Brief Summary

Competition Law — Merger Approval — Conditional approval of merger between Cherry Creek Trading 14 (Pty) Ltd and Northwest Star (Pty) Ltd — Cherry Creek, a newly formed company, acquires Northwest Star, a government-owned public transport entity, as part of a public tender process to extinguish judicial debt — No competition concerns identified due to lack of geographic overlap in services — Public interest concerns raised regarding employment and transparency of fare structures — Tribunal imposes conditions to ensure price transparency for consumers and protects employees through a moratorium on retrenchments for one year.

Comprehensive Summary

Summary of Judgment

1. Introduction

The matter concerned large merger proceedings before the Competition Tribunal of South Africa under case number 52/LM/Jul04, relating to a transaction in which Cherry Creek Trading 14 (Pty) Ltd (the acquiring firm, also referred to as “CCT” or “Bojanala”) acquired a division of Northwest Star (Pty) Ltd (the target firm, “NWS”), namely the Tlhabane business.

CCT was described as a newly formed company whose shareholders included Unitrans, Trans Africa Holdings (“TAH”), and Mvelaphanda Holdings (“Mvela”). NWS was described as a government-owned public transport company, with its shares held by Northwest Transport Investments (“NTI”), which in turn was held as to 65.5% by the North West Provincial Government (“NWPG”) and 33.5% by the Public Investment Commissioner.

The Tribunal conditionally approved the merger on 1 October 2004, and subsequently furnished its reasons for decision dated 20 October 2004. The proceedings were marked by a finding that the merger raised no competition concerns due to a lack of geographic overlap, but that it warranted conditions addressing public interest considerations, particularly relating to consumer transparency and employment protections.

The general subject-matter of the dispute concerned the acquisition of a subsidised commuter bus service business operated under a government contract in the North West Province, including issues arising from the privatisation/disposal process and the employment consequences of the transaction structure.

2. Material Facts

In March 1999, both NWS and its holding company NTI were placed under judicial management. The judicial managers were advised that, in order to extinguish the judicial debt, NWS’s various businesses should be disposed of through a public tender process. The transaction under consideration arose pursuant to that disposal process.

The business transferred to CCT comprised the government contract to supply subsidised commuter bus services from two depots in the North West Province, namely the Tlhabane depot and the Mogwase depot, together with 186 buses servicing those routes. The Tribunal accepted that commuter transport in the area was subsidised by the NWPG, and that the subsidy constituted guaranteed income to the operator for a seven-year period. Consumers also paid a cash fare calculated by an agreed formula and subject to annual increases.

A further material fact was the creation of an employee share trust intended to benefit employees of the acquiring firm, of whom 95% were historically disadvantaged persons. The Tribunal treated as material that the transaction structure changed during negotiations: the employee share trust would no longer hold a direct 15% interest in CCT, but instead would hold an indirect interest through 15% shareholdings in two entities, Class A Trading (“CAT”) (on behalf of TAH) and Expectra (on behalf of Mvela and Unitrans). The Tribunal accepted that this structural change did not affect the competition analysis, but did affect the public interest considerations.

As regards competitive conditions, the Tribunal relied on the fact that although some shareholders of CCT provided subsidised commuter bus services elsewhere, there was no geographic overlap between those services and the services offered by the target business being acquired in the North West Province.

Concerning participation at the hearing, the Tribunal recorded that the NWS Management Forum (representing retrenched employees) initially raised concerns but withdrew its objection in writing immediately before the hearing commenced. Two other participants made representations: the Coalition Group Against the Unfair Process of the Privatisation of NTI and the Transport and Allied Workers’ Union (“TAWU”), representing approximately 6.72% of employees in the business.

On employment consequences, the Tribunal relied on the sequence that the parties initially intended that CCT would be the operating company and the employer, with employees transferring in terms of section 197(2) of the Labour Relations Act, and that employee rights to employment were further guaranteed for a minimum of one year in the sale agreement. The Tribunal also relied on the later clarification that, notwithstanding a division of routes among entities, all employees would be employed by Expectra, creating uncertainty about the enforceability of undertakings originally made by CCT.

3. Legal Issues

The central questions before the Tribunal were whether the merger would result in a substantial lessening or prevention of competition, and, notwithstanding the absence of competition harm, whether public interest considerations justified conditional approval of the transaction.

The competition component largely concerned the application of law to fact, namely whether the absence of geographic overlap between subsidised commuter bus services meant there were no competition concerns requiring further intervention.

The public interest component required evaluative judgments about how to address concerns arising from (i) the grant and transfer of an exclusive right to provide a bus service on particular routes for seven years, including whether transparency protections should be imposed for consumers, and (ii) the adequacy and enforceability of employment-related undertakings in light of changes to the transaction’s operating and employment structure.

4. Court’s Reasoning

On the competition assessment, the Tribunal proceeded from the factual premise that there was no geographic overlap between the acquiring group’s existing subsidised commuter bus services and the routes covered by the target business. On that basis, it concluded that the merger raised no competition concerns requiring extended analysis, and that the merger would not lead to a substantial lessening of competition.

However, the Tribunal treated public interest considerations as requiring specific attention. It recorded complaints by the Coalition Group and TAWU. The Coalition Group’s concerns related to the privatisation process of NTI and alleged irregularities, including a complaint that commuters were not consulted or involved. The Tribunal did not indicate that it would review the tender or privatisation process as such; instead, it focused on the effects of the merger on consumers and public interest considerations within its merger assessment framework.

A key factual and evaluative premise was that the government contract gave CCT the exclusive right to provide bus services on the relevant routes for seven years. The Tribunal accepted that taxi services were the only alternative on those routes, and noted the Commission’s view that taxis were not an adequate substitute due to their relatively higher prices compared to buses. It accepted the parties’ submission that NWS had enjoyed the same monopoly before the transaction, meaning the exclusivity was not newly created by the merger, but transferred in identity.

The Tribunal nevertheless reasoned that the merger changed the incentives of the exclusive rights-holder because the contract moved from a parastatal to a private operator. It therefore considered it important that consumer protections contained in the contract (including the regulated fare arrangements) should be transparent to consumers to enable them to enforce their rights if necessary. In that context, and expressly linking the condition to competition and public interest considerations (with reference to section 12(3)(a)), the Tribunal imposed a condition requiring the merging parties to disclose the relevant contractual stipulations on fares to consumers through a newspaper advertisement or notices on buses.

On employment, the Tribunal treated as material the confusion and mistrust generated among employees represented by the minority union (TAWU), which it attributed to the nature of the tender process, communications, or both. It accepted that initial undertakings regarding a one-year moratorium on retrenchments and other employee protections were given in a context where CCT was expected to be the employer, but that the revised structure placed employment in Expectra. This raised the practical question, also raised by the Commission, of what value an undertaking by CCT had if CCT was no longer the employer.

The Tribunal required further clarification after the hearing and received a memorandum in which Expectra undertook to respect the one-year moratorium on retrenchments that had been associated with CCT. While welcoming the undertaking, the Tribunal considered that, given the history and the peculiar transactional arrangements, it was appropriate to ensure the undertaking was enforceable by making it a condition of merger approval. The Tribunal’s stated rationale was that the moratorium was otherwise an agreement between buyer and seller, not something an individual employee could readily enforce, and that this justified conditioning the merger to ensure that the undertaking “bites”. In adopting this approach, it referred to its prior approach in the Telkom/Praysa merger.

TAWU also sought a longer protection period than one year, arguing that the seven-year subsidised contract reduced future business risk and justified longer employment protection. The Tribunal accepted that the merging parties contended that risk remained, including the possibility that taxis could become a greater competitive risk. The Tribunal placed weight on the fact that the majority union, SATTAWU, representing approximately 90% of workers, accepted the undertaking, and it received correspondence confirming this. The Tribunal reasoned that it had to respect outcomes of collective bargaining, and that altering an agreed arrangement would undermine that process and create uncertainty. On that basis, it declined to extend the period beyond one year, while indicating more generally that each case would be assessed on its own merits and that variations could occur where circumstances were compelling.

5. Outcome and Relief

The Tribunal found that the merger would not lead to a substantial lessening of competition and approved the transaction, but did so conditionally in deference to the public interest issues identified.

The approval was accompanied by conditions directed at consumer price transparency and employment protection. The Tribunal indicated that one condition required the merging parties to make known to consumers, by newspaper advertisement or a notice on buses, the contractual stipulations concerning the fares that may be charged during the contract period. It also made the one-year moratorium on retrenchments a condition of approval, to ensure enforceability notwithstanding the revised employment arrangements placing employees in Expectra.

The reasons provided do not set out any separate costs order, and the Tribunal’s conclusion focused on conditional approval with conditions contained in an attached order (not reproduced in the provided text).

Cases Cited

Telkom SA Ltd, TPI Investments and Praysa Trade 1062 (Pty) Ltd (Competition Tribunal case no. 81/LM/Aug00).

Legislation Cited

Competition Act 89 of 1998, section 12(3)(a).

Labour Relations Act 66 of 1995, section 197(2).

Rules of Court Cited

No rules of court were cited in the provided reasons.

Held

The Competition Tribunal held that, because there was no geographic overlap between the acquiring group’s subsidised commuter bus services and those of the target business being acquired, the merger raised no competition concerns and would not substantially lessen or prevent competition.

The Tribunal further held that public interest considerations warranted conditional approval, particularly because the exclusive, regulated, subsidised contract would pass from a parastatal to a private operator, making consumer transparency regarding fare regulation important, and because revised transaction arrangements created a risk that employee protections would be inadequately enforceable unless embodied as merger conditions.

The Tribunal therefore approved the merger subject to conditions requiring disclosure to consumers of fare-related contractual stipulations and making the one-year moratorium on retrenchments a condition of approval, while refusing to extend the moratorium beyond one year in light of collective bargaining outcomes.

LEGAL PRINCIPLES

The Tribunal applied the principle that where a merger entails no competitive overlap in the relevant markets, it may be found not to result in a substantial lessening of competition, permitting approval on competition grounds.

The Tribunal applied the principle that merger control under the Competition Act may justify conditions addressing public interest considerations, including under section 12(3)(a), even where competition harm is not established, provided the conditions are directed at relevant public interest effects arising from the merger.

The Tribunal applied the principle that where employment-related protections are embodied in arrangements that may not be readily enforceable by individual employees—particularly due to transaction structures separating contract ownership from the identity of the employer—it may be appropriate to make those protections conditions of merger approval to ensure practical enforceability.

The Tribunal further applied the principle that, in considering whether to alter negotiated employment protections, weight may be given to the outcomes of collective bargaining, and that extending or changing agreed moratoria may be declined to avoid undermining bargaining processes and creating uncertainty, while acknowledging that such decisions remain context-specific.

Cherry Creek Trading 14 (Pty) Ltd and Northwest Star (Pty) Ltd (52/LM/Jul04) [2004] ZACT 67; [2004] 2 CPLR 281 (CT) (20 October 2004)