Growthpoint Management Services (Propietary) Ltd and Fund Management Business; Property Administrators Business; and Buildmain Managers (Pty) Ltd (70/LM/Jul07) [2007] ZACT 90; [2008] 1 CPLR 105 (CT) (13 November 2007)

78 Reportability

Competition Law

Brief Summary

Competition Law — Merger Approval — Conditional approval of merger between Growthpoint Management Services (Pty) Ltd and target firms, including Fund Management Business and Buildmain Managers (Pty) Ltd — Tribunal imposed conditions to ensure compliance with Competition Act — Concerns raised regarding restraint clauses in Sale of Business Agreement potentially contravening section 4(1)(b)(ii) of the Act — Tribunal's decision to approve merger subject to deletion of certain clauses to prevent anti-competitive practices.

Comprehensive Summary

Summary of Judgment

1. Introduction

The matter concerned merger proceedings before the Competition Tribunal of South Africa in terms of the Competition Act 89 of 1998. The Tribunal was required to determine whether to approve a transaction in which Growthpoint Management Services (Proprietary) Ltd (“GMS”), as the acquiring firm, would acquire control of certain target businesses described as the Fund Management Business, Property Administration Business, and Buildmain Managers (Pty) Ltd (collectively, “the target firms”).

The Tribunal’s reasons record that the Competition Commission had initially recommended approval without conditions, but issues emerged during the first hearing regarding the contractual structure underpinning the transaction. This prompted further procedural steps, including the filing of additional agreements and a second hearing focused on the competition implications of those agreements.

The general subject-matter of the dispute was whether contractual provisions contained in agreements related to the merger—particularly a restraint clause in the Sale of Business Agreement and renewal-related provisions in the Co-operation Agreement—raised competition-law concerns requiring conditions to be imposed on approval.

2. Material Facts

GMS was described as a newly formed subsidiary of Growthpoint Properties Limited (“Growthpoint”). The target firms were collectively controlled by Investec Property Group (“IPG”), an indirect subsidiary of Investec Limited (“Investec”). In terms of the Sale of Business Agreement, IPG would sell its rights, title, and interest in the target firms and related activities as a going concern, resulting in Growthpoint acquiring control of the target firms through GMS.

The Tribunal accepted that the transaction was subject to interrelated agreements, including the Sale of Business Agreement and the Co-operation Agreement. At the first hearing, it emerged that only the Sale of Business Agreement had been filed with the Commission, and the Tribunal directed that the additional agreements be submitted. Following the filing of the agreements and written submissions, a second hearing was convened to address their implications.

The Tribunal recorded that Growthpoint owned a portfolio of properties that, prior to the merger, were managed by IPG. Growthpoint’s rationale was that in-house property management was more convenient than outsourced management, while IPG sought to realise a return on its investment. It was also noted that Investec Asset Management held 12.1% of Growthpoint’s issued share capital, which the parties contended meant Investec would continue to benefit from the transaction.

In competition terms, the Tribunal recorded that the transaction affected the listed property loan stock market, the market for property fund/asset management services, and the market for property management/administration services, assessed on a national geographic basis. The Commission and the parties characterised the transaction as a vertical merger and considered customer foreclosure unlikely because the target firms were the sole providers of property services to Growthpoint. The Commission further considered that alternative suppliers existed for Investec should Growthpoint not supply relevant services post-merger.

The key facts giving rise to the Tribunal’s concerns were contractual. Clause 12.1 of the Sale of Business Agreement imposed restraints which, on the Tribunal’s reading, restrained both Investec and Growthpoint from entering each other’s markets, rather than operating as a conventional seller-only restraint. In the Co-operation Agreement, clauses providing for rights of first refusal were accompanied by a provision (identified in the proceedings as clause 10.2) permitting the agreement to be renewed by mutual agreement, raising the possibility of continuation beyond the initial four-year period contemplated.

3. Legal Issues

The central legal questions concerned the competition-law characterisation and permissibility of provisions in the agreements ancillary to the merger, and whether those provisions required the Tribunal to impose conditions on approval.

A primary issue was whether clause 12.1 of the Sale of Business Agreement should be treated merely as a restraint assessed within a vertical framework (as the Commission had approached it under section 5(1) of the Act), or whether it was properly understood as a form of market division prohibited as a restrictive horizontal practice under section 4(1)(b)(ii) of the Act.

A further issue was whether the rights of first refusal in the Co-operation Agreement, when coupled with the ability to renew the agreement potentially indefinitely, raised competition concerns that could not be left unregulated within the merger approval.

These issues primarily involved the application of competition-law provisions to the contractual facts, with an evaluative assessment of the competitive significance of the relevant clauses in the context of the transaction.

4. Court’s Reasoning

The Tribunal proceeded from the premise that the merger itself, viewed as a vertical transaction, had been assessed by the Commission as unlikely to create foreclosure effects and that alternatives existed for any firm that might require property fund/asset management or property management services. The Tribunal’s concerns, however, were directed not at the merger structure alone but at the interrelated agreements that formed part of the broader transaction context.

In relation to the Sale of Business Agreement, the Tribunal noted that the Commission had analysed clause 12.1 as a vertical restraint under section 5(1) and had concluded it was unlikely to substantially lessen or prevent competition. The Tribunal, however, considered that clause 12.1 appeared to go beyond a conventional restraint aimed at preventing the seller from re-entering a market after selling a business. The Tribunal emphasised that the clause, as drafted, restrained both parties from entering each other’s markets, which the Tribunal regarded as resembling a market division arrangement.

To support its concern that market division can arise even where firms are not current competitors, the Tribunal referred to its earlier decision in Nedschroef Johannesburg (Pty) Ltd and Teamcor Limited and Others, where it had held that market division does not require firms to be competitors prior to the division; potential competition could suffice. The Tribunal also referred to the quoted statement from the United States Supreme Court decision in Jay Palmer et al v BRG of Georgia, Inc et al, indicating that agreements splitting markets are anticompetitive regardless of whether the parties previously did business in both markets. On this reasoning, the Tribunal viewed clause 12.1 as raising a potential contravention of section 4(1)(b)(ii), an aspect the Commission had not investigated in its original approach.

The merging parties were given an opportunity to address the Tribunal on the restraint. Growthpoint’s representative submitted that the restraint was a normal commercial arrangement linked to the payment of a substantial purchase price and was needed to protect the post-merger business, including by preventing employee poaching for a limited period. The Tribunal indicated that it was not concerned about the restraint on employees, but remained concerned about the broader reciprocal restraint effect in clause 12.1, which it viewed as not confined to protecting the purchased business in the conventional manner.

Regarding the Co-operation Agreement, the Tribunal accepted that rights of first refusal could be common in the property market and noted the parties’ submission that the agreement was intended as a temporary arrangement facilitating the sale. The Tribunal’s concern centred on the fact that the agreement could be renewed by mutual agreement, which meant that the rights of first refusal could, in effect, be continued beyond the initial term. The Tribunal considered that this potential for renewal had not been previously considered in the Commission’s initial unconditional recommendation. The Commission, in turn, indicated concern about renewal beyond the initial period because competitive effects would need assessment in light of future market conditions, and it indicated a preference that any renewal be notified and investigated.

The Tribunal accepted the parties’ undertakings to amend the agreements to address these concerns. It therefore grounded its conditional approval on the deletion of the reciprocal restraint clause in the Sale of Business Agreement and the removal of the renewal mechanism in the Co-operation Agreement, together with a fixed limitation on the duration of the Co-operation Agreement.

5. Outcome and Relief

The Tribunal conditionally approved the merger in terms of section 16(2)(b) of the Competition Act 89 of 1998.

The approval was subject to conditions that the entire paragraph 12.1 of the Sale of Business Agreement (signed 20 July 2007) would be of no force and effect and deleted; that paragraph 10.2 of the Co-operation Agreement (concluded 20 July 2007) would be deleted; and that the duration of the entire Co-operation Agreement would be limited to four years and could not be extended or renewed. The parties were also required to provide the Tribunal with signed copies of the amended agreements within five business days of the order.

The Tribunal recorded that the transaction did not raise significant public interest issues. The reasons do not record any costs order.

Cases Cited

Nedschroef Johannesburg (Pty) Ltd and Teamcor Limited and Others, Competition Tribunal of South Africa, Case No: 95/IR/Oct05.

Jay Palmer et al v BRG of Georgia, Inc et al 498 U.S. 46, 111 S. Ct. 401 (United States Supreme Court).

Legislation Cited

Competition Act 89 of 1998, section 4(1)(b)(ii).

Competition Act 89 of 1998, section 5(1).

Competition Act 89 of 1998, section 16(2)(b).

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Tribunal held that, although the merger had been assessed as a vertical transaction unlikely to raise foreclosure concerns, the interrelated agreements created competition issues requiring conditions.

The Tribunal held, in particular, that clause 12.1 of the Sale of Business Agreement was not treated as a conventional seller-only restraint but instead appeared to restrain both parties from entering each other’s markets, raising concern that it resembled market division prohibited by section 4(1)(b)(ii), including in circumstances of potential competition.

The Tribunal held that, while rights of first refusal in the property context may be common, the ability to renew the Co-operation Agreement by mutual agreement raised concern that these rights could persist beyond the contemplated term, and it accepted amendments that prevented renewal and fixed the agreement’s duration.

LEGAL PRINCIPLES

The decision applied the principle that market division prohibited by section 4(1)(b)(ii) does not depend on firms being current competitors at the time of the division; potential competition may be sufficient, consistent with the Tribunal’s earlier approach in Nedschroef Johannesburg (Pty) Ltd and Teamcor Limited and Others.

The decision further reflected the principle that, in merger proceedings, the Tribunal may scrutinise interrelated or ancillary agreements forming part of the broader transaction structure, and may impose conditions to remove or neutralise contractual provisions that raise competition concerns.

The decision also applied the principle that contractual arrangements such as rights of first refusal, while not inherently unlawful in the abstract, may raise competition concerns depending on their structure and duration, including where provisions permit renewal that could extend effects beyond an initial term without further competition scrutiny.