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[2003] ZACAC 1
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Mondi Limited v Kohler Cores and Tubes (20/CAC/Jun02) [2003] ZACAC 1; [2003] 1 CPLR 25 (CAC) (14 February 2003)

BEFORE THE COMPETITION APPEAL COURT
Case
No. 20/CAC/Jun02
In the appeal
of:
MONDI
LIMITED
1
st
Appellant
KOHLER
CORES AND TUBES,
2
nd
Appellant
A division
of Kohler Packaging Limited
JUDGMENT : 14 FEBRUARY 2003
DAVIS JP
INTRODUCTION
[1] A proposed merger between first and second
appellant was prohibited by the Competition Tribunal (‘the
Tribunal’) in terms
of an order issued on 23 May 2002, the reasons
for which were provided on 20 June 2002. First appellant, a
supplier of paper products,
including those used in the manufacture
of cores and tubes, sought to acquire the cores and tubes division of
Kohler Ltd, (‘KC&T’)
one of first appellant’s downstream
customers. First appellant is a wholly owned subsidiary of Anglo
America plc (‘Anglo American’).
Both Anglo American and first
appellant control numerous companies. First appellant consists of a
number of divisions including
Mondi Paper, Mondi Recycling, Mondi
Carton Board, Mondipak, Mondi Kraft, Mondi Timber and Mondi Forest.
The primary target firm
is a division of Kohler Packaging Limited
which is a subsidiary of Malbak Limited. Remgro Limited, Malbak’s
largest shareholder,
holds 50,4% of the issued share capital of
Malbak. First appellant intends to locate second appellant within
Mondipak which produces
corrugated packaging for both agricultural
and industrial markets.
[2] The
value of the acquiring firm’s annual turnover in South Africa
(‘first appellant’) combined with that of the target firm
(‘second appellant’) exceeded the threshold which had been set by
the Minister of Trade and Industry in terms of section 11 of
the
Competition Act 89 of 1998 (‘the Act’).
[3] Once the
parties had duly notified the merger, the Competition Commission
conducted an investigation and, in terms of section
14 A(1) of the
Act, forwarded its written recommendations with reasons to the
Competition Tribunal for its consideration.
[4] A hearing
was held on 9 and 10 May 2002 before three members of the Tribunal.
Evidence was led by the Competition Commission in
support of its
recommendation as well as by appellants in response. The
Competition Tribunal also called several witnesses to testify.
It
delivered its decision prohibiting the merger on 23 May 2002.
[5] This
appeal, which has been brought by first and second appellant in terms
of section 17(1) of the Act, concerns the question
of whether this
court should set aside the decision of the Competition Tribunal and
approve the merger in terms of section 17(3)(a)
of the Act.
FACTUAL BACKGROUND
[6] Second
appellant informed the Commission that it wanted to sell its cores
and tubes business, KC&T, because the manufacturing
of cores and
tubes did not constitute its central business. It approached two
companies to purchase the cores and tubes business,
namely Sonoco
International and first appellant. Sonoco did not materialise as a
prospective purchaser because it was concerned
about the return it
would receive on its investment due its view of the depreciation of
the rand, labour problems and crime levels
in the country.
[7] First
appellant had previously considered the possibility of starting its
own cores and tubes manufacturing business in order
to ensure the
quality of the cores and tubes employed in certain of its own
manufacturing processes. When approached to purchase
KC&T, first
appellant adopted the view that it would be preferable to do so as
opposed to commencing its own operations for a
number of reasons,
inter alia
KC&T
would be purchased as a going concern together with the necessary
technical skills;
the
cores and tubes market would not be destablised by the creation of
additional capacity in an already small industry;
first
appellant intended to continue supplying other core and tube
manufacturers with raw materials needed to manufacture cores
and
tubes.
[8] In
evidence before the Tribunal, Mr Theo van Breda, the general manager
of Mondi Cartonboard stated, ‘the only reason we’ll
do the merger
is if its value enhancing and its value enhancing according to our
assumptions and calculations going forward’.
[9] The
following exchange between the Chair of the Tribunal and Mr van Breda
provides additional evidence as to first respondent’s
motive: ‘I
am still struggling to understand what motivated this decision to buy
Kohler Cores and Tubes. You have, as Mr Coetzee
has pointed out,
spent I think thirty seven and a half(371/2) million Rand buying a
plant that you could have put up yourself with
twenty six (26)
million Rand by your estimate.
So I am
struggling to understand why you wanted to enter the cores and tubes
business in general and why you wanted to buy Kohler
in particular…..
Mr Van Breda:
Well as I mentioned before Mr Chair I believe we can run it more
cost efficiently than what Kohler is currently running
at and that
has been indicated in our submissions, largely due to the elimination
of administrative costs. And secondly we will
be securing market and
skills, which if we were to do that with our own operations, and I am
not sure how up-to-date those figures
are, lets say the twenty five
(25) to thirty (30) million if we were to start our own plant we
would be acquiring markets and skills’.
[10] Mondi
Cartonboard operates in two broad categories. It produces coated,
uncoated and laminated folding boxboard which is used
for packaging
inter alia
of food, pharmaceuticals and detergents. The
division also manufactures speciality boards used in the stationery,
match, paper and
textile industries. The division’s mill is
situated at Springs and it produces approximately 130 000 tons of
board each year.
[11] Mondi
Cartonboard supplies a number of products to KC&T and its
competitors for use in the manufacturing of cores and tubes,
inter
alia:
(1) Ndicore core board which is a core board manufactured
from recycled paper with a maximum strength of 300-330 scott ply.
Although
not a strong paper, Ndicore creates bulk to build up the
wall thickness and hence the crush strength necessary for thick wall
cores.
(2) Kraft paper which is manufactured for use in the
corrugated box industry although, to a limited extent, it is also
used in the
manufacture of cores and tubes. Kraft paper is
manufactured from virgin paper and is stronger and gives a smoother
finish than Ndicore.
Kraft prices are currently lower than the price
of Ndicore.
[12] The
other South African producer of paper products is Sappi which also
produces kraft paper. Its product which is specifically
directed at
the manufacture of cores and tubes is called Spiralwind which is the
trade name given to the kraft liner board which
Sappi supplies to the
cores and tubes industry.
[13] In the
downstream market, KC&T manufacturers cores and tubes, angle
board dufaylite and textile cones. Kohler operates
in three
factories located in Johannesburg, Pinetown, Natal and Cape Town.
[14] Cores
and tubes are spirally wound paper tubes which are utilised as an
inner core in various applications, including products,
such as
paper, board, textile, steel and plastic which are wound onto an
inner core tube. These products are used by their downstream
purchasers. The core is inserted into the printing press and the
product is wound off. This means that, if the core collapses or
crushes, it is not possible to use the surrounding material because
it cannot then be easily or smoothly wound off the core. For
this
reason, although the value of the core is a fraction of the value of
the material surrounding it, a malfunctioning core may
render
useless the very material that it supports.
[15] KC&T’s
largest customers for its cores and tubes are Sappi Paper, Hulletts
Aluminium, Columbus Steel and SA Nylon Spinners.
These high end
industrial customers represent 65% of KC&T’s cores and tube
turnover per annum. Mondi Carton board, Mondi
Paper and Modi Kraft
currently purchase 25%, 57% and 50% respectively of their cores and
tube requirements from KC&T.
[16] KC&T’s
largest rival is Framen which supplies most of Mondi’s core and
tube requirements. According to the parties,
Framen supplies 100% of
Mondi’s requirements in the Gauteng province while KC&T
supplies 100% of Sappi’s requirements in
the same region. The cores
and tube market accounts for 65% of KC&T’s turnover and is the
focus of the present dispute.
THE
COMPETITION COMMISSION’S ASSESSMENT.
[17] The
Commission examined the concern that the merger would create a
structure which could give rise to (a) foreclosure and (b)
raising
the cost of rivals.
[18] Dealing
with the question of foreclosure, the Commission observed that the
proposed transaction could facilitate foreclosure
for the top end of
cores and tube manufacturers and it could foreclose suppliers of
paper such as Sappi which was supplying paper
which compliments
Mondi’s Ndicore core board to high end cores and tube
manufacturers.
[19] The
Commission considered whether the merger would give first appellant
the ability to raise the costs of top end core and tube
manufacturers. In short, first appellant could increase the cost of
Ndicore core board to the top end cores and tube manufacturers
and
make its profits on the supply of raw material, thereby achieving
healthy profits while forcing other cores and tube manufacturers
out
of the top end of the market. This could then compel the top end
cores and tube manufacturers to compete in the low end of the
market
and the end result would be that either the top end manufacturers or
the low end manufacturers would exit the market.
[20] The
Commission recommended that the proposed transaction be prohibited
for the following reasons:
‘The merger
will result in a market structure which could foreclose the top end
core and tube manufacturers. Furthermore the merger
may result in
foreclosing existing and potential suppliers’ paper and core board
which is used in conjunction with Mondi’s Ndicore
core board, for
producing cores and tubes in the high-end of the market.
The merging
entity’s dual position as supplier and competitor of cores and
tubes would be likely to create a channel conflict in
the market.
Using its strong market position as a supplier of the raw material,
the merged entity may be able to raise core and tubes
manufacturers
costs and marginalise their market position as suppliers of cores and
tubes’.
THE
FINDINGS OF THE COMPETITION TRIBUNAL
.
[21] In
essence the Competition Tribunal found that first appellant’s
objective, which would be achieved by tacit co-ordination
with its
major competitor Sappi, was
to
raise the costs of rivals of KC&T doing business in the
“downstream market”. The merger was likely to result in ‘input
foreclosure’; that is it would preclude cores and tube
manufacturers from accessing key input into their production
process;
to
raise the cost of rivals of both first appellant and Sappi doing
business in the upstream market. The merger was likely to result
in
‘customer foreclosure’; that is it would effectively preclude
other suppliers of core board including foreign investors
from
entering the South African market;
to
establish a mechanism which would facilitate the exchange of price
and other sensitive information and hence “facilitate coordinated
conduct”, indeed cement a cartel between Sappi and first appellant
in the upstream market and a number of other markets in which
both
are engaged.
[22] Before
this court, appellants contested these findings of the Tribunal on
the following bases:
(i) The Tribunal’s conclusions amount to nothing more than
speculation which breaks down under close analysis.
The
findings were not supported by the available evidence. In
particular, the Tribunal made use of contested assumptions rather
than basing its conclusion on clear evidence which was available on
the record.
No
opportunity was afforded at the hearing to appellant to counter any
of the Tribunal’s ‘speculation’.
[23] The
findings followed upon the mandated enquiry in terms of s 12A of the
Act, namely whether the merger was likely to substantially
prevent or
lessen competition in the relevant market. In dealing with this
enquiry, the Tribunal engaged in four separate but interrelated
issues, namely
the
definition of the market;
input
foreclosure;
customer
foreclosure;
facilitation
of co-ordination.
The
Market : The Downstream Product Market.
[24] The
Commission concluded there was not a single market for cores and
tubes but rather two markets, namely a top end and a bottom
end
market, being a market for heavy industrial cores in which the
quality of the cores and particularly its crush strength, (its
ability to withstand considerable pressure) was paramount and a
market for light industrial and consumer product cores. While
acknowledging
that it was not ‘easy to specify a precise point of
delineation between these market segments’, the Tribunal accepted
the delineation
and identified the downstream market relevant to this
dispute as the market for heavy industrial cores and tubes with its
principle
customers being in the metal paper and textile industries.
Upstream Market.
[25] The
Commission found that the relevant upstream product market was that
for the supply of Ndicore, namely the speciality core
board produced
exclusively by first appellant. The Commission referred to evidence
that there was no efficient, commercially viable
substitute for
Ndicore in the manufacture of ‘top end’ or ‘heavy industrial’
cores and tubes and concluded that Ndicore core
board constituted a
separate and distinct market for top-end cores and tubes.
[26] The
Tribunal disagreed, concluding: ‘We cannot ignore the clear
evidence that demonstrates that, despite Ndicore’s technical
superiority, users of heavy industrial cores and tubes who are
clearly concerned with the quality of the product are using cores
made up of Sappi’s Spiralwind as well as locally produced kraft
paper… all other things being equal, Ndicore is the preferred
product for producing industrial cores and tubes, that is cores and
tubes in which crush strength is an important requirement. However
it is clear that substitution is technically and commercially
feasible albeit limited by Ndicore’s clearly superior qualities’.
[27] For
these reasons the Tribunal concluded that the upstream product market
constituted the market for the provision of board utilised
in the
production of industrial cores and tubes which would include Ndicore,
Spiralwind and first appellant’s kraft paper.
Input
foreclosure
.
[28] Having
determined the market, the Tribunal examined the question of input
foreclosure. The Tribunal considered the question
of whether the
integrated entity after the merger, would ‘largely self deal’,
confining its sales of Ndicore to its integrated
downstream cores and
tubes manufacturers and the latter would confine its purchases of
core board to its upstream producer of core
board. First appellant
would engage in a limited amount of trade in the market. This
limited participation would ‘facilitate the
flow of information and
hence facilitate co-operation between Mondi and Sappi’. Once the
merged entities largely self dealt, other
cores and tube
manufacturers would be compelled to negotiate with ‘an effective
Sappi monopoly’.
[29] On this
basis, the Tribunal found that there would be little to prevent Sappi
from exercising its market power by charging a
monopoly price for
Spiralwind. First appellant’s best interests would lie in following
Sappi’s price increase, thereby permitting
both producers of core
board to extract monopoly rents from non-integrated cores and tube
manufacturers in the downstream market.
By reducing the supply of
Ndicore to the market, first appellant would permit Sappi to increase
the price of core board to non-integrated
producers of cores and
tubes.
[30] In
evaluating first appellant’s interest in allowing Sappi to charge a
monopoly price to customers, the Tribunal found that
such an act
would raise the cost of first appellant's rivals in the downstream
cores and tubes market, thereby enabling first appellant’s
newly
acquired cores and tubes division to capture a larger share of the
market or enabling it to raise its prices to its customers
in the
downstream market, a market in which it would, through its
acquisition of second respondent, command a dominant share.
CUSTOMER
FORECLOSURE.
[31] Much of
the debate before the Tribunal was devoted to the argument that
imports would undermine any attempt at input foreclosure.
The
Tribunal rejected this argument concluding that ‘high quality
European core board will continue to be used in small volume
for the
manufacture of particularly demanding cores. It will however not be
a viable general alternative to local suppliers of core
board – it
is extremely costly both because of its quality and because of the
depreciation of our exchange rate visa vis developed
country
currencies’.
[32] While a
supply of core board might be possible from developing country core
board producers, the Tribunal concluded that in the
past, first
appellant had vigorously prevented the acquisition of substitute
product. The Tribunal referred in this connection to
an extract from
second respondent’s divisional budget 2001/2: ‘We have been
importing raw materials at prices well below the
local mill’s
prices. However the local mills represent 25% of our turnover and
Mondi has taken business away from us as a result
of the imports. As
a result of this we have stopped importing raw materials and are
working with Mondi to gain more business’.
[33] The
Tribunal concluded that imports ‘carry considerable risk for local
downstream producers. And the South African market for
core-board
with the ‘lion’s’ share’ foreclosed by the actions of the
powerful domestic duopoly will not be an attractive
market for
exporters….’
FACILITATION
OF CO-ORDINATION.
[34] The Tribunal found that Mondi’s downstream
cores and tubes operation ‘may thus purchase a small quantity of
Spiralwind or
Sappi kraft. It will also likely sell a certain amount
of Ndicore to its downstream competitors who are clearly destined to
purchase
the bulk of their core-board requirements from Sappi. This
will be likely to include Framen which will rely upon Sappi as the
supplier
of its core-board inputs. By the same token, the divisions
of Mondi that require cores and tubers – and this would cover most,
probably all, of its key paper producing activities – will most
secure its requirements from its downstream cores and tubes
manufacturers.’
On the basis of this evidence, the Tribunal held
that the transaction would facilitate tacit or express co-ordinated
conduct which
would be likely to substantially prevent or lessen
competition by facilitating the exchange of pricing and other
competitively sensitive
information in both the input or output
markets.
EVALUATION.
[35] As
Mr Petersen, who appeared together with Mr Wilson as amici curiae
(having been invited by this court to so appear), submitted,
the
findings of the Tribunal raised three critical interrelated questions
which all impact upon the determination of the likelihood
or
otherwise that substantial anti competitive effects are likely to
result from the proposed merger. These questions are
To
what degree the availability of imported material capable of being
substituted for the products of first appellant and Sappi
in the
production of heavy industrial cores and tubes is likely to restrain
uncompetitive conduct on the part of these organisations.
Whether,
even in the absence of a similar vertical integration by Sappi,
uncompetitive parallel conduct between first appellant
and Sappi
would be feasible and would be rendered more likely as a result of
first appellant’s merger with second appellant.
Whether,
assuming the likelihood of parallel conduct between first appellant
and Sappi, following first appellant’s merger with
second
appellant, it is likely that significant price increases of Ndicore,
coreboard and other paper supplied by first appellant
for the
production of heavy industrial cores and tubes could be introduced,
could be sustained and passed on to consumers without
effective
resistance, notwithstanding the continued existence of other
producers of cores and tubes such as Framen.
[36] To a
considerable extent, the responses to these three questions depend
upon the particular theoretical approach adopted by the
adjudicating
authority.
THE
THEORETICAL FRAMEWORK FOR MERGERS.
[37] Mr
Unterhalter who appeared together with Mr Gotz on behalf of
appellants, submitted that the Tribunal should have shown the
‘same
zeal’ in exploring the potential efficiencies of the transaction as
it did in its attempt to confirm an anti competitive
theory which
underpinned its entire findings. Underlying the arguments placed
before this court were different approaches to a vertical
merger;
thus appellants approached the dispute from the premise that the
transaction was efficiency enhancing.
[38] The
issue of the proper theoretical framework within which the Tribunal
is required to analyse a merger is of particular importance,
given
the wording of section 12 A(1) of the Act. This section provides
inter alia
that whenever required to consider a merger, the
Competition Commission or Competition Tribunal must initially
determine whether or
not the merger is likely to substantially
prevent or lessen competition. The test is not whether a merger
necessarily prevents or
lessens competition but whether it is likely
substantially to so prevent or lessen competition. As this court
observed in
Schumann (Sasol)(South Africa)(Pty) Ltd v Price’s
Daelite (Pty) Ltd
(unreported decision of the Competition Appeal
Court case No: 10/CAC/01) the decision required by S 12 A(1) must be
made on evidence
which is available to the Tribunal. In other words,
the Tribunal cannot base its decision upon ‘speculation of a kind
which cannot
be attributed to any evidential foundation placed
before the Tribunal’. But the prohibition against unjustified
speculation should
not be confused with the need for a predictive
judgment. The section enjoins the Tribunal to forecast a likely
possibility; that
is, it makes a predictive judgment, based on
evidence which has been placed before it. The issue of an underlying
theory is important
because, in coming to different predictive
judgments, appellants and the amici adopted different theoretical
frameworks within which
to evaluate the meaning of section 12 A.
[39] Appellant
submitted that vertical mergers are presumptively regarded as
efficiency enhancing. Relying,
inter alia,
on Roirdan and
Sallop ‘Evaluating Vertical Mergers: a Post Chicago Approach’
1995 (63)
Anti Trust Law Journal
513, Mr Unterhalter submitted
that anti trust law in general adopts the approach that cooperation
among firms in a vertical relationship
holds the potential for
greater efficiency than does cooperation among horizontal
competitors. As vertical mergers often do not
raise a significant
likelihood of consumer harm, it is unnecessary in most cases to
assess the efficiency benefits of a specific
proposed merger to
evaluate the net competitive impact thereof.
[40] Mr
Petersen submitted that a recourse to American economic theory which
was predicted upon the specific body of American anti
trust law
required qualification within the South African context. The idea
that a monopolist may decrease prices when its costs
are reduced
depends on an assumption that the monopolist can preserve or increase
profit by way of increasing the volume of sales
at the lower price.
This practice might well be successful within the context of a vast
continental market with a mass of affluent
customers, but, in a less
developed economy with a limited market afflicted by a monopoly
oligopoly, this form of generalisation
was less likely to hold.
Furthermore, even where efficiency and cost savings were
demonstrated, it did not follow that these benefits
would be passed
on to the ultimate consumers where a few producers had substantial
collective market power at several inter-connected
levels.
[41] In
support of this series of submissions, Mr Petersen cited Charles
Mueller
Anti Trust Law and Economics Review
volume 26 no. 4
(Glossary of Anti-trust terms) who describes an oligopoly thus:
‘A market
structure characterized by “fewness of sellers, as distinguished
from Atonomism (“many” sellers) and Monopoly (a
single seller).
Given a situation in which there are only a few sellers, a phenomenon
called “oligopolistic interdependence”
is expected. Whereas the
individual firm in an atomistic industry has such a small share of
aggregate industry sales that nothing
it can do will perceptibly
influence the overall market wide price (e.g., the withdrawal of its
entire supply from the market would
not affect that market price),
the individual firm in an oligopolistic industry is, by definition,
sufficiently large that any substantial
change in its output volume
will have a perceptible effect on the overall
market-wide
price-and hence on the volume of sales, and price received, by each
of its rivals. The latter are thus expected to notice these changes,
recognize their source, and take appropriate measures to protect
their respective interests.
A price
decrease, for example will normally prove unprofitable for the price
cutter. The others will promptly match his lower prices,
thus
removing any incentive for buyers to switch suppliers. With his
market share unchanged, but priced now at a lower level, the
price-cutter’s profits are presumably lower than before. Similarly,
a failure to go along with the price increase would generally
prove
unprofitable, since the others will quickly drop back to protect
their market share if there is a holdout still selling at
the lower
price, the result being that the holdout gets no increase in his
market share and foregoes higher per-unit price that all
could have
had if it had gone along with the change. By a series of such
adjustments, rational oligopolists are expected to eventually
arrive
at the price level that will maximise their joint profits, i.e. the
industry’s profit-maximising price level, the same price
as that a
single-firm monopolist would charge.
The
possibility of this result actually being reached is dependant on
other factors, however, particularly on (1) whether the industry
in
question belongs to the Tight Knit or Loose sub category of
oligopoly, that is whether its concentration ratio is very high or
only moderate, and (2) whether its entry barriers are high enough to
permit the exercise of that pricing policy without inducing
new
entry.’
[42] Mueller
defines a Tight Knit oligopoly as ‘a market structure so highly
concentrated that prices are expected to be significantly
above, and
output significantly below, the competitive norm. In general,
….studies suggests that this result is to be expected
when the four
largest sellers have 50% or more of the sales in the market or when
the eight largest have 70% or more’.
[43] This
latter definition is relevant to the present dispute in that, on the
evidence, first appellant and Sappi each produce about
38% of the
requirements of the South African market for core-board. First
appellant produces 33% and Sappi 51% of the requirements
of the South
African market for pulp, paper and wood chips. This represents a
very high concentration of ownership in relation to
production and
supply of materials for cores and tubes. Both Sappi and first
appellant are also major producers of products which
are wound onto
the heavy industrial cores and tubes. They are also important
purchasers in the market supplied by the producers of
cores and
tubes. Mr Davies divisional managing director of second appellant
confirmed that ‘Mondi and Sappi ..are the two dominant
users of
cores’.
[44] South
African competition authorities should be careful to base a decision
on the presumptively efficiency enhancing approach
to mergers coupled
with otherwise benign consequences. The Chicago school’s approach
to vertical mergers (following their critique
of the restrictive
approach to mergers in
Brown Shoe Co v United States
[1962] USSC 112
;
370 US
294(1962)
was based upon two assumptions being, (1) that while a
vertical merger may foreclose rival firms’ access to the supply of
inputs,
it does not mean that the net supply of inputs available to
those rival firms has been reduced and (2) that vertical mergers
carried
out by a monopolist cannot enhance monopoly power. Both of
the assumptions have come under searching scrutiny. See, for
example,
Herbert Hovenkamp ‘
Antitrust policy after Chicago’
1985(94) Michigan Law Review 213.
[45]
The article by Riordan and Sallop, supra afford further significant
theoretical insight into the assumptions generated by the
Chicago
School (see Robert H Bork
The Anti-Trust Paradox
(1978). The
authors observe that ‘some vertical mergers…. have the potential
for anti competitive effect by creating, enhancing
or facilitating
the exercise of market power. The competition affected may be in the
sale of input produced by one merger partner
(“the upstream” or
“input” market) the sale of the products produced by the other
merger partner that uses these inputs (“the
downstream” or
“output” market) or in markets that are ancillary to the input
and output markets.’(at 519). The authors
then observe that
anti-trust concerns regarding these anti competitive effects flow
from three main sources, being (1) vertical mergers
can lead to
exclusionary effects by increasing rivals’ costs of doing business
which may involve raising input costs by foreclosing
access to
important inputs or foreclosing the access to a sufficient customer
base, (2) by facilitating tacit or express coordinated
conduct by
facilitating the exchange of pricing and other competitively
sensitive information in either the input or output market
and (3) by
permitting a firm to evade a variety of pricing regulations such as
where a vertical merger can help a regulated firm
to evade
cost-based, maximum price regulations by setting an artificially high
transfer price on inputs sold by the upstream division
to the
downstream division and as a result shift profits from the regulated
to the unregulated market. (at 519-520).
[46] In
assessing the effect of a proposed merger, an assumption of
efficiency enhancement cannot trump nor should it prevent an enquiry
into the manner in which market pricing is exercised, viewed in terms
of the structure of the market. Hence, the very assumption
upon which
appellants have based their attack has but limited analytical
purchase in this the South African legislative context.
[47] The
examination of theoretical approaches has been conducted without
recourse to the Act. Brassey et al
Competition Law
(2002)
at 30 suggest that the ultimate concern of merger control ‘is not
with dominance or (what amounts to much the same thing)
the number of
participants in the market, but with the greater harm to the market
that large firms can potentially wreak’.
[48] The
assessment of harm has to be analysed within the specific framework
of the Act. This enquiry necessitates recourse to the
preamble to
the Act and the purpose thereof as set out in section 2. These are
important sources for interpretative guidelines (see
also section
1(2) of the Act). Thus care must be taken before an uncritical
borrowing of traditional anti-trust economic theories,
as developed
in the United States of America, encrust the process of
interpretation of our Act. Unlike much comparative competition
law,
the Act specifies among overall its purpose of the maintenance of
competition, that small and medium size businesses have
an equitable
opportunity to participate in the economy and that there be promotion
of a greater spread of ownership, in particular
to increase the
ownership stake of historically disadvantaged persons (section 2(e)
and (f) of the Act).
IMPORTS.
[49] Appellants
placed considerable reliance on the Competitiveness Report which
contained a table setting out the estimated market
share of
competitors in respect of the product sold by Mondi Cartonboard. The
figure for imports including Europe and from the East
was estimated
at 24%.
[50] Mr van
Breda, general manager of Mondi Carton boardtestified before the
Tribunal as follows: ‘Currently the market, as I
see it, is
extremely competitive and imports is (sic) possible low cost
alternative in the business…’ He further informed the
Tribunal
that ‘imported paper is the real threat to Mondi… The threat of
substitutability is great’.
[51] Mr
Unterhalter submitted that the evidence available from ‘the smaller
players in the cores and tubes manufacturing market’
did not assist
in answering the critical question as to whether they would turn to
imports if first appellant and Sappi significantly
raised the price
of their core board. He referred particularly to evidence which
suggested that all of the smaller manufacturers
had imported core
board in the past. Mr Unterhalter then examined the evidence of Mr
Davies, a representative of second appellant
who testified as
follows:
‘MR
UNTERHALTER. Could we just talk a little bit about imported paper?
It has been suggested by the Competition Commission that
effectively
this market can’t utilise imported products, one, because they say
they are too expensive, that the exchange rate is
adverse and that
there is so much inconvenience and holding costs and difficulty of
securing supplies that, practically speaking,
imports are not an
option for local manufacturers. Could you comment on that
proposition?
MR DAVIES:
That’s totally incorrect. I would just like to allude to is the
fact that we placed an order two (2) days ago for two
hundred (200)
tons of imported paper at a very competitive price.
MR
UNTERHALTER. Where did you source that paper?
MR DAVIES.
From Finland.
MR
UNTERHALTER: Where are the sources of paper that would be, imported
paper, that would be utilised in this industry?
MR DAVIES:
Obviously the whole, I mean there are lots of manufacturers in
Europe, but if I can just tell you from where we have imported,
we
import from Finland, from the UK, we have imported from France, from
Indonesia, those are probably, and the US.’
On the basis
of this evidence Mr Unterhalter contended that, on a balance of
probabilities, there was insufficient evidence to conclude
that
imports were likely to have little constraining effect on the prices
of first appellant and Sappi.
[52] In my
view, these submissions do not deal with the essence of the
Tribunal’s findings. The Tribunal found that high quality
European
core board might be used in small volumes for the manufacture of
particularly demanding cores but would not be a viable
general
alternative to local supplies of core board because it was extremely
costly, both as a result of its quality and the depreciation
of the
rand.
[53] While
the Tribunal did recognise that small producers from other developing
countries (such as Indonesia) may provide a viable
alternative, it
concluded that the board produced by these countries was of a lower
quality. It also referred to the reaction of
first appellant when
second appellant had attempted to import core board from Indonesia.
The Tribunal concluded that it was likely
that only the smaller
cores and tubes manufacturers would be potential importers of core
board, but ‘in relying on imports they
all face reduced certainty
in the source of supply of their critical input; in order to take
advantage of volume discounts and deductions
in transport costs they
will have to purchase input in greater volume and face concomitantly
larger storage and finance charges;
they will have to cope (without
commanding the resources necessary to hedge large foreign exchange
exposures) with the volatility
that characterizes emerging market
exchange rates; they will, given Sappi’s injunction, cut
themselves off from Sappi’s customers;
and they run the risk, as
the much larger KC&T earlier discovered, of incurring Mondi’s
wrath’.
[54] These
conclusions were also supported by other witnesses who testified
before the Tribunal. Mr Silva, who has been associated
with the
industry for twenty years and who had recently started a company
called Diversified Cores and Tubes testified thus: ‘If
you can
give me an alternative product, …that can do exactly the same job
that Ndicore does, I have got no qualms ….I can’t
source it. We
can import paper better but when you have got the fluctuation of the
exchange rate the way it is at the moment the
prices are just not
compatible. And then inventory, you have got to keep stocks for a
much longer period. So we will be at a total
disadvantage’.
[55] He went
on to say that ‘[i]f you take your imports, price of imports in
comparison to local based prices, you are probably
looking at the
difference of about five percent (5%) if that, because the Rand in
the last week, as you know has appreciated in
value. But the Rand is
very volatile, look what happened last year. So if you tell me that
imports would be a secure option in the
future to come, I don’t
think I would be able to accept that, I don’t think there is a
guarantee whatsoever’.
[56] This
view was supported by Mr Peter Jooste of International Tube
Technology who testified that his company had previously imported
paper but no longer did so because of a volatile exchange rate.
[57] Of particular significance was the evidence
of Mr Bouzaglou, managing director of Framen which was described by
the Tribunal
as second appellant’s largest rival. Fifty two percent
of Framen’s annual turnover was derived from sales to first
appellant.
Mr Bouzaglou described how Framen had sought to develop a
relationship with a paper manufacturer in Zimbabwe, in order to
obtain
an additional source of supply. His explanation is
significant (albeit that the wording of his testimony is hardly the
essence of
clarity) 'I know where you live …we are busy with
another paper manufacturer out of the country in Zimbabwe. And now it
is a concern
to us the story of the Mondi and Kohler and all of that.
Even what you said sir you know about are you going to join Sappi.
Sappi
can turn around and put you in the same situation and next
year too. We’ve gone even two steps ahead by looking to bring
paper
and helping another guy that makes wood the same as Mondi to
make paper for the core industry. We succeeded to make that payable.
The same thing as what we helped Mondi building the Ndicore. We
helped this guy to make the paper and we are very pleased with our
result. So you know what ? If Sappi wants to play around we can
bring paper, so we’re not concerned’.
[58] These
protestations of a lack of concern notwithstanding, Mr Bouzaglou’s
evidence indicated the necessity for Framen to find
an alternative
supplier so as not to be vulnerable to the exercise of the power of
first appellant and Sappi. Somewhat later in his
evidence in an
exchange with Mr Unterhalter, Mr Bouzaglou testified as follows:
‘ADV
UNTERHALTER. Yes, yes. Now just lets just analyse what your options
are as far as moving to other papers. As I understand
it in respect
of the very, very high crush strength, even Indicore [Ndicore] by and
large isn’t good enough. You’ve got to have
imported paper
anyway.
MR BOUZAGLOU.
Ja. That’s for certain cores, ja.
ADV
UNTERHALTER. Yes. So the only area where Indicore can be advantageous
if the price is right is for not the very highest crush
strength but
for those customers who require a particular crush strength like,
well you tell us, what’s the sort of crush strength
where you would
be looking to use Indicore?
MR BOUZAGLOU:
Okay. The Indicore you can use it in ninety nine comma nine percent
(99,9%) of the market and the high crush imported
paper is used in
like one (1) to two (2) percent of the market. So the Indicore you
can use it everywhere.
ADV
UNTERHALTER: Yes. What I’m asking you is that if the price, if
Indicore became non-available….
MR BOUZAGLOU:
Ja?
ADV
UNTERHALTER: Or if the price of Indicore was increased very
substantially….
MR BOUZAGLOU:
Ja?
ADV
UNTERHALTER: Where would you be left? What would you do?
MR BOUZAGLOU:
I would have gone into Kraft.
ADV
UNTERHALTER: You’d go into Kraft?
MR BOUZAGLOU:
Ja.’
[59] This
passage from the record indicates that Framen was not prepared to
accept imported paper as a general substitute for Ndicore.
The
substitute for Ndicore could only be Kraft which would inevitably
draw Framen back into the scale of influence of first appellant
and
Sappi. Furthermore as Mr Petersen submitted, Zimbabwe, as was
evident from the Competitiveness Report, has no significant track
record in this area. In the context of the present political and
economic circumstances of Zimbabwe, Mr Petersen was justified in
submitting that dependence on supplies from that country could hardly
be considered to be a satisfactorily viable option for South
African
cores and tube producers to reliance upon Sappi and first appellant.
[60] Much was
made of the volatility of the South African rand. Mr Unterhalter
submitted that there was no evidence that the rand
would continue to
be volatile. By contrast, the Tribunal, staffed with expert
economists, arrived at the opposite conclusion, on
the basis of
evidence of the overall pattern of the rand over the past number of
years. For these reasons it cannot be expected that,
following the
merger of first and second appellant, the availability of imported
paper input suitable for the manufacture of heavy
industrial cores
and tubes would exert significant competitive pressure upon Sappi and
first appellant. In other words, the conclusion
of the Tribunal that
the supply of imports would be insufficient to mitigate any effective
foreclosure of the supplier of core board
inputs is not one which
justifies interference from this court. In my view, it is the most
reasonable conclusion based upon the evidence.
THE POSSIBILITY OF COMPETITIVE PARALLEL CONDUCT BETWEEN FIRST
APPELLANT AND SAPPI.
[61] Appellant attacked the approach adopted by
the Tribunal that the merger was designed to foreclose inputs
utilised by rival manufacturers
of cores and tubes. The Tribunal had
concluded this part of its determination thus: ‘We are concerned
that the transaction is the
centre-piece of the strategy designed to
facilitate the flow of price and other competitor sensitive
information between Mondi and
Sappi thus cementing the domestic
duopoly, indeed cartelising a number of segments of the broad
domestic paper manufacturing market’.
[62] In my view, appellants are correct in their
submission that there was no evidence to justify the conclusion of a
conscious strategy
of foreclosure which motivated the merger. That
the Tribunal might have been unimpressed by the explanations of first
appellant
as to the business motivation for the merger is one issue.
That it adopted the view that the merger was designed to create an
opportunity
for monopoly pricing through parallel conduct with Sappi
is another proposition and it was one which was never put to any
witness
nor was counsel for the merging parties asked to address the
Tribunal’s concern. In this regard Mr Petersen’s observation that
inferences should be conservatively drawn and not over elaborated is
advice which the Tribunal should have followed. Nonetheless,
the key
question which arises is whether, on the evidence available to the
Tribunal, there was a clear justification for the conclusion
ultimately reached, namely that the merger was likely to have
substantial uncompetitive effects.
[63] Mr Unterhalter submitted that in order for
the finding that ‘potential entrants at the cores and tube
manufacturing stage
of the production process would find their source
of core board effectively foreclosed by the collective dominance of
Mondi and Sappi’,
a number of hypothesis had to be sustained:
(i)
appellant would ‘self deal’ by largely confining its sales of
Ndicore to the integrated second appellant and the latter would
largely confine its purchases of core board to that sold by first
appellant
(ii) after the merger Sappi would have an
effective monopoly and would increase the price of the kraft paper
that it sold to monopoly
levels.
(iii) Imports from
inter alia
Indonesia
and other developing countries would not be purchased by cores and
tubes manufacturers if Sappi charged a monopoly price.
First
appellant would follow any monopoly price increase by Sappi,
permitting it to extract monopoly rents when supplying core board
to
non-integrated cores and tubes manufacturers in a downstream market.
The
object of input foreclosure would be achieved through tacit
co-ordination between first appellant and Sappi.
[64] Regarding
the question of self dealing, Mr Unterhalter referred to the
following evidence of Mr van Breda:
‘MR
COETZEE. Could you give us an indication on what your approach would
be as regards the business that Mondi is presently allocating
to
Framen? What would happen to that business?
MR VAN BREDA:
As far as possible I’d like to keep business as usual as it
currently is structured in the industry.
MR COETZEE:
Are you telling us that post-merger Mondi, having absorbed Kohler,
you will still outsource Mondi business to Framen?
MR VAN BREDA:
I’d outsource it to other people, provided they are cost
competitive. I think it would be inordinately risky to bring
all the
business in-house for a group as large as Mondi.’
Mr van
Breda then went on to testify as follows:
‘MR
COETZEE: Taking what you’ve just said into consideration would you
then say that imported paper is a real threat to Mondi
and with
specific reference to Indicore?
MR VAN BREDA:
Absolutely. Not only imported paper but also papers available in
South Africa. The threat of substitutability is great.
MR COETZEE: Will Mondi post-merge allow Kohler or
the division that will be Kohler to source raw material at the
cheapest possible
prices or will you expect them to source from Mondi
alone?
MR VAN
BREDA: They have to source at the cheapest possible price if we’re
going to make this acquisition pay and it has to be the
best cost
decision for the other divisions. We operate on a very decentralised
basis in Mondi, so the divisions make their own decisions
largely.
MR COETZEE:
Perhaps asking the previous question just in another way, post-merger
are you going to manufacture all your own requirements in-house?
MR VAN BREDA:
I already gave the answer to that. I said it will be inordinately
risky for us to do all of that. And secondly I do
believe by doing
that we won’t have an opportunity to cross-benchmark ourselves as a
known internal operation. So the answer to
that is no, we won’t’.
(emphasis added by appellants).
[65] In
short, Mr van Breda testified that first appellant would continue to
source cores and tubes from manufacturers such as Framen
and that
second appellant would continue to source core board from suppliers
other than first appellant.
[66] However
upon closer examination, Mr van Breda’s evidence reveals that he
acknowledged that the plant that manufactures Ndicore
suffered from a
definite capacity constraint. First appellant did not have sufficient
capacity to supply the needs of the entire
South African packaging
and industrial market.
[67] Mr van
Breda also conceded that cores and tube manufacturers who did not
have
contractual
supply relationship with first appellant (such as Framen and second
appellant) would have to take their changes and
obtain supply on the
spot market, thereby being placed in a far more vulnerable
proposition
[68] In
the context of a post merger market, there is a clear basis for
drawing an inference that second appellant, as a vertically
integrated manufacturer, would continue to receive priority in
supplies over other manufacturers. While there is no direct evidence
that first appellant would be likely to restrict supplies of Ndicore
to non-integrated cores and tube manufacturers after the merger,
the
existence of an acknowledged capacity constraint, and the legitimate
inference that first appellant would, in all probability,
give
priority to the firm which it acquired (second appellant) constituted
a sufficient justification for a conclusion that, post-merger,
there would, in all likelihood, be a restriction of suppliers of
Ndicore to non-integrated cores and tube manufacturers.
[69] Turning
to the question of whether Sappi would have an effective monopoly and
thus increase the price of its kraft paper, the
evidence indicated
that manufacturers of cores and tubes, particularly second appellant,
had been able to buy supplies from either
Mondi or Sappi and thus
ensure that the pricing of supply would reflect competitive levels.
Manifestly, the merger would be likely
to have the effect of
substantially curtailing customers’ ability to so do. Mr
Bouzaglou’s testimony, in which he expressed concern
about being
susceptible to the power of Sappi following the merger and hence was
seeking an alternative source outside South Africa,
supports this
conclusion.
[70] Given
the nature of the duopoly, Sappi would be able to pass on increased
prices it is charged as purchaser of cores and tubes
to its own
customers. First appellant as the other duopolist would be able to
do likewise. Accordingly, Sappi would suffer no risk
of losing its
market to first appellant as a result of these price increases. This
practice would be made all the easier because
the price of cores and
tubes constitutes so small a component of the price of the composite
products sold by Sappi. Hence the latter
would not face any
significant resistance from its customers following the price
increase.
This
conclusion is supported by the Tribunal’s finding regarding low
price elasticities that characterise the cores and tubes market.
[71] On this
basis there is clear support for the Tribunal’s conclusion that
there would be ‘little to prevent Sappi from exercising
its new
found market power by charging a monopoly price for its core board,
Spiralwind. To the extent that Mondi’s newly merged
entity
continues to participate in the market (that is to the extent that it
does not exclusively self deal but rather continues
to supply some
Ndicore to non integrated cores and tubes manufacturers) it will have
no interest in increasing output and decreasing
prices in order to
wrest market share from its rival, Sappi. On the contrary Mondi’s
best interests would simply lie in following
Sappi’s price increase
thus permitting both producers of core board to extract monopoly
rents from non integrated cores and tubes
manufacturers in the
downstream market.’
[72] Mr
Unterhalter sought to counter this conclusion by contending that it
would be irrational for Sappi to charge its clients at
the cores and
tubes manufacturing level a price above the competitive level because
Sappi itself was a downstream customer of such
manufacturers. This
submission overlooks the fact that Sappi is but one of the customers
of the manufacturers to whom it will be
able to supply paper at an
increased price. Therefore, whatever cost it incurs pursuant to the
increase which it bears as a downstream
customer, would be recouped
from its other customers.
The
influence of a theoretical approach
.
[73] To a
large extent, these conclusions depend upon the manner in which the
duopoly between first appellant and Sappi is analysed.
Mr Unterhalter
urged that this court should not presume the existence of
collaborative behaviour by oligopolists; in this case duopolists.
Fundamental to appellants’ approach was the submission that the
structure of an oligopolistic market does not constitute evidence
of
a probability of uncompetitive parallel conduct. Such conduct is
nothing more than a possibility. Although the issue of theory
has
been examined in general, it is necessary to analyse appellants’
specific submissions regarding tacit coordination, themselves
a
product a particular the vertical approach.
Mr
Unterhalter relied heavily on the decision of the Appeal Court of
Justice in
Airtours plc v Commission of the European Communities
(6 June 2002) in support of his argument that the Tribunal’s
theory of how the strategy of tacit coordination will operate in
practice
suffered from serious flaws. The relevant passage of the
judgment reads thus:
‘As the
applicant has argued and as the Commission has accepted in its
pleadings, three conditions are necessary
for a finding of
collective dominance as defined
:
first, each
member of the dominant oligopoly must
have the ability to know how
the other members are behaving in order to monitor whether or not
they are adopting the common policy.
As the Commission
specifically acknowledges, it is not enough for each member of the
dominant oligopoly to be aware that interdependent
market conduct is
profitable for all of them but each member must also have a means of
knowing whether the other operators are adopting
the same strategy
and whether they are maintaining it. There must, therefore, be
sufficient market transparency for all members of
the dominant
oligopoly to be aware, sufficiently precisely and quickly, of the way
in which the other members' market conduct is
evolving;
second,
the
situation of tacit coordination must be sustainable over time, that
is to say, there must be an incentive not to depart from the
common
policy on the market
. As the Commission observes, it is only if
all the members of the dominant oligopoly maintain the parallel
conduct that all can
benefit. The notion of retaliation in respect
of conduct deviating from the common policy is thus inherent in this
condition. In
this instance, the parties concur that, for a
situation of collective dominance to be viable, there must be
adequate deterrents to
ensure that there is a long-term incentive in
not departing from the common policy, which means that each member of
the dominant
oligopoly must be aware that highly competitive action
on its part designed to increase its market share would provoke
identical
action by the others, so that it would derive no benefit
from its initiative (see, to that effect,
Gencor v Commission
,
paragraph 276);
third, to
prove the existence of a collective dominant position to the
requisite legal standard,
the Commission must also estabish that
the foreseeable reaction of current and future competitors, as well
as of consumers, would
not jeopardise the results expected from the
common policy
’ (at para 62, appellant’s emphasis).
[74] Mr
Unterhalter submitted that, in order for the Tribunal to have
concluded that there was tacit coordination between first
appellant
and Sappi, it would have had to establish (1) that the two parties
had the ability to know how the other was behaving
in order to
monitor whether or not they were both adopting the common policy of
input foreclosure, (2) the policy would have to be
sustainable over
time so that there was no incentive to depart from the policy and
(3) the foreseeable reaction of current and
future customers such as
Framen and ITT as well as customers such as Columbus Steel would not
jeopardise the result expected from
the common policy.
[75] In my
view, these submissions did not take sufficient account of the
specific context of the market in which this disputed transaction
must be evaluated. The facts of this case show that substantial
market power exists in the hands of two parties and is likely to
be
strengthened significantly if the merger takes place.
[76] The
structure of the market reveals that, insofar as the estimated
national market share for the products manufactured by second
appellant and its competitors are concerned, it dominates the market
(45% market share of the cores and tubes, 65% of angle board,
33% of
dufaylite and 75% of textile cones). The estimated market share for
raw materials supplied to the cores and tubes, angle
board, dufaylite
and textile cone markets are as follows: first appellant enjoys 38%
of the market share, Sappi 38% and 24% is supplied
by imports.
[77] In its
recommendations the Commission cast further doubt on the significance
of the role of imports. It said that it ‘has
its reservations
regarding these high import figures since all the competitors
contacted confirmed that imports are possible but
not economically
viable due to the exchange rate’. Based on this market share
information the Commission found that the market
were highly
concentrated, far above 1800 points in terms of the HHI calculation.
[78] Even the
merging parties acknowledged that the structure of the market was
susceptible to collusion prior to the merger. The
following passage
from a submission made to the Tribunal by appellants’ attorney’s
is illustrative:
‘The
Commission’s conclusion that the merger is anti competitive because
this strategy is likely to occur following the merger
and that the
merger should therefore be prohibited is flawed for the following
reasons….Absent the merger, the upstream market
is oligopolistic in
nature. Structural conditions in the upstream market thus are such
that Mondi would be able to pursue a collusive
strategy with Sappi in
any event should it wish. The merger certainly does not enhance the
possibilities for collusion between Sappi
and Mondi. In addition,
the dangers of relying solely on structural conditions to conclude on
potential conduct post transaction
are well known’
In the light
of the context of the market in terms of which this merger
transaction has taken place, the conclusion of the Tribunal
that the
requirements as set out in the
Airtours
case are easily met,
namely that the two parties have the ability to know how the other
behaves so as to monitor common practices,
sustainable tacit
co-ordination and the inability of competitors (who do not
effectively exist) and customers to jeopardise the results
obtained
from the common practice is manifestly reasonable.
CONCLUSION
[79] The
evidence on the record clearly supports the Tribunal in its
conclusion that ‘importing carries considerable risk for local
downstream producers. And the South African market for core-board,
with the lions share foreclosed by the actions of the powerful
domestic duopoly will not be an attractive market for exporters’.
[80] Once it
is decided that the importation of supply is not a viable option to
the supply of the products produced by first appellant
and Sappi, it
becomes critical to examine, on the basis of the available evidence,
whether uncompetitive parallel conduct between
first appellant and
Sappi will be rendered more likely as a result of the proposed
merger.
[81] In this
assessment, it is important to emphasize that a finding of
uncompetitive motive or intention is unnecessary in the
determination
as mandated by section 12 A of the Act. The question,
of which the section requires an answer, is whether the merger is
likely,
on the available evidence, to have substantial anti
competitive effects. Given the structural relationship between first
appellant
and Sappi, the likelihood is that, post the merger, second
appellant will continue to receive priority of supply over other
manufacturers
in the downstream market. There is clear evidence,
particularly provided by Mr Bouzaglou, that manufacturers such as
Framen will
increasingly be dependent upon Sappi for supply as a
result of the merger. It therefore follows that the possibility of
having to
pay higher prices to Sappi can only be offset by seeking
alternative sources for paper supplies outside of South Africa,
arguably
at a higher price, which increases will then, in turn, be
passed on to consumers.
[82] There is
also a realistic likelihood that the merged entity will largely self
deal. Once that occurs other cores and tubes manufacturers
are
effectively left with Sappi as the supplier to provide for its
requirements of core-board, by way of a supply of Spiralwind.
ALLEGED UNFAIRNESS.
[83] Appellants raised the issue of compliance
with the
audi alteram partem
rule by the Tribunal Mr
Unterhalter contended that the particular construction of the Act and
its application to the evidence relied
upon by the Tribunal in coming
to its decision that the proposed transaction substantially
prevented or lessened competition, was
not raised at the hearing in a
way which would have allowed appellants a proper opportunity to deal
with this approach.
[84] Although
appellants are correct that, where reasonably possible, the concerns
of members of the Tribunal ought to be indicated
so that they can be
adequately addressed by appellant, the test must be, whether on the
evidence which was led before the Tribunal,
there is a likelihood
that the proposed merger would substantially prevent or lessen
competition. Were this court to uphold an appeal
on the basis that
the precise nature of its particular conclusion was not put by the
Tribunal to appellants’ representatives at
the hearing before the
Tribunal, it would constrain the scope of the Tribunal’s activity
and render many sound decision susceptible
to a successful appeal in
most complex cases. The nature of the probabalistic enquiry mandated
by section 12 A makes it exceptionally
difficult for the Tribunal to
consider each and every implication of ‘probabalistic possibility’
at the hearing. An appeal must
test the essence of the finding
against the evidence on the record. As I am satisfied that, on the
evidence before it, the proposed
merger is likely to substantially
lessen or prevent competition, the appeal must be dismissed.
[85] At the
hearing, the Commission was represented by Mr Maleka and Mr Mokoena
who also submitted that, in the final analysis, the
transaction is
likely to lead to an increase in price and hence the non-integrated
parties will be forced to acquire raw material
at non-competitive
prices so that the transaction is likely to lessen competition.
The issue of
the
locus standi
of the Commission was raised by
appellants. In particular, Mr Unterhalter referred to S 17 of the
Act in terms of which the Commission
is precluded from being heard by
this Court, in that it is neither a party to the merger nor is it a
party contemplated in terms
of S 13 A(2).
Given the
conclusion to which I have arrived and the absence of a cost order
against appellants there is no need to decide this question.
However
there is some merit in the argument of appellants and it is
preferable if the Legislature were to examine the Act with a
view to
considering the desirability of the primary investigating agency, the
Commission having a right to appear in proceedings
of this nature.
[86] The
court wishes to record its appreciation for the considerable
assistance which it received from counsel for the amici, Mr
Petersen
and Mr Wilson.
ORDER.
The appeal
is dismissed. There is no order as to costs.
_____________
DAVIS
JP
HUSSAIN J
A and MAILULA AJA concurred.