly incumbent to Holdens as well. We tested quite a
bit of the Golden Harvest material at
the time and I’m not even
sure that we got a lot of it to South Africa, but we tested a lot of
it in our US program too and
we couldn’t really identify
anything that we wanted to proceed with in South Africa.”
He
explained that Syngenta was “quite strong in France” -
Pannar had tested “a lot of European genetics,”
but did
not obtain the fit with Pannar’s genetics, that Pannar had
achieved with U S genetics.
Van Rooyen also testified
that Pannar had not enjoyed a good experience with other germplasm
that Syngenta had sent them. It appeared
to him that Syngenta was
interested in supplying yellow germplasm, while Pannar sought to
supply white germplasm. He stated that
“their whole emphasis
with us has been we are actually interested in your white genetics
and we could not really understand
it” been an interest in the
white genetics of Pannar. He was of the view that there was little
complementarity with the germplasm
of Pannar. He went on to say:
“
I
think they might have even overestimated the value of the white
market in South Africa. It is round about 60 to 65% of the area,
but
there is also a very important and growing yellow sector in the
market, which cannot really be met in the medium maturity.
It is not
adequately met by … well, it’s not met at all by US
Germplasm, except as I said in pockets of the country.
The irrigated region would be met by
US Germplasm and that’s predominantly yellow at the moment, but
they haven’t had
a success rate with their own hybrids that
they introduced into the JV. There was no success when we looked at
that. But as I say,
I think their whole emphasis with us has been we
are actually interested in your white genetics and we could never
really understand
it. Maybe it’s a relic of the Seed Co
relationship, because Seed Co, because they are outside South Africa,
their programs
are principally white genetics.
van Rooyen confirmed that
a key limiting feature in any merger with Syngenta, was the
competitiveness of their genetics in South
Africa. In thenegotiations
Pannar held with Syngenta, he found that Syngenta found it very
difficult to put a proper value on the
potential of the business in
terms of how Pannar’sgermplasm could be exploited. van Rooyen
emphasised that synergies had
to be present: ”
You’ve
got to be sure that you can actually do something with that
germplasm. Otherwise it is valueless, or of lesser value
.”
For all of these reasons, van Rooyen could not envisage a merger with
Syngenta, unless there was a sudden breakthrough
and Syngenta sent
Pannar a whole new set of genetics with the result that Pannar could
see huge synergies, developing in the future.
[7] In summary, van
Rooyen’s attitude to a possible merger with Syngenta, is
clearly set out in his supplemental witness statement,
where he says
the following:
“
In fact
since Pannar last extensively considered fuller collaboration with
Syngenta in hybrid maize seeds (a 2006 process that included
the
consideration and ultimate rejection by Pannar, of a possible equity
acquisition in Pannar by Syngenta) its view of Syngenta
as a
potential maize seed collaborator has remained the same. Over the
years Pannar has pursued limited evaluations of the potential
to
develop joint maize hybrids from combinations of inbreds from
Syngenta and Pannar, including full tests of such combinations.
The
results of these tests have confirmed Pannar’s earlier
conclusion that Syngenta’s lack of compatible maize germplasm
makes it an inappropriate candidate for a partnership with Pannar,
especially when compared to Pioneer”.
[8] Mr.Suter, the head of
the African Middle East business for the Syngenta Group of Companies,
stated that Syngenta had embarked
upon a joint venture with Seedco,
between 2001 and 2006, with the object of gaining a foothold in the
southern African market.
They tried, together with Seedco, to expand
breeding capabilities based on germplasm that both Syngenta and
Seedco would contribute.
One of the reasons why the joint venture
failed, according to Suter, was that from a germplasm point of view
“
there was no
direct fit at that moment between our own germplasm as well as the
Seedco Zimbabwe germplasm”.
He explained that
“
the
fit of the germplasm”
did
not allow Syngenta to expand the breeding operations. By the “
fit
of the germplasm”
he
explained that he meant that it was originally thought that the
Seedcogermplasm would fit the South African conditions, but this
was
not so. In addition, the South African market was shifting towards
earlier maturity germplasm, but the specificities of the
germplasm of
Seedco, were in the later maturity grades.
He stated that the
attraction that Pannar had as a partner was the germplasm that Pannar
had to offer.
When
cross-examined by Mr.Unterhalter, he agreed that in 2004, Syngenta
made two significant acquisitions of seed companies in the
U
S, namely Garst and Golden Harvest
and conceded that since
the acquisition of these companies, Syngenta had lost a significant
share in the market. He accepted that
it had taken Syngenta
“
much
longer to develop the basis of germplasm, adapted from these
acquisitions”
and
they had expected to commercialise it faster. He agreed that Syngenta
had not yet been able to exploit the germplasm that it
had acquired.
[9] As regards the joint
venture with Seedco, he conceded that after a six year research
programme, the results were not impressive.
There was no data with
which to determine the competitiveness of the programme. He also
agreed that it did not produce very successful
hybrids and that the
hybrids making it to the commercial stage, were utilising the genetic
material of either Syngenta or Seedco,
which according to the
assessment of Pannar (which was offered the assets of the joint
venture for purchase) were not winners.
He accepted that this outcome
was not suggestive of Syngenta’s position as a genetic pool
which was highly useful, at that
time, for the purposes of entry into
the South African market. As regards his contention that the
Seedcogermplasm was not particularly
well suited to South African
conditions, Mr.Unterhalter put it to Suter that at present there are
fourteen Seedco hybrids on the
register, and that Suter was not in a
position to say much about Seedco’sgermplasm, because Seedco
had commercialised offerings
in their own right on the market for
many years. Suter agreed with this proposition but added that his
remarks were directed at
the joint venture, not Seedco itself.
Suter said he was not
aware that the reason why the attempt by Syngenta to acquire Pannar
had failed was because the ability to
exploit the germplasm pool of
Syngenta and Pannar, was thus not a very promising prospect for
Pannar.
[10] Suter stated that he
was aware of the collaboration between Syngenta and Pannar, where
fifteen lines were made available for
the purposes of testing hybrids
with Pannar, of which four were based on the BT 11 trait of Syngenta.
These comprised 100% Pannar
genetics, with the Syngenta trait
introduced, because Syngenta would prefer Pannar to sell their seeds
with Syngenta traits, rather
than Monsanto traits. Suter agreed, that
apart from this, “
in
terms of taking the germplasm that had been part of a testing
programme with Pannar… since 2006, nothing had been
commercialised.”
As regards the BT 11
trait he said it was being tested in limited quantities for its
efficacy by Pannar, during the then current
season. However no
agreement had as yet been concluded with Pannar, in respect of the GA
21 trait or the stack trait.
[11] By reference to the
document headed
“
SA
Topical Review 2011 maize seeds”
compiled
by Syngenta, with reference to Syngenta’s objectives in the
South African market, it was clear that there was no
express
reference to finding a seed breeding partner on the South African
market, by Syngenta. Express reference was however made
to looking
for a seed partner which could be utilised in order, to sell the crop
protection portfolio of Syngenta as well as for
the purpose of
ingressing Syngenta’s traits into seeds.
Conclusion
regarding Syngenta
[12] In summary, it is
clear that a vital element in whether a successful merger could be
consummated between Syngenta and Pannar,
turned upon the
complementarity of their germplasm. As is evident from the evidence
so summarised, this vital element is lacking.
In the absence of the
production of
“
a
whole new set of genetics”
by
Syngenta, any such collaboration is doomed to fail, as occurred in
the abortive joint venture between Syngenta and Seedco, for
the same
reason.
[13] Consequently, in so
far as Syngenta is concerned, the evidence cannot support the
Tribunal’s conclusion that if the proposed
merger does not
proceed
“
the way
in which the value of the Pannar business could be preserved and
exploited is by a partnership with an international seed
firm”.
A merger with Dow?
[14] Turning to a
consideration of the likelihood of a successful merger, between
Pannar and Dow. Mr. van Rooyen said that the Dow
germplasm was
probably
“
less of
a fit”
than
the Syngenta germplasm. Mr van Rooyen testified that
Pannar had crossed Dow’s
germplasm with Pannar’s lines and tested and evaluated it.
There was one white hybrid that
Pannar had in its final testing
phase, in which Pannar was interested, because it would have fitted
the ultra early market and
Pannar had never had a white hybrid, for
the ultra early market. However, when Pannar wished to develop this
hybrid, Dow told Pannar
that it was actually a line from another
company, that they had an arrangement with, and they did not have
authority to supply
it to Pannar.
[15] According to van
Rooyen, Dow had taken over a company in Argentina, with which Pannar
had had a long standing relationship.
Pannar had never identified
“
anything
exciting
”
in
the Argentinian genetics. He explained that benefit could be obtained
from Argentinian genetics, but they had to be put into
a programme
and worked on and it was not possible to simply take a line and cross
it.
[16] Van Rooyen stated
that Dow had possibilities in relation to Brazilian genetics, where
the germplasm was yellow and more suited
to the tropics. However,
because South Africa was not tropical and did not work in yellow
germplasm, the contribution would be
limited. As regards the U S
genetics he stated that a lot of the companies that were today part
of the Dow group, were companies
with which Pannar had relationships,
before they were taken over, all of which had very small breeding
programmes.
[17] Mr. Robertson, Dow’s
global project success leader for corn in that evidence in chief,
stated that Pannar were seeing
some benefits from the germplasm
testing that they had done and requested
“
the
registration and the potential commercialisation of a hybrid or two”.
He stated that
they had permitted Pannar, to put one hybrid into registration prior
to a commercial licensing agreement. He added
that Dow was
consequently interested in discussing with Pannar, the germplasm
components that Pannar owned in South Africa.
However, under
cross-examination when it was put to him, that the results of the
Pannar tests of the inbreds and hybrids of Dow
that were made
available to Pannar, were singularly unsuccessful, he re-iterated
that Pannar had requested
“
one
or potentially two hybrids that they would like to take to
commercialisation. So there was some success that was generated from
these tests”.
However,
he agreed that, in respect of one of those hybrids, which was a white
inbred, when Pannar said it was showing promise and
they would like
to develop it further, it transpired that it did not belong to Dow.
He also conceded that there was one hybrid
that was still being
tested, but “
it
did not have any great future … all the rest were eliminated,
at a much earlier stage.”
When
it was then put to him that the evidence from Pannar would be that
they found very little complementarity between Dow’s
germplasm
and Pannar’sgermplasm he replied
“
If that’s
their statement, that’s their statement”
[18]
Robertson agreed that Dow had no breeding programme either in South
Africa, or anywhere else on the African continent He had
never
contemplated the possibility of acquiring local germplasm, such as
from Kenya or Tanzania to see how that worked with Dow’s
hybrids.
Conclusion
[19] On this evidence, it
is clear that there was very little complementarity between the
germplasm of Dow and that of Pannar. Consequently,
as in the case of
Syngenta, the evidence cannot support the Tribunal’s
conclusion, that a way in which the value of Pannar’s
business
could be preserved and exploited would be by way of a merger or any
other partnership with Dow.
[20] As pointed out
above, the Tribunal in its assessment of the capabilities of Dow and
Syngenta as possible partners of Pannar,
failed to assess the vital
issue of the complementarity of the germplasm of these two companies
with that of Pannar. Significantly,
the Tribunal did however note the
complementarities between the Pioneer and Pannargermplasm pools and
the fact that both Dr Soper
head of the research of Pioneer and Mr
Schickler President of Pannar emphasised that Pannar had developed a
highly valuable pool
of maize germplasm, adapted specifically for
South African growing conditions which Soper described as
“
unique”.
[21]
Unfortunately, rather than giving due weight to the fact that, on the
evidence, Pioneer was the only international seed breeder,
possessed
of the complementary germplasm as well as the technology needed to
fully exploit and develop the unique local asset which
is
Pannar’sgermplasm, the Tribunal viewed the value of
Pannar’sgermplasm as a factor operating against approval of
the
proposed merger, in the following respects:
[21.1]
Pannar’sgermplasm pool was the only pool that was sufficiently
diverse and extensive, to constitute a platform for
timely and
effective new entry into the market by a participant to compete with
Pioneer and Monsanto.
[21.2] It was not
credible that Pannar would allow its locally adapted germplasm, which
was a very valuable and
“
unique”
asset, to go to waste and
this would be achieved by
“
strategic
partnerships with one or more other global seed companies”
.
[22] This approach
effectively compels Pannar to enter into such a
“
strategic
partnership”
to
prevent its demise and thereby preserve its germplasm pool, which
would be in the public interest of maintaining competition,
by
ensuring the presence of at least three competitors in the market.
The Tribunal correctly noted that, in the context of a higher
price
being paid for a target firm, in terms of a transaction under
scrutiny, as opposed to an alternative transaction, the private
interests of firms
“
cannot
ever trump the broader public interest consideration of a substantial
lessening or prevention of competition, with concomitant
negative
effects on consumers”.
However, in my view, such
an approach is of limited application in the present context. The
Tribunal framed the key question for
determination thus:
“
If
realistic alternative strategies exist that Pannar could pursue and
which could stem the alleged decline of its maize seed business,
which strategies may include an alternative transaction with another
partner, ultimately of Pannar’s choice, should the current
transaction not proceed.”
The
public interest in maintaining competition in the market, cannot
justify the refusal of a merger, on the basis that competition
will
be maintained in the market, as a consequence of such refusal, by
virtue of unsubstantiated speculation that the target firm
will enter
into a partnership with another firm, which is not a competitor in
the market, and which is wholly unsuited to a merger.
The Tribunal’s
approach runs the danger of placing too much emphasis upon the
interests of competitors rather than upon the
key principle, of
maintaining or promoting competition in the relevant market. The
public interest in maintaining competition in
the market, does not
justify the exploitation of the vulnerability of a target firm, by
the competition authorities, in such a
manner. To condone such an
approach would constitute an intrusion into the management and
control of private companies, not justified
in the public interest,
particularly, as on the available evidence such a merger could not
possibly be considered to make financial
sense
[23] In this context the
Tribunal rejected the view of Hodge, that an insistence upon the
availability of Pannar’s local germplasm
as a platform for
effective new entry into the market, meant that an obligation was
being imposed upon Pannar
“
to
be a public repository for local germplasm”
with
whatever partner came along.
The Tribunal’s
rejection of this allegation, was justified on the basis that there
were only three firms in South Africa with
substantially locally
adapted germplasm pools being Pannar, Pioneer and Monsanto and such a
germplasm pool was required for timely
and effective new entry into
the hybrid maize breeding market.
The
Tribunal then added the following:
“
If the
proposed merger raised no significant competition concerns on the
merits, then this would not be an issue, but if it did
and one wanted
to preserve a market structure with at least three effective
competitors, then the pairing of the proposed two of
the three
incumbent firms would not be a possibility”
It added that any firm
operating in a
“
three
firm market”
such
as the present
“
must
accept that an anticipated merger with either of the other two
incumbent firms, would inevitably risk rejection by the competition
authorities. That risk was known to the merging parties when this
transaction was contemplated”.
[24]
In my view, the reasons advanced by the Tribunal do not justify its
rejection of the proposition advanced by Hodge, because
they take no
account of the fact that Pannar will eventually cease to be a
competitor in the market, which will then be reduced
from a three to
two firm market, with the accompanying loss of Pannar’s local
pool of germplasm. The evidence cannot justify
the denial of the
preservation and exploitation of Pannar’sgermplasm, by way of
the proposed merger and accept as a likely
solution the acquisition
of Pannar and its germplasm by another entity, not presently in the
market and, on the available evidence,
which is unlikely to be
successful in the South African market. This justification cannot be
found in the public interest principle
of ensuring competition by
maintaining the presence of three competitors in the market, if this
means the effective imposition
of an obligation on Pannar to be a
public repository for local germplasm.
[25]
In summary, the approach of the Tribunal, which effectively compels
Pannar to seek a partnership with another company, not
presently
competing in the market and more particularly Syngenta or Dow, also
impinges upon the private control of Pannar in another
and far more
insidious manner. The vulnerability of Pannar, and its inevitable
decline in the market, has been exposed in the proceedings
before the
Commission and the Tribunal. The need to enter into an alliance with
an international seed breeder, in order to prevent
its demise, has
been made clear. Consequently, its ability to negotiate such an
alliance must have been considerably weakened in
the interim.
[26] The Commission, has
failed manifestly to establish the likelihood of a successful
acquisition and exploitation of Pannar’s
local pool of
germplasm by Syngenta, Dow or an unnamed international seed breeder.
The only conclusion which flows from the evidence
must run contrary
to the Tribunal’s decision that the answer to the
“
crisprelevant
issue”
(in
regard to the counterfactual) of whether absent the merger Pannar
could hold its
“
alleged
deteriorating competitiveposition”,
is
by way of a strategic partnership with one or more other global seed
companies.
[27] I accordingly
disagree that the relevant counterfactual is the conclusion of
“
a
viable commercial arrangement with anotherinternational seed breeder”
by Pannar, to arrest its
decline and that the
status
quo,
is
the relevant counterfactual against which the effects of the proposed
merger should be determined, as decided by the Tribunal.
[28] In my view, the
relevant counterfactual is the continued decline,
eventual
demise and exit from the market as a competitor, by Pannar, with the
consequent loss of its valuable local germplasm and
thus a two firm
market, probably dominated by Monsanto.
[29] This conclusion has
a profound effect upon an assessment of the proposed merger. At the
heart of the Tribunal’s disapproval
of the merger, lies the
assumption that where there are three competitors in a market, a
merger between two of them must lessen
competition and
“
inevitably
risk rejection by the competition authorities”.
Generally
speaking such an approach is warranted, but not in the present case,
where the demise of one of the competitors is inevitable,
albeit that
the precise time when this will occur, is uncertain. It is of little
assistance, on the unique facts of the present
case, to approach the
issue of whether the proposed merger will lessen competition, by
simply focusing upon possible post-merger
price increases, whether
these would be offset by any dynamic efficiencies flowing from the
merger, and whether any adverse effects,
can be resolved by way of
the proposed remedies, and to turn a blind eye to the reality of the
situation.
[30]
Of vital importance is the need to ensure that the valuable local
asset, being Pannar’sgermplasm is preserved and effectively
exploited in the public interest, based upon evidence which ensures
this, rather than speculative propositions of what may occur
in the
future. On the available evidence, the merger achieves this result.
In addition, the preservation of the economic incentive
to innovate,
by the application of the advanced breeding technology and germplasm
of Pioneer, to the germplasm of Pannar, in a
market which is
dominated by innovation competition, is also of importance. This is
particularly so where Monsanto is the market
leader, in respect of
which increased innovation competition, as a consequence of the
proposed merger, is a desirable and likely
consequence.
Price Increases
[31] Notwithstanding this
conclusion, I will deal with the Tribunal’s assessment of the
consequences of the merger by examining
firstly the predicted
unilateral price increases of the proposed merger.
[32] An issue much
debated before the Tribunal and dealt with extensively in its
judgment, was whether the so-called
“
irrigation
market”
was
a separate market, which fell to be excluded from the unilateral
price effects modelling, as contended for by the merging parties.
[33] In argument before
us, it appeared that Mr.Unterhalter no longer relied upon this
proposition.. He contended that, although
the distinction was not
abandoned, it was not necessary for this Court, to examine it. The
distinction consequently need not detain
this Court any further.
[34]
Mr.Unterhalter, referred to a table prepared by Dr Waehrer which set
out the predicted percentage price effects, applying the
model to all
South Africa and assuming inputs, the 2010/2011 trait penetration
rates, but not including the effects of dynamic
efficiencies. This
table illustrated that the percentage price increase with trait fee
efficiencies included, as well as the proposed
price cap remedy, was
1.6%. With trait fee efficiencies excluded, the price increase was
2.6 %.
[35] As regards the
dynamic efficiencies which would flow from the merger, Mr.Trengrove S
C, who appeared for the Commission, together
with Mr Wilson,
submitted that although 3 hybrids, may have been produced from 117
hybrids, as a result of the joint trials conducted
between Pioneer
and Pannar, there was no evidence of any benefit from these hybrids.
Mr Trengove contended that Mr Hodge’s
assumption of yield gains
between 5% and 15% was also fundamentally flawed because he assumed
that those yield gains would be achieved
across all the hybrids sold
by the merged entity in a single year. In his view, such an
assumption was wholly unsupported by the
trial results which, at
best, suggest that they might produce three new hybrids in respect of
which these yield gains might be
achieved (out of a total portfolio
of some 71 hybrids in Pioneer’s 2011 catalogue and 46 hybrids
in Pannar’s 2011 catalogue,
or a total of 117 hybrids for the
merged entity). Mr Trengove referred to Dr Soper’s evidence
that the industry average yield
gain is 1% per year and that Pioneer
strives towards 2%.
Mr.Unterhalter in reply,
submitted that this proposition was flawed and referred to the
Genesis report, which compared a combined
hybrid, with the best
performing hybrids of Pioneer and Pannar in the following terms.
“
This
combined hybrid demonstrates a superior yield performance of over
fourteen percent in the Western region relative to Pioneer’s
and Pannar’s best performing hybrids in this segment, namely
PHB30Y79B and PAN 6Q – 455B”.
In
support of appellant’s argument in favour of dynamic
efficiencies, Mr.Unterhalter then referred to schedules of sales
figures of the Pioneer and Pannar hybrids. Pioneer hybrid 30Y79B was
the second best selling hybrid in Pioneer’s range with
6.9% of
Pioneer’s total sales. Pannar hybrid 6Q-455B was the sixth best
selling hybrid in Pannar’s range, with a 5%
share of Pannar’s
total sales. By reference to the evidence of Dr.Soper, he pointed out
that the hurdle rate, of whether
a hybrid is progressed to the next
level of development at the T4 – T5 level, was a yield gain of
4%.
He consequently submitted
that the yield gain of 14% by the combined hybrid, over two of the
best selling hybrids of Pannar and
Pioneer, demonstrated that there
was evidence of the benefit from the joint tests, and that this came
close to an annual yield
gain of 1%. On this basis, the trial result
illustrate the yield gain. Indeed this figure came close to the 1.2%,
which Mr.Trengrove
had submitted was needed to counteract the
predicted price increase because of the merger. This figure was based
on the evidence
of Dr.Waehrer that a yield improvement of 1.2% was
sufficient to offset a 10% increase in price.
However,
if the predicted percentage price effects of Mr. Smith, the expert
who testified on behalf of the Commission, of 1.6% with
trade fee
efficiencies and the price cap included, were utilised, the yield
gain would offset the predicted price increase. Consequently
I must
respectfully disagree with the approach of the Tribunal that Hodge’s
dynamic efficiency calculations were grossly
overstated, in so far as
the evidence relating to this particular hybrid is concerned. In
addition, by reference to the table,
Mr.Unterhalter
submitted further that the yield increased over the following years,
which would counteract any price increases.
As regards any immediate
price increase, this would be dealt with by the price cap proposed by
the appellants.
The question of
precise quantification of efficiencies
[36] The Tribunal, in
reliance upon the U K Merger Assessment Guidelines (paragraph 5.7.4),
stated that the efficiency claims of
the parties to a merger must
meet three criteria, namely they must be likely, timely and
sufficient to prevent a substantial prevention
or lessening of
competition. The
onus
of
proving this lay upon the merging parties.
Mr.Unterhalter, submitted
however that what was important was their verification, rather than
their precise quantification, which
was difficult to assess. He
submitted that the U S merger guidelines provided for an assessment
of the evidence relating to their
existence, but did not require the
welfare amount, to be exactly quantified.
[37]
It appears to me that in a market, such as the one under
consideration, which is dominated by innovation competition,
verification
of the existence of such efficiencies, rather than their
precise quantification, should be emphasised.
[38] In a presentation
(George Mason University Law Review, 11
th
Annual Symposium on
Antitrust), Thomas Barnett the Assistant Attorney General, Antitrust
Division, U S Department of Justice on
31
st
October 2007 notes:
“……
..antitrust
enforcers must be careful not to pursue immediate, static efficiency
gains at the expense of long term, dynamic efficiency
improvements,
since the latter are likely to create more consumer welfare than the
former”. (at 15)
Mr
Barnett then says:
“
Since
dynamic efficiency is crucial, preserving innovation incentives is
one of the most important concerns of U S antitrust law.
This can
mean bringing an action to prevent conduct that reduces
innovation
or it can mean declining to act where overly aggressive antitrust
enforcement risks killing the type of vigorous, innovative
competition that brings long term benefits to consumers. In this
regard, we recognise that when innovation leads to dynamic efficiency
improvements and a period of market power, it is not a departure from
competition, but it is a particular type of competition,
and one that
we should be careful not to mistake for violation of the antitrust
laws”. (page 17)
[39]
Of relevance to this issue is the argument of Michael Katz and Howard
Shelanski of the University of California at Berkeley:
“
Merger
policy is the most active area of U S Antitrust policy. It is now
widely believed that merger policy must move beyond its
traditional
focus on static efficiency to account for innovation and address
dynamic efficiency. Innovation can fundamentally affect
merger
analysis in two ways. First, innovation can dramatically affect the
relationship between the pre-merger market place and
what is likely
to happen if a proposed merger is consummated. Thus, innovation can
fundamentally influence the appropriate analysis
for addressing
traditional, static efficiency concerns. Second, innovation can
itself be an important dimension of market performance
that is
potentially affected by a merger”.
(Michael
L Katz and Howard A Shelanski Merger Policy and Innovation: Must
Enforcement Change to Account for Technological Change?
Innovation
Policy and the Economy (2005))
[40] Katz and Shelanski
point out that
“
traditionally
merger policy focused on the question of whether a proposed
transaction would lead to higher or lower prices, based
on a static
analysis that compared market power and efficiency effects”.
However, as important as
is price competition,
“
a
second major and possibly even greater concern is maintaining
competition for innovation”.
It
is important that economic incentives to innovate are preserved.
“
Merging parties
frequently assert that the transaction will allow them to engage in
greater innovation, while antitrust enforcers
may object to a
transaction, on the grounds that it will lead to a loss of
competition that would otherwise spur innovation”.
They
submit that
“
to
assess fully the impact of a merger on market performance, merger
authorities and courts must examine how a proposed transaction
changes market participants’ incentives and abilities to
undertake investments in innovation”.
They
refer to this first rôle for innovation in merger policy as
“
the innovation
incentives criteria”.
Katz
and Shelanski
supra
at pg 110
[41] The learned authors
also propose that
“
A second way
in which innovation is central to antitrust policy is that the
presence of innovation can fundamentally alter the nature
of the
appropriate analysis even if
one
focuses on traditional performance measures, such as static pricing
efficiency. In brief, merger analysis forms a prediction
of a
proposed transaction’s effects on consumer welfare by examining
present characteristics of the parties to the transaction
and the
market setting in which these parties operate. Innovation can
dramatically affect the relationship between the pre-merger
market
place and what is likely to happen if the proposed merger is
consummated ….. This situation raises the broad question
of
how merger analysis should form predictions about the likely
competitive effects of a proposed transaction”.
They refer to
“
this
second
rôle
for innovation in merger analysis as the innovation impact
criterion”.
Katz
and Shelanski
supra
at
pgs 110 -111
[42] As to how
“
the
innovation incentives criterion”
and
“
the
innovationimpact criterion”
are
to be applied Katz and Shelanski have the following to say:
“
Under the
innovation incentives criterion, one asks how the change in market
structure and competition brought about by a merger
will likely
affect consumer welfare through effects on the pace or nature of
innovation that might reduce costs or bring new products
to
consumers. Under the innovation impact criterion, the situation is
reversed. It refers not to how market structure will affect
innovation but to how innovation will affect the evolution of market
structure and competition. Innovation is a force that could
make
static measures of market structure
unreliable
or irrelevant, and the effects of innovation may be highly relevant
to whether a merger should be challenged and to the
kind of remedy
antitrust authorities choose to adopt”. (page 111)
Katz and
Shelanski
supra
at
pg 111
[43]
The learned authors also point out that:
“
The closer
the innovation at issue in a particular merger is to resulting in an
identifiable, predictable product, the more likely
the issue for
merger review will be how the innovation will affect future structure
and performance in the product market, relevant
to the transaction
(i.e. the innovation impact criterion). The further the innovation is
from a tangible result, the more likely
the question for merger
authorities will be how the transaction will affect the likelihood
and level of continued investment in
R & D (i.e. the innovation
incentives criterion)”. (page 112)
Katz and
Shelanski
supra
at
pg 112
[44] Dr.Soper, on behalf
of Pioneer, was of the view that the test results of the joint
hybrids developed with Pannar were
“
very
promising”
and
that the test results were
“
just
the tip of the iceberg of what couldoccur ifthe two germplasm pools
were brought together”
and
that it had
“
tremendous
potential”.
He expressed the view
that the successful joint hybrids could be commercialised and be
brought to market by the 2015/2016 cycle
year or season.
[45] Soper stated that
upon merger, Pioneer “
would
take the Pannar material and genetically profile it to see what
genetics it has
.”
They would also conduct tests to confirm association of certain
traits with the genetic markers in the Pannargermplasm.
Within a
year, Pioneer “
would
start utilising the marker selection techniques and their double
haploid technology to speed up the Pannargermplasm and put
it on the
same track of efficient and expedient breeding used for Pioneer
material
.”
The advantages that would be obtained from this process, would then
be put through a normal breeding cycle, which would
result in the
advantages coming into the market, probably within six to eight years
of the merger. None of this evidence was disturbed
,to any material
extent, under cross examination. Indeed, when Mr Wilson put it to
Soper that the hybrids could be ‘commercialised’
even if
the transaction did not proceed, Soper’s answer was
significant:
“
I don’t
think we can tell yet. We would have to go back through the process
and again would hope you could work something
like that out, but
history tells us that it rarely works out that way, I don’t
know exactly what the percentage is, but in
my time we have had far
more failures to come to commercialisation than successes in taking
joint hybrids to market, again because
when you get the final result
one company gets that and the other one doesn’t and the one
that doesn’t is really fearful
of losing market share by
letting it go, when you have a really good result like we appear to
see here. In cases where it does
work it is usually that the provider
of the inbred is a relatively small player and recognises the value
of receiving royalties
on much larger hectare age because of the
distribution power of a company like Pioneer and then they would be
more apt to agree
to this sort of commercial term.
[46]
According to van Rooyen, Pioneer had probably the most extensive
international genetics base. By contrast, in South Africa
Monsanto
was the clear market leader in genetics, followed by Pioneer and then
Pannar. On a percentage basis Monsanto had about
50% of the market,
Pioneer 25% to 30%, followed by Pannar at 16% of the market in terms
of genetics.
[47] Appendix E of the
Genesis report, dealing with the dynamic efficiencies flowing from
the merger, concludes that the merger
“
presents
certain merger-specific dynamic efficiencies”.
These
“
efficiencies are
scientifically certain as the germplasm pools are demonstrably
diverse and advanced breeding tools are proven to
bring about
improvements in breeding performance”.
In
addition
“
the
efficiencies are merger specific as the parties would not share their
elite inbreds absent the merger and Pannar could not effectively
license or use the advanced breeding tools absent close integration
with Pioneer”.
The
report also observes that
“
the
dynamic efficiencies are also likely to be of an order of magnitude
that brings large total welfare benefits which are highly
likely to
be passed through to farmers and final consumers”.
The following remarks of
Smith, in the light of this evidence are apposite:
“
These
dynamic efficiencies described above seem more compelling and that’s
more compelling than trait efficiencies and that
I think that goes to
a legal point, which I will leave for others. Well, we could classify
it as a legal point, although I think
there is some economic
rationale to it and could potentially be of large magnitude and
beneficial both to farmers directly and
for competition in the
industry. I think that’s fairly unobjectionable”
[48] The Tribunal however
decided that
“
the
benefits flowing from the current joint trials of the merging parties
are not merger specific”.
The
Tribunal reasoned that
“
If
the gains realised from the current collaboration were
merger-specific it would mean that the proposed merger had been
implemented
without competition approval”
which
was not the case. It pointed out that
“
the
material exchange agreement between Pioneer and Pannar predates the
merger agreement of July 2009 and is independent of the
merger…..
hence the joint trial yield gains are merely indicative of potential
future efficiencies that may follow from
a merger”.
[49] The Tribunal also
pointed out that
“
efficiencies
must be achieved within a relatively short period of time to prevent
a proposed merger from causing harm to consumers”.
It
also concluded that the new hybrids would take a number of years to
commercialise and
“
any
potential merger-specific efficiency lies beyond a five year time
horizon in the future”.
In
addition,
“
any new
varieties which might arise from the combination of Pannar and
Pioneer germplasm are likely to take several years to emerge”
and finally concluded
“
that the
efficiencies are distant and therefore not associated with a high
probability of offsetting the competitive harm”.
[50] With respect, the
reasoning and conclusion of the Tribunal, starkly illustrates the
danger of pursuing immediate static efficiency
gains, at the expense
of long-term dynamic efficiency improvements, in a market dominated
by innovation competition. This is unfortunately
an example of
anti-merger enforcement, stifling vigorous innovative competition
that brings long-term benefits to consumers. The
present case is one,
where innovation is a force that, to a degree, renders static
measures of market structure unreliable. The
evidence reveals that
new combined hybrids will be commercialised by the 2015/2016 year,
with more to follow in six to eight years.
The predicable products
will consequently arrive within the near future and over the long
term. Consequently both
“
the
innovation incentives criterion”
as
well as the
“
innovation
impact criterion”
,
must be assessed.
[51] As regards the
“
innovation
incentives criterion”
it
is likely that the merger will affect consumer welfare, as the pace
and nature of innovation will bring new hybrids to the market.
Absent
the merger, it is clear that Pioneer, without the germplasm of
Pannar, will not achieve the same level of innovation. Pannar,
without the advanced breeding technology of Pioneer and the
complementary germplasm pool of Pioneer, likewise will not achieve
the same level of innovation. As regards the
“
innovation
impact criterion”
it
is likely that the market structure will be altered by the creation
of a more competitive adversary for Monsanto, the market
leader, in
the long-term in the form of the merged entity of Pioneer and Pannar.
[52]
I consequently disagree with the views of the Tribunal, regarding the
possible effects of the dynamic efficiencies flowing
from the merger.
I, consider that the Tribunal’s exclusion of the results of the
joint trials from consideration, on the
grounds that they are not
merger-specific, are somewhat artificial. These joint tests are
merger-specific, as they predict the
consequences of the merger and
the future benefits that will inure to the advantage of consumers, if
the merger is approved. In
addition, I disagree that the unilateral
anticompetitive effects that result from the merger, are not offset
by the dynamic efficiencies,
when proper regard is had to the
incentive to innovate, as well as the effect of innovation upon the
market, post merger. Should
the merged entity, as a consequence of
innovation, attain a period of market power, as against Monsanto (the
present market leader),
this would not be anti-competitive, but
rather a form of competition.
This would simply
constitute an example of the impact of innovation upon the market.
Monsanto in turn would be compelled to undertake
further investment
and innovation to remain competitive, which would be an example of an
incentive to innovate, operating in an
innovation market.
Pass-through benefit
[53] The Tribunal decided
that the merging parties had not substantiated their assumed level of
pass-through of benefits to farmers.
However, Schickler testified
that of the total amount of increased value created by improvements
to Pioneer seed, Pioneer realises
approximately 30% and the other 70%
of gains are realised by farmers.
In addition, the
appellants in their heads of argument referred to the decision of the
Tribunal, in the case of
Trident
Steel and Dorbyl (Case No. 89/LM) at para 81)
where the following was
said:
“
Where
efficiencies constitute ‘real’ efficiencies and there is
evidence to verify them of a quantitative or qualitative
nature,
evidence that the efficiencies will benefit consumers, is less
compelling ……. The test is thus one where
real
economies and benefit to consumers exist in an inverse relationship.
The more compelling the former, the less compelling need
be the
latter”.
As pointed out above, the
dynamic efficiencies are
“
real”
efficiencies which have
been verified qualitatively and quantitatively by evidence.
[54]
I accordingly disagree with the conclusion of the Tribunal that the
efficiencies were distant and therefore not associated
with a high
probability of offsetting the competitive harm.
If due regard is had to
the fact that the market is one of innovation, the conclusion of the
Tribunal is again erroneously based
upon a narrow application of
immediate static efficiency gains, and not long-term dynamic
efficiency improvements.
Co-ordinated effects
[55] Turning to the issue
of co-ordinated effects, the Tribunal decided that there was no need
to decide on this issue, because
it had already decided that the
merger raised significant concerns regarding unilateral price
effects, which were not offset by
cognisable efficiencies, and this
issue did not alter their conclusion.
[56] The Tribunal did
however note that
“
The
merger itself by permanently changing the market structure to that of
a duopoly would significantly increase the susceptibility
of the
market to tacit co-ordination”.
[57] This view was based
upon the fact that post-merger monitoring of a tacit agreement by
Monsanto and the merged entity, would
be easier with the detection of
deviation by either party. This was because the merged entity would
be “
far more
similar to Monsanto in terms of its product portfolio, size cost
structure and scope than anyindividual Pioneerand Pannar”.
In addition, because
“
there would be
only two significant firms in the market after the merger would
significantly increase the market transparency from
both a price and
volume perspective”.
[58] The Tribunal has
ignored the fact that the market is one which is dominated by
innovation competition. As pointed out by Katz
and Shelanski (
supra
at pg 120), albeit
uttered in the context of intellectual property policy
“
The modern
view holds that both intellectual property policy and merger policy
seek to promote consumer welfare by creating an economic
environment
in which innovative activities are stimulated by both competition and
the promise of returns to successful innovation”.
[59]
Soper stated that Pioneer and Monsanto were, as regards technical
expertise, on a similar level, which was at a higher level
than other
seed breeders. Monsanto and Pioneer were the leading breeding
organisations across most of the world. He described Monsanto
in the
following terms:
“…
..they
are the other gorilla in the cage and we kind of look at ourselves as
two organisations that are continually fighting tooth
and nail to
remain on top of the market. It’s been good for the market,
because it’s stimulating competition, but it’s
a very,
very tough battle”.
Mr.Unterhalter asked
Soper whatrôleinnovation played in the competitive struggle, to
which he replied:
“
Well
innovation is critical in staying on top and innovation such as the
market technologies and such as the biotechnology traits,
those are
all part of innovation that all of us at the top as particularly
Pioneer and Monsanto are investing extremely and heavily
in to stay
on top. And I think it just takes one pause in terms of aggressive
investment, in those technologies and you put your
company at risk of
falling stiffly behind”.
Mr.Unterhalter
then asked Soper what effect the merger would have upon competition
in South Africa, in the light of the views expressed
by the
Commission to the Tribunal, that the merger might give rise to softer
competition, to which he replied as follows
“
Well I think
it would …….when we think about Monsanto, there’s
never a day that we think about the word soft
competition. It is
hard, in your face slugging battling going on constantly. We’re
fighting in the freedom-four free-in-the
operate
(sic
freedom
to operate
)
patterns
(
sic
patents)
and intellectual property. We’re constantly battling in courts
over various issues. So its ….. I don’t
foresee any
softening of competition between Monsanto and Pioneer, it will make
maybe South Africa the same as it is in the rest
of the world, where
they really are head-to-head, and investing strongly in technologies
to maintain a leadership in those markets”.
[60] What emerges clearly
from these answers of Soper, is that central to competition between
Pioneer and Monsanto, is innovation
competition. Successful
innovation ensures leadership in the market, together with profitable
returns. I find it difficult to imagine,
in such a context, that the
type of
“
tacit
co-operation”
in
terms of a
“
tacitagreement”
concluded between Pioneer
and Monsanto, would exist yet the Tribunal seemed so readily to so
infer. I accordingly regard the likelihood
of co-ordination between
Monsanto and the merged entity as remote.
Remedies
[61] Turning to the issue
of the remedies proposed by the merging parties, I have already dealt
with the price cap and its effect
upon any unilateral price increases
caused by the merger. This issue consequently need not be canvassed
any further. The remaining
issue is that of the licensing of plant
materials to third parties, the object of which would be to
facilitate entry into the market,
by a new competitor, to compensate
for the loss of Pannar, as a consequence of the merger.
[62]
A central issue in the Tribunal’s assessment of the adequacy of
the licensing remedy, was that, in a worst case scenario,
Pannar
would still have a market share in the breeding market of
approximately 10% in five years’ time, and that Pannar’s
share in respect of commercialisation would fall more slowly, and not
to such a low level.
The Tribunal concluded
that
“
a minimum of
a 10% market share in breeding and a higher market share in
commercialisation would appear to be the bare minimum market
share
that any new entrant would require to compensate for the loss of
competition as a result of the proposed merger”.
This
entry was also to be achieved in the interim
“
window
period”
of
three seasons.
[63] The imposition of
such a minimum standard by the Tribunal, again entirely ignores the
fact that the market is one dominated
by innovation competition. In
the light of the evidence that any new entrant would not only have to
be in possession of the advanced
breeding technology, to enable it to
exploit any germplasm of Pannar’s made available to it, but
also its own germplasm which
was complementary to the germplasm of
Pannar, it is difficult to see how any remedy proposed by the merging
parties, short of a
divestiture by Pannar of its seed breeding
division, including its germplasm, could ever satisfy the Tribunal’s
requirements.
In this regard, the Tribunal stated that
“
it
is conceivable that a divestiture remedy may have provided a more
workable solution to the identified concerns. No such remedy
was
suggested by the merging parties”.
[64] Divestiture by
Pannar of its seed breeding division, would obviously prevent the
merger taking place. On the available evidence,
I find it difficult
to see how this could have been achieved. In any event, when regard
is had to the evidence that if the merger
is allowed, the joint
hybrids developed by Pioneer and Pannar, will only be commercialised
and be on the market by the 2015/2016
season. It is clear that it
would be impossible for a new entrant to achieve a 10% market share
within a period of three years,
even if it was handed Pannar’s
entire pool of germplasm. What this illustrates is that the minimum
requirement established
by the Tribunal is unrealistic and incapable
of being fulfilled.
[65]
On the particular facts of this case it is clear that any licensing
remedy standing alone, could never satisfy the traditional
requirement of providing sufficient and sustainable entry, such that
effective competition will remain between three providers,
at both
the breeding and commercialisation levels.
The reason is that the
adequacy of any licensing remedy is dependent upon the attributes
possessed by any potential new entrant,
in the form of advanced
breeding technology and its own germplasm. Both Syngenta and Dow have
been found manifestly wanting, in
the absence of complementarity
between their respective germplasm pools and that of Pannar. Where
innovation competition dominates
the market, it becomes extremely
difficult, if not impossible, in the absence of clear evidence of the
attributes of any potential
new entrant, to devise a minimum
requirement for a licensing remedy, which will ensure sufficient and
sustainable entry into the
market by a potential new entrant.
[66] In any event, I
consider that the
crux
of the
matter is whether, on the facts of this case, the merger will in fact
result in a lessening of competition, with the result
that a remedy
is required to facilitate entry by a new competitor. I have found
that the relevant counterfactual is the continued
decline and exit
from the market, as a competitor, by Pannar. It is also clear that
Monsanto and Pioneer are fierce competitors
and that their rivalry is
dominated by innovation competition, such that any danger of a
co-ordination between them is remote.
I accordingly agree with the
submission of Mr.Unterhalter, that the proposed merger will not
result in a significant reduction
in competition. This follows if due
weight is given to the long-term dynamic efficiency improvements to
be gained by the merging
parties, resulting in the merged entity
being a far stronger adversary for Monsanto, than Pioneer and Pannar
individually. On this
basis, no remedy is required to facilitate
entry by a new competitor into the market.
[67]
However, in so far as Syngenta and Dow have professed a desire to
enter the market, it is necessary to examine the adequacy
of the
remedy as far as they are concerned. Suter, on behalf of Syngenta,
maintained that if the merger went ahead it would be
impossible for
Syngenta to enter the South African market in the short term.
He also maintained that
the limited portfolio offered by Pannar in respect of the remedy, was
not significant, when the percentage
of inbreds was compared to the
total. However when cross-examined, he agreed that he had not
properly investigated, or applied
his mind to this aspect of the
offer because his concern lay with the licensing requirement, which
meant that Syngenta would not
have the exclusive right, to use the
proprietary germplasm of Pannar, which was offered. He agreed
however, that the remedy allowed
competition between companies, who
were in a position to exploit the germplasm offered but maintained
that his main concern was
the market structure if the merger
proceeded, of there being only two competitors in the market and that
the remedy was restricted
to South Africa, because Syngenta’s
aim was to gain “
a
foothold to expand in the rest of Africa
.”
[68] It is therefore
clear that Syngenta had not investigated the value of the germplasm
offered and whether it was technologically
able to exploit the
germplasm offered, and did not wish to compete with other companies
in doing so.
[69] As regards Dow,
Robertson said the germplasm component offered as part of the remedy
“
would certainly
be a starting point”.
He
added however that
“
I
think I would probably need to have much more in-depth information
and then provide that to some of our breeding staff to fully
understand what that might entail, what it might deliver ….”.
However, he emphasised
that his concern lay in the concentration of the market which he saw
as the main factor inhibiting entry
into the market. He agreed,
however when cross-examined, that in terms of the remedy offered,
Pannar was making its germplasm available
for a full breeding
programme and accepted that the contract with Pannar, in terms of
which Dow sent Pannar some of its germplasm,
only entitled Pannar to
cross one inbred of Dow, with one inbred of Pannar’s, but that
they were not given the flexibility
to produce more inbreds. It was
therefore clear that the access remedy, was more generous than the
contract with Pannar.
[70] As in the case of
Syngenta, it is clear that Dow had not investigated the value of the
germplasm offered, and whether it was
technologically able to exploit
it.
[71] It appears that
Syngenta and Dow are not interested in the remedies offered, as they
see the only desirable entry into the
South African market, to be by
way of the acquisition of Pannar, now made even more vulnerable in
the event that the merger with
Pioneer does not take place. In the
absence of any evidence from Syngenta or Dow, as to their
technological capacity to exploit
the remedy offered, it becomes
impossible to properly evaluate its adequacy. As pointed out, it is
extremely difficult to assess
the remedy
in
vacuo
,
without knowledge of the attributes of any potential new entrant. In
this regard the evidence was that in the big seed breeding
markets,
the companies involved are Monsanto, Pioneer, Syngenta, Dow and then,
arguably Bayer and smaller companies.The only companies
not
considered in this context would therefore appear to be Bayer and
certain unnamed smaller companies. However, in the event
that Dow or
Syngenta may wish to avail themselves of the remedy provided and
enter the South African market, it should remain as
a condition of
approval of the merger.
The Amicus
[72] Turning to the final
issue, namely the interests of small scale communal and subsistence
farmers who were represented by A
C B, who limited its case to
“
the
negative effect that an increase in hybridseed prices will have on
subsistence and small scale farmers”.
[73] The Tribunal
concluded that the merger would have a
“
likely
and significant effect ……. on maize seed prices that
would affect maize farmers in South Africa including small
scale
commercial and subsistence farmers …..”
[74]
The appellants had proposed a pricing remedy, in terms of which, in
respect of the seven hybrids and two open pollinated varieties
(O P
V’s) as well as any replacement products, currently sold by
Pannar to small scale commercial, developing and subsistence
farmers,
there would be no increases in prices for a period of three sales
seasons immediately following the date of the closing
of the
transaction. Thereafter the appellants undertook that the actual
selling prices of these products would not increase beyond
the C P I
on an annual basis for a further five sale seasons. The appellants
also committed to continue offering the seven hybrids
and two O P V
products, currently being marketed and sold by Pannar to small scale
commercial and developing farmers, in sufficient
commercial
quantities to meet demand from these farmers, and to ensure that such
seed was accessible, in line with Pannar’s
existing, ordinary
commercial practices.
[75]
In the event that the appellants could not retain a maize hybrid
currently being marketed and sold by Pannar in South Africa,
by
reason of the licensing agreement or consents that the parties had
with third parties, the appellants committed to replacing
such hybrid
with a functionally similar product.
[76] The Tribunal
concluded that because the proposed pricing remedy was of limited
duration, being eight sales seasons, it was
only meaningful if it was
combined with an effective long-term structural remedy, in the terms
required by the Tribunal under the
proposed competition remedies.
[77] In his argument,
Mr.Budlender, who appeared together with Ms Lewis on behalf of A C B,
fairly and properly conceded that A
C B accepted that the pricing
remedy proposed by the appellants was
“
as
good as it gets”.
When
due regard is had to the fact that there will be no price increase,
in the maize seed sold to small scale commercial, developing
and
subsistence farmers, for a period of three years and thereafter for a
further five years, any price increase on an annual basis
will not be
beyond the C P I, I agree with the submission of Mr.Gotz that the
proposed price cap is a
“
complete
answer”
to
any concerns in this regard.
[78]
Due weight should also be given to the evidence that Pioneer is not
present in the O P V market and Pannar estimates its share
of this
market at 5 to 7%. As regards the hybrid seed market, in respect of
this sector of the market, Pioneer’s share is
approximately 7%.
Pannar’s share of this market is estimated to be 25% but
according to van Rooyen, in respect of these hybrids
which they have
identified as being part of this market, they have sought to contain
price increases in a number of ways. Because
it is uneconomical to
conduct a separate breeding programme for the benefit of small scale
farmers, the hybrids which they had
identified for small scale
farmers, had, where possible, been introduced into the main market,
so that the benefits of the economy
of scale of production could be
enjoyed. In addition, they had tried to make these identified hybrids
available at a reasonable
cost. By helping such farmers to improve
their overall farming practices and obtain a return on their
investment and seed, they
thereby sought to render such seed more
affordable.
[79] Accordingly, and in
so far as this sector of the market is moving away from the use of O
P V’s, and towards the use of
hybrid seed, as submitted by
Mr.Budlender, I am satisfied that the price cap remedy is adequate.
[80]
A C B, in their heads of argument, refer to a structural remedy which
they had proposed, which was not accepted by the appellants,
in terms
of which the appellants would be obliged to set up a fund, from their
own resources, to improve maize O P V’s under
their ownership
in collaboration with public institutions and farmer organisations.
The fund would also be used to build seed production
capacity amongst
smallholder farms and associated organisations. The appellants would
also be obliged to make available maize plant
material on the variety
list under their ownership on a non-exclusive and perpetual basis on
request by public institutions for
development, propagation and/or
development to small scale farmers. Such provision would be without
any licensing fees or payment
of royalties. The public institutions
would be entitled to develop, propagate and distribute the seed to
black small holder farms
free of charge.
[81] Mr.Gotz submitted
that there was considerable uncertainty as to the meaning of this
proposal. In addition, no agreement had
been reached on the size of
the fund. In my view, it will be extremely difficult to agree, not
only upon the amount of the fund,
but also the particular
“
maize
plant material onthe variety list under their ownership”
which
would be subject to the agreement. It would also be difficult to
manage and monitor the conduct of the parties, to ensure
compliance
with the terms of the agreement.
[82]
In my view, the public interest would be better served by the
establishment of a new International Research and Technology
hub in
South Africa, implementing world class technology in double haploids,
molecular markers, embryo rescue, laser assisted seed
selection,
precision phenol typing, trait characterisation and new trait
development, as tendered by the appellants.
[83] The Tribunal
dismissed this offer by the appellants, as well as that offered in
respect of community partnerships, on the ground
that it suffered
“
from one fatal
flaw in that it is not measurable and therefore is incapable of any
enforcement”.
The
Tribunal added that even after A C B at the hearing brought this
particular flaw to the attention of the appellants,
“
they
did not ultimately step up to plate to address it”.
[84] The appellants’
commitment in this regard, as well as its defined terms, appear not
only in Schickler’s witness
statement but also in a letter
dated 29 November 2010 written by Schickler on behalf of Pioneer, to
the Commission:
“
As part of
the establishment of this research hub, Pioneer hereby confirms that
it is prepared to invest up to R 62 million by 2015
to develop the
research and technology hub in South Africa. In this context, we note
the following:
This research hub will have global
expertise in all aspects of advanced breeding and technology
development, which will improve
the precision of and shorten
research breeding cycles, increase the pace and scope of innovation,
and bring South African farmers
better products faster.
Specifically, the technologies likely to be employed at the South
African research hub include:
Doubled haploid production, which
shortens research breeding cycles.
Utilization
of advanced breeding and enabling technologies such as molecular
markers, embryo rescue and Laser Assisted Seed Selection
–
technologies that allow for increased precision.
Precision
phenotyping for key genetic characteristics, including insect and
disease resistance and drought tolerance.
Trait
characterization and new trait development, which is research
targeted to value adding traits for African germplasm and the
African
environment.”
I agree with the
appellants’ submission that this commitment is both specific
and enforceable and that any breach could be
rectified by the
Commission, acting in terms of Rule 39 of its Rules. In order to
ensure compliance, I intend incorporating the
terms contained in the
letter, as part of the conditions to be attached to approval of the
merger. In this regard Mr.Gotz asked
however that the date for the
completion of the project, which was specified to be 2015, be delayed
by one year to 2016, because
the commencement date had obviously been
delayed by the present approval process. This is a reasonable request
which will find
expression in the order I intend making.
[85] I accordingly
disagree with the conclusion reached by the Tribunal that the
proposed merger
“
would
not be in the best interests of South African maize farmers and
consumers of maize products, since it would result in a likely
substantial prevention or lessening of competition in the relevant
maize seed market(s)”.
[
86]
During the hearing, the merging parties were requested to engage with
ACB with regard to the formulation of a proposal which
would further
assist small scale and developing farmers. In a letter of 11 May
2012, the attorney for the merging parties informed
this Court that:
“
With regard to Community
Partnerships (clause 5 of Remedy Proposal), the parties will
formulate measurable targets and deliverables
and Pioneer will commit
an additional and specific amount of R 20 million over the next six
years aimed at fostering the partnerships,
endeavours and
collaborations contemplated by the Remedy Proposal to increase the
productivity, knowledge and welfare of small-scale
and developing
farmers. In the interest of clarity, Pioneer confirms that his
expenditure is in addition to any existing expenditure
that would
arise in the ordinary course of business, as well as in addition to
the investment in the Hub.”
The undertaking will also
form part of the order that I intend to make.
Conclusion
[87] In my view, in the
absence of the proposed merger, the decline of Pannar as a
competitive force in the market will continue,
resulting in its
eventual demise, together with the loss of a valuable local resource,
being its pool of local germplasm. In addition,
the merger will
result in an increase in competition, for the market leader Monsanto,
in the form of the merged entity, combining
Pioneer and Pannar. Such
competition, in the South African maize seed breeding market,
dominated as it is by innovation competition,
will result in
long-term dynamic efficiency improvements, in the nature and quality
of seed produced, as well as its competitive
pricing, to the benefit
of maize farmers and maize consumers in South Africa.
For all these reasons,
the following is ordered:
The appeal is upheld.
The order of the
Competition Tribunal handed down on
14 October 2011 in C T
Case No. 81/AM/DEC10, is set
aside.
The merger between the
first and second appellants is approved subject to the conditions
contained in Annexure C to the appellants’
heads of argument,
read together with the conditions contained in the letter, from
Pioneer to the Commission, dated 29 November
2010, relating to the
establishment by Pioneer of an International Research and Technology
Centre in South Africa, to be completed
by 2016; and with the
undertaking given in a letter from Pioneer’s attorney of 11
May 2012 which is to be read together
with clause 5 of Annexure C
The first respondent is
ordered to pay the appellants’ costs in this appeal and in the
Tribunal proceedings, including the
costs of two Counsel and the
qualifying fees of the appellants’ experts.
_____________
SWAIN
AJA
DAVIS
JP and MAILULA JA agreed
Appearances:/
For the Appellants :
Adv D.
N. Unterhalter S C
Adv A. G. Gotz
Instructed by
:
:
Bowman Gilfillan
For the 1
st
Respondent
:
Adv W. Trengrove S C Adv
J. Wilson
Instructed by :
The Competition
Commission
For the 2
nd
Respondent :
Adv
S. Budlender S C Adv N. Lewis
Instructed by :
Impact Litigation Unit
Legal Aid S A
Date of Hearing
:
02
and 03 April 2012
Date of Filing of
Judgment :
May
2012
Appendix C –
Remedy Proposal
This document proposes
remedies or conditions for the approval of the transaction between
Pioneer Hi-Bred International Inc. and
Pannar Seed (Proprietary)
Limited that is the subject of a Request for Consideration before the
Competition Tribunal under case
number 81/AM/Dec10. This document
consolidates remedies and conditions submitted before and during the
hearing of this matter including
concerning Developing Farmers
(defined below).
The commitments herein
recognise that many Developing Farmers are Historically Disadvantaged
Persons and that the Act aims to promote
the ability of small
businesses, or firms controlled or owned by Historically
Disadvantaged Persons, to become competitive.
1.
Definitions
The following expressions
shall bear the meaning assigned to them below
-
1.1 “
Conditions
”
means these conditions or
remedies;
1.2 “
Commission
”
means the Competition
Commission of South Africa;
1.3 “
CPI
”
means the average annual
rate of change (expressed as a percentage) in the Consumer Price
Index as published by the South African
Statistics Council in terms
of the
Statistics Act No. 6 of 1999
, which annual change shall be
determined by comparing the most recently published index with the
index published in respect of
the corresponding month in the previous
year.
1.4
“
Date
of Closing
”
means
the date on which the proposed transaction is implemented by the
Parties following the approval by the Tribunal of the merger
between
Pioneer and Pannar subject these Conditions;
1.5
“
Developing
Farmers
”
means
small-scale, developing and subsistence farmers within South Africa;
1.6 “
Developing
Farmer Product
”
means
those current and replacement hybrid maize seeds and open pollinated
maize varieties ordinarily sold by Pannar to Developing
Farmers
including the following current products:
PAN 6479, RO 413, PAN
53, PAN 67, PAN 7M-07 (white hybrid maize);
PAN 6480, PAN 6966,
(yellow hybrid maize);
PAN
6671 (white OPV);
PAN
66 (yellow OPV);
1.7 “
Discounts
”
means those discounts
which Pannar provides in the ordinary course of its business based on
volumes of purchases, timing of payment
and customer type;
1.8 “
Dow
”
means any of the South
African subsidiaries of Dow AgroSciences LLC;
1.9 “
Genetic
Material List
”
means
the conventional, Pannar, maize, inbred lines in South Africa
attached as
Annexure
“A”
for
use in South Africa in terms of these Conditions;
1.10
“
Historically
Disadvantaged Persons
”
means
historically disadvantaged persons within the meaning of the Act;
1.11
“
Monsanto
”
means Monsanto South
Africa (Pty) Ltd, Monsanto International, SARL or any affiliated,
related, subsidiary or associated company
or firm;
1.12 “
Parties
”
means Pioneer and Pannar;
1.13 “
Pannar
”
means Pannar Seed
(Proprietary ) Limited or the target firm in these proceedings;
1.14 “
Pioneer
”
means Pioneer Hi-Bred
International Inc. or the acquiring firm in these proceedings;
1.15 “
Public
Institutions
”
means
South African public institutions such as the Agricultural Research
Council established in terms of the Agricultural research
Act of
1990, Public Benefit Organisations registered as such in terms of
Income Tax Act of 1962, the Council for Scientific and
Industrial
Research (CSIR) established in terms of the Scientific Research
Council Act of 1945, public universities or technikons
and/or other
suitable public institutions that may be identified by the Ministers
of Agriculture, Forestry and Fisheries and Science
and Technology;
1.16
“
Syngenta
”
means any of the South
African subsidiaries of Syngenta Crop Protection AG;
1.17 “
Transitional
Products
”
means
those current maize hybrids sold by Pannar that are the subject of
license agreements between Pannar and Monsanto;
1.18 “
Tribunal
”
means the Competition
Tribunal of South Africa.
2.
Pricing
Remedy
2.1 The Parties undertake
that, for a period of three sales seasons immediately following the
Date of Closing, the annual increase
in the prices of all the Pannar
maize hybrids in South Africa available for sale in commercial
quantities and all current commercialised
Pannar open pollinated
maize varieties (“OPVs”) in South Africa on the Date of
Closing will not exceed the CPI published
one month prior to
advertisement of Pannar’s prices. This commitment does not
apply to any new maize products not available
for sale in commercial
quantities on the Date of Closing.
2.2
In addition to item 2.1 above, the Parties undertake, for a period of
three sales seasons immediately following the Date of
Closing, that
there will be no increase in the prices of the Developing Farmer
Products (as prevailing at the sales season immediately
following the
Date of Closing). Thereafter, the Parties undertake that the actual
selling prices of the Developing Farmer Products
will not increase
beyond the CPI on an annual basis for a further five sales seasons.
2.3 The pricing
commitment in item 2.1 shall apply to any hybrid products that may
replace the Transitional Products in the three
sales seasons after
the Date of Closing, and the Parties commit to ensure that any
replacement of the Transitional Products shall
be functionally
similar.
2.4
The parties confirm that all prices for purposes of this item 2 will
be calculated on the basis that all Pannar customers will
continue to
receive Discounts on no less advantageous or favourable terms than
those which apply on the Date of Closing.
3. Employment
The Parties confirm and
undertake that there will be no job losses or retrenchments
attributable to the merger at the merged entity
for a period of two
years after the Date of Closing.
4.
Research
and Development
4.1 In addition to the
Parties’ ongoing research investments in South Africa, Pioneer
confirms its commitment to establish
an International Research and
Technology Hub in South Africa by 2016 (as more fully described by
Pioneer to the Competition Commission
on 29 November 2010).
4.2
The Parties commit to work with Public Institutions (in particular
the Agricultural Research Council) to increase a better understanding
and application of advanced breeding skills in relation to improving
expertise in crops important to South Africa. Pioneer will
partner
with Public Institutions to coordinate areas of cooperation to
provide advisory services to such institutions, the establishment
of
internships at the hub for students from Public Institutions and the
transfer of know-how (including Pioneer sponsored scientific
symposia, the development of course design and instruction).
5. Community
Partnership
The Parties note that a
key rationale of the merger is to make all farmers in South Africa
and throughout Africa more productive.
This applies specifically to
Developing Farmers. Accordingly, the Parties recognise that
partnerships with communities and Government
(Including under
extension services or programs) are crucial. The Parties commit to
foster and to work with Government to establish
further community
programs and partnerships in the interests of Developing Farmers.
Such programs will focus on know-how about
effective farming
practices in conjunction with the use of maize seeds to increase the
productivity and welfare of Developing Farmers,
and will include
training programs (dealing with hybrid choice and crop production
practices), information days (with plot trials)
and collaboration
with Government extension programs and managers.
6.
Seed
varieties post merger
6.1 The Parties commit to
keep in place the same maize hybrids currently being marketed and
sold by Pannar in South Africa that
are affected by the pricing
remedy (in item 2.1 above) and all current PannarOPVs sold in South
Arica for a period of three years.
In the event that the Parties
cannot retain a maize hybrid currently being marketed and sold by
Pannar in South Africa by reason
of the licensing agreements or
consents that the Parties have with a third parties, then the Parties
commit to replace such hybrid
with a functionally similar product.
6.2
In addition to item 6.1 above, the Parties commit to keep in place
the Developing Farmer Products in sufficient commercial quantities
to
meet demand from Developing Farmers and to ensure accessibility to
Developing Farmers in line with Pannar’s ordinary commercial
practices.
6.3
The Parties intend to maintain Pannar’s breeding programs in
South Africa related to sunflower, grain sorghum, forage
sorghum,
wheat, dry beans and soybeans for five years from the Date of
Closing. If for any reason, the Parties undertake to terminate
any
such breeding programs during that time, other than soybeans, Pioneer
will seek to divest the programs to a suitable purchaser
for use
within South Africa within two years, failing which Pioneer will make
the germplasm available to Public Institutions by
way of donation
subject to licenses as may be required to protect the Parties’
intellectual property within the confines
of this proposal.
Licensing of Varieties
6.4 The Parties undertake
to negotiate in good faith to make available and licence the plant
materials in the Genetic Material List
(as defined above), of which
it has a right to license, to public Institutions in South Africa on
a non-exclusive and perpetual
basis, subject to such terms as agreed
upon by the parties and the terms and conditions stated herein. The
license shall allow
the right to sub-licence and/or commercialise any
inbreds so developed solely for use in South Africa that may be a
consequence
or outcome of the Public Institutions’ breeding
activity under the license. Such licences shall occur as soon as
practical
after the Date of Closing, and after request in this regard
have been received from the Public Institutions in question.
6.5
The licences shall be on commercially reasonable terms and conditions
including reasonable compensation and/or royalties.
6.6
The licence shall permit the Public Institutions in South Africa to
cross the licensed plant material with other non-Pannar
lines to
create breeding populations. No inbred derived from such breeding
population may contain more than 50% Pannargermplasm
based on
pedigree. The license will require systems of notification and
inspection to allow the Parties the ability to monitor
compliance
with the license and sub-licences.
6.7
The Parties also undertake to negotiate in good faith to make
available and licence the plant materials in the Genetic Materials
List (as defined above), of which it has a right to license, to Dow
and Syngenta in South Africa on a non-exclusive and perpetual
basis,
subject to such terms as agreed upon by the parties and the terms and
conditions state herein. It shall not permit the right
to sub-licence
any genetic material so developed as a consequence of either Dow or
Syngenta’s breeding activity under the
license. Such licences
shall occur as soon as practical after the Date of Closing, and after
request in this regard have been received
from either Dow or
Syngenta.
6.8
The licences shall be on commercially reasonable terms and conditions
including reasonable compensation and/or royalties.
6.9
The licence shall permit Dow and Syngenta in South Africa to cross
the plant material licensed to each with other non-Pannar
lines to
create breeding populations for use in South Africa. No inbred
derived from such breeding population may contain more
than 50%
Pannargermplasm based on pedigree. It shall also allow the right to
commercialise hybrids in South Africa developed as
a consequence or
outcome of either Dow or Syngenta’s breeding activity under the
license. The license will require systems
of notification and
inspection to allow the Parties the ability to monitor compliance
with the license.
6.10
The obligation of the Parties to licence the material in the Genetic
Material List to either Dow or Syngenta that has not entered
into a
license as contemplated hereby shall cease after three years from the
Date of Closing. This requirement will not apply to
Public
Institutions.
6.11
The Parties record that any such license shall include provisions
excluding any transfer of plant materials provided under
license or
any derived inbreds or hybrids derived as a consequence of breeding
activity under the licenses either directly or indirectly
to
Monsanto.
7.
Monitoring of compliance with these Conditions
In the event that the
Commission receives a complaint regarding non-compliance by the
Parties with these Conditions, or otherwise
determines that there has
been an apparent breach by the Parties of the Conditions, the matter
shall be dealt with in terms of
Rule 39 of the Rules for the Conduct
of Proceedings in the Commission.
8.
General
81. The Parties undertake
to negotiate any licences or other requirements in these Conditions
in the utmost good faith.
8.2
The Parties reiterate that the above commitments recognise that many
Developing Farmers are Historically Disadvantaged Persons
and that
the Act aims to promote the ability of small businesses, or firms
controlled or owned by historically disadvantaged persons,
to become
competitive. Accordingly, these commitments will be interpreted and
implemented in line with these objectives.
8.3
The Parties record that these Conditions shall under no circumstances
whatsoever apply to, or directly or indirectly favour,
Monsanto.
8.4
Any obligation in terms of these Conditions shall be subject to the
terms and conditions of any third party licences, agreements
or
consents that may apply and/or to the appropriate and necessary
consents being obtained in this regard.
8.5
Subject to any approval from the Tribunal that may be required, the
Commission may on good cause shown, lift, revise or amend
these
Conditions upon being approached by the Parties.
49