Brief Summary

Competition Law — Merger Control — Approval of large merger between Kansai Paint Co. Ltd and Freeworld Coatings Limited — Merger initially approved by Competition Commission subject to divestiture condition — Kansai contested the condition, asserting no overlap in activities — Tribunal ultimately approved the merger without divestiture, imposing a local manufacturing obligation instead — No significant market power post-merger due to the structure of the automotive coatings market and the presence of imports.

Comprehensive Summary

Summary of Judgment

Introduction

These proceedings were merger proceedings before the Competition Tribunal of South Africa concerning the approval of a large merger in terms of the Competition Act 89 of 1998. The primary acquiring firm was Kansai Paint Co. Ltd (“Kansai”), a Japanese public company listed on the Osaka and Tokyo stock exchanges. The primary target firm was Freeworld Coatings Limited (“Freeworld”), a South African public company listed on the Johannesburg Stock Exchange.

The matter came before the Tribunal following a reconsideration request lodged by Kansai after the Competition Commission had approved the transaction subject to conditions. The Commission’s initial conditional approval included a significant structural remedy requiring the divestiture of Freeworld’s entire automotive coatings business. Kansai contested that condition and sought Tribunal approval of the merger without the divestiture requirement.

The general subject-matter of the dispute concerned the merger’s competitive effects in automotive coatings supply, particularly questions arising from market definition, the appropriate assessment of overlaps across the supply chain, and whether a divestiture remedy was necessary. Although Freeworld had substantial activities in decorative coatings, the Tribunal’s competitive analysis focused on automotive coatings, because Kansai was not active in decorative coatings in South Africa.

Material Facts

Kansai was described as a multinational coatings producer and marketer, with activities spanning automotive coatings, industrial coatings, decorative coatings, and marine/protective coatings. In South Africa, Kansai’s supply presence (as recorded in the reasons) was limited to supplying certain coatings to Toyota through Duco, an independent distributor, with Kansai having no manufacturing facilities in South Africa and supplying via imports from Japan.

Freeworld manufactured and distributed decorative coatings under brands including Plascon, Polycell, Crown, and Earthcote, and it also participated in automotive coatings through Freeworld Automotive Coatings (Pty) Ltd (“FAC”), its wholly-owned subsidiary. Freeworld was involved in an arrangement with E.I. DuPont Nemours and Company (“DuPont”), described in the reasons as involving a licence to manufacture OEM coatings on DuPont’s behalf. The reasons further described a joint venture, DFW, owned 49% by FAC and 51% by DuPont, with DFW being controlled by DuPont and manufacturing certain water-borne coatings using DuPont technology.

The transaction was a hostile takeover, structured as an offer by Kansai to acquire the remaining issued share capital of Freeworld, resulting in Kansai obtaining control over Freeworld post-merger.

The merger was notified to the Commission on 21 January 2011 (as an intermediate merger at notification). On 18 April 2011, the Commission approved the merger subject to conditions, including a requirement that the parties divest Freeworld’s entire automotive coatings business. Kansai then filed a reconsideration request with the Tribunal on 11 July 2011 under section 16(1)(a), alleging that the Commission’s findings were incorrect because it had aggregated different levels of the supply chain and thereby inflated market shares.

The Department of Trade and Industry initially obtained intervention rights but later indicated it would not proceed because the Commission would represent its concerns. Subsequently, on 4 November 2011, the Commission filed revised conditions which withdrew the divestiture condition and replaced it with conditions including an obligation relating to local manufacture, following negotiations with the merging parties. The Tribunal approved the large merger on 23 November 2011 subject to conditions, with reasons issued on 20 January 2012.

As to the market context relied upon by the Tribunal, OEM automotive coatings were described as involving four products used in coating new vehicles, namely e-coat, surface coat, base coat, and clear coat. The Tribunal accepted that, while all four coatings are required for a vehicle, OEMs may source different coatings from different suppliers and may spread procurement across suppliers.

The supply chain described in the reasons distinguished between multinational technology suppliers (including DuPont, Kansai, PPG, BASF, and Hemmelrath), local manufacturing arrangements in South Africa (where Freeworld was described as the only local physical manufacturer in the OEM supply chain), and distribution arrangements (including distributors such as Duco and Chemetall, and distribution conducted by certain manufacturers). The Tribunal recorded that a significant portion of the South African market was supplied by imports, with a conservative estimate of imports by value being 40% of the domestic market.

The Tribunal also relied on the presence of a concentrated customer base comprising major multinational OEMs in South Africa, and on features of procurement such as bidding processes and accreditation requirements for products and production facilities. The Tribunal further relied on evidence regarding price comparisons, noting that earlier Commission analysis suggested a 30% differential between domestic price and import parity pricing, but that later, more disaggregated data obtained by Econex showed the differential to be 5% to 10%.

Legal Issues

The central legal questions before the Tribunal concerned whether the merger was likely to result in substantial prevention or lessening of competition in the relevant market(s) for automotive coatings, and whether the Commission’s initial divestiture condition was justified on the record as it stood at reconsideration.

A significant issue was the proper definition of the relevant market, both in product and geographic terms, and the appropriate treatment of the merger’s effects across different levels of the supply chain. This raised a mixed question involving application of competition-law concepts to market facts, including whether it was appropriate to aggregate vertically different activities into a single market assessment or instead to distinguish markets for technology supply, manufacturing, and distribution.

The Tribunal also had to consider, on the facts placed before it, whether alleged competitive risks such as market power and potential coordinated conduct were sufficiently constrained by imports and by the countervailing power of OEM customers, and whether the revised conditions negotiated between the Commission and the parties adequately addressed any remaining concerns.

Court’s Reasoning

The Tribunal approached the competitive assessment by focusing on the area of potential overlap, namely automotive coatings, given that Kansai was not involved in decorative coatings in South Africa. The Tribunal summarised the structure of the OEM automotive coatings supply chain, distinguishing between upstream technology providers, local manufacturing arrangements, and downstream distribution.

A key aspect of the Tribunal’s reasoning concerned the dispute between the experts on market definition. The Commission’s expert (Econex) advanced an approach that defined a single aggregated vertical market for coatings by integrating down the supply chain. The parties’ expert (RBB) characterised the industry as comprising three vertically distinct markets at different levels of the supply chain, namely the supply of technology, manufacturing, and distribution. The Tribunal also noted the debate on geographic scope, with Econex adopting a national market definition and RBB suggesting a global market.

The Tribunal did not treat the difference between national and global market definitions as determinative for the ultimate competition assessment. It reasoned that, on the evidence before it, the national market (even if used as a frame) was strongly constrained by global considerations. The Tribunal considered that pricing behaviour provided a concrete indicator of the extent of import discipline and global competitive constraint. In that regard, the Tribunal referred to updated pricing data showing that domestic prices were close to import parity, with a differential of approximately 5% to 10% rather than the earlier suggested 30% differential. The Tribunal viewed this as indicative of limited scope for the merged firm to exercise market power through price increases.

The Tribunal further accepted the relevance of countervailing power exercised by OEM customers, reflected in their ability to influence pricing outcomes through procurement processes, accreditation requirements, and the ability to spread purchasing across suppliers. It also considered that the threat of imports, together with OEM countervailing power, reduced the likelihood and sustainability of coordinated conduct among producers.

Against this background, the Tribunal concluded that the initially required divestiture of Freeworld’s entire automotive coatings business was no longer necessary. The Tribunal expressly linked this conclusion to the updated analysis and the revised conditions that had been negotiated between the Commission and the merging parties, and it accepted that the divestiture condition was correctly excluded from the revised conditions.

The Tribunal recorded that revised behavioural conditions had been introduced during renegotiation, including measures aimed at discouraging Kansai from raising toll manufacturing fees (by making renegotiated fees subject to Commission oversight), measures aimed at limiting information flows to inhibit possible coordination between Kansai and DuPont, and a notification requirement to the Commission should Kansai’s Master Global Alliance Agreement with PPG be extended to South Africa. The Tribunal did not undertake an independent adequacy assessment of these conditions, stating that it did not need to do so because they were agreed to by the parties, while noting that information-flow concerns were adequately addressed by the conditions.

On public interest, the Tribunal noted that certain conditions addressing public interest concerns had been agreed during the Commission’s initial process and were retained, but were not the subject of the reconsideration proceedings and therefore were not analysed further in the reasons.

Finally, the Tribunal recorded a concern arising from its conclusion that divestiture was unwarranted, namely whether incorrect information had been provided to the Commission in the earlier phase, contributing to the initial divestiture recommendation. The Tribunal noted that the Commission had indicated an internal process was underway to assess the veracity of the original information, and it emphasised that knowingly providing false information to the Commission constitutes an offence under the Act.

Outcome and Relief

The Tribunal approved the large merger between Kansai and Freeworld subject to conditions, as reflected in the order issued on 23 November 2011 and the revised conditions referenced as being contained in Annexure A to the reasons.

The Tribunal’s decision resulted in the removal of the divestiture condition that had required divestiture of Freeworld’s entire automotive coatings business, replacing it with revised conditions negotiated between the Commission and the merging parties, including obligations relating to local manufacture and behavioural measures addressing potential information flows and coordination risks.

No specific costs order was recorded in the reasons.

Cases Cited

No judicial precedents were cited in the Tribunal’s reasons for decision.

Legislation Cited

Competition Act 89 of 1998, section 13A

Competition Act 89 of 1998, section 16(1)(a)

Competition Act 89 of 1998, section 73(d)

Rules of Court Cited

No rules of court were cited in the Tribunal’s reasons for decision.

Held

The Tribunal held that it could not find substantive anticompetitive effects arising from the merger that were not addressable through the revised agreed conditions. It held that the Commission’s initial divestiture requirement was unwarranted on the basis of the later analysis placed before the Tribunal, including evidence concerning import constraints, pricing close to import parity, and the countervailing power of OEM customers.

The Tribunal further held that the revised conditions agreed between the Commission and the merging parties were sufficient for approval, and it approved the merger subject to those conditions, while noting that knowingly providing false information to the Commission is an offence and that the Commission should report such conduct if it has reason to believe it occurred.

LEGAL PRINCIPLES

The Tribunal applied the principle that market definition and competitive assessment must be grounded in the economic realities of the industry, including the roles of different participants at different levels of the supply chain and the extent to which domestic outcomes are constrained by global forces and import competition.

The Tribunal applied the principle that import competition and pricing close to import parity can operate as a significant constraint on the exercise of market power, and that the threat of imports may also diminish the feasibility of coordinated conduct among suppliers.

The Tribunal applied the principle that strong countervailing power of large, sophisticated customers, reflected in bidding processes, accreditation regimes, and multi-sourcing strategies, is relevant to assessing whether a merged entity can profitably raise prices or otherwise exercise market power.

The Tribunal applied the principle that merger remedies should be proportionate to the competitive harm identified, and that a severe structural remedy such as divestiture is not justified where the evidence indicates that competitive constraints and agreed conditions sufficiently address the risks identified.

The Tribunal reaffirmed that providing false information to the competition authorities is treated seriously under the Competition Act, noting the statutory characterisation of such conduct as an offence under section 73(d).

Kansai Paint Co. Ltd v Freeworld Coatings Ltd (53/AM/JUL11) [2012] ZACT 7; [2012] 1 CPLR 140 (CT) (20 January 2012)