Brief Summary

Competition — Merger approval — Momentum Group Limited acquiring African Life Health (Pty) Ltd — Competition Tribunal approval granted subject to conditions — The merger aimed to expand Momentum into new market segments while African Life sought access to Momentum's distribution expertise — Concerns raised regarding potential market power due to overlapping interests with Discovery Health, a subsidiary of FirstRand — Tribunal concluded that despite high combined market shares, the competitive dynamics and regulatory oversight mitigated anti-competitive risks, leading to approval of the merger.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings concerned a large merger before the Competition Tribunal of South Africa in terms of the Competition Act 89 of 1998. The Tribunal was required to decide whether to approve a transaction in which Momentum Group Limited (the acquiring firm) sought to acquire African Life Health (Pty) Ltd (the primary target firm).

The acquiring firm, Momentum Group Limited (“Momentum”), was described as a wholly-owned subsidiary of FirstRand Limited (“FirstRand”). The target firm, African Life Health (Pty) Ltd (“ALH”), was controlled by its holding company, African Life Assurance Company Ltd (“African Life”). The Tribunal’s competition assessment was materially influenced by the fact that FirstRand also had a controlling shareholding in Discovery Holdings Limited, which controls Discovery Health (Pty) Ltd (“Discovery Health”), another significant medical scheme administrator.

Procedurally, the Tribunal issued a Merger Clearance Certificate on 9 December 2005, approving the merger subject to conditions in terms of section 16(2)(b) of the Act. The judgment provided the Tribunal’s reasons for that decision, dated 3 January 2006.

The dispute concerned competition effects in the national market for medical scheme administration services, with the Tribunal focusing on how the transaction could affect competitive rivalry and create incentives for co-ordination between firms linked through common shareholding and cross-directorships, particularly between Momentum and Discovery-related entities.

2. Material Facts

Momentum was the acquiring firm and was wholly owned by FirstRand. Momentum controlled several subsidiaries, including Sovereign Health (Pty) Ltd, through which Momentum provided medical administration services and marketed and distributed a medical aid scheme referred to as “Pulz” (with Sovereign as the administrator). Momentum’s corporate group was thus active in medical scheme administration.

ALH was the target firm. It provided medical aid scheme administration services (including administration and risk management functions) to various medical aid schemes through various entities, including Ingwe Med (Pty) Ltd and Ingwe Med Risk Managers (Pty) Ltd. The Tribunal treated the transaction as creating an overlap in the market for medical scheme administration.

A central, undisputed structural fact was that FirstRand controlled both Momentum and Discovery Health (through Discovery Holdings), and that there were common directorships between the Momentum and Discovery corporate structures. The Tribunal noted that, in previous matters, it had raised concerns about the possibility of co-ordination given these structural links. In this merger, the Commission assessed the case on the basis that Momentum and Discovery Health belonged to a single economic entity, and the market share analysis in the record included an aggregated view under a “worst case scenario”.

The Commission calculated that, on an aggregated approach including Discovery, Momentum (via Sovereign), and ALH, the combined market shares could be 34.62% based on gross contribution income and 31.62% based on number of beneficiaries. The Commission nevertheless contended that the combined shares were unlikely to lead to market power because Discovery generated approximately 95% of its revenue from its own medical aid scheme; on that approach, excluding those beneficiaries would reduce the combined share to 12.77%. The Tribunal treated this as a key disputed analytical premise and rejected it.

The Tribunal accepted that there was evidence suggesting vigorous competitive rivalry between Momentum and Discovery at the time of the merger, including assertions by the parties and supporting statements in the record. However, the Tribunal treated as significant the evidence that strategic and financial information about the operating businesses could be discussed at holding company board level, and that common directors could be exposed to such information.

The Tribunal also treated as material the evidence indicating that Momentum, through Pulz and the acquisition of ALH, intended to expand into the lower income market and potentially compete for large public-sector related business (including reference in the record to competing for GEMS business), while Discovery also appeared to be participating in the low-income segment (including reference to a local government scheme moved into Discovery’s in-house portfolio and known as the LA Health Medical Scheme). These facts were treated as relevant because they suggested expanding overlap and increased strategic stakes in maintaining (or potentially softening) rivalry.

Finally, the Tribunal recorded that the merging parties offered to consider conditions addressing governance concerns, but at the hearing they refused to accept a condition that would eliminate cross-directorships at the holding company level, while indicating some willingness to eliminate cross-directorships at the operating company level. This refusal, considered in light of the Tribunal’s view that strategic issues were discussed at holding company boards, was treated as important to the ultimate remedial condition imposed.

3. Legal Issues

The central legal questions were whether the merger was likely to substantially prevent or lessen competition in the relevant market and, if so, whether conditions could appropriately address the identified competition concerns. The Tribunal also had to decide what the correct approach was to market definition and market share assessment in circumstances where a common shareholder controlled multiple significant participants, and where the parties contended that those participants nevertheless competed independently.

A key issue of application of law to fact concerned whether it was appropriate, for competitive assessment purposes, to treat beneficiaries of Discovery’s own medical aid scheme as outside the contestable market for administration services, given the Commission’s argument that Discovery earned most revenue from its own scheme. The Tribunal framed this as an analytical error affecting the competitive assessment.

Another central issue involved a forward-looking value judgment grounded in competition policy and risk assessment: whether the existing competitive rivalry between Momentum and Discovery would likely persist given the corporate governance structure, including cross-directorships, and whether that governance structure created an enhanced incentive or increased likelihood of co-ordination (including through the exchange of competitively sensitive information) post-merger.

Public interest considerations were also part of the statutory merger assessment, but the Tribunal recorded that no public interest concerns were raised by the transaction.

4. Court’s Reasoning

The Tribunal approached the matter by identifying the relevant overlap as the market for medical scheme administration, encompassing services such as administration, risk management (including claims processing and payment), monitoring of healthcare fund spend, information integration, and provision of management information to scheme trustees. It reaffirmed its prior finding that the relevant geographic market for these services is national, and stated that it saw no reason to depart from that in this matter.

In assessing competitive effects, the Tribunal accepted that, absent the structural link through FirstRand to Discovery, the acquisition of ALH by Momentum would not raise concerns. It referred to prior findings that barriers to entry in this market were low, and it noted evidence of switching activity by medical schemes between administrators, as well as the role of the Registrar for Medical Schemes in monitoring fees and regulating scheme–administrator relationships. These considerations, however, did not resolve the Tribunal’s core concern, which arose from the combination of the merger with FirstRand’s control over both Momentum and Discovery-related entities and the presence of common directors.

The Tribunal rejected the Commission’s contention that Discovery’s beneficiaries should be excluded from the contestable market because Discovery generated most of its revenue from its own scheme. It reasoned that administrators compete for beneficiaries, and that this competition occurs whether beneficiaries are linked through closed schemes, open schemes, or an administrator’s own scheme. The Tribunal considered it material that beneficiaries can change schemes and that administrators assist schemes in winning customers, such that members of Discovery’s scheme form part of the contestable space in which administrators compete, even if the scheme as a legal entity might not readily defect to another administrator.

Although the Tribunal accepted evidence that Momentum and Discovery were, at present, vigorous competitors, it distinguished the present state of rivalry from the future risk created by governance arrangements. It focused on whether the “overall governance structure and corporate governance issues” would allow competition to continue into the future, particularly as both firms appeared to be expanding into overlapping segments (including lower-income offerings and large tenders). The Tribunal considered that consolidation trends and strategic expansion could increase the incentive for co-ordination and reduce competitive pressure if rivalry between the two largest competitors (as characterised in the record) were softened.

On the question of remedies, the Tribunal treated the existence of common non-executive directors at holding company level as a serious concern because it could facilitate the exchange of competitively sensitive information and make possible a market-division strategy. It considered that removing cross-directorships only at operating company level did not resolve the risk where strategic matters were discussed at holding company boards. The Tribunal found it significant that the parties refused to accept the elimination of cross-directorships at the holding company level even after being given an opportunity to consult, and it described that position as incongruous given the acknowledged flow of strategic and consolidated financial information to holding company boards.

The Tribunal concluded that the merger should be approved subject to a condition addressing the cross-directorship problem. It emphasised that while the Competition Act did not outlaw cross-directorships between competing firms, the legislature’s “distaste” for such arrangements was reflected in the presumption created in section 4(2) concerning restrictive horizontal practices where firms share a significant interest or a director or substantial shareholder in common. This statutory reference was used to support the Tribunal’s concern that cross-directorships could be a “vehicle for collusion” and to justify a governance-focused condition designed to preserve rivalry.

5. Outcome and Relief

The Tribunal approved the merger in terms of section 16(2)(b) of the Competition Act 89 of 1998, subject to conditions. The condition required the elimination of cross-directorships between the Momentum and Discovery groups, both at the operating company level and at the holding company level. The condition further provided for the resignations of existing directors serving on both groups’ boards and sought to prevent cross-directorships in the future.

The Tribunal recorded that there were no public interest concerns raised by the transaction. The reasons as provided did not record any separate costs order.

Cases Cited

Momentum Group Ltd and Bonheur 94 General Trading (Pty) Ltd – Case No. 84/LM/Oct04.

Medicross Healthcare Group (Pty) Ltd and Prime Cure Holdings (Pty) Ltd – Case No. 11/LM/Mar05.

Sanlam’s takeover of Momentum’s stake in African Life – Case No. 81/LM/Aug05.

Legislation Cited

Competition Act 89 of 1998 (section 16(2)(b); section 4(2), with reference to restrictive horizontal practices referred to in section 4(1)(b)).

Rules of Court Cited

No rules of court were cited in the reasons provided.

Held

The Tribunal held that the relevant overlap was in the national market for medical scheme administration services and that, although Momentum and Discovery were presently vigorous competitors, the merger raised a material concern about the future preservation of rivalry given the corporate structure within FirstRand and the existence of cross-directorships.

It held that the Commission’s approach of excluding Discovery’s own scheme beneficiaries from the contestable market was incorrect for purposes of assessing competitive constraints, because administrators compete for beneficiaries and those beneficiaries form part of the contestable environment.

It held that to address the risk that cross-directorships could facilitate co-ordination and the exchange of competitively sensitive information between competing groups under a common parent, approval should be granted only subject to a condition eliminating cross-directorships at both operating and holding company levels, including the resignation of existing cross-directors and restrictions preventing such arrangements in the future.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger assessment must consider not only current competitive dynamics but also whether the transaction, combined with existing ownership and governance links, creates increased incentives or mechanisms for future co-ordination that may lessen competition, particularly where key rivals are connected through a common shareholder.

It applied and reaffirmed the principle that the market for medical scheme administration services is national in scope, and that competitive assessment must be grounded in how administrators compete for beneficiaries and scheme attractiveness, rather than limiting analysis to a narrow conception of third-party administration contracts divorced from beneficiary contestability.

It applied the principle that corporate governance structures, including cross-directorships, can constitute a mechanism for sharing competitively sensitive information and can therefore be relevant to merger conditions aimed at preventing a substantial lessening of competition. In support of this approach, it referenced the statutory presumption in section 4(2) of the Competition Act 89 of 1998 as indicative of legislative concern where competing firms share directors or substantial shareholders.

It applied the remedial principle that merger approval conditions may be imposed to preserve competitive rivalry by addressing structural features that create a risk of collusion or strategic collaboration, and that conditions must be framed at the level where strategic decisions are made if the concern relates to strategic information flow and co-ordination incentives.

Momentum Group Limited and African Life Health (Pty) Ltd (87/LM/Sep05) [2006] ZACT 1; [2006] 1 CPLR 171 (CT) (3 January 2006)