Brief Summary

Competition — Merger approval — Conditional approval of merger between Ferro South Africa (Pty) Ltd and Revertex South Africa — Merger assessed for impact on competition in water-based dispersions and emulsions market — Horizontal overlap identified but deemed negligible — Structural condition imposed requiring divestiture of shares in joint venture to prevent anti-competitive effects in powdered coatings market — Merger unlikely to substantially prevent or lessen competition in relevant markets.

Comprehensive Summary

Summary of Judgment

1. Introduction

The matter concerned large merger proceedings before the Competition Tribunal of South Africa, in which the Tribunal was required to decide whether to approve a proposed acquisition of control subject to the competition and public-interest standards under the competition-merger regime.

The acquiring side comprised Ferro South Africa (Pty) Ltd (“Ferro”) and, as the primary acquiring firm for purposes of the transaction, Ferro Coating Resins (Pty) Ltd (“Ferro Coating”), a wholly owned subsidiary of Ferro. The target firm was Revertex South Africa (Pty) Ltd (“Revertex”), controlled by Synthomer PLC. Revertex held interests in Synthomer (Pty) Ltd (“Synthomer SA”) and a 50% shareholding in Arkem (Pty) Ltd (“Arkem”), a joint venture with Akzo Nobel (Pty) Ltd (“Akzo Nobel”).

Procedurally, the merging parties filed the large merger with the Competition Commission on 22 March 2016. The Tribunal heard the matter on 4 August 2016, issued an order on 4 August 2016, and later issued reasons on 17 August 2016. The Tribunal approved the merger subject to a divestiture condition, with detailed conditions attached as “Annexure A”.

The general subject-matter of the dispute was whether the merger would substantially prevent or lessen competition in relevant markets. Although the parties overlapped in water-based dispersions, the principal concern addressed by the Tribunal related to the risk of coordinated effects in the separate market for powder coatings, arising from a post-merger structural link between Ferro and Akzo Nobel through the Arkem joint venture.

2. Material Facts

Ferro Coating is a South African incorporated company and a wholly owned subsidiary of Ferro. Ferro is ultimately controlled by JEP Portfolio 1 (Pty) Ltd, owned by Investec Bank Limited (a wholly owned subsidiary of Investec Limited). Ferro, as a group, manufactures base coating materials in the industrial chemicals sector and manufactures and distributes resins and additives used in architectural, industrial, construction, adhesives, and graphics markets. A fact central to the remedy was that Ferro is active in the market for powder coatings, manufacturing and selling powdered paint via its Powder Coatings Division under the brand “Ferro Vedoc”.

Revertex is an investment company holding Synthomer’s interests in Synthomer SA and the joint venture Arkem. Synthomer SA manufactures and sells particular emulsions and polymers (including styrene acrylics, acrylics, vinyl acetate polymers, as well as surfactants and thickeners) and performs toll manufacturing of certain chemical products. Arkem operates as a technology provider and supplier of specialty chemicals that are toll manufactured on its behalf by Synthomer SA, and it is involved in research and development in areas including water treatment and paints.

The proposed transaction entailed Ferro Coating acquiring the entire share capital of Revertex, including its interests in Synthomer SA and Arkem. The consequence of implementation was that Ferro Coating would obtain sole control over Synthomer SA and joint control over Arkem with Akzo Nobel, stepping into Revertex’s position as the 50% shareholder in Arkem.

On market activity, the Tribunal recorded that there was no competitive effect in the market for solvent-based dispersions and emulsions, because only Ferro was active there. By contrast, the transaction created a horizontal overlap in the market for water-based dispersions, but this overlap was described as negligible in light of Ferro’s pre-merger market share being approximately 0.1%, with the merged entity’s post-merger share being approximately 27.6% (with most of that share attributable to the target side).

The central competitive harm identified by the Commission, and accepted by the Tribunal as a concern requiring a remedy, related to the market for powder coatings, described as having steep barriers to entry and in which Akzo Nobel and Ferro were the two largest competitors with a combined market share of 73%. The Commission’s concern was that Arkem, as a joint venture with post-merger governance links, created a structural opportunity for information exchange and coordination between two leading powder coatings competitors.

The Tribunal also recorded a public-interest fact: the merging parties stated that the transaction would not affect employment, and that no merger-specific retrenchments would occur.

3. Legal Issues

The Tribunal was required to determine whether the merger was likely to substantially prevent or lessen competition, particularly in the national market for water-based dispersions and emulsions, and whether any other competition concerns arose from the transaction structure, including the acquisition of joint control in Arkem.

A further central question was whether the merger created a material risk of coordinated effects in the separate market for powder coatings, specifically through a mechanism of information sharing and interaction created by the Arkem joint venture relationship between Ferro (post-merger) and Akzo Nobel.

The issues largely concerned the application of competition-law standards to facts and forecasts, including market delineation, the assessment of unilateral effects, and a forward-looking evaluative judgment regarding the risk of coordination facilitated by governance structures and information flows.

4. Court’s Reasoning

On market delineation for dispersions/emulsions, the Tribunal noted an absence of Tribunal precedent directly demarcating the functionality of dispersion or emulsion products into relevant product markets. It therefore recorded the Commission’s reliance on the European Commission decision in Dow/Rohm and Haas, which differentiated water-based dispersions from solvent-based dispersions. The Tribunal then explained the functional distinction as it appeared from the record: water-based dispersions and emulsions function as binder inputs for paints used primarily indoors and decorative applications, whereas solvent-based dispersions and emulsions are used in more durable outdoor or functional paints such as those used for rust prevention.

The Tribunal accepted the Commission’s supply-side substitution analysis that, although some of the same machinery may be used to manufacture both categories, the machinery is not easily interchanged between processes because it requires extensive cleaning and involves significant downtime. On this evidentiary basis, the Tribunal concluded there was sufficient support for differentiating the relevant markets for water-based and solvent-based dispersions/emulsions.

Having separated the markets, the Tribunal found that the merger had no impact on solvent-based dispersions/emulsions because only Ferro participated there. In relation to water-based dispersions, although the post-merger share was recorded as approximately 27.6%, the Tribunal treated the overlap as negligible in competitive-effect terms because Ferro’s pre-merger presence was approximately 0.1% and the Commission had identified alternative significant competitors as well as relative ease of customer switching. On that basis, the Tribunal concluded the merger did not threaten unilateral anti-competitive effects in the water-based dispersions market and was unlikely to substantially prevent or lessen competition there.

The Tribunal then turned to coordinated effects. It recorded that post-merger Ferro Coating would become the 50% shareholder in Arkem alongside Akzo Nobel, and that Ferro and Akzo Nobel were the two largest competitors in powder coatings, with high combined shares and substantial barriers to entry. The Commission’s theory of harm, as set out in the reasons, was that the joint venture would provide an organisational and governance “structural link” through which competitively sensitive information could be shared, particularly because board members involved in the Arkem joint venture relationship could, within Ferro’s governance structure, sit alongside those responsible for the powder coatings business.

In response to that concern, the Tribunal accepted the Commission’s view that a structural remedy was required to sever the link, rather than a solely behavioural approach. The remedy took the form of a divestiture condition involving the disposal of shares in Arkem, structured in stages: first, the merging parties would seek to acquire Akzo Nobel’s 50% shareholding in Arkem under the joint venture agreement’s disposal provisions; failing agreement, the merged entity would dispose of its 50% shareholding to an independent third party; and failing disposal within specified time periods, a trustee would be appointed with a mandate to effect the divestiture.

The Tribunal also dealt with an interpretive clarity point regarding implementation. It recorded that there was ambiguity in the conditions’ use of the term “conclude” in relation to divestiture and that, upon questioning, counsel for the parties confirmed that the intended meaning was “disposed”, namely actual disposal rather than merely concluding an agreement to dispose. The Tribunal required an amendment to the conditions to ensure clarity, which the parties accepted.

On public interest, the Tribunal recorded the parties’ submission that there would be no employment impact, and it did not identify public-interest harm requiring conditions beyond those addressing the competition concern.

5. Outcome and Relief

The Tribunal approved the large merger between Ferro South Africa (Pty) Ltd and Revertex South Africa subject to a divestiture condition aimed at addressing the coordinated-effects concern arising from the post-merger joint venture link in Arkem.

The relief granted was a conditional approval incorporating comprehensive divestiture machinery set out in Annexure A, including staged divestiture periods, Commission oversight of any proposed purchaser, governance restrictions during the divestiture period (including restrictions relating to the sharing of competitively sensitive information and board participation), and the appointment and mandate of an independent trustee if required.

The reasons did not record any separate costs order.

Cases Cited

Dow/ Rohm and Haas Case No: COMP/M.5424, 08 January 2009.

Legislation Cited

Competition Act 89 of 1998 (as amended).

Rules of Court Cited

Rules for the Conduct of Proceedings in the Commission and the Tribunal.

Held

The Tribunal held that the merger was unlikely to substantially prevent or lessen competition in the national market for the manufacture and sale of water-based dispersions and emulsions, given the negligible pre-merger presence of Ferro in that segment, the presence of alternative competitors, and customers’ ability to switch suppliers.

The Tribunal further held that the merger nonetheless created a threat to competition in the powder coatings market by creating a structural opportunity for information sharing and coordination between Ferro and Akzo Nobel through the post-merger joint venture relationship in Arkem. To address that threat, the Tribunal approved the merger subject to a structural divestiture condition designed to sever the link, with implementation safeguarded through staged divestiture obligations and trustee mechanisms.

LEGAL PRINCIPLES

The Tribunal applied the principle that relevant product markets may be differentiated where functional use and supply-side conditions indicate limited substitution, including where manufacturing processes are not readily interchangeable due to practical constraints such as cleaning requirements and downtime. On the record before it, the Tribunal accepted differentiation between water-based and solvent-based dispersions/emulsions.

The decision reflects the principle that merger assessment encompasses not only unilateral effects in overlapping product markets but also coordinated effects, including circumstances in which a transaction creates or strengthens a structural link (such as a joint venture relationship) between close competitors in a separate market, thereby facilitating the exchange of competitively sensitive information and increasing the risk of coordination.

The Tribunal’s approach illustrates that where the identified harm arises from the creation of a structural connection capable of facilitating coordination, a structural remedy (here, divestiture to sever the link) may be regarded as necessary and appropriate, supported by detailed implementation conditions, oversight of purchaser suitability, and trustee mechanisms to ensure effective and timely compliance.

Ferro South (Pty)Ltd v Revertex South Africa (LM261Mar16) [2016] ZACT 69; [2016] 2 CPLR 851 (CT) (17 August 2016)