Brief Summary

Competition Law — Merger Approval — Conditional approval of merger between Business Venture Investments No. 1658 (Pty) Ltd and AFGRI Operations Limited, Senwes Limited, and Senwes Capital (Pty) Ltd — Tribunal finding that proposed joint venture addresses competition and public interest concerns through behavioral conditions — Approval granted subject to monitoring conditions to prevent anti-competitive information exchange.

Comprehensive Summary

Summary of Judgment

1. Introduction

These reasons concern merger proceedings before the Competition Tribunal of South Africa under the Competition Act 89 of 1998 (as amended). The Tribunal was required to determine whether to approve a proposed transaction involving the creation of a joint venture and the transfer of certain business assets into a newly incorporated special purpose vehicle.

The matter was between Business Venture Investments No. 1658 (Pty) Ltd (referred to in the reasons as “Newco”) as the primary acquiring firm, and AFGRI Operations Limited (Afgri), Senwes Limited (Senwes), and Senwes Capital (Pty) Ltd (Senwes Capital) as the primary target firms. Post-transaction, Newco would be jointly controlled by Afgri and Senwes on a 50/50 basis.

The Competition Commission investigated the transaction and identified a competition concern (centred on post-merger coordinated conduct through information exchange) and a public interest concern (centred on employment losses). Prior to the hearing, the Commission and the merging parties agreed on a set of behavioural conditions intended to address both concerns. The Tribunal held a hearing on 10 April 2013, issued an order conditionally approving the merger on 12 April 2013, and later issued these written reasons on 7 May 2013.

The general subject-matter of the dispute was whether the proposed joint venture—against the background of multimarket contact between Afgri and Senwes and their prior collusion in grain storage tariffs—created a sufficient risk of coordinated effects to require conditions, and whether the merger’s anticipated retrenchments required employment-related conditions in the public interest.

2. Material Facts

Afgri and Senwes each operated farming requisite retail stores selling agricultural inputs (including fertiliser, animal feed, seed, fuel and lubricants, vaccinations, and crop protection products) and also selling certain non-farming product lines (including hardware and building materials). In addition to retail overlap, the parties also had horizontal overlap outside the joint venture in other lines of business, including grain and oilseed storage, grain and oilseed trading (including SAFEX-related trading), and the provision of certain financial services.

The transaction involved the establishment of a joint venture by transferring specified assets into Newco. Afgri would sell to Newco certain farm requisite retail stores and depots, as well as the issued shares in Domanko Dertig (Pty) Ltd (Agri-Onderdele) and Partrite (Pty) Ltd, which were described as wholesale businesses involved in sourcing and distributing agricultural and industrial parts and mechanisation components. Senwes and Senwes Capital would sell to Newco certain farm requisite retail stores and Senwes Capital’s property leasing business.

The Tribunal recorded that certain activities were excluded from the joint venture. The merging parties agreed that “30 day” store credit would not form part of Newco; Afgri and Senwes would continue to deal with such store credit separately, with Newco stores only receiving information about account limits and balances. The parties’ John Deere franchises (including associated mechanisation components) were also excluded.

In the Commission’s assessment of the retail store overlap, it found that Afgri and Senwes had a limited geographic overlap. Specific overlap areas were identified, but the Commission found that only in the Heidelberg/Vereeniging area were the parties’ stores located within a 50 km radius. The Commission targeted customers (farmers) in that area, who reportedly indicated that they did not have concerns about the merger and had alternative suppliers available.

The Commission also considered background facts relevant to coordinated effects. The Tribunal recorded that Afgri and Senwes had a history of collusion in relation to grain silo operations, having admitted under consent agreements to fixing daily grain storage tariffs in contravention of section 4(1)(b) of the Competition Act, with those consent agreements having been made orders of the Tribunal in 2011.

On the public interest dimension, the merging parties indicated that the merger could cause duplication of positions and job losses, while stating that no retrenchments of unskilled employees or employees in Paterson Grading job levels A1 to B2 were anticipated. The Tribunal recorded that the affected employees were confirmed at the hearing to be head office level employees and skilled employees within Paterson grades B3 to E5. The Commission raised an employment concern, and the parties made commitments that were said to have been accepted by relevant trade unions.

3. Legal Issues

The central legal questions before the Tribunal were whether the proposed merger was likely to substantially prevent or lessen competition, and if so (or if risks were identified), whether approval subject to conditions was warranted to address the identified competition and public interest concerns.

The competition dispute primarily concerned the application of competition law principles to the facts, specifically an assessment of coordinated effects risk arising from information exchange facilitated by the joint venture, in circumstances of multimarket contact and prior collusion between the shareholders. The Tribunal also dealt with factual assessments regarding the extent of overlap and customer alternatives, but it accepted the Commission’s unilateral and vertical conclusions without needing to resolve contested factual disputes in the reasons.

The public interest dispute concerned a value judgment and discretionary assessment within the merger control framework regarding whether anticipated job losses justified employment-related conditions, and if so, what conditions would be fair to employees and merging parties.

4. Court’s Reasoning

The Tribunal accepted the Commission’s analysis that, from the perspective of unilateral effects in the downstream retail market for farming requisite stores, the merger was unlikely to create a substantial lessening of competition. This conclusion rested on the Commission’s findings of limited geographic overlap, the identification of alternative suppliers, and the absence of customer concerns in the area of closest proximity (Heidelberg/Vereeniging). On this basis, the Tribunal stated it had no reason to doubt the Commission’s conclusion on unilateral effects and did not analyse that aspect further.

Similarly, the Tribunal accepted the Commission’s vertical assessment. It noted that Afgri was active upstream as a wholesaler of certain agricultural products through Partrite and Agri-Onderdele, and that AFGRI Feeds (while not part of the transaction) supplied certain product lines to stores. The Commission concluded the transaction was unlikely to result in input foreclosure (because downstream rivals had credible alternative suppliers) or customer foreclosure (because upstream rivals would still have access to sufficient customers). The Tribunal again indicated it had no reason to doubt the Commission’s vertical conclusions and did not expand further.

The Tribunal’s principal competition analysis focused on coordinated effects. It emphasised that Afgri and Senwes’ relationship extended beyond the joint venture through multimarket contact in storage, trading, and financial services, and that their customer bases overlapped across those markets. The Tribunal accepted the Commission’s concern that Newco could become a platform for information sharing and that coordination could occur both in the non-joint-venture overlaps and through information flows emanating from the joint venture.

In assessing the risk of information exchange, the Tribunal noted the Commission’s view that the shareholders agreement provisions (including a confidentiality undertaking) were insufficient to guard against competitively sensitive information exchange, being more aligned to governance than competition safeguards. The Tribunal further treated as significant the parties’ history of collusion in grain storage tariffs, which increased the probability that competitively sensitive information could be exchanged and used to coordinate conduct post-merger.

The Tribunal concluded that the transaction created significant potential spill-over effects due to multimarket contact and that, combined with the collusion history, this increased the likelihood of post-merger coordination. It therefore concurred with the Commission that conditions were warranted, and found the agreed behavioural conditions (with Tribunal-requested enhancements) to be proportionate to the identified coordination concern. A key enhancement requested by the Tribunal was that confidentiality and information-exchange restraints should bind not only directors and executives but also permanent, contract, and temporary employees.

On public interest, the Tribunal accepted that the proposed merger could cause job losses through duplication but considered the parties’ undertakings (as accepted by unions) as an appropriate basis for addressing employment concerns. After questioning the merging parties about the nature and skill levels of potentially affected employees, it recorded that the affected employees were skilled head office employees in Paterson grades B3 to E5. The Tribunal expressed satisfaction that the employment conditions ultimately imposed were fair to both employees and the merging parties, and it found no other public interest concerns arising.

The Tribunal also imposed monitoring mechanisms, including ongoing reporting obligations to the Commission, to support effective enforcement of the competition-related behavioural conditions.

5. Outcome and Relief

The Tribunal conditionally approved the merger between Newco and the target firms. Approval was granted subject to competition-related behavioural conditions aimed at preventing the exchange of competitively sensitive information between Afgri and Senwes through Newco and thereby addressing coordinated effects risks.

The Tribunal also imposed monitoring and reporting conditions, including requirements to submit confidentiality agreements, provide affidavits confirming implementation of a compliance programme, and deliver annual compliance affidavits to the Commission for as long as the conditions remained operative.

On public interest, the Tribunal approved the merger subject to employment-related conditions, including a prohibition on retrenchments in specified businesses for a defined period and a cap on retrenchments thereafter, and it ordered that employees must receive a copy of the Tribunal’s order and conditions within a specified time.

The reasons do not record any separate costs order.

Cases Cited

No cases were cited in the reasons.

Legislation Cited

Competition Act 89 of 1998 (as amended), including section 4(1)(b) and section 12(1).

Companies Act, including section 2(1)(a) to (c) (as referenced in the definition of “Related”).

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Tribunal held that, although the merger raised no material unilateral or vertical competition concerns on the evidence accepted from the Commission’s investigation, it created a material risk of coordinated effects through the potential exchange of competitively sensitive information, given the parties’ multimarket contact and history of collusion. The Tribunal therefore held that behavioural conditions were necessary and proportionate to prevent the joint venture from facilitating anti-competitive information flows and coordination.

The Tribunal further held that the merger raised an employment-related public interest concern warranting conditions limiting retrenchments for specified periods and requiring communication of the order and conditions to employees. It held that no other public interest issues arose.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger assessment must consider not only unilateral and vertical effects but also the risk of coordinated effects, including where a transaction structure (such as a joint venture) may create avenues for the exchange of competitively sensitive information between firms that continue to compete or interact in other markets.

The reasons reflect the principle that multimarket contact can increase the risk of coordination, particularly where the merging parties’ overlapping relationships extend beyond the assets being combined in the transaction, and where the same customer base is served across multiple markets.

The Tribunal also applied the principle that a proven history of collusion is a relevant factor in evaluating the probability of future coordination and may justify more stringent or carefully designed behavioural safeguards.

In relation to remedies, the Tribunal applied the principle that merger conditions should be proportionate to the identified risk and may include confidentiality obligations, restrictions on governance and staffing arrangements that could enable information exchange, the implementation of a competition compliance programme, and monitoring obligations such as audits and periodic reporting to the Commission.

On public interest, the Tribunal applied the principle that anticipated merger-related job losses may justify conditions limiting retrenchments and that such conditions should be assessed for fairness to affected employees and the merging parties within the merger control framework.

Business Venture Investments No. 1658 (Pty) Ltd v AFGRI Operations Limited and Others (87/LM/Sep12) [2013] ZACT 30 (7 May 2013)