Summary of Judgment

1. Introduction

These were large merger proceedings before the Competition Tribunal of South Africa concerning two formally separate but interdependent transactions that were filed under different case numbers and heard simultaneously. The Tribunal issued Merger Clearance Certificates approving the transactions on 11 January 2006, and later furnished reasons for decision dated 23 February 2006.

In the first transaction (Case no: 110/LM/Nov05), the acquiring firm was Vodafone Group Plc (an English company) and the target firm was Venfin Limited. In the second transaction (Case no: 111/LM/Nov05), the acquiring firm was Business Venture Investments No 951 Limited (referred to as “Newco”) and the target firms were Venfin Group Finance (Pty) Ltd and others, being Venfin’s wholly owned subsidiaries identified in the reasons.

The general subject-matter of the dispute was whether the two interdependent transactions raised any competition concerns (including any change in control affecting market structure), and whether the transactions could or should be restricted on public interest grounds, particularly in light of a late objection contending that Venfin’s stake in Vodacom should have been sold to a BBBEE acquirer rather than to Vodafone.

2. Material Facts

Vodafone’s only identified interest in South Africa was a 35% shareholding in Vodacom Group (Pty) Ltd (“Vodacom”), a national cellular telecommunications network operator. Vodacom, through its subsidiary Vodacom Service Provider Company (Pty) Ltd, provided services including the sale and distribution of cellular handsets and accessories, and the supply of Vodacom cellular airtime on contract and prepaid bases.

Venfin Limited was an investment holding company with a range of investments, including telecommunications, technology, media and sport, and financial and risk services. For purposes of the merger, Venfin’s relevant telecommunications interest was that, through its subsidiary Venfin Telecommunication Investments Ltd, it held 15% of the issued share capital of Vodacom. Venfin also had several wholly owned subsidiaries, including Venfin Group Finance (Pty) Ltd, and other investment-related subsidiaries listed in the reasons.

A further structural fact relevant to control was that Telkom South Africa Limited (“Telkom”) owned the remaining 50% of Vodacom (with the other 50% held through Vodafone’s and Venfin’s combined interests). The parties’ position, accepted for purposes of the Tribunal’s analysis, was that pre-merger Vodafone, Telkom and Venfin exercised joint control over Vodacom, arising from the need for shareholder cooperation on certain strategic resolutions.

The first transaction entailed Vodafone acquiring all Venfin’s B ordinary shares held by Rembrandt Trust (Pty) Ltd (“Rembrandt Trust”), and making a general offer to acquire all or at least 90% of Venfin’s ordinary shares from other Venfin shareholders. The Tribunal recorded that the commercial rationale advanced by the parties was that Vodafone wished to increase its interest in Vodacom.

The Tribunal accepted that Vodafone was primarily interested in Venfin’s stake in Vodacom rather than Venfin’s other investments. Accordingly, the parties concluded a “sale of surplus assets” arrangement under which Venfin would dispose of its other interests (the “surplus assets”) to Newco. This disposal constituted the second transaction. Newco was described as a dormant investment company with no operational activities in South Africa, and was said to be likely to be controlled by Rembrandt Trust.

On the public interest aspect, the Tribunal received a last-minute written objection from two groupings identified as MYBICO and HBR Foundation. The objection was delivered in an unprocedural manner (arriving after proceedings were due to begin), the authors did not attend the hearing to speak to their submission, and the Tribunal made it clear that considering the objection as a submission did not mean the objectors were recognised as intervenors for purposes of section 53 of the Competition Act.

The Tribunal understood the nub of the objection to be that Venfin had failed to place its Vodacom stake in an “open bid” that would allow broader participation in the economy, and that the stake should have been sold to a “true BBBEE” at the same or even a subsidised value.

3. Legal Issues

The Tribunal was required to determine, first, whether the interdependent transactions were likely to result in a substantial prevention or lessening of competition in any relevant market. This was primarily an application of competition principles to the deal’s structure and to the parties’ activities, including whether the transaction involved a change in control of a competitively significant firm.

Second, the Tribunal was required to consider whether the merger raised concerns on public interest grounds, in particular the contention that the stake should have been sold to a BBBEE purchaser. This entailed questions of statutory power and interpretation, including the scope of the Tribunal’s authority under the merger control provisions and the meaning and reach of section 12A(3)(c) (effect on the ability of small firms or firms controlled by historically disadvantaged persons to become competitive).

A further procedural issue arose as to whether, and on what basis, the Tribunal would consider a late objection that was not properly brought and whose authors did not participate in the hearing. The Tribunal treated this as a matter of how to handle the submission, while emphasising limits on formal intervention.

4. Court’s Reasoning

On competition, the Tribunal focused on the effect of the first transaction on Vodafone’s interest in Vodacom. It recorded that Vodafone’s shareholding in Vodacom would increase from 35% to 50%, with Telkom holding the remaining 50%. However, it accepted the parties’ position that Vodacom was subject to joint control pre-merger and would remain subject to joint control post-merger. On that basis, the Tribunal concluded that the transaction did not lead to a change in control in a manner that would materially alter the competitive landscape.

The Tribunal also considered the second transaction, namely the disposal of Venfin’s “surplus assets” to Newco. It accepted that this disposal would not affect competition in any markets in which the parties were active. Newco had no prior operational activity in South Africa, and neither Rembrandt Trust nor its controlling shareholders were said to control other firms apart from an entity providing management and administration services to Rembrandt Trust’s subsidiaries. The Tribunal found that no vertical relationships arose as a result of the transaction.

Taking these considerations together, the Tribunal found that the transactions were not likely to lead to a substantial prevention or lessening of competition in any market.

On public interest, the Tribunal first dealt with the procedural posture of the objection. Despite the objection being raised at the last minute and brought in an unprocedural fashion, the Tribunal decided to consider it as a submission, but expressly stated that this did not amount to recognising the objectors as intervenors under section 53 of the Competition Act. The absence of the objectors at the hearing meant they did not address the Tribunal on their written assertions.

Turning to the substance, the Tribunal characterised the objection as seeking, in effect, to require that Venfin’s Vodacom stake be sold to a BBBEE acquirer rather than Vodafone. The Tribunal held that, under the Competition Act’s merger regime, it did not have the power to tell parties to whom they must sell. It stated that, at most, it was empowered to prohibit a merger on the grounds listed in the Act, and it reasoned that it followed from this statutory design that a party aggrieved because it was not chosen as purchaser had no remedy under the merger provisions on that basis.

The Tribunal considered the provision most closely aligned with the objection, namely section 12A(3)(c), requiring consideration of the merger’s effect on the ability of small firms or firms controlled by historically disadvantaged persons to become competitive. It rejected the contention that this provision could be read to empower the Tribunal to compel a sale to an acquirer of the Tribunal’s choosing, describing such an interpretation as requiring an “enormously ambitious” reading.

Finally, the Tribunal adopted an explicitly deferential approach to the public interest issue in circumstances where other regulatory instruments were better suited to address the equity concerns raised. Relying on its earlier approach in Shell/Tepco, the Tribunal stated that the competition authorities’ role in defending public interest aspects listed in the Act was, at most, secondary to other statutory and regulatory instruments. It identified, in this matter, the Telecommunications Act, the ICASA Act, and the ICT charter as more direct and appropriate vehicles for the equity issues raised by the objectors than the merger control provisions of the Competition Act. On this basis, the Tribunal concluded that the objection had no substance.

5. Outcome and Relief

The Tribunal approved both interdependent transactions without conditions.

No costs order was recorded in the reasons.

Cases Cited

Shell South Africa (Pty) Ltd and Tepco Petroleum (Pty) Ltd (Competition Tribunal of South Africa, Case Number: 66/LM/Oct01)

Legislation Cited

Competition Act (section 12A(3)(c); section 53)

Telecommunications Act

ICASA Act

ICT charter

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Tribunal held that the first transaction would increase Vodafone’s shareholding in Vodacom from 35% to 50% but would not result in a material change in control, because Vodacom was subject to joint control before and after the merger. It further held that the second transaction, involving the disposal of Venfin’s surplus assets to Newco, would not affect competition, including because Newco had no operational activities and no vertical relationships arose.

The Tribunal held that the late public interest objection seeking, in effect, to require a sale of the Vodacom stake to a BBBEE acquirer disclosed no basis for relief under the Competition Act’s merger provisions, because the Tribunal lacks power to direct parties as to whom they must sell to. It held that section 12A(3)(c) could not reasonably be interpreted to empower such an outcome, and that equity concerns of the kind raised were more appropriately addressed through sector-specific regulatory instruments rather than merger control.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger assessment under the Competition Act requires determining whether a transaction is likely to result in a substantial prevention or lessening of competition, which includes assessing whether the transaction entails a relevant change in control and whether the transaction creates horizontal or vertical competitive effects.

In relation to public interest in merger control, the Tribunal applied the principle that its remedial powers do not extend to directing a seller to dispose of assets or shares to a particular purchaser or class of purchasers, and that public interest provisions such as section 12A(3)(c) must be interpreted within the limits of the statutory merger control framework.

The Tribunal further applied the principle, drawn from its prior approach, that even where public interest considerations are listed in the Competition Act, the competition authorities’ role may be secondary where other statutory and regulatory instruments exist that address the relevant public interest concerns more directly and appropriately.