Summary of Judgment

1. Introduction

These proceedings concerned a large merger (an acquisition of control) considered by the Competition Tribunal of South Africa under the merger control provisions of the Competition Act 89 of 1998. The Tribunal was required to decide whether the proposed transaction should be approved and, if so, whether it should be subject to conditions.

The primary acquiring firm was Octodec Investments Limited (“Octodec”), a JSE-listed property company. The primary target firm was Premium Properties Limited (“Premium”), also JSE-listed and holding Estate Investment Trust status. Octodec already held 14% of Premium and sought to acquire the remaining 86% of Premium’s issued share capital, thereby obtaining sole control.

The matter came before the Tribunal following the Competition Commission’s investigation. The Tribunal heard the merger on 3 September 2014, issued the order on 3 September 2014, and subsequently issued reasons on 1 October 2014. The general subject-matter of the dispute concerned the competitive and public interest implications of combining two property portfolios active in leasing office, retail, light industrial, and residential space in certain nodes, together with a specific public interest concern arising from exclusivity clauses in certain retail lease agreements.

2. Material Facts

Octodec was a listed property company controlled by a group of shareholders including the Wapnick Family, Stanlib, Old Mutual Life Assurance Company, and the Government Employee Pension Fund (GEPF). Premium was also listed, with major shareholders including the Wapnick Family, Octodec, Stanlib, Old Mutual, and the GEPF. At the time of the transaction, Octodec already owned 14% of Premium.

The proposed transaction was that Octodec would acquire the remaining 86% of Premium’s shares, resulting in Octodec obtaining sole control over Premium. The parties advanced a rationale consisting of asserted benefits including tax efficiency, a larger and more diversified property fund, increased market capitalisation and liquidity, potential re-rating, improved debt capital terms, and financial/operating efficiencies with associated time and administrative cost savings.

On the competition assessment, the Tribunal recorded that both firms were active in leasing markets for office property, retail space in convenience centres, light industrial space, and residential space. The Tribunal identified overlaps in several product and geographic markets, including B-grade and C-grade office nodes in Pretoria and Johannesburg CBD-related areas, convenience-centre retail within a 10 km radius in Johannesburg and Pretoria CBD nodes, light industrial space in Pretoria and environs, and residential space in Johannesburg CBD and Pretoria-related nodes.

The Tribunal accepted the Competition Commission’s assessment that the post-merger market shares in the overlapping markets were generally low, largely ranging between less than 5% and less than 14%. The only overlap with a materially higher post-merger share was the market for rental space in C-grade office property in the Johannesburg CBD, where the post-merger share was estimated at between less than 30% and less than 40%. The Commission nevertheless considered that this level did not raise competition concerns, in part because vacant space in the relevant nodes constrained the merged entity and also incentivised it to refrain from unilateral conduct.

A discrete set of facts underpinned the public interest issue. The Commission identified that three anchor tenants (large retail chain stores) held leases with Premium containing clauses granting them rights that effectively restricted leasing to their competitors. These rights operated for the duration of the leases, which had 10-year terms expiring in 2021. The Tribunal noted the content of one clause which imposed an absolute restriction preventing the landlord, during the lease period (or renewals), from leasing any part of the shopping centre (or extensions) to tenants whose business comprised, in whole or part, specified categories such as bakery, fresh meat, fresh produce, groceries, and delicatessen. The Tribunal further noted that similar restrictions existed in other anchor tenant agreements, including formulations requiring prior written approval for leasing to supermarkets or stores with food departments above specified thresholds and/or certain categories of business.

The merging parties did not object to the Commission’s proposed condition that Octodec use best efforts to negotiate the removal of these clauses. However, the Tribunal recorded that the merging parties suggested the condition was “neither here nor there”, stating that their centres did not attract small businesses and that the design would allow an additional anchor tenant. The Tribunal recorded that no explanation or supporting evidence (such as LSM analysis or customer profiles) was presented to substantiate the claim that small businesses were not likely to be attracted in the future, and the parties did not advance efficiency justifications for including the restrictive provisions.

3. Legal Issues

The Tribunal was required to determine, first, whether the proposed merger was likely to substantially prevent or lessen competition in any relevant market. This required an application of competition law principles to the market facts recorded, including market definition, market shares, and constraints such as vacancy levels.

Second, the Tribunal was required to consider public interest factors under the Competition Act, specifically the concern raised by the Commission that the anchor tenant exclusivity clauses adversely affected “the ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive” within the meaning of section 12A(3)(c). This aspect of the dispute concerned a mix of fact (the existence and practical effect of the clauses), application of law to fact (whether the clauses implicated section 12A(3)(c) considerations in the merger context), and an evaluative judgment about the appropriateness of imposing conditions.

A further issue was whether merger approval should be conditional, and if so, whether a condition requiring the acquiring firm to use best efforts to negotiate removal of the restrictive clauses was justified on the record before the Tribunal.

4. Court’s Reasoning

On the competition assessment, the Tribunal proceeded from the premise that the parties’ overlapping activities were in the provision of rentable space across multiple property segments and geographic nodes. It accepted the Commission’s market delineation as reflected in the identified overlaps and evaluated the merger’s likely competitive effects primarily through post-merger market shares and the presence of competitive constraints.

The Tribunal accepted that in most relevant markets the parties’ post-merger shares were low, and it recorded the Commission’s view that even the higher post-merger share in the C-grade Johannesburg CBD office market did not raise concerns. Central to that conclusion was the Commission’s assessment that vacant space in the relevant nodes constrained the merged entity. The Tribunal also accepted the Commission’s reasoning that vacancy not only constrained pricing and conduct but also created incentives for landlords, including the merging parties, to avoid unilateral conduct that could exacerbate vacancy or reduce occupancy.

On public interest, the Tribunal focused on the restrictive leasing provisions in anchor tenant agreements. It treated the relevant clauses as capable of limiting leasing opportunities for potential competitors, including smaller retailers. The Tribunal highlighted that at least one clause was framed as an absolute prohibition against leasing to businesses that might compete (even partially) in specified categories, and that other clauses required tenant approval for leasing to certain kinds of food-related retailers above particular sizes. The Tribunal’s reasoning reflected a concern that these restrictions could foreclose access to retail space for the kinds of businesses contemplated by the Commission’s section 12A(3)(c) submission.

In evaluating whether a condition was warranted, the Tribunal attached significance to the merging parties’ inability to provide a persuasive explanation for the continued presence of the restrictive clauses. The Tribunal reasoned that if the merging parties’ view were correct—that the centre did not attract small businesses and would not do so in future—then the clauses would serve little practical purpose and their removal should attract no meaningful objection. The Tribunal noted that the parties did not provide evidence supporting their assertion (such as customer profiling), nor did they advance efficiency arguments for the clauses. Against that backdrop, the Tribunal considered it preferable that the merging parties endeavour to have the clauses removed, aligning with the Commission’s proposed best-efforts condition.

The Tribunal concluded that the merger was unlikely to substantially prevent or lessen competition in the identified markets. It further concluded that no other public interest issues arose beyond the exclusivity concern, which it addressed through conditional approval.

5. Outcome and Relief

The Tribunal conditionally approved Octodec’s acquisition of the remaining issued share capital of Premium, resulting in Octodec obtaining sole control.

The condition required that the acquiring firm use its best efforts to negotiate with the relevant tenants for the removal of the exclusivity/restrictive clauses identified by the Commission as objectionable on public interest grounds.

No costs order is recorded in the reasons provided.

Cases Cited

No cases are cited in the reasons provided.

Legislation Cited

Competition Act 89 of 1998 (as amended), section 12A(3)(c).

Rules of Court Cited

No rules of court are cited in the reasons provided.

Held

The Tribunal held that the proposed acquisition by Octodec of the remaining shares in Premium was unlikely to substantially prevent or lessen competition in the relevant property leasing markets identified. While a public interest concern arose from anchor tenant exclusivity clauses that could restrict leasing opportunities for smaller competitors, the Tribunal addressed this concern by approving the merger subject to a condition requiring the acquiring firm to use best efforts to negotiate the removal of those clauses.

LEGAL PRINCIPLES

The Tribunal applied the merger control principle that a merger must be prohibited or remedied only if it is likely to lead to a substantial prevention or lessening of competition, assessed with reference to the structure of relevant markets, market shares, and competitive constraints such as vacancy levels in property nodes that may discipline landlord conduct.

The Tribunal applied the statutory public interest framework in section 12A(3)(c), treating merger conditions as an appropriate remedial tool where contractual arrangements associated with the target’s operations (here, anchor tenant exclusivity clauses) may adversely affect the ability of small businesses or historically disadvantaged firms to become competitive, particularly where the merging parties provide no substantiated justification for the continuation of such restrictions.

The Tribunal endorsed the use of behavioural conditions framed as an obligation to employ best efforts to address identified public interest risks, where outright prohibition is not warranted and where the competitive assessment does not otherwise reveal substantial anticompetitive harm.