Brief Summary

Competition Law — Merger Approval — Conditional approval of merger between Sycom Property Fund and AECI Pension Fund regarding Somerset Mall — Tribunal assessing competition implications and public interest concerns — No substantial prevention of competition identified; however, exclusivity clause in lease agreement raised public interest issues — Merger approved subject to conditions for negotiation to remove exclusivity clause.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings concerned a large merger determination before the Competition Tribunal of South Africa, resulting in a decision to conditionally approve a transaction in terms of the Competition Act 89 of 1998. The Tribunal’s order was issued on 25 July 2013, with reasons delivered on 7 August 2013.

The primary acquiring firm was Sycom Property Fund Collective Investment Scheme in Property (“Sycom”), represented through its trustee and manager structures, and managed within the Sycom/Acucap group. The primary target firm was AECI Pension Fund (“APF”), in respect of its interests in the property letting enterprise known as Somerset Mall and in Somerset Mall Property Management Company (Pty) Ltd (“Somerset Mall ManCo”).

Procedurally, the matter came before the Tribunal following investigation by the Competition Commission. The Tribunal assessed both competition effects and public interest considerations, ultimately approving the transaction subject to conditions recorded in Annexure A to the decision.

The dispute’s general subject-matter was whether the change from joint control to sole control over a major regional shopping centre (Somerset Mall) raised competition concerns and, in particular, whether the transaction implicated a public interest concern regarding small business access to retail space due to an exclusivity clause in an anchor tenant lease.

2. Material Facts

Sycom was a closed-end property unit trust listed on the JSE, investing in retail and office property. Sycom’s management and control structure was linked to Acucap Properties Limited (“Acucap”), which, according to the merging parties, controlled Sycom and provided asset management services within the group through a wholly-owned subsidiary. Sycom and Acucap together held a portfolio of more than 50 properties in retail and office sectors.

APF was a registered pension fund under the Pension Funds Act 24 of 1956, holding, among other investments, a 50% undivided share in Somerset Mall and 50% of the shares in Somerset Mall ManCo. Prior to the merger, Sycom already held the other 50% of Somerset Mall and Somerset Mall ManCo. The transaction therefore entailed Sycom acquiring APF’s remaining 50% interests, producing a change in control from joint control to sole control by Sycom.

The reasons recorded by the parties for the transaction were that Sycom sought to facilitate a broader restructuring intended to accommodate Hyprop Investments Limited’s exit from Sycom, and APF sought to comply with Regulation 28 of the Pension Funds Act, which limited the pension fund’s exposure by providing that it may not hold more than 5% of its total assets in a single property.

A related transaction was noted: the merger was filed alongside another large merger (Tribunal case number 016683) in which Sycom planned to dispose of its 100% share in Somerset Mall and Somerset Mall ManCo to Hyprop. The Tribunal recorded that if that related deal did not materialise, Sycom would retain sole control as a result of the present transaction.

On the competition facts, the Commission found that although the Sycom/Acucap group owned retail centres in the Western Cape, there was no geographic overlap relevant to this transaction because the group did not own any other shopping centre in the relevant geographic market besides its existing 50% share of Somerset Mall. This conclusion was stated to hold whether the geographic market was delineated narrowly (a 10–15 km radius) or more broadly (a 35 km radius).

On public interest facts, the Commission identified an exclusivity clause in the lease agreement between the landlord and Pick ’n Pay Stores Limited (“Pick ’n Pay”), an anchor tenant at Somerset Mall. The clause was found to have the potential effect of restricting entry by certain small businesses, including grocery stores and bakeries of a certain size, cafés and delicatessens selling fresh fish or meat, butcheries other than halaal butcheries, and fresh produce businesses.

The Commission investigated practical indicators relevant to potential small business entry into Somerset Mall, including vacancy rates, tenant turnover over the preceding years, upcoming lease expiries, and the prospect of expansion. It concluded that, unlike in an earlier matter where conditions were found ineffectual due to lack of available space, there were practical possibilities for entry at Somerset Mall because multiple leases were expected to terminate within two years and there was evidence of tenant entry and exit.

The Commission also considered two nearby shopping centres (Habitat Centre @ The Mall and Waterstone Village Shopping Centre) as alternative sites for small business entry, and noted they had available space and no exclusivity clauses. However, the Tribunal recorded that the Commission had not consulted small businesses on substitutability between those centres and Somerset Mall and that there were concerns about whether one of those centres was a genuine alternative given a relatively high vacancy rate and other differentiating attributes (such as footfall, tenant mix, public transport proximity, size, parking, classification, and trading hours).

3. Legal Issues

The central legal questions were whether the proposed merger was likely to substantially prevent or lessen competition in any relevant market, and whether the merger raised public interest concerns requiring conditions under the Competition Act.

The competition assessment primarily concerned the application of law to fact, notably the delineation of a relevant geographic market and the assessment of overlap and concentration effects given that the acquiring firm already held an interest in the target asset. The public interest assessment required a value-laden evaluation under section 12A(3)(c) of the Competition Act, focusing on the effect of the merger on the ability of small businesses to become competitive, given the existence and potential operation of exclusivity provisions in an anchor tenant lease.

A further issue was remedial: whether conditions of the kind previously imposed in other retail property mergers—obligations to negotiate removal of exclusivity clauses—were appropriate and effective on these facts, and whether the evidentiary record supported the Commission’s initial view that no condition was required.

4. Court’s Reasoning

On competition, the Tribunal accepted the Commission’s conclusion that the transaction posed no material competition harm. The Tribunal’s reasoning turned on the structure of the transaction and the absence of meaningful competitive overlap. Sycom already owned 50% of Somerset Mall and Somerset Mall ManCo, and the merger merely moved the asset from joint to sole control. Although Sycom and Acucap owned retail centres in the Western Cape, the Tribunal recorded that the Commission found no geographic overlap relevant to the letting enterprise at issue, and that the group did not own any other shopping centre in the relevant geographic market beyond the existing share in Somerset Mall. This conclusion was stated to remain the same regardless of whether a narrower or broader radius was used for geographic market delineation.

The Tribunal also noted that the Sycom group did not provide asset management services to third parties, supporting the conclusion that the transaction did not create foreclosure or related vertical concerns in asset management markets on the record presented.

On public interest, the Tribunal focused on the exclusivity clause in the Pick ’n Pay lease and its potential to restrict certain categories of small business tenants from accessing Somerset Mall. The Tribunal located the concern within the framework of section 12A(3)(c) of the Competition Act, which recognises the public interest in preserving and promoting the ability of small businesses to become competitive.

The Tribunal engaged with the Commission’s recent approach in similar retail property mergers. It referred to prior matters where the Commission had recommended, and the Tribunal had accepted, conditions requiring good faith negotiations to remove exclusivity clauses. It then distinguished a more recent decision (involving Fortress Income 2 (Pty) Ltd) where such a condition was not imposed because it would have been ineffectual in circumstances of no available space and no expansion prospect. In this case, the Tribunal accepted the Commission’s factual assessment that Somerset Mall was different from the Fortress matter because there were indicators of realistic entry opportunities, including upcoming lease terminations and demonstrated tenant turnover.

The Tribunal did not accept that the existence of other nearby neighbourhood centres, identified as potential alternatives, eliminated the public interest concern. It reasoned that substitutability from a small tenant’s perspective had not been sufficiently tested, including because small businesses had not been consulted and because differences between a major regional mall and neighbourhood centres could be material for commercial viability. It further expressed concern that a high vacancy rate at one alternative centre could signal that it was not a realistic substitute for entry or expansion by small businesses.

Given these uncertainties and the potential exclusionary effect of the exclusivity clause, the Tribunal treated the clause as raising a potential substantial public interest concern. It then relied on the fact that the merging parties tendered a condition aimed at addressing that concern, and approved the merger on the basis of that undertaking. The condition required Sycom (in this merger) and Hyprop (in the related merger) to use reasonable commercial endeavours, in the utmost good faith within a specified period, to negotiate removal of the exclusivity clause with Pick ’n Pay, coupled with reporting obligations to the Commission by affidavit.

The Tribunal recorded that the transaction raised no other public interest concerns, including none relating to employment, as the parties confirmed there would be no adverse employment effects.

5. Outcome and Relief

The Tribunal conditionally approved the merger in terms of section 16(2)(b) of the Competition Act 89 of 1998.

Approval was granted subject to conditions requiring Sycom and Hyprop jointly to use reasonable commercial endeavours to negotiate with Pick ’n Pay, in the utmost good faith within 60 days of the Tribunal’s order, to remove the exclusivity clause in the Pick ’n Pay lease. The conditions further required that Sycom or Hyprop provide the Commission with an affidavit setting out the outcome of the negotiations within 90 days of the Tribunal’s order.

No costs order was recorded in the reasons provided.

Cases Cited

Fortress Income 2 (Pty) Ltd and The immovable proprietary and property letting enterprises of Pick 'n Pay Rustenburg, Central Park Bloemfontein, Nelspruit Plaza, New Redruth Alberton, Sterkspruit Plaza and Tzaneen Centre (Competition Tribunal case number 016519).

Accelerate Property Fund Limited and 15 letting enterprises being sold by Fourways Precinct (Pty) Ltd (Competition Tribunal case number 016170).

Fairvest Property Holdings Limited and A portfolio of commercial properties of the South African Corporate Real Estate Fund (Competition Tribunal case number 015610).

Redefine Properties Limited and Hyprop Investments Limited in respect of a 50% undivided share of the business enterprise known as “South Coast Mall” (Competition Tribunal case number 014993).

Growthpoint Properties Limited and Liberty Group Limited in respect of a 64.29% interest in the business enterprise known as “Alberton City” (Competition Tribunal case number 014415).

Legislation Cited

Competition Act 89 of 1998 (as amended), including section 16(2)(b) and section 12A(3)(c).

Pension Funds Act 24 of 1956 (as amended), including Regulation 28.

Rules of Court Cited

No rules of court were cited in the reasons provided.

Held

The Tribunal held that the merger did not substantially prevent or lessen competition in any relevant market on the record, including because the acquiring group had no relevant geographic overlap beyond its existing interest in Somerset Mall and did not provide third-party asset management services.

The Tribunal further held that the exclusivity clause in the Pick ’n Pay anchor tenant lease raised a potential substantial public interest concern regarding the ability of small businesses to enter and become competitive at Somerset Mall, particularly given evidence suggesting realistic opportunities for tenant entry and insufficient information establishing that nearby centres were effective substitutes for small businesses.

On that basis, the merger was approved subject to conditions requiring time-bound, good faith negotiations aimed at removing the exclusivity clause, and compliance reporting to the Competition Commission by affidavit.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger control under the Competition Act requires an assessment of whether a transaction is likely to substantially prevent or lessen competition, which entails defining and applying an appropriate market framework to the evidence of overlap and competitive constraint. Where, on the facts, there is no meaningful overlap or incremental concentration within the relevant geographic market, approval may follow on competition grounds.

The Tribunal applied the principle that merger assessment must also consider public interest factors, including under section 12A(3)(c) the effect of a merger on the ability of small businesses to become competitive. Exclusivity clauses in anchor tenant leases may, depending on the factual context, raise such a public interest concern by restricting access to retail space for certain categories of smaller tenants.

The Tribunal applied a further remedial principle that merger conditions should be assessed for practical effectiveness. Where conditions aimed at removing exclusivity clauses would be ineffectual due to the absence of space or expansion prospects, they may be omitted; conversely, where there are practical possibilities for entry and the record does not adequately demonstrate effective alternatives, conditional approval requiring good faith negotiations may be warranted to address the public interest concern identified on the facts.

Sycom Property Fund Collective Investment Scheme in Property v AECI Pension Fund in respect of the property letting enterprise known as “Somerset Mall” and in Somerset Mall Property Management Company (Pty) Ltd (016659) [2013] ZACT 85; [2013] 2 CPLR 565 (CT) (7 August 2013)