Summary of Judgment

1. Introduction

The proceeding concerned the Competition Tribunal’s determination of a large merger in terms of South African competition merger control. The matter was heard by a panel of the Tribunal comprising Norman Manoim (Presiding Member), Takalani Madima (Tribunal Member), and Medi Mokuena (Tribunal Member).

The acquiring firm was Shanike Investment No 137 (Pty) Ltd (“Shanike”), a shelf company established to implement the transaction and to be renamed Kagiso Tiso Holdings (Pty) Ltd post-merger. The target firms were Kagiso Trust Investments (Pty) Ltd (“KTI”) and Tiso Group Investment (Pty) Ltd (“Tiso”).

The Tribunal approved the merger on 29 June 2011, subject to a condition. The Tribunal’s reasons were issued on 1 July 2011. The dispute concerned whether the consolidation of KTI’s and Tiso’s investment holdings into a single vehicle created competition concerns, particularly in relation to overlapping minority shareholdings in competing firms in the steel merchant sector, and to a lesser extent the financial services sector.

2. Material Facts

Shanike was established solely to give effect to the proposed transaction and, at the time relevant to the Tribunal’s assessment, had no subsidiaries and no operating activities. KTI and Tiso were both South African investment firms with diversified portfolios, including interests in financial services and industrial sectors.

Under the transaction, KTI and Tiso would transfer all their assets and liabilities to Shanike in exchange for shares in Shanike. The share consideration was structured in a 60:40 ratio, with 60% to KTI and 40% to Tiso. The stated rationale advanced for the transaction was that consolidating investments would enhance the merged firm’s growth opportunities.

The Competition Commission identified overlaps arising not from horizontal operating activities of Shanike (which had none), but from the fact that KTI and Tiso each held investments in firms that competed in certain markets. In the financial services market, KTI held a shareholding in First Rand Bank Limited, while Tiso held a shareholding in Investec, both described as public companies providing financial products and services (with differing geographic and client-base emphases). The Commission considered the target firms’ interests in this market to be minimal and did not pursue further analysis on that aspect.

The more material overlap concerned the steel merchant market. KTI held a 7.5% shareholding in Macsteel Service Centre SA (Pty) Ltd (“Macsteel”), and Tiso held a 9% shareholding in Trident Steel (Pty) Ltd (“Trident”). The Commission relied on market share estimates previously used in Tribunal proceedings (discussed below), which reflected relatively high shares for both Macsteel and Trident across various steel product categories, and treated the geographic dimension of the relevant markets as national.

A further fact relied upon by the Tribunal was that both KTI and Tiso had non-executive board representation associated with their interests in Macsteel and Trident respectively, which the parties indicated would be dissolved post-merger. The Commission’s concern, accepted by the Tribunal, was that after consolidation Shanike would hold interests in both competing steel merchants (Macsteel and Trident, or indirectly in Aveng as applicable), thereby creating a structural link that might facilitate the exchange of competitively sensitive information and possible coordination.

The Commission also recorded that these concerns were heightened by a current investigation of suspected collusion involving both Macsteel and Trident. In response, the merging parties tendered an undertaking—ultimately imposed as a merger condition—designed to prevent interlocking involvement in the governance of Macsteel and Trident and to separate governance participation in those firms from participation at acquiring-firm level.

3. Legal Issues

The central legal question for the Tribunal was whether the proposed large merger should be approved unconditionally, approved subject to conditions, or prohibited, given the risk that the post-merger structure could facilitate coordinated conduct through information exchange between competing steel merchants in which the merged entity would have an investment stake.

The dispute required the Tribunal to make an assessment that combined application of competition principles to the facts (notably the consequences of common shareholding and governance links in competing firms) with an evaluative judgment about whether a tailored condition would sufficiently reduce the identified risk. The Tribunal also had to consider whether any public interest issues arose, in particular whether retrenchments were anticipated.

4. Court’s Reasoning

The Tribunal’s reasoning proceeded from the Commission’s identification of two areas of overlap, while distinguishing their competitive significance.

In relation to financial services, the Tribunal accepted the Commission’s assessment that the target firms’ interests were minimal and that it was therefore unnecessary to undertake further competitive analysis for that market in the context of this merger.

In relation to the steel merchant market, the Tribunal accepted the Commission’s market framing and competitive concern. The Commission had defined the market as the steel merchant market and treated it as national, referring to the Tribunal’s prior ruling in Kulungile Metals (Pty) Ltd and Abkins Steel Corporation (Pty) Ltd and Abkins Steel Services (Pty) Ltd (case number 13/LM/Mar03) where the steel merchant market had been considered and where Macsteel and Trident were described as competing at the level of large steel merchants. The Commission also relied on market share estimates used in that prior matter, which suggested that both Macsteel and Trident held comparatively high shares in several product categories. The Tribunal accepted that these features supported the significance of the overlap.

On the key theory of harm, the Tribunal agreed with the Commission that the consolidation of KTI’s and Tiso’s interests into Shanike would create a link and platform that might facilitate collusive behaviour, specifically through the exchange of sensitive information between Macsteel and Trident. The Tribunal noted that this concern was intensified by the fact that there was an existing investigation into suspected collusion involving those firms.

The Tribunal then addressed the remedial undertaking tendered by the parties and accepted by the Commission. The undertaking aimed to prevent the same person from simultaneously serving as a director or executive (or attending board meetings) in both Macsteel and Trident, and also to prevent those individuals from simultaneously participating in Shanike’s board governance. The Tribunal expressed satisfaction that, if this undertaking were imposed as a condition, it would reduce the possibility of information exchanges between Macsteel and Trident.

Finally, the Tribunal considered public interest and recorded that there were no public interest issues, as there was no anticipation of retrenchments arising from the merger.

5. Outcome and Relief

The Tribunal approved the large merger between Shanike Investment No 137 (Pty) Ltd and Kagiso Trust Investments (Pty) Ltd and Tiso Group Investment (Pty) Ltd subject to a condition.

The condition required that, for as long as the acquiring firm had an investment stake in Macsteel Services (Pty) Ltd and Trident Steel (Pty) Ltd (or directly in Aveng Ltd, as the case may be), the same person could not be appointed to simultaneously serve as a director or executive of Macsteel and Trident, or attend board meetings of both, and the persons appointed as a director or executive of Macsteel or Trident (or attending their board meetings) could not be a director of the acquiring firm or attend its board meetings.

No separate costs order was recorded in the reasons.

Cases Cited

Kulungile Metals (Pty) Ltd and Abkins Steel Corporation (Pty) Ltd and Abkins Steel Services (Pty) Ltd, Competition Tribunal case number 13/LM/Mar03.

Legislation Cited

No legislation was expressly cited in the text of the reasons provided.

Rules of Court Cited

No rules of court were expressly cited in the text of the reasons provided.

Held

The Tribunal held that the merger created a structural link through consolidated shareholdings in competing steel merchants (Macsteel and Trident) that could facilitate anti-competitive coordination, particularly through the exchange of competitively sensitive information. The Tribunal further held that this risk would be sufficiently mitigated by a governance-separation condition preventing interlocking directorships, shared board meeting attendance, and overlap between the boards of the acquiring firm and those of Macsteel and Trident.

The Tribunal also held that no public interest concerns arose on the facts presented, since no retrenchments were anticipated. The merger was therefore approved subject to the stated condition.

LEGAL PRINCIPLES

The decision applied the principle that a merger may raise competition concerns not only through direct operational overlaps, but also by creating or strengthening structural links between competitors, including through consolidated ownership interests that may facilitate coordination.

The decision further applied the principle that where the competitive risk is the creation of a potential platform for coordination via information exchange, an appropriately framed behavioural condition aimed at preventing interlocking governance roles and board-level access can be accepted as a remedy to reduce the likelihood of such information flows.

The Tribunal also applied the approach that where the parties’ interests in an overlapping market are assessed as minimal, detailed competitive analysis may be unnecessary for that market within the merger assessment, and that public interest considerations require attention but may be disposed of where no adverse effects (such as retrenchments) are anticipated on the facts before the Tribunal.