About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Competition Appeal Court
SAFLII
>>
Databases
>>
South Africa: Competition Appeal Court
>>
2006
>>
[2006] ZACAC 5
|
|
Johnnic Holdings Ltd v Mercanto (Pty) Ltd and Others [2006] ZACAC 5; [2006] 2 CPLR 448 (CAC) (18 August 2006)
IN
THE COMPETITION APPEAL COURT OF SOUTH AFRICA
In the matter between:
JOHNNIC HOLDINGS LTD
Applicant
and
MERCANTO INVESTMENTS (PTY) LTD
First
Respondent
HOSKEN CONSOLIDATED INVESTMENTS LTD
Second
Respondent
THE COMPETITION TRIBUNAL
Third Respondent
THE COMPETITION COMMISSION
Fourth
Respondent
JUDGMENT
HUSSAIN, J
:
On 9 December 2005 the applicant brought an urgent
application against the first and second respondents for an
interdict. The third
and fourth respondents did not make any
representations and I assumed that they elected to abide by the
court's decision.
In this application I
will refer to the
2
applicant, Johnnic Holdings Ltd,
as
"Johnnic",
the first respondent, Mercanto
Investments (Pty) Ltd, as
"Mercanto"
and the second
respondent, Hosken Consolidated Investments Ltd, as
"HCI".
The Competition Commission and the Competition Tribunal will be
referred to as
"the Commission"
and
"the
Tribunal"
respectively. Any references to
"the Act'
means the
Competition Act No 89 of 1998
.
In its application Johnnic
asked for the following relief:
"2.
Interdicting and
restraining the first and second respondents from implementing
alternatively further implementing the merger including,
without
limitation, by acquiring any further shares in the applicant and/or
by exercising the voting and/or other rights attaching
to such shares
as it may have acquired since March 2005, pending the final
determination of:
2.1 the appeal by the
applicant against the Tribunal's order approving the merger subject
to the conditions set out therein dated
7 December 2005 ('the
Tribunal's order'),
2. 2 the review application
to be launched by the applicant for the review and setting aside of
the Tribunal's order, which review
application is to be issued on or
before a date to be determined by this Honourable Court..
3. Declaring that, upon a
proper construction of the undertaking given in favour of the
applicant by the second respondent in the
following terms:
'HCI has, since the date of
publication of the Mandatory Offer, not purchased any further shares
in Johnnic , and will not do so other
than in terms of the Mandatory
Offer pending the date upon which HCI receives approval (whether
unconditionally or on such conditions
as may be acceptable to HCI)
from the Competition Tribunal in respect of the proposed merger
contemplated in the merger notification
('the approval date')',
the first and second
respondents are precluded from purchasing any further shares in the
applicant pending the final determination
of the aforesaid appeal and
review application, and then only in the event of both being
dismissed"
3
At the commencement of the hearing of the application I
indicated that I intended to grant an order after hearing counsel and
that
I will, at a later stage, give full reasons. The circumstances
of the hearing were such that I was compelled to publish my order
immediately as there was no time to give full reasons.
On 9 December 2005 and after hearing counsel for the
parties I granted an order dismissing the application with costs.
These are my reasons.
[1] As far as urgency is concerned, I indicated to
counsel that I had read the papers and was satisfied that the matter
should be
heard and disposed of on its merits. I therefore did not
entertain any argument over the question of urgency. In my view it
was in
the interests of all the parties, including shareholders, that
the matter be disposed of without delay.
THE FACTUAL BACKGROUND
[2] Johnnic and HCI are holding companies that are
listed on the JSE Securities Exchange South Africa (hereinafter
referred to as
"JSE').
Johnnic's main investments, after
unbundling some of its assets, lie in gaming and exhibitions. HCI's
areas of investment include
media and broadcasting, information
technology, gaming, financial services and transport HCI also has an
interest in the conference
and exhibitions market The
subject-matter
4
of this application involves a large merger, as defined
in the Act, where Mercanto is the primary acquiring firm and Johnnic
is the
primary target firm. It has to be said at the outset that this
was, at least in the eyes of Johnnic, a hostile merger. It is not
in
dispute that Johnnic wanted to and indeed took steps to oppose the
merger, which Johnnic describes as an
"unsolicited hostile
takeover bid'.
HCI and Johnnic each own an indirect equity interest in
Tsogo Investment Holding Company (Pty) Ltd (hereinafter referred to
as "TIH"),
and accordingly in the Tsogo Sun group of
companies.. The Tsogo Sun group holds five casino licences in South
Africa. In addition
to its interest in the Sun Coast Casino and
Entertainment held through T1H, Johnnic has an interest in Sun Coast
Casino and Entertainment
held through Durban Add-Ventures, The effect
of the merger will be to increase the extent of HCI's indirect equity
interest in TIH
and, accordingly, in the five casinos in the Tsogo
Sun group. It was not disputed that the effect of the implementation
of the merger
would merely be to increase HCI's investment interest
in the Tsogo Sun group It will not increase HCI's market share in the
casino
and hotel industry.
[3] On 7 July 2005 HCI announced an unsolicited offer to
acquire all or part of the share capital in Johnnic for a cash
consideration
of R9,75 per Johnnic share. The offer was thereafter
increased to R10,70 per Johnnic share, alternatively, one HCI share
for every
2,57 Johnnic shares Upon receipt of the requisite number
of acceptances from Johnnic shareholders, HCI intended to invoke the
provisions
of section 440K of the Companies Act
5
No. 61 of 1973 and delist Johnnic from the JSE As at 5
August 2005 HCI obtained irrevocable undertakings from 3,1% of
Johnnic shareholders
to accept its offer Due to the hostile nature of
the offer the Commission granted the parties permission to file
separate merger
notifications in terms of Rule 28 of the Rules of
Conduct of proceedings in the Competition Commission. Mercanto filed
its merger
notification on 3 August 2005 and Johnnic on 15 August
2005
[4] The aforesaid transaction constitutes a merger in
terms of section 12(2)(a) of the Act as HCI stands to acquire more
than 50%
of the issued share capital in Johnnic, It was accepted that
the merger constitutes a large merger in terms of section 11(5)(c) of
the Act as the value exceeded the higher threshold published in terms
of section 11(1)(a) of the Act..
The Commission found that there was a product overlap
between the merging firms in the following sectors:
Gaming, hotels and leisure and Exhibition and conference
facilities
Notwithstanding such overlap the Commission, after
investigating the matter, decided to recommend merger approval
without condition
When the matter came before the Tribunal the
applicant, Johnnic , contended that, post merger, there were very
real competition concerns
in the exhibition and conference
6
sectors as well as in the gaming sector. The Tribunal
dealt with these concerns comprehensively.
[5] According to Johnnic HCI increased its shareholding
in Johnnic from 30% to approximately 40% through the acquisition of
shares
from Gold Reef Casino Resorts Ltd (hereinafter referred to as
"GRC")
This acquisition by HCI included an
arrangement with GRC that HCI will support GRC, should GRC make an
offer for the entire issued
share capital in TSH from SABSA Holdings
(Pty) Ltd (hereinafter referred to as
"SABSA")
Johnnic
alleged that this agreement between HCI and GRC constitutes a
prohibited practice in terms of section 4(1)(a) of the Act,
in that
it amounted to an agreement between or concerted practice by HCI and
GRC. Johnnic further alleged that in the event of GRC
acquiring the
shares in TSH from SABSA, this will raise significant competition
concerns in the casino industry.
[6] In response to Johnnic's concern, HCI pointed out
that its acquisition of Johnnic shares from GRC was an independent
transaction
and not conditional upon the successful conclusion of an
agreement between SABSA and GRC for 49% of SABSA's stake in TSH. In
any
event, SABSA made a public announcement that it had no intention
to sell its shares in TSH. There were, accordingly, no further
discussions
between GRC and SABSA On 9 December 2005, the CEO of GRC
deposed to an affidavit to this effect. It was not disputed by
Johnnic
that SABSA was no longer selling its stake in TSH and that
no negotiations were being held with GRC.
7
[7] At the hearing before the Tribunal Johnnic
expressed concern over the effect on competition in the convention
and exhibition
market if the merger was approved. Johnnic led expert
evidence that it was not appropriate for both Gallagher Estate and
the Sandton
Convention Centre to be under the control of the merged
entity. Although HCI was of a different opinion, namely that there
was no
serious competition concerns in the conference and exhibition
market post merger, it decided that since this was not part of their
core undertaking, it may be in the interests of the merger to divest
themselves of Gallagher Estate's post merger HCI accordingly
gave
such an undertaking to the Tribunal. It must be noted that the
Commission did not share Johnnic 's concern and recommended
unconditional
approval of the merger to the Tribunal. The Tribunal
approved the merger on condition that the parties, dispose of
Gallagher Estate
The Tribunal set out the conditions very carefully
and in my opinion succeeded in addressing any genuine competition
concern The
Tribunal thus gave its conditional approval for the
merger
The applicant noted an appeal against the order and
pending appeal to this Court required, in effect, a suspension of the
merger
[8] At the hearing before me the parties engaged in a
squirmish over the appropriateness of the order sought by the
applicant Mr Gauntlett
SC, for the respondents, argued that the order
sought by the applicant was an interdict the nature of which was not
permitted by
the Act According to Mr Gauntlett section 38(2A)(d)
permitted
"suspension"
of operation of an order and
did not permit the granting of an interdict . In any event, Mr
Gauntlett submitted, the
8
Act did not permit the granting of an interdict in the
wide terms required by the applicant, In my view this is a point
worth debating,
Mr Unterhalter SC, for the applicant, argued that the
relief claimed in the Notice of Motion was competent and amounted to
no more
than an equivalent relief to what is stated in section
38(2A)(d) This submission, in my view, was equally worthy of
consideration
However, for purposes of this judgment I need not
decide this point I could nevertheless grant an order, if the
applicant succeeded,
in terms of section 38(2A)(d).
The issues
[9] In this application the following must be
addressed:
Does the applicant's appeal of the Tribunal's
conditional merger approval enjoy
prima facie
prospects of
success?
Is whose favour does the balance of convenience lie?
Would any injustice caused by the implementation of the
merger outweigh any subversion of the purposes of the Act caused by
a suspension
of the Tribunal's approval of the merger?
The grounds of appeal and the prospects of success
[10] The grounds upon which the appeal is founded is
as follows:
9
"
1. The Tribunal erred in not requiring that
the procurement by the first respondent orHosken Consolidated
Investments Ltd ('HCT) of
a suitable purchaser for Gallagher Estate
Exhibition and Conference Centre ('Gallagher') or the appellant's
entire shareholding in
Gallagher Estate Holdings Ltd ('the
shareholding') operate as a condition precedent to the approval of
the proposed merger
2 The Tribunal erred in approving the merger subject
to the
conditions in circumstances where the conditions do
not
adequately address the competition concerns identified in
the
economic report filed by G:enesis, and, more
particularly,
though without derogating from the generality of the
aforegoing,
in circumstances where the conditions fail adequately
to ensure
that:
the economic and competitive value of Gallagher will
be preserved and maintained pending the disposal of Gallagher or the
shareholding;
the party or parties who will ultimately manage
Gallagher will have the necessary skills and ability to run
Gallagher as a viable
and active competitive force in competition
with other exhibition and conference centres in Gauteng which
currently operate in
competition with Gallagher.
3 The Tribunal erred in permitting the first
respondent or HCI the
extended period of 12 months (including a
mechanism for the
further extension thereof) within which to
procure the disposal of
Gallagher or the shareholding, insofar as
that period, during
which Gallagher is run under the control of
the merged entity,
permits of precisely the harmful
anti-competitive effects which
were identified in the Genesis
economic report and the
evidence of Carol Weaving, which evidence
was not
substantially challenged. Such effects include but are
not
limited to the removal of the basis upon which
exhibition
organizers are currently able to bargain on prices,
service levels
and schedule allocations in respect of exhibitions
not yet finally
agreed upon for 2006 and thereafter
4. The Tribunal erred insofar as it failed to
consider the true nature and extent of the relationship between Gold
Reef Casino Resorts
(Pty) Ltd and HCI, and thereby precluded itself
from finding, as it should have, that the merger, through the
operation of that relationship,
had the effect of substantially
preventing or lessening competition in the gaming market, and should
accordingly be prohibited"
10
I will first deal with each of these grounds and their
prospects of success The grounds of appeal can be conveniently
separated into
two parts namely that the Tribunal erred in approving
the merger without taking into account genuine competition concerns
in:
The conference and exhibition market and
The gaming market, and in particular the casino
industry.
The conference and exhibition market
[11] Johnnic owns Gallagher Estate and HCi controlled
the Sandton Exhibition Centre.. These two conference and exhibition
facilities
are in Gauteng and compete in exactly the same segment of
the market. The applicant disagreed with the Commission's definition
of
the geographic market. The Commission saw the market as national
while the applicant saw the market as regional. At the hearing before
the Tribunal the applicant led evidence of the harmful effects of
both Gallagher Estate and the Sandton Convention Centre falling
into
the same hands. Although HC! did not accept Johnnic 's submission to
the Tribunal, they decided, in the interests of removing
a potential
and unnecessary obstacle to the merger, to give an undertaking to
divest the merged entity of Gallagher Estate's post
merger. In my
view this put paid to any legitimate competition concerns in the
conferencing and exhibition market and the way was
then open for the
Tribunal to approve the merger
11
[12] Once divestiture was ordered by the Tribunal,
Johnnic , in its grounds of appeal, changed its strategy, as plainly
it was forced
to. Now Johnnic 's complaint is that the Tribunal erred
in not ordering divestiture of Gallagher Estate as a condition
precedent
to the approval of the merger.. The applicant argued that
the period of 12 months, post merger, given to the parties to dispose
of
Gallagher Estate was too long and will be harmful to competition
within the market In my view this is an entirely spurious criticism
which is not supported by any facts What is more is that the
suggestion that Gallagher Estate be sold before the merger is
implemented
is unsustainable as it is in law not possible and will
simply cause extended delays and give the applicant means to
frustrate the
merger For HCI to dispose of Gallagher Estate it must
first obtain control over Johnnic . There is no means in law,
pre-merger, to
force Johnnic to dispose of its assets.
[13] The Tribunal very carefully considered the effect
of ordering divestiture and therefore set out, in its conditions,
what was
expected to happen to Gallagher Estate during the period of
12 months, post merger. I am satisfied that the Tribunal had
addressed
the competition concerns raised by Johnnic . In the face of
the very detailed and carefully considered conditions imposed by the
Tribunal, Johnnic merely and vaguely make an allegation that the
conditions do not address the concerns raised by its experts Johnnic
advances no facts to sustain this allegation It must be noted that
Johnnic 's expert evidence was based on the merged entity controlling
both Gallagher Estate and Sandton Convention Centre The opinion of
Johnnic 's experts did not extend to divestiture post merger
12
[14] The Tribunal was alive to the competition concerns
regarding the conference and exhibition market and carefully
addressed that.
The following conditions are noteworthy:
The Tribunal established an interim regime concerning
the management of Gallagher's business pending its divestiture,
through placing
obligations on the merging parties to maintain the
competitiveness of such business.
The Tribunal provided for the appointment of an
independent trustee to monitor the steps that the merging parties
are taking to
comply with their obligations
The provision of a period of 12 months (or such further
period as the Tribunal may, on application, approve) for the
divestiture
of Gallagher is reasonable and appropriate, given that
it represents a valuable asset of Johnnic which will require time
to be
disposed of on commercially viable terms.
Accordingly, in my opinion the applicant has no prospect
of success on appeal in respect of these grounds
13
The
gaming market
[15] At the outset it must be said that Johnnic 's
expert, at the hearing before the Tribunal, offered no opinion or
view of the effect
of the merger on the gaming market and in
particular the casino industry. Johnnic 's complaint is that the
Tribunal erred in denying
itself the opportunity to probe the alleged
relationship between GRC and HCI, The Tribunal found that this
relationship, if there
was one, was in all the circumstances
irrelevant and did not assist it in deciding the appropriateness of
the merger. I can find
no fault in the Tribunal's findings in this
regard. Again, Johnnic fails to put up any facts which justify the
conclusion that there
was a relationship between HCI and GRC which
was calculated to exert some control over the casino industry in
future.. The whole
idea of the relationship comes from two facts
namely:
That HCI purchased GRC's shares in Johnnic and
That HCI supported GRC in the latter's desire to
purchase TSH shares from SABSA
According to HCI, its purchase of Johnnic shares from
GRC was a separate and independent and stand alone transaction. There
is no
evidence before me to suggest that it was anything else. The
whole submission by Johnnic around the acquisition of TSH shares in
SABSA by GRC turned into a red herring The truth is that no agreement
was actually concluded by GRC to purchase TSH shares from SABSA
In
fact SABSA made a public announcement that it had no intention of
selling its shares in TSH On 9
14
December 2005, Steven Joffe the CEO of GRC stated the
following in an affidavit:
"GRC has made a public announcement that SABSA
informed GRC that it was not a seller of its shareholding in TSH and
that GRC's
negotiations with SABSA have ceased.
"
This was not disputed by Johnnic .
[16] It must be noted that on Johnnic 's own version the
conclusion of the proposed GRC/SABSA transaction is a prerequisite
for any
of the alleged anti-competitive effects which Johnnic
alleges constitutes a reason for prohibiting the merger. Absent such
precondition
the relationship, if any, between HCI and GRC becomes
entirely irrelevant to the determination of the merger by the
Tribunal,
[17] In any event, even if the proposed GRC/SABSA's
transactions for TSH shares were to be implemented, this will be
subject to regulatory
approvals, including merger approvals in terms
of the Act Any competition concern can then be properly pursued at
that time
[18] The relevance of the alleged GRC/HCI relationship
was properly ventilated before the Tribunal. Prior to the hearing the
Tribunal
had received the record of the Commission's investigations
and recommendations, as well as submissions made to the Commission,
by
both sides, on this very issue. I accordingly find that the
decision of the Tribunal to exclude evidence relating
15
to the HCI/GRC arrangement or relationship followed a
procedurally fair process.,
[19] The impression made by Johnnic , in these papers,
regarding the possible harm to competition on the gaming industry
appears to
be based on speculation The initial objection by Johnnic
was that HCI and GRC had concluded an arrangement which constituted a
prohibited
restrictive horizontal practice in terms of section 4 of
the Act. If this was indeed the case it was open to Johnnic to
follow the
machinery created by the Act to deal with such concerns.
The complaint procedures under Part C of Chapter 5 of the Act were
available
but Johnnic made no attempt to use them. In fact Johnnic
's allegations regarding the HCI/GRC arrangement is not based on any
credible
facts..
In my view Johnnic has failed to establish any
legitimate ground for appeal or review of the Tribunal's decision
insofar as it relates
to the HCI/GRC relationship. There are no
prospects of success.
Balance of convenience
[20] The balance of convenience and the issue of urgency
was based on the following:
20 1 That pending the outcome of the appeal
competition within the exhibition and conference market will be
compromised;
16
20 2 That the relationship between GRC and HCI could
compromise competition within the gaming market and
20.3 That the general meeting called by Johnnic was
due to take place on 12 December 2005.
I
will deal with each of these issues..
[21] Post merger both Gallagher Estate and the Sandton
Convention Centre will effectively fall into the same hands. This the
applicant
submits will lessen competition within the exhibition and
conference market. At the hearing before the Tribunal this issue was
fully
canvassed, including the presentation of an expert witness. In
my view the Tribunal applied their minds to the issue and properly
addressed all of the applicant's competition concerns in the
conditions imposed in approving the merger. It was anticipated that,
post merger, the parties should be able to dispose of Gallagher
Estate within 12 months I find that there is no balance of
convenience
that favours the applicant in this regard..
[22] The applicant made much of the fact that the
Tribunal failed to properly investigate the relationship between GRC
and HCI. The
applicant alleged that there was a relationship between
these parties which was designed to, in future, exert dominance in
the gaming
and casino market in Gauteng and KwaZulu The Tribunal
correctly found that this relationship was irrelevant. The applicant,
on the
papers before me, was unable to show any legitimate
17
competition concerns in the gaming and casino market,
post merger. Nor do I believe they were able to do so before the
Tribunal. In
any event there can be no competition concerns which
cannot be addressed in future if HCI and GRC increased their presence
in this
market. As the Tribunal correctly pointed out any such
conduct in future will be subject to regulatory measures within the
ambit
of the Act Again there is no balance of convenience that
favours the applicant.
[23] The general meeting for 12 December 2005 was
called,
inter alia,
for the following main purposes:
The voting of HCI's nominees onto the Board of
Directors of the applicant and
The approval for the applicant's acquisition of the
entire shareholding of NAFCOC Investment Holdings Ltd (hereinafter
referred
to as
"NAFHOLD")
in TIH. This will secure
a further 25% shareholding in TIH for the applicant.
The voting of nominees to the board was not material to
this application and I will say nothing further about it.
The applicant relied heavily on the date of the meeting
for urgency and to demonstrate possible injustice if HCI were allowed
to vote
its shares, at the meeting, post merger. It was common cause
that HCI was purchasing Johnnic 's shares on an incremental basis and
that post merger will control
18
more than 40% of the shareholding in Johnnic . The
applicant submitted that the NAFHOLD transaction was in the interests
of the company
and its shareholders and anticipated that the
shareholders, barring HCI, would vote in favour of it. The applicant
expressed concern
that if HCI was not interdicted it will vote
against the NAFHOLD transaction thereby causing the applicant to
possibly lose a favourable
transaction.
Upon closer scrutiny of the NAFHOLD transaction it
emerged that there was nothing special or magical about the 12
December 2005. The
meeting could be postponed for another date at the
instance of the applicant and NAFHOLD It was not in dispute that
NAFHOLD and the
applicant enjoyed a cordial relationship. The whole
transaction was also subject to certain conditions, some of which
were only due
to be fulfilled some time in the near future namely by
31 December 2006. Upon reading the papers and considering the NAFHOLD
transaction,
I came to the conclusion that there was nothing in the
approval of the merger which could cause the applicant and its
shareholders
serious competition issues in the meeting of 12 December
2005. In fact the meeting need not even take place and if it did take
place
there was an equal possibility that HCI, as a shareholder, will
vote in favour of the NAFHOLD transaction.
[24] HCI on the other hand had a legitimate interest in
implementing the merger. The order obtained from the Tribunal is and
remains
valid HCI is a shareholder of the applicant and I can find no
basis in law to deprive it of its rights as a shareholder
19
[25]
Accordingly I find as follows:
No injustice will be caused by the implementations of
the merger prior to the determination of the underlying
review/appeal.
If the appeal or review
succeeds then HCI will be at risk of being ordered to divest. A risk
which HCI plainly accepted.
The purposes of the Act will, in the circumstances, be
subverted if the Tribunal's approval of the merger is suspended
pending determination
of the appeal/review
It became abundantly clear to me that the applicant was
merely using the processes of this Court to thwart the merger. The
applicant
could demonstrate no legitimate competition concerns post
merger.. Orders in terms of section 38(2A)(d) must not be lightly
granted
The parties seeking relief in terms of section 38(2A)(d) must
do so for genuine competition concerns and must assist the court and
make a full disclosure to the court of all of the material facts
See:
Glaxo Wellcome (Pty) Ltd v Terblanche NO and
Others (No 1)
2001 (4)
SA
901
(CAC).
Community Health Care Holdings (Pty) Ltd v The
Competition Tribunal and Others
Case No. 46/CAC/FEB05.
20
I was therefore persuaded to
exercise my discretion in favour of the respondent. I accordingly
dismissed the applicant's application
with costs.
I HUSSAIN JUDGE OF THE
COMPETITION APPEAL COURT
COUNSEL
FOR THE APPLICANT
ATTORNEYS FOR
THE APPLICANT
COUNSEL FOR THE RESPONDENTS
ATTORNEYS FOR THE FIRST AND
SECOND RESPONDENTS
MR
D
UNTERHALTER
SC
WEBBER WENTZEL BOWENS MR
J
GAUNTLETT
SC
SONNENBERG HOFFMAN GALOMBIK