Brief Summary

Competition Law — Merger Review — Review of decisions by Competition Commission — Applicants challenging conditional approval of small mergers involving Lexshell and Nomad, and Comesa and Emid — Tribunal considering merits of review despite delay in prosecution — Tribunal finding that Commission's decisions were reviewable under PAJA — Tribunal remitting matters back to Commission for reconsideration of merger approvals and conditions imposed.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings were review applications brought to the Competition Tribunal in terms of section 27(1)(c) of the Competition Act 89 of 1998, read with rule 42 of the Competition Tribunal Rules, seeking to review and set aside decisions of the Competition Commission of South Africa (“the Commission”). The decisions under review were the Commission’s conditional approvals of two voluntarily notified small mergers, namely the merger involving Lexshell 129 General Trading (Pty) Ltd and Nomad Information Systems (Pty) Ltd (“the Nomad merger”), and the merger involving Comesa Financial Exchange (Pty) Ltd and Emid Holdings (Pty) Ltd (“the Emid merger”).

The applicant in each matter was the Association of System Operators (“ASO”), an industry body representing most authorised payment system operators in South Africa. The first respondent was the Competition Commission. The second and third respondents were the relevant merging firms in each transaction. Although the merging parties initially opposed aspects of the litigation (particularly relating to access to confidential information), they ultimately did not oppose the merits (Part B) of the review and indicated they would leave the matter for the Tribunal to decide on the pleadings as they stood.

Procedurally, the review was initiated within the 180-day period contemplated in section 7 of the Promotion of Administrative Justice Act 3 of 2000 (“PAJA”), but it reached hearing only some 18 months later. The Tribunal raised the delay at the outset, but noted that no adverse party sought dismissal for failure to prosecute within a reasonable time and accordingly dealt with the review on the merits. The notices of motion were divided into Part A (inspection of confidential documents in the Commission record) and Part B (review and setting aside of the Commission decisions). Part A was strongly opposed, but was resolved through an agreement that gave limited access to the applicant’s legal representatives, so the Tribunal did not have to decide it.

In addition, several ASO members applied to join as applicants or interveners in each matter after ASO’s locus standi was challenged by the merging parties. As these joinder applications were unopposed and the applicants had a direct interest, the Tribunal granted leave to intervene.

The dispute concerned the competitive effects of Bankserv’s acquisitions and diversification strategy in adjacent payments and transaction-processing markets, and in particular the legality and adequacy of the Commission’s chosen behavioural conditions for these small mergers. A central focus was whether the Commission had impermissibly relied on and deferred to anticipated “hold separate” conditions to be imposed by the South African Reserve Bank (“SARB”), instead of imposing enforceable merger conditions itself.

2. Material Facts

On 31 August 2010, the Commission conditionally approved both the Nomad and Emid mergers. Both transactions were small mergers and were voluntarily notified to the Commission. Bankserv featured centrally in both matters: Lexshell was ultimately a wholly owned subsidiary of Bankserv, and Comesa was a wholly owned subsidiary of Bankserv. Bankserv operated the inter-bank clearing and settlement system (a Payment Clearing House Systems Operator) and was owned by the four major banks (Absa, Nedbank, First National Bank, Standard Bank) and two smaller banks.

In the Nomad merger, Nomad provided technology for electronic switching of funds (from a cardholder’s account to a retailer’s account) and related services. The Commission found no horizontal overlap, characterised the relationship as complementary, and nonetheless identified a risk that Bankserv could leverage market power from its payment clearing “core” into transaction switching, including through cross-subsidisation and degradation of interoperability. The Commission concluded the merger was likely to substantially prevent or lessen competition in transaction switching services to retailers, but approved it subject to conditions aimed at access, pricing, confidentiality, monitoring, and duration.

In the Emid merger, Emid provided ICT services including retail banking platforms, transaction and account management solutions, and managed ICT services. The Commission again found no horizontal overlap and described complementary services, but identified the possibility of foreclosure through bundling of Bankserv’s payment core with Emid’s account hosting and transaction management services. The Commission also identified risks of non-replicable bundling, discounting/predatory pricing sustained by profits in the less competitive clearing market, and possible interoperability degradation. It concluded the merger was likely to substantially prevent or lessen competition in retail bank platform services (including card issuing and transaction account hosting and management) and approved it subject to conditions. The conditions imposed in the Emid matter were the same as those imposed in the Nomad matter.

A key factual feature of the Commission’s conditional approvals was its engagement with SARB. Before imposing conditions, the Commission received a letter dated 16 August 2010 from SARB’s Head: National Payment System Department indicating that SARB’s National Payment System division was proposing “hold separate” conditions to its Board of Governors, including separation into distinct legal entities, no sharing of resources (human resources and IT), no cross-subsidisation, and ensuring the safe and efficient operation of the core. However, at the time of the Commission’s decisions on 31 August 2010, SARB’s Board had not yet imposed those conditions. A later letter dated 8 September 2010 (after the Commission’s decisions) recorded that SARB endorsed the ring-fencing recommendations and the necessity to prevent cross-subsidisation.

The Tribunal treated it as material that, although the Commission referred to these “hold separate” measures as important to alleviating competitive concerns, the Commission’s own merger approval conditions did not formally impose SARB’s anticipated hold-separate requirements as Commission-enforceable merger conditions, and the content and public availability of the SARB conditions were contested. The record further reflected that SARB refused to provide ASO with requested information about its monitoring approach, citing confidentiality in terms of the South African Reserve Bank Act.

3. Legal Issues

The central legal questions were whether the Commission’s decisions to conditionally approve the two small mergers were reviewable under PAJA, and specifically whether the decisions (including the conditions) were vitiated by reviewable defects such as error of law, consideration of irrelevant considerations or ignoring relevant ones, irrationality, and unreasonableness.

The Tribunal framed its task as one of administrative-law review rather than appeal, requiring attention to whether the Commission’s decisions bore a rational connection to the potential competitive harm identified and whether they were decisions a reasonable decision-maker could reach on the material before the Commission. Within that framework, the dispute involved a mix of legal questions (including whether the Commission could lawfully rely on and effectively delegate material merger conditions to another regulator), application of law to fact (whether the Commission’s conditions adequately addressed the identified theories of harm), and a value judgment (the appropriateness of remittal and the scope of remittal given the passage of time, implementation realities, and institutional competence).

A further remedial issue arose if a reviewable irregularity was found: whether the Tribunal should remit the matter for reconsideration of the approval decision itself (including the possibility of prohibition), or remit it only for reconsideration and reformulation of the conditions.

4. Court’s Reasoning

The Tribunal approached the matter by emphasising the distinction between review and appeal. It held that a mere disagreement with the Commission’s substantive conclusions was insufficient: the inquiry was whether the decision was rational and reasonable in the administrative-law sense, and whether it was affected by a reviewable defect under PAJA. The Tribunal also criticised the applicants’ tendency to “lump” review grounds together, noting that a reviewing party should identify the specific PAJA provisions grounding the challenge so that the decision-maker can properly answer them, but proceeded to consider the complaints as presented.

On the bundling concern (which the Tribunal noted was common cause as relating only to the Emid merger), the Tribunal accepted that bundling is not inherently anticompetitive and depends on context. It found that the Commission had attempted to remedy the potential exclusionary effects through an access condition, and that there was a rational connection between the identified harm and the imposed remedy. The Tribunal held that the applicant’s true disagreement was with the Commission’s choice of behavioural remedy instead of prohibition, and that this did not, without more, establish a reviewable error. Nonetheless, the Tribunal considered the bundling-related condition imprecisely formulated and indicated it should be redrafted more clearly.

On cross-subsidisation, asymmetric information exchange, and related innovation/growth concerns, the Tribunal noted that the Commission’s responses substantially depended on the existence and operation of SARB’s “hold separate” regime (including separation of management structures and ring-fencing). This dependency led into what the Tribunal treated as the decisive defect in the Commission’s decision-making.

The Tribunal’s core reasoning concerned the SARB conditions and the Commission’s reliance on them. It held that the Commission treated “hold separate” measures as a necessary element of conditional approval while not knowing the final form of those measures at the time, and while not formally imposing them as Commission conditions. In the Tribunal’s view, this amounted to an abdication of the Commission’s merger enforcement responsibility to SARB, a regulator whose mandate concerns payment-system risk rather than competition. The Tribunal further stressed that the Commission has statutory enforcement powers under the Competition Act—specifically the power to revoke approval for breach of merger obligations and to seek penalties for implementation contrary to conditions—and that these powers depend on the obligations being Commission-imposed merger conditions.

The Tribunal reasoned that, because the SARB conditions were not Commission conditions, the Commission could not enforce compliance with them under the Competition Act. Moreover, at the time of the approvals, SARB’s Board had not yet imposed those conditions, meaning the Commission could not have known whether SARB would impose them, or in what form. The Tribunal also treated the public availability and clarity of behavioural conditions as central to effective monitoring, noting that the best monitoring often comes from market participants with incentives to detect non-compliance. Where conditions are unclear or not in the public domain, the Commission is left unable to monitor effectively and must rely on the merging parties’ reporting.

On this basis, and noting that the materiality of these hold-separate measures was fairly conceded, the Tribunal concluded that the Commission’s decision-making was tainted by unreasonableness, irrationality, and error of law in its reliance on a future and uncertain SARB regulatory intervention that it neither imposed nor could enforce.

Turning to remedy, the Tribunal rejected prohibition and divestiture as inappropriate in the circumstances, largely because divestiture was not sought in the notice of motion and the merging parties were not before the Tribunal on the merits. It declined to determine the merger conditions itself, holding that the Commission was better placed to craft detailed conditions, consult interested parties (including the merging parties), and consider developments including what SARB had done and whether those measures were working.

The Tribunal also refused to remit the entire approvals for reconsideration. It reasoned that broad remittal would entail reconsideration on current market conditions and would raise practical and regulatory complexities if the Commission were to reverse approvals, especially given implementation realities and the absence of the merging parties in the review on the merits. It also noted resource implications of a de novo inquiry. It accepted that behavioural remedies can, in appropriate cases, effectively address competition concerns and may be less restrictive than structural remedies, and found insufficient basis (in a review posture) to interfere with the Commission’s decision to approve subject to conditions.

Accordingly, the Tribunal crafted a narrow remittal focused on curing the reviewable defect by requiring the Commission to impose additional hold-separate conditions itself and to reconsider and clarify the bundling remedy in the Emid matter on the existing record.

On costs, the Tribunal declined to award costs against the Commission, citing its general approach that adverse costs could chill the Commission’s enforcement work, and noting the Commission’s partial success in avoiding a full remittal.

5. Outcome and Relief

The Tribunal granted leave for the intervening payment system operators to join the proceedings. It upheld the Commission’s decisions to approve the Nomad and Emid mergers subject to conditions, but remitted the conditions back to the Commission for reconsideration and reformulation.

The Tribunal directed the Commission to impose additional conditions in both approvals addressing the “hold separate” issue, with specified minimum features, including separate legal entities, no sharing of human resources or IT, no cross-subsidisation of profits from Bankserv to Nomad/Emid, restrictions on overlapping directorships, and controls on information flows from Bankserv’s core business unless made available to rivals on reasonable terms.

For the Emid merger specifically, the Commission was directed to consider on the existing record whether the bundling concern could be sufficiently remedied by the hold-separate conditions alone or by an improved condition either preventing bundling or ensuring rivals have equal access enabling a reasonably competitive replica bundle.

The Tribunal imposed a process and timetable: the Commission was to circulate draft new conditions for comment to ASO, interveners, and merging parties; receive submissions; and then issue a final order within the prescribed periods. Pending the Commission’s new order, the merging parties were required to comply with the existing conditions.

No costs order was made.

Cases Cited

The judgment cited the following cases: TWK Agriculture Limited v The Competition Commission (Case No. 67/CAC/Jan07); A.C Whitcher (Pty) Ltd v The Competition Commission and Others (Case No. 84/CAC/Jan09); Democratic Alliance v President of South Africa and Others 2013 (1) SA 248 (CC).

Legislation Cited

The judgment referenced the following legislation: Competition Act 89 of 1998 (including sections 9(1), 15(1)(c), 27(1)(c), and 59(d)(iiii)); Promotion of Administrative Justice Act 3 of 2000 (including sections 6 and 7); National Payment System Act 78 of 1998 (including section 3(1)); South African Reserve Bank Act 90 of 1989 (including section 33).

Rules of Court Cited

The judgment cited rule 42 of the Competition Tribunal Rules.

Held

The Tribunal held that the Commission’s conditional approval decisions were reviewable under PAJA, and that the Commission committed a reviewable irregularity by treating “hold separate” measures as material to its approval while effectively leaving their formulation and enforcement to SARB. This was found to constitute unreasonableness, irrationality, and an error of law, because the Commission did not impose these measures as enforceable merger conditions, could not be sure they would exist at the time of approval, and could not effectively monitor or enforce them under the Competition Act.

The Tribunal nonetheless held that the Commission’s underlying choice to approve the small mergers subject to behavioural conditions was not, in review terms, shown to be irrational or unreasonable, and that the appropriate remedy was a narrow remittal limited to reconsideration and reformulation of the conditions. The Tribunal further held that the Emid bundling remedy required clearer formulation and reconsideration within the remittal.

LEGAL PRINCIPLES

Administrative-law review, rather than appellate re-hearing, governs challenges to Commission merger decisions: dissatisfaction with substance is insufficient unless the decision is shown to be irrational, unreasonable, or otherwise reviewably defective under PAJA, including lacking a rational connection to the material before the decision-maker.

The Competition Appeal Court’s approach, as applied by the Tribunal, treats Commission merger decisions as administrative action subject to PAJA, including the review grounds in section 6 of PAJA.

A competition authority may not treat a condition as material to a merger approval while abdicatedly relying on another regulator to craft and police that condition, particularly where the authority does not impose the condition as part of its own order and therefore cannot enforce compliance using its statutory enforcement mechanisms.

The efficacy of behavioural merger conditions depends materially on their clarity, enforceability, and the feasibility of monitoring. Conditions that are uncertain, not within the decision-maker’s enforcement reach, or not suitably available for monitoring undermine the integrity of behavioural remedies.

Where a reviewable defect is established, remedial discretion may favour remittal on a narrow basis to cure the defect—particularly where the decision-maker has specialised competence, the record is better developed before the administrator, third-party participation is required, and broader relief (such as prohibition/divestiture) would be procedurally and practically inappropriate on the papers and in the absence of affected parties.

Association of System Operators v Competition Commission and Others (71/SM/Nov10, 72/SM/Nov10) [2013] ZACT 45 (5 June 2013)