Summary of Judgment

1. Introduction

The proceedings were merger control proceedings before the Competition Tribunal of South Africa concerning an asset acquisition by a bank from an ATM services provider. The Tribunal was required to decide whether the proposed transaction should be approved under the merger provisions of the Competition Act 89 of 1998, and, if so, whether approval should be conditional or unconditional.

The primary acquiring firm was Absa Bank Limited (ABSA), a wholly owned subsidiary of Barclays Africa Group Limited, which is ultimately controlled by Barclays Plc. The primary target firm was not Bytes as an operating business as a whole, but rather a defined set of assets described as 913 ABSA-branded automated teller machines (ATMs) and their related sites owned by Bytes (the “Assets”), held via Bytes Managed Solutions, an unincorporated division of Bytes Technology Group South Africa (Pty) Ltd.

Procedurally, the merger was heard on 30 July 2014, when the Tribunal issued an order approving the merger unconditionally. The Tribunal’s reasons for that decision were issued later on 26 August 2014. The Competition Commission participated and recommended that approval should be conditional due to concerns associated with exclusivity clauses in certain franchise agreements connected to the ATM sites.

The general subject-matter of the dispute concerned whether ABSA’s acquisition of ownership and sole control over the ABSA-branded ATMs (previously owned by Bytes and operated on ABSA’s behalf) raised any competition concerns, including possible vertical foreclosure, the acceptability of a restraint of trade, and whether exclusivity clauses in franchise agreements warranted merger conditions.

2. Material Facts

ABSA was a retail and corporate bank operating, as part of its retail banking business, a network of approximately 9 600 ATMs across South Africa. Within that network, approximately 6 300 ATMs were supplied and maintained by Bytes (including the Assets), approximately 2 500 were supplied and maintained by a competitor of Bytes, and approximately 800 were owned and maintained by ABSA itself. The Assets at issue were ABSA-branded and were at the time operated by Bytes on ABSA’s behalf.

Bytes was the exclusive distributor of NCR products (including ATMs and related devices) in South Africa and selected neighbouring countries. Bytes supplied and maintained over 11 000 ATMs to different retail banks through two models. Under the first model (the ISO model), Bytes owned, maintained and operated ATMs on behalf of retail banks in exchange for a share of revenue. Under the second model, Bytes supplied and maintained ATMs that were owned by the retail banks.

The proposed transaction was structured as an asset acquisition. In terms of an Asset Acquisition Agreement, ABSA intended to acquire the Assets from Bytes, and post-merger ABSA would have sole control over the Assets. The Tribunal characterised the transaction as effectively contemplating the cessation of the existing arrangement (Bytes operating ABSA-branded ATMs on ABSA’s behalf for a revenue share) and a change in ownership of those ATMs and sites from Bytes to ABSA.

A restraint of trade formed part of the Asset Acquisition Agreement. As described by the Tribunal, the restraint provided that Bytes would not establish (directly or indirectly) a business competing with the Assets within South Africa for a period of five years following closing, and would not procure that another party place an ATM within a 500-metre radius of any of the ATM sites acquired by ABSA. The Tribunal understood the restraint in effect to prevent Bytes from placing ATMs on behalf of other retail banks within that 500-metre radius, while not preventing Bytes from continuing its other ATM-related activities (such as supplying, installing and maintaining ATMs for other banks more generally).

In addition, within the existing relationship between ABSA and Bytes, Bytes had entered into franchise agreements with site owners where the ATMs were located. The Commission identified that three of five sample agreements contained exclusivity clauses, and expressed concern that such clauses could prevent other retail banks from installing and operating ATMs at those sites. The Commission sought a condition that, upon renewal of the franchise agreements after the merger approval date, ABSA (as the recipient of ceded agreements) would use reasonable endeavours in good faith to negotiate the removal of exclusivity clauses.

The merging parties disputed the need for such a condition. They contended, in summary, that no relevant market had been identified for assessing the exclusivity clauses, that the Commission had not met the evidential burden of showing a substantial prevention or lessening of competition, and that in any event the exclusivity clauses were part of a pre-existing agreement and were not merger-specific, and thus fell outside the scope of section 12A.

3. Legal Issues

The central legal questions the Tribunal was required to determine were whether the proposed transaction was likely to substantially prevent or lessen competition under the merger assessment required by section 12A of the Competition Act 89 of 1998, and, if so, whether it should be approved subject to conditions.

Within that broad enquiry, the Tribunal confronted several more specific questions. The first was whether the transaction created any horizontal competitive overlap between ABSA and Bytes in the ownership and maintenance of ATMs, given ABSA’s ATM activities were for internal retail banking purposes. The second was whether the transaction raised vertical foreclosure concerns, given that Bytes supplied and maintained ATMs for multiple banks, including ABSA.

A further issue concerned the treatment of the restraint of trade included in the Asset Acquisition Agreement, and whether it was reasonable and not unduly restrictive in the context of the transaction.

Finally, the Tribunal had to address whether the Commission’s concern about exclusivity clauses in franchise agreements justified a merger condition, and whether such exclusivity concerns belonged properly within merger control under section 12A or rather within a separate rule-of-reason analysis of exclusive vertical agreements under section 5(1) of the Act.

These issues largely involved the application of legal standards to established facts, rather than pure disputes of fact. The Tribunal’s approach also required evaluative judgment about competitive effects, the necessity and scope of the restraint, and the appropriateness of addressing exclusivity through merger conditions.

4. Court’s Reasoning

The Tribunal began by assessing competitive overlap. It accepted that ABSA and Bytes were both active in the ownership and maintenance of ATMs. However, it considered it decisive that ABSA’s ATMs were used solely for its in-house retail banking activities and that ABSA did not supply or maintain ATMs for third parties. On this basis, the Tribunal found that the transaction did not result in a relevant horizontal overlap between the merging parties’ activities.

The Tribunal then considered the vertical dimension. Bytes supplied and maintained the relevant ATMs for ABSA, and also provided similar services to other retail banks. The Tribunal addressed whether ABSA’s acquisition of the Assets could give rise to foreclosure concerns affecting ABSA’s competitors, given Bytes’ position in supplying and maintaining ATMs across banks. The Tribunal concluded that no foreclosure concern arose on the facts presented. It relied on the considerations that only a fraction of Bytes’ supplied ATMs were supplied to ABSA and Nedbank under the ISO model, that Bytes submitted it was exiting the ISO model, and that Bytes would continue after the transaction to supply, install and maintain ATMs for other retail banks (including ABSA). The Tribunal therefore formed the view that the asset sale would not impact ABSA’s competitors and was unlikely to have an adverse effect on competition.

Turning to the restraint of trade, the Tribunal analysed its scope and effect. It found that the restraint was limited in effect to preventing Bytes from placing ATMs on behalf of other retail banks within a 500-metre radius of the sites acquired by ABSA. The Tribunal accepted the rationale advanced that the restraint served to ensure that the value of the Assets transferred to ABSA, given Bytes’ access to commercially sensitive information, and to protect ABSA’s investment during the period needed to achieve an adequate return. On this reasoning, the Tribunal concluded that the restraint was reasonable, justifiable and necessary, and that it was not unduly restrictive. It also stated that its assessment was consistent with the approach the Tribunal had previously adopted in earlier matters referenced in its reasons.

The most contested part of the reasoning concerned the Commission’s recommended condition about exclusivity clauses in franchise agreements with site owners. The Tribunal accepted, in general terms, the Commission’s position that exclusivity clauses can have the effect of foreclosing and restricting entry by competing firms. However, it held that the mere existence of exclusivity does not by itself constitute a plausible theory of harm for purposes of merger conditions. It noted that an exclusive vertical agreement is not per se prohibited and is instead subject to a rule-of-reason assessment under section 5(1), which requires an analysis establishing, on a balance of probabilities, whether the agreement would substantially prevent or lessen competition in an identified market.

In this case, the Tribunal placed weight on the fact that, in the Commission’s own enquiry into similar exclusivity clauses, it was acknowledged that other participants engaged in similar contractual exclusivity. Against that background, the Tribunal considered it unfair and inappropriate to burden the merging parties with a condition to remove exclusivity while competitors remained free to retain similar clauses. It further reasoned that implementing antitrust concerns “through the back door” via merger control was inappropriate where other avenues existed for investigating exclusivity concerns, particularly given the broader use of such clauses in the sector. The Tribunal also expressed concern that selective implementation could undermine competition between competitors rather than safeguard it.

Finally, the Tribunal recorded that, in addition to the absence of a substantial prevention or lessening of competition, no public interest issues arose from the proposed transaction.

5. Outcome and Relief

The Tribunal approved the proposed transaction unconditionally.

It refused to impose the condition recommended by the Competition Commission regarding the removal (on renewal) of exclusivity clauses in the franchise agreements.

No specific costs order was recorded in the reasons.

Cases Cited

Replication Technology Group (Pty) Ltd and Gallo Africa Limited, Competition Tribunal case number 92/IR/Sept07.

Calulo Investments (Pty) Ltd, Investec Bank Ltd and FFS Refiners (Pty) Ltd, Competition Tribunal case number 91/LM/Oct12.

Legislation Cited

Competition Act 89 of 1998 (as amended), including section 12A and section 5(1).

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Tribunal held that the asset acquisition by ABSA of 913 ABSA-branded ATMs and related sites owned by Bytes was unlikely to substantially prevent or lessen competition. It found no horizontal overlap of competitive significance because ABSA’s ATM operations were confined to its own retail banking activities and it did not supply or maintain ATMs for third parties.

The Tribunal held further that the vertical relationship between ABSA and Bytes did not give rise to foreclosure concerns on the facts, given the limited proportion of Bytes’ ISO-model ATMs attributable to ABSA (and Nedbank) and Bytes’ stated intention to exit the ISO model while continuing to supply and maintain ATMs for other retail banks.

It also held that the restraint of trade in the Asset Acquisition Agreement was reasonable, justifiable, and not unduly restrictive, being directed to protecting the value of the acquired assets and ABSA’s investment.

On the Commission’s proposed condition relating to exclusivity clauses in franchise agreements, the Tribunal held that exclusivity is not per se unlawful and must be assessed under a rule-of-reason analysis under section 5(1). It concluded that imposing a merger condition to remove exclusivity would be inappropriate and unfair in circumstances where similar clauses were used in the sector and where competition concerns could be pursued through other mechanisms. The merger was therefore approved unconditionally.

LEGAL PRINCIPLES

Merger assessment under section 12A of the Competition Act 89 of 1998 requires an evaluation of whether a transaction is likely to substantially prevent or lessen competition, including consideration of both horizontal overlaps and vertical effects such as foreclosure, assessed on the facts of the merging parties’ activities and the nature of the transaction.

A restraint of trade ancillary to a transaction may be accepted in merger control where it is found to be reasonable, justifiable, and necessary to protect the value of what is being acquired and the acquirer’s investment, and where its scope is not unduly restrictive in relation to competitive conditions.

An exclusive vertical agreement is not per se prohibited and is subject to a rule-of-reason analysis under section 5(1) of the Competition Act 89 of 1998. The existence of exclusivity alone does not establish competitive harm; an assessment is required to determine whether, on a balance of probabilities, the exclusivity has the effect of substantially preventing or lessening competition in an identified market.

Competition concerns associated with exclusivity clauses should not be selectively imposed via merger conditions where similar clauses are widespread in the sector and where other enforcement avenues exist, as selective intervention may have unintended consequences for competitive rivalry.