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[2006] ZACAC 1
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Momentum Group Limited and Others v African Life Health (Pty) Ltd and Others (58/CAC/DEC05) [2006] ZACAC 1; [2006] 1 CPLR 17 (CAC) (14 February 2006)
IN THE COMPETITION
APPEAL COURT
HELD AT CAPE TOWN
Competition Appeal
Court Case No: 58/CAC/DEC05
Competition Tribunal
Case No: 87/LM/SEP05
In the review
application between:
MOMENTUM GROUP
LIMITED
First Applicant
LAURITZ LANSER
DIPPENAAR
Second Applicant
JOHAN PETRUS BURGER
Third Applicant
and
THE CHAIRPERSON,
COMPETITION TRIBUNAL
First Respondent
THE ACTING
COMMISSIONER,
COMPETITION
COMMISSION
Second Respondent
AFRICAN LIFE HEALTH
(PTY) LTD
Third Respondent
and the appeal
in the large merger
between
MOMENTUM GROUP
LIMITED
Appellant
and
AFRICAN LIFE HEALTH
(PTY) LTD
Appellant
Judgment
Malan AJA :
The
applicants/appellants (“the applicants”) seek a review
of the decision of the Competition Tribunal of 12 December
2005 and
appeal against it. The Tribunal approved the large merger between
Momentum Group Limited (“Momentum Group”)
and African
Life Health (Pty) Ltd (“ALH”). The applicants object to
the conditions to which the approval was subjected
to by the
Tribunal. Neither the application for review nor the appeal is
opposed. There is no cross-appeal. The only issue is
whether the
conditions were properly imposed. This court ordered that the merger
be approved unconditionally on 2 February 2006.
The reasons for the
order are set out in this judgment.
On 2
September 2005, Momentum Group and ALH applied for the approval of a
merger between them in accordance with Chapter 3 of
the Competition
Act 89 of 1998 (“the Act”). The Competition Commission
investigated the proposed merger and recommended
its approval
without conditions to the Tribunal on 9 November 2005. The merger
application was referred to the Tribunal in terms
of s 14A of the
Act for approval.
After
hearing the parties on 8 December 2005, the Tribunal approved the
merger on 12 December 2005, but made the approval subject
to certain
conditions that it considered appropriate. The conditions impose on
persons holding certain dual directorships an
obligation to resign
from one of those directorships by 12 January 2006.
The
order made by the Tribunal reads as follows:
A The merger is approved
in terms of section 16(2)(b) of the Act subject to the following
conditions:
1 Any person who
presently serves as a director on both a Momentum Group and a
Discovery Group board must resign from one of these
Group’s
boards within one month of the date of this order.
2 The acquiring firm must
ensure, for so long as a firm in the FirstRand Group (ie FirstRand
Limited or any firm that is controlled
by FirstRand Limited) owns a
controlling interest in both the Discovery Group and the Momentum
Group, that a person who is a serving
director or executive of a
company in the one of the Groups, is not appointed to a board in the
other Group.
3 For the purposes of
this order;
A ‘Discovery Group’
includes Discovery Holdings Ltd, Discovery Health (Pty) Ltd or any
subsidiary of these firms;
B “Momentum Group’
includes Momentum Group Limited, Momentum Healthcare (Pty) Ltd or any
subsidiary of these firms.
On 23
December 2005, both a notice of appeal and an application for review
of the Tribunal’s order were filed. The review
application
included an application for interim relief suspending the conditions
attached to the order pending the outcome of
the hearing of the
review and appeal, which application was heard and granted on 10
January 2006.
The
review application is based on the fact that conditions were imposed
by the Tribunal in circumstances where neither the Commission
nor
any other party to the merger proceedings disputed that the merger
should be approved unconditionally; is no proper
evidential
basis by reference to which the conditions might rationally be
justified (
inter alia
because
there is no substantiated risk that cross-directorships would create
or aggravate a risk of collusion); the parties affected
by the
order, being the directors holding dual directorships, had not been
heard by the Tribunal; and the conditions are too
broad.
The
two individual applicants involved in the Tribunal’s order
were not joined but are now joined in these proceedings and
are
willing to submit to the decision of this court. It is thus not
necessary to express an opinion on the question whether they
should
have been joined in the proceedings from the outset.
The
grounds of appeal are, first, that there was no
lis
the
parties before the Tribunal in that neither the Commission nor any
other party to the merger proceedings disputed that the
merger
should be approved unconditionally. It is submitted that the
Tribunal exceeded its jurisdiction by imposing conditions
in these
circumstances. Secondly, the Tribunal acted unreasonably or
irrationally by imposing conditions in circumstances where
the
evidence presented should have led it to approve the merger
unconditionally. Moreover, there was no evidence to suggest that
the
cross-directorships which the conditions seek to cure created or
aggravated the risk of anti-competitive consequences resulting
from
the merger.
Although
there are some suggestions (I would put it no stronger) in the Act
that a
lis
is
required before the Tribunal may adjudicate a matter by, for
example, imposing certain conditions where none were recommended
(see eg ss 14A(3), 16(1)(a), 16(2), 16(3) and 53(1)(
c
)(v))
the structure of the Act as well as the composition of the Tribunal
militates against such construction. The argument of
the applicants
centres around the word “adjudicate” used in s 27 of the
Act. Where a merger constitutes a large merger,
the Commission is
required to refer that merger to the Tribunal and to make a reasoned
recommendation to the Tribunal on whether
it considers it
appropriate that the merger be approved unconditionally, approved
with conditions or prohibited (s 14A(1)(
b
)).
Section 27 defines the functions of the Tribunal on receiving the
referral. After delineating the Tribunal’s power to
“adjudicate” on prohibited practices, subs (1)(
b
)
states that the Tribunal has the power to “
adjudicate
on
any other matter that, in terms of this Act, [may] be considered by
it, and make
any
order
provided for in this Act”. The orders that may be made, it
should be said, are set out in s 16(2) which enjoins the
Tribunal to
consider the merger in terms of the provisions of s 12A as well as
the recommendation or request and then to “(a)
approve the
merger; approve the merger subject to any conditions; or (c)
prohibit implementation of the merger”. There
is no suggestion
in the Act that the Tribunal may only exercise its powers where
there is a dispute or
lis
.
Other sections in the Act are destructive of the suggested
interpretation: the Act allows the Tribunal to proceed in an
inquisitorial
manner (s 52(2)(
b
)).
In so acting, the Tribunal can “direct or summon any person to
appear at any specified time and place” (s 54(
a
)),
question any person under oath or affirmation (s 54(
b
)),
and summon or order any person to produce items necessary for the
hearing (54(
c
)).
These provisions emphasise the public nature of the Tribunal’s
functions: it is no mere rubber stamp but has to exercise
its powers
within its own right (see s 27). The decision in
Special
Investigating Unit and Another v Mfeketo and Twenty Similar
Matters
1
SA 1089
(Spec
Trib) to which reference was made is entirely distinguishable and
was concerned more with the meaning of the words
“justiciable
civil disputes” than “adjudicate” and is of no
assistance in this matter. To my mind, the
Tribunal was correct in
its in
Coleus
Packaging (Pty) Ltd and Rheem Crown Plant, a division of Highveld
Steel and Vanadium Corporation Limited
(Case
75/LM/Oct02 of 27 January 2003);
[2003]
1 CPLR 51
(CT))
where it that s 16 of the Act, which provides for the Tribunal to
“consider the merger in terms of s 12A, and
the recommendation
and the request”, did not allow it to simply endorse the terms
of a settlement agreement between the
Commission and merging parties
without exercising any discretion of its own. In coming to this
conclusion, it distinguished merger
cases from restrictive practices
cases where, so it held, the Tribunal is not required to come to its
own conclusion on the evidence
when presented with a consent order
(at 53CE). Of course, the very nature of the proceedings requires
the issues to be formulated
and the parties to be informed of them
before a proper adjudication can take place. To ensure a fair
hearing and clear evidential
justification for its imposition of
conditions, the Tribunal must afford the parties an opportunity to
respond if they should
wish, by the placing of evidence and /or
argument before the Tribunal in respect of conditions that the
Tribunal may consider
imposing in such a case.
It is
now necessary to consider the merits of both the review and the
appeal, the grounds of which overlap. The acquiring firm
is Momentum
Group Limited, a wholly-owned subsidiary of First Rand Limited,
which controls
inter alia
Momentum
Healthcare (Pty) Ltd, Momentum Interactive (Pty) Ltd and Sovereign
Health (Pty) Ltd. FirstRand consists of a large group
of companies
and holds approximately 65,6 % of the issued share capital of
Discovery Holdings. Rand Merchant Bank is a subsidiary
of FirstRand
holding a 10 % interest in Life Healthcare (Pty) Ltd. The primary
target firm was African Life Health (Pty) Ltd
(ALH) which is
controlled by African Life Insurance Company Ltd. The latter is
owned by Sanlam (20,5 %) and Momentum (33,4 %).
Momentum is
acquiring the entire share capital of ALH from African Life. Since
FirstRand controls both Momentum and Discovery
the Tribunal assessed
the merger on the basis that the latter two entities belong to a
single economic unit (§ 11). After
the merger this single
economic unit would command 34,62 % of the medical scheme
administration market (§ 12).
The
Tribunal, however, opined that FirstRand’s relationship with
Discovery raised concern (§ 16) despite the evidence,
which the
Tribunal apparently accepted (§§ 16-20), to the effect
that there existed between the different entities
within the
FirstRand Group “vigorous competitive rivalry” (§
20). Despite this the Tribunal concluded as follows:
“
[31]
[T]he administration market is one in which large, well-resourced
firms and institutions compete, but in an ever-consolidating
environment. The fact that both Discovery and Momentum are seeking to
enter this lucrative lower income market, coupled with the
increasing
consolidation at the administration level, does not bode well for
future competition in light of the fact that they
share a common
parent. Their size and market power under one umbrella could remove
the competitive pressure from the market and
thereby enable them to
behave strategically and submit bids and tenders for large government
projects. It is therefore imperative
to maintain the rivalry between
these entities and the concern raised by this merger would be that
post merger there would be an
enhanced incentive to co-ordination,
rather than rivalry.
[32] At the present
moment Discovery Holdings and the Momentum Group have two common
non-executive directors Mr Laurie Dippenaar
and Mr Burger,
respectively the chief executive and financial director of FirstRand.
We find cause for concern with respect to
the level of cross-holdings
and common directorships between Discovery and Momentum, even at
non-executive director level. The
possibility of exchange of
sensitive information at board level becomes even more of a concern
where conceivably a market division
strategy could easily be
entertained between Discovery and Momentum.
[33] For this reason our
condition requires the elimination of cross-directorships between the
Momentum and Discovery Groups …”
12 To overcome this
concern, the parties in their competitiveness report offered to
negotiate merger conditions (see § 34).
This offer was repeated
at the hearing (§ 35) and the merging parties’ attorney
indicated that they would have no objection
to a prohibition of cross
directorships at operating but not at holding company level (§
36). The Tribunal continued:
“
[40]
We have previously observed the importance to consumers in ensuring
that markets within the health sector remain competitive.
We find
that at present the medical administration businesses carried out by
Discovery and Momentum compete in the market, irrespective
of the
fact that they are controlled by the same shareholder in the form of
FirstRand. We find further that the FirstRand Group,
if it was so
inclined, is in a position to easily change its current strategy from
a competitive to a co-operative one. Were this
to occur, this would
lead to a lessening of an important rivalry in the health care market
between the largest present competitor
in the form of Discovery, and
the firm that itself asserts it is in a position, post merger, to be
its most effective rival, Momentum.
[41] This change of
strategy can be implemented at present without the need for a merger
notification. The complete elimination
of cross-directorships between
the firms both at operating company and holding company level is
necessary to preserve this rivalry,
as whilst, post merger, the
potential for greater competition between the firms exists, there is,
conversely, also a greater temptation
for the boards to collaborate
as a means of overcoming th effects of competition.
[42] The merging parties
acknowledge what they euphemistically call the ‘corporate
governance issue’ and tender to do
something about it. Yet
their tender to eliminate cross-directorships at operating company
level, but not holding company level,
is contradictory insofar as it
does not resolve the problem, but merely shifts it to a different
level in the corporate chain –
a level where on their own
version, strategic decisions in relation to these ostensibly
competing groups are taken. For this reason,
that is our point of
departure with the parties and hence, despite their tender of
eliminating cross-directorships at operating
company level, we
require that they be eliminated at holding company level as well. The
condition will not prejudice the interests
of the shareholder, as
given the size of the FirstRand Group and its abundance of executive
talent, it can presumably find other
suitable directors to replace
those to the board the present incumbents elect to resign from.“
It
should be remarked at the outset that the conditions imposed provide
no real safeguard for competition. Cross-directorships
are
prohibited without restricting the attendance of non-directors at
board meetings. At board meetings of large companies non-directors
are often present, and they include directors of other companies,
executives of the holding and subsidiary companies and corporate
experts and advisers. Nothing in the order prevents them in this
case from sharing information. Moreover, the condition is too
widely
framed. As the founding affidavit shows, companies within the two
groups provide services that go beyond those provided
by Sovereign,
Momentum Health and ALH. There is no reason why cross-directorship
should not be permissible in the companies that
provide these wider
services within each group, but this is what the order prohibits. In
addition, there seems to be no evidential
basis for the Tribunal’s
statement in § 42 that “[t]he condition will not
prejudice FirstRand as, given the
abundance of executive talent in
the group, it can presumably find other suitable directors to
replace the persons who resign”.
As Mr Dippenaar has explained
in his affidavit, the FirstRand centre is small and few have the
required knowledge and expertise.
Nor does the statement by the
Tribunal “in the light of the need to keep groups separate,
conditions must be imposed that
have the effect of eliminating the
cross-directorships” (§ 33) lend itself to easy
comprehension: had it been the
intention of FirstRand to consolidate
the businesses of Momentum and Discovery it could have taken
appropriate legal steps to
do without resorting to a concealed
abandonment of their management policy.
Mr
Dippenaar describes the relationship between FirstRand, Discovery
and Momentum in his affidavit. As a group, FirstRand espouses
a
strong entrepreneurial spirit in all its operating subsidiaries and
promotes an “owner manager” ethos in their
management.
This means that management of its subsidiaries are given the freedom
to set and pursue the goals of the companies
concerned within the
governance framework set by FirstRand. It also entails allowing
these companies to determine their own cultures.
Without abandoning
this policy, there cannot be an “exchange of sensitive
information at board level where a market division
strategy could be
entertained”; and no information pertaining to operational
matters is exchanged. The parties have no
intention to change this
policy.
The FirstRand holding
company delegates its authority to its subsidiary boards. It is not
possible to govern the group in a different
manner. Certain FirstRand
board members sit on the boards of the subsidiary companies in which
appropriate policies are developed.
This, it seems to me, is good
corporate governance and in keeping with spirit of the
King
Report on Corporate Governance for South Africa – 2002
(see
Blackman Jooste & Everingham
Commentary on the Companies
Act
Volume 2 (2005 Revision Service) at § 8-16.2 ff and
§8-16.5). It is consistent practice across the FirstRand Group
that
members of the FirstRand board, including its chief executive
and chief financial officer are non-executive directors on the boards
of its major subsidiaries. This practice is not limited to the
medical aid administration aspect of the business. The
cross-directorships
are generally limited to those people concerned
with the surveillance and accountability within the FirstRand group.
By reason
of their positions in the FirstRand group, Mr Burger and
Mr Dippenaar are deputed perform this task on behalf of
FirstRand
and its subsidiaries. They are the appropriate people for
the purpose and are seen as such. In the same spirit, it is the
intention
that the new CEO of FirstRand (Mr P Harris), already a
member of the Momentum board, will become a member of the Discovery
board
as well. In these circumstances, it was deposed, an exchange of
sensitive commercial information between the two groups will not
be
permitted.
It seems that the
Tribunal’s reservations in this regard were ill-founded and, in
the absence of full evidence, unjustified.
It is consequently clear
why the parties tendered not to have cross-directorships at operating
level but not at holding company
level: the tender would have been
quite consistent with the policy allowing subsidiaries operating
autonomy but quite inconsistent
with the position of the subsidiaries
within the FirstRand Group. The kind of information that has to be
considered at the level
of the holding company is different: it
encompasses issues of financial and investment policy, corporate
governance and the like
that must be filtered through to FirstRand
itself. In the process of monitoring and assessing such matters,
board members should
be able to consider the issues in a proper
perspective within the context of the policies of the group as a
whole.
15 In view of the
aforesaid the following statement of the Tribunal is not justified:
“Current (pre-merger) cross-holdings
and cross-directorships
are a cause for concern, even at non-executive level, because there
is a possibility of exchange of sensitive
information at board level
where a market division strategy could be entertained” (§
32). Finance houses such as FirstRand
are principally concerned with
investment returns and growth on capital employed. For this purpose
they make strategic decisions
on the extent to which they will invest
in companies and provide them with continuing capital injections and
technical support.
These decisions entail the evaluation, assessment
and monitoring of the current and future performance of companies
within the
group. Performance of this task requires a complete
understanding of the position of each of the entities that require
comparison.
The consolidation of information in this way is crucial
to the proper management of a group. This exercise will be undertaken
within
the top management of the holding company at the head of the
group (FirstRand). Information will be submitted by the subsidiaries
to the board of directors of the holding company for deliberation.
Management of FirstRand (for example, the CEO and CFO) will
be
expected to be familiar with the facts of all group companies. This
is the reason why they need to serve on the boards of the
main
subsidiaries. Directors on the boards of the relevant subsidiaries
need to be present on the FirstRand board in order to ensure
an
understanding at FirstRand board level of the activities and
positioning of the subsidiaries. They report back to the subsidiary
boards. They represent the subsidiary in deliberations at FirstRand
board meetings and promote its interests. It follows that there
must
be people on the subsidiary boards who are familiar with the overall
policies and plans of the group and who can ensure that
they are
carried through.
16 Section 12A requires
of the Commission or Tribunal to “initially determine”
whether or not a merger is likely to
“substantially”
prevent or lessen competition, by assessing “the strength of
competition in the relevant market”
and “the probability
that the firms in the market after the merger will behave
competitively or co-operatively”. In
doing so, it must take
into account “any factor that is relevant to competition in
that market”, including the factors
set out in s 12A(2) (see s
12A(1)). This makes it clear that a specific market must first be
assessed. It is also clear that the
list of factors that must be
considered is not a closed list and any other factor that is relevant
as to whether or not there will
be a substantial lessening of
competition can be taken into account.
There was no such express
initial determination of anti-competitive consequences by the
Tribunal that must lead to a conditional
approval of the merger. The
Tribunal accepted that the market share of ALH was small and its
acquisition would serve to increase
the stake in the market of
Momentum by 3% at most (§ 29). Generally, in the absence of a
link between Momentum and Discovery,
the acquisition of ALH would not
have raised competition concerns (§ 15), and apparently this
would be so even though ALH
was of strategic importance to Momentum
(§ 29). The Tribunal accepts that there is vigorous competition
between the groups
(§ 20), and, while appreciating that there
might be some capacity to act co-operatively (§ 23), seems to
accept that
there is no such co-operation at present. In its view,
there is accordingly a basis for aggregating the market shares of the
two
groups, making at least 31.32% pre-merger and 34.62% post-merger
(§ 12). The Tribunal found that there is increasing
consolidation
in the medical aid administration market (§ 30).
Whilst it is accepted that in the provision of medical services
generally,
especially in hospital services, there is a measure of
concentration between the players, this is by no means obviously so
in other
fields. As the Tribunal accepted, the barriers to entry
within the field of medical aid administration are low and
significant
countervailing power exists. Medical aid schemes come and
go with some frequency, and the same is true of organizations that
provide
administrative services to such schemes. There are several
fairly large players and a significant number of smaller players
within
the market for the provision of medical aid administration
services. Discovery is the largest, but it has several competitors of
significant size.
17 On the basis of these
findings, the Tribunal stated that “[t]he rivalry between the
two groups is important, especially
post-merger” (§ 25)
and “it is imperative to maintain the rivalry between these
entities” (§ 31). ,
the Tribunal accepted that it was
impossible to ignore the fact that the two groups are members of a
single corporate group (FirstRand)
but that they must be forced to
continue to operate as competitors. However, if they are separate
entities, then there is no basis
for concluding that the merger will
create anti-competitive consequences. Momentum has a relatively small
share of this market.
Taken separately, it can be argued that the
transaction is pro-competitive by enhancing Momentum’s presence
in the market
and enabling it to compete more effectively with the
larger participants.
18 The Tribunal stated:
“The concern raised by this merger is that post merger there
would be an enhanced incentive to co-ordination,
rather than rivalry”
(§ 31). is no evidence to support this proposition and it
is not borne out by the probabilities.
The evidence shows that
FirstRand has embarked upon a policy of “two horses in one
race” and intends to adhere to it.
The merger enhances this
competition by strengthening Momentum's position in the market and
provide it with the capacity to compete
more effectively with the
larger players, such as Discovery and Medscheme. As I have said,
FirstRand could, if it insisted, depart
from this policy. Through its
majority holding in the two groups, it is notionally correct that it
could, if it wished, have produced
this result. There are, however,
commercial reasons why it prefers not to do this, and these were
placed in uncontested evidence
before the Tribunal. Besides the
factors referred to above, they include the large investment, both in
financial and emotional
terms, of the founders of Discovery and their
continued involvement in the management and leadership of the group.
The Tribunal never
expressly rejected the evidence to this effect; it assumed, instead,
that a convergence of the two groups is
a notional possibility. But
even on this approach there is still no basis for coming to the
conclusion it did. Prior to the merger
Momentum, through African
Life, had a one third stake in ALH, which had a 3% share of the
market. The effect of obtaining the balance
of the equity in the
company was to increase Momentum’s penetration of the market by
two thirds of 3% - ie 2%. By virtue
of that interest, pre the merger,
the FirstRand Group also had three representatives on the board of
African Life . It is not clear
why any increase of market share
should encourage co-ordination between the two groups; and even less
so where the small increase
accrues to a participant in the market
that is itself very small.
19 The Tribunal did not
deal expressly with the reasons for its apparent conclusion that
there will be a substantial lessening of
competition in the relevant
market. Discovery and Momentum have existed together as part of the
FirstRand Group prior to the merger
and the cross-directorships
between them are historical and unrelated to the merger that was
considered by the Tribunal. The Tribunal
recognised this when it
considered the acquisition by Momentum of Sovereign Health. It is
consequently assumed for the purposes
of this judgment that it is not
the combination of the Momentum and Discovery interests
per
se
that leads to an inference of a future lessening of competition
but rather the increase of market share from just over 31% to
approximately
35%. Although a market share of 35% post-merger is not
insignificant, the market power associated with such market share is
diminished
in a market that has a large number of competitors, is
fiercely contested, exhibits relatively low barriers to entry and
effective
countervailing power, evidence of which was presented to
and accepted by the Commission. A finding, if it has been made, that
the
approximate 3.3% increase in the aggregated market share of the
FirstRand Group tip the scale cannot be correct in the face of
uncontested evidence of the fact that no anti-competitive results
would flow from the merger.
20 The conditions were
imposed without the Tribunal fully having the benefit of the insights
of the merging parties of their commercial
effect. It follows that
both the review application and the appeal should succeed. The
following order was made on 2 February 2006:
The merger is approved
unconditionally.
Malan AJA
Davis JP and Mailula
AJA concurred
Applicants’/Appellants’
counsel: MSM Brassey SC and MJ Engelbrecht
Applicants’/Appellants’
attorneys: Brink Cohen le Roux Inc
Date of hearing: 2
February 2006
Date
of judgment: 14 February 2006