Brief Summary

Competition Law — Merger Notification — Review of Competition Commission decision — Freeworld Coatings Ltd sought to review the Commission's refusal to accept its application for a separate merger notification regarding Kansai Paint Company Ltd's indicative proposal to acquire Freeworld — The Commission deemed the proposal non-binding and premature — Freeworld contended that the Commission's decision was flawed due to a misinterpretation of the legal definition of a proposed merger — Tribunal held that a proposed merger can exist prior to a binding offer, thus the Commission's application of the law was too mechanistic, warranting the review and setting aside of the Commission's decision.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings were an application for review before the Competition Tribunal of South Africa in terms of section 27(1)(c) of the Competition Act 89 of 1998, read with various review grounds under the Promotion of Administrative Justice Act 3 of 2000 (PAJA). The applicant, Freeworld Coatings Limited (Freeworld), sought to review and set aside a decision of the Competition Commission (the Commission) declining to accept Freeworld’s request to file a separate merger notification.

The respondents were the Competition Commission (first respondent) and Kansai Paint Company Limited (Kansai) (second respondent). Kansai opposed the review, while the Commission indicated that it would abide the Tribunal’s decision.

Procedurally, Freeworld had applied to the Commission on 3 September 2010 for permission to file separately under Competition Commission Rule 28, in circumstances where the parties had not jointly notified any merger. On 22 September 2010 the Commission rejected that request on the basis that Kansai’s indicative proposal did not constitute a merger or proposed merger and that the Rule 28 request was therefore premature. Freeworld then launched the present review on 4 October 2010. The matter was heard on 9 November 2010, with the Tribunal’s order and reasons issued on 14 December 2010.

The general subject-matter of the dispute concerned whether Kansai’s indicative, non-binding proposal to acquire Freeworld (together with related conduct, including Kansai’s acquisition of a significant minority shareholding) could amount to a “proposed merger” for purposes of the Competition Act, and whether Freeworld could in those circumstances be permitted to make a separate merger filing under Rule 28.

2. Material Facts

Freeworld was a South African listed company producing, among other products, automotive coatings (including for original equipment manufacturers) and decorative paints. Kansai was a Japanese listed paint company producing and marketing similar products and supplying automotive coatings in South Africa through Duco. Freeworld sold automotive coatings to OEMs through a joint venture with DuPont, and parts of Freeworld’s automotive refinish business were produced under licence from DuPont. The court treated the existence of these business structures and relationships as part of the relevant commercial context, particularly because the parties raised competition concerns linked to the DuPont joint venture.

On 30 April 2010, Kansai approached Freeworld expressing interest in a potential combination of the businesses. This occurred on the same day that Freeworld issued a circular regarding a separate potential bid by a consortium led by Brait S.A. through Saphirefield Investments (Pty) Ltd; that proposed scheme was rejected by Freeworld’s shareholders on 14 June 2010. Thereafter, Kansai and Freeworld, through management and legal advisers, engaged through correspondence and meetings. Kansai alleged that Freeworld was obstructive and invoked competition concerns to restrict Kansai’s access to information, including due diligence material. Kansai offered to dispose of Freeworld’s interest in the DuPont joint venture if the merger proceeded, but Freeworld was not satisfied, and Kansai withdrew its offer on 20 May 2010.

On 23 August 2010, Kansai acquired 25.03% of Freeworld’s shares from Brait S.A. (later increasing to 27%, according to the reasons). Following that acquisition, a meeting took place on 24 August 2010 at which Kansai delivered a letter containing a second indicative, non-binding proposal to acquire a majority shareholding in Freeworld. This proposal was subject to multiple preconditions, including completion of due diligence, engagement on competition issues, an approach to DuPont, financing, Kansai board approval to make a formal offer, an intention to seek shareholder support, and a recommendation from Freeworld’s board.

On 3 September 2010, Freeworld applied to the Commission for permission to file a separate merger notification in terms of Rule 28, giving reasons that included Kansai’s existing shareholding, the seriousness of the indicative proposal, alleged serious competition concerns, and the parties’ disagreement about whether disposal of Freeworld’s interest in the DuPont joint venture would remedy those concerns.

During a call on 17 September 2010, the Commission (through the head of its merger division) raised that the application might be premature because the bid was non-binding. After further correspondence, the Commission’s letter of 22 September 2010 rejected Freeworld’s application on the basis that Kansai’s indicative proposal did not constitute a merger or proposed merger as defined, rendering the Rule 28 request premature.

In the review proceedings, Freeworld also placed additional information before the Tribunal which had not been before the Commission (including material related to submissions to the Securities Regulation Panel and later interactions with shareholders and a press statement). Kansai objected to the introduction of post-hearing material unless afforded an opportunity to respond. The Tribunal treated this evolving factual record as material to its decision on remedy, particularly whether it was appropriate to substitute its own decision for that of the Commission.

3. Legal Issues

The central legal question was whether the Commission’s refusal to accept Freeworld’s separate filing request was reviewable administrative action, and specifically whether the Commission committed a material error of law in concluding that Kansai’s non-binding indicative proposal could not constitute a merger or proposed merger for Competition Act purposes.

A related issue concerned whether the Commission’s process was procedurally fair, in that Freeworld contended it had not been afforded an opportunity to consider and respond to Kansai’s submissions. The Tribunal, however, determined it was unnecessary to decide procedural fairness once it found a reviewable error of law.

A further issue was remedial and discretionary in nature: whether, upon finding reviewable error, the Tribunal should substitute its own decision (including declaring the offer a proposed merger and permitting a Rule 28 filing), or whether the matter should be remitted to the Commission for reconsideration. This aspect involved the application of law to a changing factual record and the allocation of institutional functions under the Competition Act and Commission rules.

The dispute was therefore primarily one of law (the applicable test for a “proposed merger” and whether the Commission applied it correctly), with an important component of application of law to fact (whether the available facts met the correct test) and an element of discretion/value judgment (how the Commission should exercise its Rule 28 discretion and how the Tribunal should craft an appropriate remedy on review).

4. Court’s Reasoning

The Tribunal approached the review on the basis that the Commission’s letter of 22 September 2010 reflected that the Commission considered Kansai’s indicative proposal not to constitute a merger or proposed merger, and that the Rule 28 application was therefore premature. Freeworld argued that the Commission’s conclusion showed that it treated intent to acquire control as legally insufficient, or treated a non-binding proposal as necessarily incapable of constituting a proposed merger, and that this reflected a misapplication of the law.

In analysing the legal framework, the Tribunal considered the treatment of intention and contingency in earlier merger jurisprudence, particularly the Tribunal decision in Gold Fields Ltd v Harmony Gold Mining Company and others [2004] 2 CPLR 358 (CT) and the Competition Appeal Court judgment criticising aspects of that reasoning in Gold Fields Ltd v Harmony Gold Mining Company Ltd and another [2005] 1 CPLR 74 (CAC). The Tribunal read the Competition Appeal Court’s critique as directed not at the proposition that intention alone is insufficient, but at an overly mechanistic application of that proposition to a factual sequence where intention was accompanied by further events. On the Tribunal’s reading, the jurisprudence indicated that the decisive enquiry is not whether intention exists in the abstract, but whether the cumulative weight of intention plus additional factors supports the conclusion that a proposed merger exists, even where future steps remain contingent.

Against that background, the Tribunal identified the Commission’s legal error as follows. The Commission’s stated approach appeared to treat the non-binding character of Kansai’s proposal as excluding it from being a proposed merger, suggesting notification would only become necessary once the offer became binding. The Tribunal held that this was a legal error, because a proposed merger can exist before an offer becomes binding. In the Tribunal’s view, the Commission’s approach was “too strict and mechanistic” in the way it treated contingency and non-binding features as dispositive, rather than assessing the totality of the circumstances.

Although Freeworld advanced a suggested test focusing on sufficiently serious intent, capability to carry through the transaction, and conduct consistent or inconsistent with an intent to acquire control, the Tribunal expressly declined to endorse Freeworld’s formulation as the definitive test or to conclude that the Commission’s ultimate conclusion on notifiability was necessarily wrong. The Tribunal emphasised that no “bright lines” exist for determining when a proposed merger comes into being and that the case law supports a flexible enquiry centred on the accumulation of relevant factors rather than prior definition.

The Tribunal then turned to remedy. Despite both parties contending that the Tribunal could substitute its decision, the Tribunal declined to do so for two principal reasons. First, the factual record before the Tribunal had diverged from the record before the Commission: material concerning submissions to the Securities Regulation Panel and subsequent shareholder interactions and public statements had not been available to the Commission when it made its decision. The Tribunal considered it inappropriate to decide substitutive relief on a record “increasingly ceasing to resemble” the record the Commission had considered, particularly where the alleged facts were developing and contested.

Second, the Tribunal emphasised that Rule 28 confers on the Commission a distinct discretion not only to decide whether separate filing would be “reasonable and just” in the circumstances, but also to issue directions about how the notification requirements should be satisfied and, in appropriate cases, to permit filing of documents on behalf of the other primary firm. Because these directions would bear materially on the Commission’s investigation function, the Tribunal reasoned that it would not be appropriate for the Tribunal to exercise that discretion in the first instance.

In guiding the reconsideration, the Tribunal recognised the practical difficulty faced by the Commission where parties contest “their every act and utterance” and where the law assumes there is a moment a proposed merger comes into being but does not define it with precision. The Tribunal indicated that the Commission may consider placing greater emphasis on the second part of the Rule 28 enquiry where there is a body of accumulated facts suggesting “intention plus”, even if contested. It identified considerations relevant to Rule 28, including submissions from both parties, implications for third parties who might be required to provide information, the resource implications for the Commission, and whether merger control would be effective if undertakings are required from an acquiring firm not willing to participate in filing.

Finally, the Tribunal addressed an argument derived from the Competition Appeal Court’s Gold Fields decision to the effect that, once a merger has occurred, it must be notified. The Tribunal accepted Kansai’s contention that this was not correct in the context of unimplemented mergers. It noted that prior to a September 2000 amendment to the Competition Act, there had been a seven-day notification requirement triggered by specified events; that provision was deleted, signalling legislative intent that there is no longer a prescribed time period within which a merger must be notified (so long as it has not been implemented). On the facts, it was common cause that no implementation had occurred as at the date of the Tribunal’s decision, and therefore there was no legal obligation on the parties to notify at that stage, although that did not preclude Freeworld from requesting notification.

5. Outcome and Relief

The Tribunal set aside the Commission’s decision that the alleged proposed merger was not notifiable (and that the Rule 28 request was premature). It referred the matter back to the Commission for reconsideration in light of the correct legal test, the additional information that had emerged, and the approach outlined in the reasons.

On remission, the Commission was directed to consider whether, applying the correct test and taking into account any new facts and any response from Kansai, a proposed merger had come into existence. If the Commission concluded that a merger existed, it was then to consider whether it would be reasonable and just to allow Freeworld to notify separately under Rule 28, and to make any related directions contemplated by that rule.

The Tribunal made no order as to costs, reasoning that the decision had been referred back to the Commission.

Cases Cited

Gold Fields Ltd v Harmony Gold Mining Company and others [2004] 2 CPLR 358 (CT).

Gold Fields Ltd v Harmony Gold Mining Company Ltd and another [2005] 1 CPLR 74 (CAC).

Legislation Cited

Competition Act 89 of 1998.

Promotion of Administrative Justice Act 3 of 2000.

Rules of Court Cited

Competition Commission Rule 28.

Competition Commission Rule 27.

Held

The Tribunal held that the Commission’s rejection of Freeworld’s request to file a separate merger notification was reviewable and fell to be set aside because the Commission applied an overly strict and mechanistic legal approach by treating a non-binding indicative proposal as incapable, as a matter of law, of constituting a proposed merger. The Tribunal held that a proposed merger may exist before an offer becomes binding, and that the proper enquiry requires attention to the cumulative factual context rather than a bright-line requirement of a binding offer.

The Tribunal further held that substitution was inappropriate because the factual record before it differed materially from that before the Commission and because Rule 28 assigns to the Commission a primary discretion not only to permit separate filing but also to give consequential directions relevant to merger investigation. The matter was accordingly remitted for reconsideration, and no costs order was made.

LEGAL PRINCIPLES

A proposed merger may arise prior to a binding offer; the legal enquiry is not confined to whether an offer is unconditional or contractually binding, but must consider whether the circumstances cumulatively demonstrate “intention plus” additional factors sufficient to characterise the situation as a proposed merger.

Intention to acquire control is a necessary consideration but is insufficient on its own; the decisive assessment depends on the cumulative weight of intention together with contextual facts and conduct, and the enquiry should avoid an unduly mechanistic focus on formal steps where substance indicates a merger objective.

Where an administrative decision-maker applies an incorrect legal standard by adopting an overly strict or mechanistic test, that constitutes a reviewable error of law under administrative law review principles, warranting the setting aside of the decision.

In the context of separate merger filings, Rule 28 vests the primary discretion in the Commission to determine whether separate filing is reasonable and just and to issue directions integral to the merger investigation process; review bodies may remit rather than substitute where the record has evolved materially or where the statutory scheme assigns investigative and directional functions to the Commission.

Following the deletion of earlier statutory provisions prescribing a fixed period for notification (noted as having occurred through an amendment in September 2000), the Competition Act does not impose a general rule that an unimplemented merger must be notified within a specified time period, although parties may seek notification and the Commission may be approached in appropriate circumstances.

Freeworld Coatings Ltd v Competition Commission and Another (62/X/Oct10) [2010] ZACT 88; [2010] 2 CPLR 409 (CT) (14 December 2010)