Brief Summary

Competition Law — Merger Control — Approval of merger between Life Healthcare Group and Joint Medical Holdings — Competition Commission recommending prohibition based on potential market dominance — Tribunal finding that merger does not substantially prevent or lessen competition, as Life already exercised de facto control over JMH — Merger approved unconditionally.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings concerned a large merger before the Competition Tribunal of South Africa in which Life Healthcare Group (Pty) Ltd (the acquiring firm) sought to acquire an additional shareholding in Joint Medical Holdings Ltd (the target firm), a Durban-based private hospital group.

The Competition Commission investigated the transaction and recommended prohibition. The Tribunal heard extensive factual and expert evidence over 21–29 May 2012, with final argument concluding on 18 June 2012. The Tribunal issued an order on 24 July 2012 approving the merger unconditionally, and furnished its reasons on 24 October 2012.

The dispute concerned the competitive effects of increased concentration in private hospital services in the greater Durban metropolitan area, with the Commission advancing several theories of harm, most prominently potential price effects. A significant part of the Tribunal’s analysis focused on identifying the correct counterfactual in circumstances where the acquiring firm already held a large minority shareholding and, on the evidence accepted by the Tribunal, exercised de facto control over the target firm prior to the notified transaction.

2. Material Facts

Life Healthcare Group is one of South Africa’s three largest private hospital groups. Joint Medical Holdings owned five hospitals in and around Durban, namely City Hospital, Ascot Park, Maxwell Clinic, Isipingo Hospital, and Durdoc Hospital. Prior to the notified transaction, Life already held 49.4% of JMH’s shares; the remaining 50.6% was held by approximately 306 doctor shareholders, none individually holding more than 6%.

In the notified transaction Life sought to acquire a further 21% of JMH’s shares, increasing its shareholding from approximately 49% to 70%, and thereby acquiring de jure control (in addition to a greater economic interest). The Tribunal accepted that the transaction also had a practical background purpose of resolving an ongoing control impasse, particularly after a rival hospital network (NHN) complained to the Commission that Life was unlawfully negotiating tariffs on behalf of JMH.

By the time of the hearing, there was no dispute on market definition. The relevant market was accepted as the market for the provision of private hospital services in the greater Durban Metro area. On a conventional aggregation of market shares (ignoring any “proportional” adjustment for pre-existing shareholding), the combined post-merger share for Life and JMH would be just over 50% in the greater Durban market, with Netcare at approximately 32%, and a small number of independents making up the remainder. The post-merger HHI was stated as 3566, reflecting an increase of 1072.

A central factual dispute relevant to the counterfactual was the extent and nature of pre-merger control. Life’s evidence (primarily through Mr Wylie) was that Life had exercised sole de facto control over JMH since 1997, despite not holding de jure control under the shareholder agreement structure. On that evidence, major decisions were effectively settled ahead of board meetings between Life executives and doctor-appointed directors, with Life’s position prevailing. The Tribunal considered that board minutes and internal documentation were consistent with this account.

The Tribunal also considered that Life’s current account of de facto control was in tension with historical engagements with the Commission, including the Amahosp merger notification in 2001 (in which JMH appeared as a competitor rather than a controlled firm) and advisory opinion correspondence in 2003 regarding increasing Life’s stake. The Tribunal did not resolve the credibility of Life’s explanations for the historical inconsistency as a separate issue, but it did decide—on the record before it—that the best supported factual position for the purposes of the present proceedings was that Life exercised de facto sole control prior to the merger.

On pricing, the Tribunal accepted evidence that after centralised tariff negotiations were ended by consent arrangements, Life negotiated tariffs on behalf of JMH for most periods relevant to the evidence (with an exception around 2003 when Life held only 25% and JMH was not on Life’s systems). A significant episode occurred in 2011 during valuation disagreements: Life informed GEMS that JMH would no longer participate in Life’s arrangements, after which JMH explored joining the National Hospital Network (NHN) for tariff negotiations; this was later reversed when Life withdrew its exclusion letter and asked for JMH’s reinstatement in Life’s arrangements.

The Tribunal treated this episode as material to assessing the probable pricing counterfactual, particularly whether JMH, if required to bargain independently of Life, would likely have gravitated to the NHN tariff framework.

3. Legal Issues

The Tribunal was required to determine whether the merger was likely to result in a substantial prevention or lessening of competition under section 12A(1) of the Competition Act 89 of 1998, and if so whether any conditions were warranted. This required a predictive assessment, but one grounded in evidence.

A central legal issue was the correct identification of the counterfactual. The dispute involved the application of law to fact: although Life contended that the merger would not materially change market conduct because it already exercised de facto control, the Commission argued that the status quo could not serve as the counterfactual if the status quo depended on unlawful conduct, particularly unlawful coordination on pricing between horizontal competitors.

This led to a further legal question: whether Life and JMH, given their relationship and shareholding structure pre-merger, could lawfully behave as part of a single economic entity (and thereby fall within the section 4(5) intra-group exemption), or whether coordination on pricing would instead be exposed to the restrictive horizontal practice prohibitions in section 4(1) (and presumptions in section 4(2)).

Additional issues included the evaluation of the Commission’s theories of harm on pricing and non-pricing dimensions (specialists, diversion/tunnelling, regional schemes, exclusionary conduct), and a procedural issue regarding the Tribunal’s discretion to admit further evidence after final argument in a merger proceeding.

4. Court’s Reasoning

The Tribunal began by emphasising that merger assessment requires a comparison between the likely market outcome with the merger and the likely outcome without it, and that the “without” scenario is often the status quo but may require adjustment where the status quo is not an appropriate benchmark.

On the evidence, the Tribunal accepted that Life had exercised de facto sole control over JMH since 1997, in a manner consistent with section 12(2)(g) (material influence comparable to ordinary indicia of control), even though Life lacked de jure control at board and shareholder meeting level. The Tribunal reasoned that while the doctor shareholders could theoretically have constrained Life, there was no evidence that they did so in any competitively significant way.

However, the Tribunal rejected the merging parties’ attempt to use that factual control finding to maintain a counterfactual in which JMH and Life continued their pre-merger joint pricing arrangements. The Tribunal treated this as engaging a basic policy principle: firms should not be permitted to rely on unlawful conduct in order to portray a merger as competitively neutral. The Tribunal framed the point as analogous to competitors who collude and then argue that a merger makes no difference because they already set prices jointly.

The Tribunal then analysed the statutory framework governing coordination between firms in a horizontal relationship with partial ownership links. It relied on section 4(2) (presumption of an agreement where one firm has a significant interest in another or there are common directors and they engage in the restrictive practice) and contrasted that with the narrow exemption in section 4(5) for agreements within a wholly owned subsidiary structure or a single economic entity similar to that structure. The Tribunal reasoned that the legislation specifically contemplates that partial shareholdings and board overlap may facilitate unlawful coordination and does not automatically immunise such coordination. It concluded that the pre-merger relationship between Life and JMH—less than 50% shareholding for much of the period, absence of de jure control, and the potential for shareholder challenge—did not place them within the section 4(5) exemption as a single economic entity.

The Tribunal further reasoned that the legality of coordination could not be “cured” by the fact that the original partial interest was lawfully acquired. It referred to its prior approach that changes in control can require notification (citing its own earlier decisions, including Ethos), emphasising that merger analysis proceeds on what is notified and approved, not on later shifts in the nature of control. Against this framework, the Tribunal held that Life’s de facto control did not entitle it to engage in conduct that would otherwise contravene section 4(1), and specifically that joint pricing between horizontally related firms would fall within the prohibition on price fixing in section 4(1)(b)(i).

While the Tribunal expressly stated it was not making a finding of prohibited practice liability (as this was not a prohibited practice hearing), it concluded that the correct merger counterfactual must assume lawful independent pricing between Life and JMH pre-merger. Where such lawful independence did not exist in practice, the counterfactual had to be formulated hypothetically rather than by reference to the parties’ actual (and potentially unlawful) pre-merger behaviour.

Applying this counterfactual to the Commission’s theories of harm, the Tribunal accepted that, for nationally negotiated tariffs with major funders, the merger would not materially increase Life’s bargaining power, and it treated GEMS evidence as supporting that conclusion (including the fact that GEMS had been unaware that JMH was being negotiated for within Life’s arrangements).

The principal remaining pricing question was whether JMH, absent the merger and pricing independently, would have priced lower (for example via an NHN tariff) such that the merger would eliminate that competitive constraint. The Tribunal assessed expert evidence attempting to compare Life and NHN tariffs and overall costs and found it inconclusive due to methodological limits and data constraints. It sought to address the evidentiary gap by appointing an independent expert (Dr Green) to advise on feasibility and methodology; Dr Green explained the complexity and data demands of a robust comparison. The Tribunal decided not to undertake a delayed and resource-intensive further data exercise given uncertainty that it would yield probative results.

On the probabilities, the Tribunal nevertheless found it likely that NHN tariffs to funders were lower than Life’s, drawing support from independent hospital testimony and funder submissions in the record, and from the inference the Tribunal drew from the 2011 GEMS episode. At the same time, the Tribunal accepted that consumables and alternative reimbursement models (ARMs) complicated the comparison between “tariffs” and “overall cost,” and it accepted that Life’s buying power and ARM arrangements could reduce consumables costs to funders. The Tribunal therefore concluded that any likely tariff increase at JMH, measured against the hypothetical lawful counterfactual, would probably be slight, particularly given JMH’s limited size and the likelihood of offsetting consumables effects.

The Tribunal dismissed the Commission’s additional pricing theory regarding uninsured patients as speculative on the record, and it treated non-pricing theories of harm (specialists, diversion/tunnelling, regional scheme bargaining, exclusionary impacts) as insufficiently supported by merger-specific evidence. It noted that some concerns might be real in the private healthcare sector generally, but the Tribunal considered that the Commission’s case lacked specificity showing that this merger would materially change outcomes given Life’s already entrenched de facto influence and the relatively small increment in incentives and footprint.

The Tribunal also addressed the Commission’s attempt to introduce additional evidence after final argument, and the Tribunal’s own request for an independent expert report. It held that merger proceedings are not ordinary adversarial civil trials and that the Tribunal has inquisitorial powers and a duty to reach its own conclusion under section 12A. Relying on the Competition Appeal Court’s guidance in the Wal-mart/Massmart matter, the Tribunal rejected an approach of excessive procedural formalism and admitted the additional evidence and the expert report, while also finding that neither ultimately supported prohibition.

Finally, the Tribunal recorded that the Commission had indicated it was investigating whether joint pricing conduct might contravene section 4(1), but the Tribunal did not decide that issue within the merger reasons. The Tribunal also highlighted potential statutory consequences of inaccurate disclosures to the Commission (including sections 15(1), 16(3), and 73(2)(d)), treating these as matters for investigation rather than as determinative of the merger outcome before it.

5. Outcome and Relief

The Tribunal held that the merger was not likely to substantially prevent or lessen competition under section 12A(1), and that there were no public interest considerations under section 12A(3) requiring intervention.

The merger was approved unconditionally by order issued on 24 July 2012, with reasons issued on 24 October 2012. The reasons do not record a costs order.

Cases Cited

Mondi Limited and Kohler Cores and Tubes (Competition Appeal Court Case Number 20/CAC/Jun02).

Afrox Healthcare Limited and Amalgamated Hospitals Limited (Competition Tribunal Case Number 53/LM/Sep01).

ISCOR Limited and Saldanha Steel (Pty) Ltd (Competition Tribunal Case Number 67/LM/Dec01).

Ethos Private Equity Fund IV and Tsebo Outsourcing Group (Pty) Ltd (Competition Tribunal Case Number 30/LM/Jun03).

Copperweld Corp. v Independence Tube Corp. 467 U.S. 752 (1984).

Viho v Commission (Case T-102/92) [1995] ECR II-17.

Viho v Commission (Case C-73/95P) [1996] ECR I-5457.

Imperial Chemical Industries Limited v Commission (Case 48/69) [1972] ECR 619.

Ahmed Saeed Flugreisen and Others v Zentrale zur Bekämpfung Unlauteren Wettbewerbs (Case 66/86) [1989] ECR 803.

Minister of Economic Development and Others v Competition Tribunal and Others (Competition Appeal Court Case No: 110/CAC/Jul11 and 110/CAC/Jun11).

Legislation Cited

Competition Act 89 of 1998, including sections 1, 4(1), 4(2), 4(5), 12(2)(g), 12A(1), 12A(3), 13(1), 15(1), 16(3), and 73(2)(d).

Rules of Court Cited

Rules of the Competition Commission governing information required to be supplied with a merger filing (referred to generally, without specific rule numbers in the reasons).

Held

The Tribunal found, on the evidence, that Life exercised de facto sole control over JMH since 1997 (without de jure control), but that this did not entitle the merging parties to rely on pre-merger joint pricing as the merger counterfactual, because the counterfactual must be lawful competitive conduct, which required independent pricing between Life and JMH pre-merger.

On the merger assessment, the Tribunal held that the Commission’s theories of harm—pricing and non-pricing—were not established to a degree sufficient to show a likely substantial prevention or lessening of competition. The Tribunal considered that any incremental competitive effect on pricing (measured against the lawful counterfactual) was likely slight, particularly given JMH’s limited size and the complexity of overall cost comparisons.

The Tribunal admitted additional evidence after final argument (including an independent expert report and further emails tendered by the Commission), holding that merger proceedings are inquisitorial in nature and should not be constrained by excessive procedural formalism. The additional evidence did not change the competitive assessment.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger analysis requires a comparison between the likely world with and without the merger, and that the counterfactual must reflect a legally permissible benchmark rather than the continuation of potentially unlawful market conduct.

It applied the control principle in section 12(2)(g) that de facto control can arise through the ability to materially influence a firm’s policy in a manner comparable to ordinary indicia of control, even where there is no de jure majority at board or shareholder level.

It applied the restrictive practices framework in sections 4(1), 4(2), and 4(5) to hold that partial ownership or influence over a horizontal competitor does not automatically create immunity from horizontal collusion rules. The intra-group exemption is confined to wholly owned subsidiary structures and comparable “single economic entity” arrangements contemplated by section 4(5), and does not extend to the type of partial ownership and contested governance structure found on the facts.

It applied a procedural principle that merger proceedings are not ordinary adversarial civil litigation and that the Tribunal has inquisitorial powers and a duty to reach its own determination under section 12A, including the ability to admit further evidence where necessary, consistent with the Competition Appeal Court’s guidance that merger hearings should not be stultified by excessive procedural formalism.

Life Healthcare Group (Pty) Ltd v Joint Medical Holdings Ltd (74/LM/Sep11) [2012] ZACT 88; [2013] 1 CPLR 227 (CT) (24 October 2012)