Harmony Gold Mining Company Limited and African Rainbow Minerals Gold Limited (25/LM/May03) [2003] ZACT 17 (19 March 2003)

78 Reportability

Competition Law

Brief Summary

Competition Law — Merger Approval — Harmony Gold Mining Company Limited and African Rainbow Minerals Gold Limited — Merger notification filed with the Competition Commission; Commission found merger unlikely to prevent or lessen competition in the relevant market; merger involves Harmony acquiring entire share capital of ARMGold to create South Africa’s largest gold producer; no significant impact on market concentration or public interest concerns; transaction approved unconditionally, advancing black economic empowerment through shareholding by historically disadvantaged individuals.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings concerned a large merger considered by the Competition Tribunal of South Africa, culminating in the issuance of a merger clearance certificate and written reasons for decision. The matter involved Harmony Gold Mining Company Limited as the primary acquiring firm and African Rainbow Minerals Gold Limited (ARMGold) as the primary target firm.

The procedural history reflected that the proposed transaction was notified to the Competition Commission on 25 June 2003. After completing its investigation, the Commission concluded that the merger was unlikely to prevent or lessen competition in the relevant market and recommended unconditional approval. The Tribunal issued a merger clearance certificate on 16 July 2003, approving the merger unconditionally, and subsequently furnished written reasons for that decision.

The general subject-matter of the dispute was the competitive and public-interest assessment of a transaction designed to create South Africa’s largest gold producer, including the effect of combining two significant South African gold producers in an industry where output is sold into an international bullion market and where refining capacity and arrangements may raise potential vertical considerations.

2. Material Facts

Harmony proposed to acquire the entire issued share capital of ARMGold. The transaction was framed as one that would create the largest gold producer in South Africa. The Tribunal recorded that implementation was subject to certain conditions, including the sanctioning of a Scheme of Arrangement by the High Court of South Africa (Witwatersrand Local Division) under section 311 of the Companies Act 61 of 1973. The parties further indicated that if the Scheme of Arrangement failed, Harmony would make a general offer to ARMGold’s shareholders under the rules of the Securities Regulation Panel, and that after the merger an application would be made to the JSE Securities Exchange for the delisting of ARMGold.

Both merging firms produced and supplied gold to the global market, and both were listed on the JSE Securities Exchange, with Harmony additionally listed on the New York Stock Exchange and on London’s FTSE. Harmony had no controlling shareholders and conducted gold mining, exploration, and related activities primarily in South Africa, Australia, the Russian Federation, and Peru. ARMGold was controlled by African Rainbow Minerals Investment and Exploration Company (Pty) Ltd (ARMI), which held 54.98% of ARMGold’s issued shares; ARMI in turn was controlled by Ubuntu-Ubuntu Commercial Enterprises (Pty) Ltd, which was controlled by the Kgabo trust whose beneficiaries were historically disadvantaged individuals. According to the parties’ information recorded by the Tribunal, ARMGold was South Africa’s fourth largest gold producer and the eleventh largest worldwide, and it had no subsidiaries.

A further relevant structural fact was that ARMGold and Harmony each held 50% of ARMGold/Harmony Freegold Joint Venture Company (Pty) Ltd (Freegold). The parties presented the merger rationale as involving complementary management cultures and strategies, prior cooperation (including the Freegold acquisition), and expected synergies in the Free State by consolidating regional operations into a single unit to optimize infrastructure and ore-body exploitation. They also described the transaction as having a significant empowerment element, given ARMGold’s status as a major historically disadvantaged-persons-controlled mining company.

In relation to market operation, most gold produced in South Africa was refined into bullion at the Rand Refinery in Germiston and sold on the international bullion market. Harmony had its own refinery in Virginia, which was said not to be operating at capacity and capable of taking additional volume. However, the Tribunal recorded that the intention in the foreseeable future was for ARMGold production to continue to be refined at Rand Refinery, while acknowledging that it was conceivable that Harmony’s refinery could refine some or all of that production at a later stage.

On public interest, the parties stated at the hearing that no retrenchments were envisaged as a result of the transaction and that all ARMGold employees would be transferred to Harmony. The Tribunal also recorded that trade unions representing the majority of employees had been notified of the merger and none raised objections. The parties further asserted that the transaction would enhance job security and possibly create new job opportunities. They also indicated that historically disadvantaged individuals would hold approximately 26% of the issued share capital of the merged entity, and that Mr Patrice Motsepe would become non-executive chairman and play an active role in advancing the company’s long-term interests.

3. Legal Issues

The central legal questions the Tribunal was required to determine were whether the proposed large merger was likely to substantially prevent or lessen competition in the relevant market(s) identified, and whether any public interest concerns arose that would justify imposing conditions or prohibiting the merger.

The dispute as addressed by the Tribunal primarily concerned the application of competition-law evaluative criteria to economic facts, including market definition, market shares, concentration, and the characteristics of the gold market (particularly the extent to which producers could influence price). In addition, the Tribunal considered public interest considerations relating to employment effects and black economic empowerment as factual and evaluative matters relevant to the merger assessment.

4. Court’s Reasoning

The Tribunal approached the competition assessment by first identifying the relevant product and geographic markets. It determined that the relevant product market was the production and processing of gold. It further distinguished between the geographic market for production (an international market) and the geographic market for processing (a national market), reflecting that most South African gold is refined locally (predominantly at Rand Refinery) before being sold into the international bullion market.

Against this framework, the Tribunal evaluated whether the horizontal combination of the parties’ gold production would create or enhance market power. It emphasised the fragmented nature of international gold production and accepted as common cause that no single producer could influence the gold price. Consistent with its prior decisions, the Tribunal reiterated that gold producers are effectively price-takers, with the price determined by reference to daily price fixings of the London Bullion Association, and that the price is influenced not only by new production but also by the decisions of existing holders of gold.

The Tribunal then applied these principles to the parties’ relative positions. Although the merger combined the third and fourth largest gold producers in South Africa, the Tribunal’s focus remained on the international market for production, in which the merged entity’s estimated share was recorded as approximately 5.1% (based on estimated 2003 output). On the figures placed before it, the Tribunal concluded that the transaction would not significantly affect concentration in the relevant market and was unlikely to substantially prevent or lessen competition given the market’s characteristics and the merged entity’s relatively limited global share.

The Tribunal also noted the existence of potential vertical issues relating to refining, because Harmony owned a refinery capable of taking additional volume and ARMGold historically refined at Rand Refinery. However, it recorded that the foreseeable intention was for ARMGold production to continue to be refined at Rand Refinery, while acknowledging the possibility of future changes. On the information recorded, no vertical concern was found to arise that warranted intervention.

Turning to public interest, the Tribunal placed weight on the parties’ clear statement that the merger would not lead to retrenchments, that employees would transfer, and that organised labour had raised no objections. It also considered the asserted job-security benefits linked to operational synergies. In addition, the Tribunal treated the empowerment dimension as positive, noting ARMGold’s historically disadvantaged ownership and the envisaged shareholding of historically disadvantaged individuals in the merged entity, as well as the proposed leadership role of Mr Patrice Motsepe.

Having considered both competition and public-interest factors, the Tribunal agreed with the Commission’s recommendation that the merger raised no concerns on either ground and concluded that the transaction would advance black economic empowerment.

5. Outcome and Relief

The Tribunal approved the merger unconditionally and issued a merger clearance certificate to that effect (issued on 16 July 2003, with reasons dated 29 July 2003). No conditions were imposed. The reasons as provided did not record any costs order.

Cases Cited

ARMGold/Harmony Freegold Joint Venture Company (Pty) Ltd and St Helena Gold Mines Ltd (Competition Tribunal Case No.: 54/LM/Aug02).

Harmony Gold Mining Company Limited/Randfontein Estates Limited (Competition Tribunal Case No.: 16/LM/Feb00).

Randfontein Estates Limited/ Anglogold Limited (Competition Tribunal Case No.: 03/LM/Jan01).

Legislation Cited

Companies Act 61 of 1973, section 311.

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Competition Tribunal held that the merger between Harmony Gold Mining Company Limited and African Rainbow Minerals Gold Limited was unlikely to substantially prevent or lessen competition in the relevant market, particularly because gold production competed in an international market in which the merged entity’s estimated share was relatively small and producers were price-takers.

The Tribunal further held that the merger raised no public interest concerns on the facts placed before it, noting the parties’ representation that no retrenchments were envisaged and that the transaction would advance black economic empowerment through historically disadvantaged ownership participation and governance arrangements.

On this basis, the Tribunal approved the transaction unconditionally.

LEGAL PRINCIPLES

The Tribunal applied the principle that relevant market definition is central to merger assessment and may require distinguishing product dimensions (here, production and processing of gold) and geographic dimensions (international for production; national for processing) based on how the industry operates in practice.

In assessing unilateral market power effects in commodity markets, the Tribunal applied the principle—consistent with its prior merger decisions—that gold producers function as price-takers, with prices set by reference to internationally recognised benchmarks (the daily fixings of the London Bullion Association), and that no single producer typically has the ability to influence price in a fragmented global market.

The Tribunal further applied the merger-control principle that where a merged entity’s market share is modest in the relevant market and industry characteristics indicate limited capacity to exercise market power, the merger is less likely to substantially prevent or lessen competition.

Finally, the Tribunal applied the principle that merger assessment includes public interest considerations, including the likely effect on employment and the potential to advance black economic empowerment, and that clear factual commitments or uncontested representations on these matters may support unconditional approval where no countervailing concerns arise on the record.