Imperial Holdings Limited v Itumelo Bus Lines Proprietary Limited (LM105Sep16) [2016] ZACT 119 (21 December 2016)

78 Reportability

Competition Law

Brief Summary

Competition — Merger — Conditional approval of merger between Imperial Holdings Limited and Itumelo Bus Lines Proprietary Limited — Imperial acquiring 55% of Interstate — Competition Commission found no substantial lessening of competition but identified anti-competitive restraint of trade agreement — Merging parties agreed to limit scope and duration of restraint — Tribunal approved merger subject to conditions addressing competition concerns.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned merger proceedings before the Competition Tribunal of South Africa in which the Tribunal was required to determine whether a proposed acquisition should be approved and, if so, whether it should be approved conditionally.

The primary acquiring firm was Imperial Holdings Limited (“Imperial”), a JSE-listed company and the holding company of a diversified group active in, among other things, consumer and industrial logistics services and motor vehicle retail and related financial products and services. The primary target firm was Itumelo Bus Lines Proprietary Limited (referred to in the reasons as “Interstate”), a commuter bus operator active in the Free State, and the controller of a commuter bus operator (Cut A Cross Projects (Pty) Ltd t/a Imfuyo Bus Services) as well as a shareholder in firms involved in tyre retail and investment property.

The matter came before the Tribunal following an investigation by the Competition Commission (“the Commission”). The merger was heard on 30 November 2016, conditionally approved on 30 November 2016, and the Tribunal’s public reasons were subsequently issued on 21 December 2016.

The general subject-matter of the dispute was not a conventional horizontal or vertical competition assessment (as the Commission found no overlap), but rather the competition implications of a restraint of trade agreement concluded in the context of the merger, and whether that restraint required narrowing by conditions to address likely anti-competitive effects.

2. Material Facts

Imperial proposed to acquire 55% of the ordinary share capital in Interstate, which would result in Imperial acquiring control of Interstate after implementation of the transaction. Imperial’s rationale for the transaction was that it would enable Imperial to enter the public transport market, while Interstate regarded the transaction as strategically beneficial and enabling expansion.

Interstate operated a commuter bus service in the Free State Province, including routes between Bloemfontein, Botshabelo, Thaba ’Nchu and surrounding areas, as well as Brandfort and Soutpan. The Tribunal recorded that approximately 25 000 passengers commute daily using services provided by Interstate in the Bloemfontein area for work and school. The target firm’s operations included contracted (subsidised) commuter services and non-contracted (unsubsidised) services, including private charter and tour-related services and other described categories.

On the competition assessment of the merger itself, it was not disputed (and the Tribunal agreed) that there was no product overlap between the merging parties’ activities. On that basis, the Commission concluded, and the Tribunal concurred, that the merger was unlikely to result in a substantial prevention or lessening of competition from a horizontal or vertical perspective.

The material competition concern instead arose from a restraint of trade agreement entered into by the merging parties. The Commission discovered that certain shareholders and members of key management of the target firm were restrained from competing while they remained shareholders and employed in the merged entity, and further for five years after they ceased to be shareholders and were no longer employed in the acquiring group.

The Commission found that the restraint, in its original form, could not be justified in three respects: (i) its geographic scope (covering the whole of South Africa while the target firm operated in the Free State), (ii) the scope of restrained activities (extending to activities of the acquiring group rather than being confined to the target firm’s activities), and (iii) its duration of five years (which the Commission considered unjustified, suggesting three years as reasonable).

Before the hearing commenced, the Commission and the merging parties reached agreement to narrow the restraint in relation to the activities included (limiting it to the target firm’s activities) and its duration (reducing it from five years to three years). The only issue that remained in dispute at that stage was the geographic scope of the restraint.

The Tribunal proposed an approach to resolve the geographic scope dispute: that the restraint should apply to the geographic areas in which the target firm is active at the time the restraint commences. The merging parties and the Commission agreed to this approach. The parties then presented the Tribunal with an agreed set of conditions addressing the restraint.

On public interest, the Tribunal recorded the merging parties’ confirmation that the transaction would not result in an adverse impact on employment, and that no other public interest concerns were raised.

3. Legal Issues

The central questions for determination were, first, whether the merger was likely to substantially prevent or lessen competition in any relevant market, and second, whether the restraint of trade arrangement associated with the merger created competition concerns that warranted conditional approval.

The dispute did not turn on contested evidence regarding market overlap (the Commission found, and the Tribunal accepted, that there was no overlap). Rather, the key issue concerned the application of competition principles to the terms of the restraint and the Tribunal’s evaluation of whether the restraint’s scope was justifiable and proportionate, and what conditions would appropriately address likely anti-competitive effects.

In addition, the Tribunal was required to consider whether any public interest concerns arose, particularly regarding employment.

4. Court’s Reasoning

The Tribunal adopted the Commission’s analysis that there was no product overlap between Imperial and the target firm. As a result, the Tribunal accepted that, viewed through standard horizontal or vertical merger analysis, the transaction was unlikely to produce a substantial lessening or prevention of competition in a relevant market.

However, the Tribunal treated the restraint of trade agreement as an independent and material source of potential competitive harm. The Tribunal accepted the Commission’s position that the restraint, as originally framed, was likely to give rise to anti-competitive effects and was not justifiable in its original breadth. The concerns were directed at the restraint’s geographic reach, activity scope, and duration, each of which could operate to restrict competition beyond what was necessary to protect legitimate transactional interests associated with the acquisition.

In relation to remedy, the Tribunal’s reasoning reflects a proportionality-oriented approach: it assessed whether the restraint could be narrowed so that any restriction would be no broader than required in relation to the business acquired. The Tribunal recorded that the parties had already agreed to reduce the duration to three years and to confine the restrained activities to the target firm’s business (excluding businesses conducted by group companies within Imperial Logistics). The remaining disagreement concerned geography, where the merging parties contended (among other things) that Imperial had expended significant capital and would wish to protect its investment.

To resolve that last point, the Tribunal suggested that the restraint should be limited to the geographic areas where the target firm is active when the restraint commences, rather than covering the whole of South Africa. The Tribunal recorded that both the Commission and the merging parties agreed to this solution. On that basis, the Tribunal concluded that the resulting conditions were adequate to address the identified competition concerns and were proportional to those concerns.

On public interest, the Tribunal accepted the merging parties’ confirmation that there would be no adverse employment impact, and it recorded that no other public interest issues arose. This supported unconditional acceptance on public interest grounds, leaving the restraint-related conditions as the central basis for conditional approval.

5. Outcome and Relief

The Tribunal conditionally approved the merger between Imperial Holdings Limited and Itumelo Bus Lines Proprietary Limited (Interstate).

The approval was subject to conditions addressing the restraint of trade agreement, requiring that the merging parties reduce the restraint’s duration from five years to three years, reduce the geographic scope from the whole of South Africa to the geographic area within which the target firm conducts its business activities as at the date the restraint period commences, and reduce the scope of restrained activities to the target firm’s business while excluding businesses conducted by group companies within Imperial Logistics.

The conditions further required the merging parties to submit an addendum to the restraint of trade agreement reflecting the amendments within 10 business days of the approval date, prohibited amendment of the addendum for the duration of the restraint period, and provided for compliance monitoring and breach handling in terms of the relevant Commission rule.

The reasons do not record any costs order.

Cases Cited

No cases were cited in the Tribunal’s published reasons.

Legislation Cited

No legislation was expressly cited in the Tribunal’s published reasons.

Rules of Court Cited

Rule 39 of the Competition Commission Rules.

Held

The Tribunal held that the proposed transaction was unlikely, from a horizontal or vertical perspective, to substantially prevent or lessen competition in any relevant market because there was no product overlap between the merging parties.

The Tribunal further held that the merger nevertheless raised likely competition concerns because the merging parties had entered into a restraint of trade agreement whose original terms were regarded as unjustifiably broad and likely to have anti-competitive effects. Those concerns were addressed through conditions narrowing the restraint’s duration, geographic scope, and activity scope.

The Tribunal also held that no public interest concerns arose, including in relation to employment, on the information presented.

LEGAL PRINCIPLES

The decision applied the principle that a merger may be approved where it is not likely to substantially lessen or prevent competition on conventional market-overlap analysis, but that the competition authority and Tribunal may still scrutinise and regulate ancillary restraints associated with the transaction where such restraints are likely to generate anti-competitive effects.

The Tribunal applied a proportionality-based approach to restraints associated with mergers, requiring that restraints be limited in time, geography, and scope of activities to what is reasonably connected to the target firm’s business and the protection of the investment inherent in the transaction, rather than extending broadly to unrelated markets or an unnecessarily extensive national footprint.

The decision further reflects that merger approval may be made subject to behavioural conditions requiring contractual amendment (here, an addendum to the restraint) within a specified period, coupled with compliance and enforcement mechanisms under the Commission’s procedural rules.