Summary of Judgment

1. Introduction

This matter concerned merger proceedings before the Competition Tribunal of South Africa in terms of which approval was sought for a transaction that would result in the acquiring firm increasing its shareholding to full ownership of the target firm.

The primary acquiring firm was Arrowhead Properties Limited (Arrowhead), a property investment company listed on the Johannesburg Securities Exchange (JSE). The primary target firm was Vividend Income Fund Limited (Vividend), also a JSE-listed property investment firm. The transaction was implemented by way of a scheme of arrangement through which Arrowhead intended to increase its linked units in Vividend to 100%.

The matter proceeded from the competition authorities’ consideration of the proposed merger to a hearing before the Tribunal on 2 July 2014, with an order issued on that date and written reasons issued on 24 July 2014. The general subject-matter of the dispute was whether the proposed acquisition should be approved having regard to competitive effects in defined property rental markets and public interest considerations, particularly the transaction’s effect on employment.

2. Material Facts

Arrowhead was described as a JSE-listed firm in the real estate holdings and development sector and was stated not to be controlled by any other firm. It held 31.7% of the units in Vividend prior to the transaction and controlled certain entities, including Vividend Management Group and Arrowhead Residential (Pty) Ltd. Its top beneficial unit-holders holding more than 5% of its combined linked units included Coronation Fund Managers, Investec Asset Management, and Ford Asset Management.

Vividend was likewise described as a JSE-listed property investment firm not controlled by any other firm. Its beneficial unit-holders holding more than 5% included Arrowhead, Stanlib Asset Management, and Nedcor Bank Nominees. Vividend controlled Clearwater Crossing (Pty) Ltd and Fluxrab Investments No 196 (Pty) Ltd, and held a 90% interest in Southern Value Consortium.

The proposed transaction entailed Arrowhead increasing its linked units in Vividend to 100% by way of a scheme of arrangement. Arrowhead’s stated rationale was that the acquisition aligned with its strategy of making distribution-enhancing acquisitions aimed at increasing critical mass, asset quality, and diversification, and would provide it with a strategic stake in Vividend’s commercial and retail property portfolios valued at approximately R2 billion. Vividend’s rationale was that the disposal would be in the best interests of Vividend’s linked unit-holders.

On the competition assessment, the Tribunal recorded that the transaction gave rise to horizontal overlaps in specific localised property rental markets. These included the provision of rental space in B-Grade office property in the Randburg node, B-Grade office property in the Durban CBD node, and the provision of rental space in a convenience centre within a 10 km radius of certain Vividend retail properties in the areas identified as Rosettenville/Selby, Benoni/Boksburg, Montclair/Durban, and Pietermaritzburg. It was also recorded that there was no geographic overlap in the parties’ retail property activities in the Western Cape, Mpumalanga, and the Eastern Cape.

A material public interest fact recorded by the Tribunal was the Competition Commission’s finding that the transaction raised employment concerns. The Commission found that the transaction would likely result in the retrenchment of 21 out of 22 current employees of Vividend and considered there to be a likelihood of retrenchments within 6 to 12 months post-merger. The Commission’s concern was linked to Arrowhead’s business model, described as one in which it does not directly employ employees and instead outsources property management and other employment functions to service providers including JHI Properties (Pty) Ltd, Citiq Property Services, and Mafadi Property Management (Pty) Ltd.

The Tribunal further recorded that, following deliberations between the merging parties and the Commission, the parties initially agreed to retain all employees for 12 months except for one “white collar” employee, but were unable to agree to an extension of the retention period from 12 months to 36 months. The Commission ultimately recommended approval subject to a condition that the merged entity would not retrench the 21 employees for a period of three years from the effective date as a result of the transaction.

3. Legal Issues

The Tribunal was required to determine whether the proposed acquisition was likely to substantially prevent or lessen competition in any relevant market arising from the identified horizontal overlaps in the provision of rental space in specified property nodes and catchment areas.

In addition, the Tribunal had to consider whether public interest considerations, specifically the anticipated impact on employment (in the form of likely retrenchments), warranted conditional approval of the merger notwithstanding the Commission’s view that competition concerns were not material.

The dispute primarily concerned the application of competition law principles to the facts, including market overlap assessment and an evaluative assessment of whether the anticipated employment effects justified the imposition of conditions.

4. Court’s Reasoning

On the competition analysis, the Tribunal accepted the Commission’s view that the proposed transaction was unlikely to substantially prevent or lessen competition. This conclusion was tied to the assessment that the merging parties’ post-merger shares would remain low in the overlap markets identified, and to the finding that in certain provinces there was no geographic overlap in the parties’ retail property activities. On the facts as recorded, the Tribunal treated the identified overlaps as not giving rise to material competitive foreclosure or market power concerns requiring prohibition or structural remedies.

On public interest, the Tribunal addressed the Commission’s employment concerns as a distinct basis for intervention. The reasoning recorded that the Commission considered retrenchments of 21 unskilled employees significant and that the likelihood of retrenchments was connected to Arrowhead’s outsourcing model and the expectation that Vividend’s existing employees would not be retained post-merger. The Tribunal recorded the parties’ engagement with the Commission around mitigation measures, including proposals related to employee retention periods and the nature of employment (including an agreement to employ affected employees on a permanent basis as a measure aimed at addressing concerns).

In concluding, the Tribunal weighed the absence of substantial competition harm against the existence of public interest concerns relating to employment. It then recorded an approval outcome that incorporated an employment-related restraint, namely that the merged entity would not retrench the 21 employees for a period of three years from the effective date as a result of the proposed transaction. The Tribunal thus treated the employment issue as requiring a condition notwithstanding its overall finding that the transaction was unlikely to harm competition in the relevant markets.

5. Outcome and Relief

The Tribunal approved the proposed transaction. In its written reasons, it recorded that the approval was subject to a condition that the merged entity shall not retrench 21 employees for a period of three years from the effective date as a result of the proposed transaction.

The text provided does not record a costs order.

Cases Cited

No cases were cited in the text provided.

Legislation Cited

No legislation was cited in the text provided.

Rules of Court Cited

No rules of court were cited in the text provided.

Held

The Tribunal found that the proposed acquisition was unlikely to substantially prevent or lessen competition in the identified markets for rental space, including the specified B-Grade office property nodes and convenience-centre catchment areas.

The Tribunal further held that public interest concerns relating to employment arose on the facts placed before it, and it approved the merger on terms recorded in its conclusion as including an employment-related restriction on retrenchments connected to the transaction.

LEGAL PRINCIPLES

The decision applied the principle that a merger is assessed by reference to whether it is likely to substantially prevent or lessen competition in any relevant market, which requires identification of areas of horizontal overlap and an evaluation of competitive significance, including the role of post-merger market shares and the presence or absence of geographic overlap.

The decision also applied the principle that merger control includes consideration of public interest factors, and that where a merger raises employment concerns (including anticipated retrenchments attributable to the transaction), approval may be accompanied by conditions directed at addressing or mitigating those public interest effects.