Summary of Judgment

1. Introduction

These were large merger proceedings before the Competition Tribunal of South Africa in which the Tribunal was required to determine whether to approve a proposed acquisition under the Competition Act 89 of 1998.

The primary acquiring firm was Firefly Investments 319 Proprietary Limited (“Firefly”). The primary target was the Murray and Roberts Infrastructure and Building Platform (“I&B Platform”), a business division of Murray and Roberts Limited (“Murray and Roberts”), conducted through Concor Proprietary Limited (“Concor”) and Forum SA Trading 284 Proprietary Limited (“Forum SA”) (together, the “I&B Platform entities”).

The matter served before a panel comprising Mr Norman Manoim (Presiding Member), Mr Enver Daniels (Tribunal Member), and Mr Andreas Wessels (Tribunal Member). The merger was heard on 8 March 2017, and an order was issued on the same date. The Tribunal’s reasons were subsequently issued on 24 March 2017.

The general subject-matter of the dispute concerned whether the proposed transaction was likely to substantially prevent or lessen competition in any relevant market, whether a restraint of trade in the merger agreement raised competition concerns, and whether any public interest considerations (including employment and black economic empowerment) were implicated.

2. Material Facts

Firefly was described as a newly established black-owned company. Its shareholders were the Southern Palace Group (“Southern Palace”), holding 75% of the equity, and the Government Employees Pension Fund (“GEPF”), holding 25%. The Tribunal recorded that it was advised the GEPF would exercise no control over Firefly, with Southern Palace being the sole controller of Firefly.

Southern Palace was described as having diverse interests (including real estate, industrial companies, information technology, steel products manufacturing and recycling, and automotive trading and manufacturing). The Tribunal recorded as material that Southern Palace had no investments in any firm that could be regarded as a competitor of the target firm. It was also recorded that Southern Palace had no prior experience as a controlling shareholder before this transaction.

The I&B Platform conducted operations through Concor and Forum SA. The I&B Platform entities were engaged in civil engineering, general building, road and earthworks, open cast mining, main civil works for power stations, construction plant and equipment, and property development.

In terms of the sale agreement, Firefly would acquire the entire I&B Platform, and post-merger Firefly would control the I&B Platform entities. The transaction was also to be notified in Namibia and Botswana, as recorded by the Tribunal.

On the competitive assessment, the Competition Commission found that there were no overlaps between the products or services offered by the merging parties. The Tribunal further recorded that Murray and Roberts was a top-tier construction firm, with a level 9 status in the Civil Engineering and General Building sectors as classified by the Construction Industry Development Board. The merging parties indicated that the I&B Platform would remain competitive after the merger notwithstanding Southern Palace’s lack of prior sector experience, and that the I&B Platform had operated independently from Murray and Roberts for many years. It was also recorded that Southern Palace indicated the I&B Platform had a large order book of projects to continue executing post-merger, and that it did not anticipate losing its level 9 status.

The Tribunal treated as relevant background that, on 1 September 2009, the Commission launched a complaint against various construction companies for engaging in horizontal restrictive practices (price fixing, market allocation, and collusive tendering) in contravention of section 4(1)(b) of the Act, and that Murray and Roberts was among the firms implicated, with most contraventions apparently having been settled. At the hearing, the Tribunal enquired what steps would be taken to ensure that the target firm would not contravene section 4(1)(b), and it recorded that Southern Palace stated it had conducted extensive due diligence and training on prohibited practices and would implement governance and leadership measures to foster compliance.

A further material contractual feature was a restraint of trade in clause 24 of the merger agreement. The clause restrained Murray and Roberts (excluding its marine business) from engaging in business activities conducted by the I&B Platform for five years throughout Southern Africa. The Commission had initially regarded the restraint as disproportionate, noting that typical restraints in sales of this nature were between two and three years, but it was persuaded by the merging parties that the longer restraint was justified in the particular circumstances.

On public interest, the merging parties submitted that the transaction would not negatively affect employment, that it would have a positive impact on employment opportunities within Firefly, and that it would result in the creation of the first industrialist black-owned construction entity from the acquiring group’s perspective. The Commission concluded that there was unlikely to be a negative effect on employment and that no other public interest concerns were raised.

3. Legal Issues

The central questions for determination were whether the proposed merger was likely to substantially prevent or lessen competition in any relevant market, and whether any conditions were necessary to address competition or public interest concerns.

The dispute largely concerned the application of competition-law standards to the established facts, particularly the presence or absence of competitive overlaps, the likelihood of competitive harm, and the competition implications of ancillary restraints. It also involved an evaluative assessment of whether a five-year restraint of trade was justified in competition terms within the merger control framework.

In addition, the Tribunal considered whether the merger raised any public interest concerns (including employment) and took account of the asserted positive public interest effect of introducing a BEE participant into the sector.

4. Court’s Reasoning

The Tribunal accepted the Commission’s assessment that there were no product or service overlaps between the merging parties. On that basis, the Tribunal found there was no indication that the merger would remove existing competition between the acquirer and the target in any market. The Tribunal also recorded the merging parties’ explanation that the I&B Platform had been operating with a degree of independence for many years and that it had a substantial order book, which supported the view that it would remain competitive after the change in ownership.

The Tribunal considered it relevant that, despite Southern Palace’s lack of prior experience in the construction sector, the merging parties indicated the I&B Platform would remain competitive and would retain its industry-regulator classifications, including its level 9 civil engineering and general building status. Against this factual background, the Tribunal concluded that the merger was unlikely to substantially prevent or lessen competition in any market.

The Tribunal addressed the historical collusion context by noting the Commission’s 2009 complaint in the construction industry and that Murray and Roberts had been implicated in several contraventions. While the reasons did not suggest that this history altered the competitive effects analysis for the merger itself, the Tribunal recorded that it had specifically raised compliance questions at the hearing. It accepted Southern Palace’s submissions that it had undertaken due diligence and training around prohibited practices and would implement governance and leadership measures aimed at preventing contraventions of section 4(1)(b).

On the restraint of trade, the Tribunal noted the Commission’s initial concern that a five-year restraint might be disproportionate relative to the interest to be protected. However, it accepted the merging parties’ justification for the longer period based on the factors recorded in the reasons. These included the need to protect Firefly’s investment while the new owners established themselves, the long-term nature of construction projects (recorded as potentially lasting three to eight years), and the particular branding risk given that Firefly would only be entitled to use the Murray and Roberts name for one year. The Tribunal also recorded that the Commission considered additional factors, including that the transaction did not result in market power, that the deal involved an exchange of goodwill and know-how, and that the acquiring firm was a new entrant with BEE status. In light of these considerations, the Tribunal concluded that the nature and scope of the restraint clause did not raise competition concerns, and that the purpose of the restraint reasonably justified a five-year period.

On public interest, the Tribunal recorded the submissions that employment would not be adversely affected and that the transaction would have positive effects through increased opportunities within Firefly. The Tribunal further noted the public interest benefit that the transaction introduced a BEE company into the sector. It accepted the Commission’s view that the transaction was unlikely to have negative employment effects and raised no other public interest concerns, while recognising a positive public interest dimension.

5. Outcome and Relief

The Tribunal unconditionally approved the large merger between Firefly Investments 319 Proprietary Limited and the Murray and Roberts Infrastructure and Building Platform of Murray and Roberts Limited.

No conditions were imposed. No costs order was recorded in the reasons.

Cases Cited

No cases were cited in the judgment.

Legislation Cited

Competition Act 89 of 1998, section 4(1)(b).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The Tribunal held that the proposed acquisition of the I&B Platform by Firefly was unlikely to substantially prevent or lessen competition in any relevant market, primarily because the Commission found no competitive overlaps between the activities of the merging parties.

The Tribunal further held that the five-year restraint of trade operating throughout Southern Africa (excluding the marine business) did not raise competition concerns on the facts presented, given the investment-protection rationale, the long duration of construction projects, and the branding transition risk, alongside other contextual considerations recorded by the Commission.

The Tribunal held that the transaction raised no adverse public interest concerns, including in relation to employment, and that it presented a positive public interest aspect by introducing a BEE-owned participant into the sector. The merger was therefore approved without conditions.

LEGAL PRINCIPLES

Merger approval under the Competition Act 89 of 1998 turns on whether the transaction is likely to substantially prevent or lessen competition in any relevant market, assessed with reference to the parties’ activities and the competitive structure indicated by the evidence before the competition authorities.

Where a merger involves no overlaps between the merging parties’ products or services, this may support a conclusion that the transaction is unlikely to materially reduce competition, subject to the broader context reflected in the record.

A restraint of trade ancillary to a merger may be assessed for competition concerns by considering whether its nature, scope, and duration are reasonably justified by the transaction’s protective purposes on the facts presented, including the protection of goodwill, the characteristics of the industry (such as long project durations), and transitional considerations such as branding arrangements, as reflected in the Tribunal’s evaluation of the Commission’s and merging parties’ explanations.

In merger control, public interest considerations include employment effects and may include the introduction or expansion of BEE participation, with the assessment grounded in the submissions and conclusions recorded by the Commission and considered by the Tribunal.