Evraz Group SA and Highveld Steel and Vanadium Corporation Ltd (04/LM/Jan07) [2007] ZACT 45; [2007] 2 CPLR 303 (CT) (6 July 2007)

78 Reportability

Competition Law

Brief Summary

Competition Law — Merger Approval — Evraz Group SA acquiring Highveld Steel and Vanadium Corporation Ltd — Competition Tribunal approving merger subject to divestiture conditions — Concerns regarding market competition addressed through commitments to divest vanadium interests — Tribunal satisfied that merger will not substantially lessen competition in identified markets.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings concerned an application for merger approval before the Competition Tribunal of South Africa in respect of a large merger between Evraz Group S.A. (the acquiring firm) and Highveld Steel and Vanadium Corporation Ltd (the target firm). The Tribunal determined whether the proposed transaction should be approved in terms of South African merger control, and, if so, on what conditions.

The acquiring firm, Evraz Group S.A. (“Evraz”), is a company incorporated in Luxembourg and a subsidiary of Lanebrook Ltd. The target firm, Highveld Steel and Vanadium Corporation Ltd (“Highveld”), was controlled by Anglo South Africa Capital (Pty) Ltd, a subsidiary of Anglo American South Africa Ltd. The transaction contemplated Evraz acquiring a controlling stake in Highveld.

As to procedural history, the transaction was notified both to the European Commission under the European Union Merger Regulations and to the Competition Commission in South Africa. By the time the Tribunal considered the matter, the European Commission had already approved the transaction subject to conditions. The Tribunal issued a Merger Clearance Certificate on 25 April 2007, approving the merger conditionally, and later issued written reasons on 6 July 2007.

The dispute concerned the competitive impact of the merger, particularly in relation to vanadium markets and any overlap in South Africa arising from the parties’ activities. A further feature of the matter was the relationship between the remedy proposed and negotiated in South Africa and the remedy already imposed by the European Commission, and the desirability of avoiding conflicting remedial obligations across jurisdictions.

Material Facts

Evraz already held 24.9% of Highveld’s share capital, which it had purchased from Anglo on 13 July 2006. That earlier acquisition was not notifiable because it did not confer control over Highveld. In the proposed transaction, Evraz would acquire a further 54.1% of Highveld’s share capital, consisting of 29.2% from Anglo and 24.9% from Credit Suisse International, increasing Evraz’s shareholding to 79%.

Evraz’s business activities included the mining of iron ore and coking coal, and steel production in the Russian Federation, as well as the production of vanadium-bearing steel slag as a by-product of its Russian steelmaking. Evraz did not directly own assets in South Africa beyond its existing shareholding in Highveld. However, in 2006 it acquired a stake in Strategic Minerals Corporation USA, together with Sojitz Corporation. Strategic Minerals owned Vametco Minerals Corporation, which had a South African subsidiary selling vanadium products to customers in South Africa.

Highveld mined ore for its steelworks and vanadium operations at its wholly owned Mapochs mine, and produced steel, vanadium and other ferroalloys and carbonaceous products. Highveld also sold some vanadium products to third parties in South Africa. The Tribunal recorded that there was therefore an overlap between Evraz (via Vametco) and Highveld in relation to certain vanadium products sold in South Africa.

The Tribunal treated as significant that, in the South African context described by the parties, there were limits to third-party effects. The parties’ account (as recorded) was that neither merging party sold vanadium feedstock to third parties in South Africa; Highveld sold some feedstock annually to Vametco; and neither party sold vanadium oxide to third parties in South Africa. The overlap in South Africa arose in “finished vanadium products” used in steel applications, including sales by Strategic Minerals of Nitrovan (to Mittal Steel, Cisco and Cape Gate) and sales of ferrovanadium by both Strategic Minerals and Highveld.

A central factual development, relied upon by the Tribunal, was that the European Commission had approved the merger subject to undertakings which included a divestiture remedy affecting Highveld’s vanadium-related operations in South Africa. The European Commission had been concerned that the merged entity would control a very substantial portion of the global vanadium value chain and gain a very strong position in vanadium feedstock (especially vanadium steel slag), potentially enabling it to restrict access to feedstock and raise downstream prices. To address these concerns, Evraz offered undertakings that included divestment of vertically integrated vanadium interests associated with Highveld, including a divestiture involving an interest in the Mapochs mine and the sale of Highveld’s vanadium oxides and finished vanadium products activities (the “Vanchem Plants”).

At the Tribunal hearing, the parties agreed to the Tribunal imposing the same terms for approval of the merger as those imposed by the European Commission. The Tribunal noted that the South African Competition Commission and the merging parties had initially developed a condition materially similar to the European Commission’s, but with differences (including divestment periods and descriptions of the divested businesses). The Tribunal expressed concern that two different remedies might conflict and create undesirable compliance difficulties. The merging parties and the Commission agreed that compliance with the European Commission order could be made an order of the Tribunal. They also agreed to an additional condition requiring the merging parties to file with the South African Competition Commission any notice, report, or application that they were required to file with the European Commission under their commitments, at the same time as filing with the European Commission, to enable the South African Commission to contribute to any variance process insofar as it might affect South African markets.

The Tribunal recorded that there were no public interest issues arising from the transaction.

Legal Issues

The central question for determination was whether the proposed merger would result in a substantial lessening or prevention of competition in any relevant market in South Africa, given the parties’ activities in steel and vanadium products and the overlap identified in relation to certain vanadium products.

A further legal issue concerned the appropriate form of conditional approval, specifically whether the Tribunal should impose the same remedial conditions as those already imposed by the European Commission in order to address competition concerns and avoid conflicting obligations across jurisdictions.

The dispute primarily concerned the application of competition-law principles to the established and recorded facts, including an evaluative assessment of the effect of the divestiture conditions on the South African competitive overlap and on any potential anti-competitive effects.

Court’s Reasoning

The Tribunal approached the competitive assessment by reference to the overlap in vanadium-related activities in South Africa, while recognising that the European Commission’s investigation had focused on the vanadium value chain and the merged entity’s position globally. The Tribunal noted the European Commission’s segmentation of the vanadium value chain into vanadium feedstock, vanadium oxides, and finished vanadium products, as well as the European Commission’s conclusion that the transaction raised concerns in vanadium markets (rather than significantly changing the structure of steel markets in the European Economic Area due to Highveld’s limited presence there).

A key component of the Tribunal’s reasoning was that it did not need to analyse the South African overlaps in extensive detail because the European Commission’s conditions would eliminate the overlap in South Africa. The Tribunal accepted that the European Commission’s required sale of Highveld’s vanadium oxides and finished vanadium products business would mean that Highveld would not remain active on those downstream markets after divestment, thereby removing the overlap created by the merger in respect of those activities where the parties competed in South Africa for third-party business.

The Tribunal further reasoned that, even if the merger without divestiture could have led to a substantial lessening of competition, the extent of the divestiture was sufficient to remedy any such problem in South Africa, because it removed the overlap relevant to third-party sales within South Africa in the identified vanadium product areas. On this basis, the Tribunal stated that it was satisfied that the European Commission’s condition would remedy competition concerns.

In relation to remedy design and implementation, the Tribunal made an evaluative and pragmatic judgment that it was undesirable for the merging parties to be required to comply with two potentially conflicting remedies. It therefore accepted the agreement between the merging parties and the Competition Commission that compliance with the European Commission’s order should also be made the Tribunal’s order. The Tribunal also accepted, as an important monitoring and coordination mechanism, the condition requiring the simultaneous filing in South Africa of any notices, reports, or applications submitted to the European Commission under the commitments, to enable the South African Competition Commission to participate in any process that might vary the conditions insofar as they could impact the South African market.

Finally, the Tribunal recorded that there were no public interest issues requiring separate consideration.

Outcome and Relief

The Competition Tribunal approved the merger conditionally. It concluded that, on the basis of the divestiture conditions confirmed by the European Commission, the transaction would not result in a substantial lessening or prevention of competition in the identified markets.

The relief granted was approval subject to conditions, including divestiture of an interest in the Mapochs mine and the Vanchem Plants (Highveld’s vanadium oxides and finished vanadium products activities), in line with the European Commission’s conditions, together with the additional requirement that specified filings made to the European Commission under the commitments also be filed with the South African Competition Commission simultaneously. The Tribunal attached the condition to its decision as Annexure “A”. No costs order was recorded in the reasons.

Cases Cited

European Commission, Case Comp/M.4494 — Evraz/Highveld (decision approving the concentration subject to commitments).

Legislation Cited

European Union Merger Regulations (as referenced in the reasons in relation to notification to the European Commission).

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Tribunal held that the merger between Evraz and Highveld should be approved subject to conditions, because the divestiture and related undertakings accepted by the European Commission removed the South African overlap in finished vanadium products and were sufficient to address any potential competition concerns. The Tribunal further held that it was preferable to align the South African conditions with the European Commission’s remedy to avoid conflicting obligations, and required that filings made under the European Commission commitments also be filed with the South African Competition Commission at the same time to facilitate oversight and engagement should the conditions be varied.

LEGAL PRINCIPLES

The Tribunal applied the principle that a merger may be approved where it is not expected to lead to a substantial lessening or prevention of competition, and that such approval may be made conditional where remedies are necessary to address identified competition concerns.

The Tribunal accepted and applied the principle that structural remedies, including the divestiture of relevant business activities, can remove competitive overlaps and thereby remedy potential adverse competitive effects, including overlaps in downstream markets for third-party sales.

The Tribunal also applied a practical remedial principle that, where a transaction is subject to conditions in multiple jurisdictions, it is undesirable to impose conflicting remedies. Aligning conditions with those imposed by a foreign regulator was treated as an appropriate mechanism in the circumstances, coupled with a requirement designed to ensure that the South African competition authority is kept informed of, and able to engage with, any potential variation of the foreign commitments insofar as it may affect the domestic market.