Brief Summary

Competition — Merger Approval — IEP Portfolio 1 (Pty) Ltd acquiring additional shares in Assupol Holdings Limited — Competition Tribunal conditionally approving merger despite concerns over information exchange and cross-directorships — Imposed conditions to mitigate potential anti-competitive effects — No public interest issues identified.

Comprehensive Summary

Summary of Judgment

1. Introduction

These reasons concern a merger proceeding before the Competition Tribunal of South Africa in which the Tribunal assessed and ultimately conditionally approved a notified transaction. The transaction involved IEP Portfolio 1 (Pty) Ltd as the primary acquiring firm and Assupol Holdings Limited as the primary target firm.

The matter followed the ordinary merger-control process. The transaction was considered by the Competition Commission (which investigated competitive effects and made a recommendation), and then set down for hearing before the Tribunal. The Tribunal heard the matter on 4 July 2018, received a last submission on 25 July 2018, issued an order on 26 July 2018 conditionally approving the merger, and later issued reasons on 22 August 2018 explaining why conditional approval was granted and what concerns the conditions were intended to address.

The general subject-matter of the dispute concerned whether the transaction—by which IEP would slightly increase its existing shareholding in Assupol and (on the parties’ and Commission’s version) acquire de facto control—raised competition concerns, particularly those arising not from a direct operational overlap between IEP and Assupol, but from the structural links between Assupol and the Investec group (through Investec Bank Limited’s shareholding and governance position in the IEP group) and the resulting risk of information exchange and cross-directorships in overlapping long-term insurance markets.

2. Material Facts

IEP Portfolio 1 (Pty) Ltd (IEP) was a wholly owned subsidiary of IEP Group (Pty) Ltd. The shareholding in IEP Group was held by several shareholders, including Investec Bank Limited (IBL), and the merger parties submitted that IBL had negative control over IEP Group. IBL formed part of the Investec group and was ultimately controlled by Investec Limited. Of relevance to the competition assessment, IBL controlled Investec Life (Pty) Ltd (Investec Life), which provided insurance products including life cover, income protection, disability cover, and severe illness cover.

Assupol Holdings Limited (Assupol) was described as a widely held public company not controlled by any single firm. Prior to the merger, IEP was Assupol’s largest shareholder. Assupol operated as an authorised financial services provider offering, among other products, funeral, life, savings, and retirement annuity products, and its insurance product offering included life cover, funeral cover, dread-disease benefits, and physical disability cover.

The proposed transaction entailed IEP increasing its shareholding in Assupol from 42.05% to 42.23%. The merger parties and the Commission submitted that, after implementation and on the basis of voting trends over the preceding three years, IEP would obtain de facto control over Assupol.

On competitive interaction, the Commission found no direct product overlap between the activities of IEP and Assupol themselves. However, it identified a horizontal overlap between Investec Life and Assupol in respect of certain long-term insurance products, specifically life cover, disability cover, and dread disease/severe illness cover.

The Commission assessed the transaction’s effects in national (potential) product markets for (i) long-term insurance broadly, and more narrowly for (ii) life cover, (iii) disability cover, and (iv) dread disease cover. It found that the combined market shares of Investec Life and Assupol in South Africa were below 5% in each of these (potential) markets.

Beyond market shares, the Commission investigated concerns about post-transaction information exchange and cross-directorships given existing governance links. It recorded that, by virtue of its existing shareholding, IEP received information from Assupol including monthly management accounts, quarterly unaudited financial statements and CEO reports, proposed and final annual budgets, and anti-money laundering reports. It also recorded that IEP was able to appoint three members to Assupol’s board, and that IBL—given its shareholding in IEP—was entitled to appoint members to IEP’s board, which the Commission regarded as potentially enabling IBL to access information of a competitor (Assupol) of Investec Life. The Commission further identified that Mr A Birrell was an independent, non-executive board member sitting on both the Assupol and Investec Life boards.

The merger parties confirmed that the transaction would have no negative impact on employment, and the Tribunal recorded that no other public-interest concerns were raised on the record.

3. Legal Issues

The central questions the Tribunal had to determine were whether the notified transaction, in circumstances where IEP would obtain de facto control over Assupol, gave rise to competition concerns requiring intervention, and if so, whether those concerns could be adequately addressed through conditions.

The dispute was primarily concerned with the application of competition-law principles to the facts, rather than the resolution of primary factual disputes. In particular, the Tribunal had to evaluate the competitive significance of (i) a relatively small incremental change in shareholding leading to de facto control, (ii) the existence of overlapping activities between Investec Life and Assupol in long-term insurance products despite low combined market shares, and (iii) structural links (information rights and board interlocks) that might facilitate the flow of competitively sensitive information between actual or potential competitors.

A further issue concerned the appropriate approach to risk of collusion and information exchange, given that the Tribunal noted collusion between horizontal competitors is per se prohibited in terms of section 4 of the Competition Act. The Tribunal also had to decide whether the transaction raised any public-interest concerns, particularly in relation to employment, on the information presented.

4. Court’s Reasoning

The Tribunal accepted that the Commission had not identified a direct product overlap between IEP and Assupol, but it focused on the horizontal overlap between Investec Life and Assupol in long-term insurance products. While the Commission had found that combined market shares were below 5% in the potentially relevant markets, the Tribunal treated this as insufficient, by itself, to dispose of concerns relating to information exchange and cross-directorships. The reasoning reflected an understanding that competitive harm from information exchange is not limited to high market shares, because information exchange can affect rivalry dynamics and may facilitate coordination.

In addressing information exchange, the Tribunal articulated the mechanism of harm as the facilitation of collusion between competitors, noting that collusion between horizontal competitors is per se prohibited under section 4 of the Competition Act. The Tribunal emphasised that direct exchange of competitively sensitive information—such as future commercial and marketing strategies and product or service innovation—could be used to maintain, enhance, reinforce, or lead to market division strategies between competitors. On this basis, the Tribunal reasoned that concerns about information exchange could persist even if competitors currently targeted different customer segments within long-term insurance markets.

The Tribunal also rejected the notion that pre-existing structural links were a reason not to intervene at merger stage. Although the Commission had recommended unconditional approval partly because the structural links existed prior to notification, the Tribunal reasoned that the notification involved IEP obtaining de facto control over Assupol and that the merger review was an appropriate time to address competition concerns. The Tribunal stated that the possibility that competitively sensitive information may have flowed prior to notification was not, in itself, a reason to refrain from addressing the concerns “at this juncture”.

In response to these concerns, the Tribunal requested the merger parties and the Commission to consider remedies. The merger parties proposed remedies, and the Tribunal imposed these as conditions to approval. The conditions were designed to address two main risk areas.

First, regarding information exchange, the Tribunal imposed conditions requiring that, where any board within IEP Group received competitively sensitive information pertaining to Assupol, IEP Group had to ensure such information was not made available to any IBL representative who was a director or manager of, or otherwise involved in determining strategy at, any competing Investec entity. The Tribunal’s conditions contemplated practical measures to give effect to this separation, including the redaction of competitively sensitive information from board packs, recusal of relevant IBL representatives from discussions concerning Assupol, and confidentiality undertakings by certain IBL representatives.

Second, regarding cross-directorships, the Tribunal imposed conditions aimed at preventing individuals who were involved in the strategic direction of competing Investec entities from simultaneously occupying certain governance positions that could create conduits for information exchange. The conditions prohibited, for so long as IEP Group held shares in Assupol and Investec retained a minority shareholding in IEP Group, the appointment (by entitlement or by voting support) of Assupol directors who were also directors or managers of, or involved in determining strategy at, competing Investec entities. The conditions further required that individuals with such roles at competing Investec entities not be appointed to boards within IEP Group that had access to Assupol information by virtue of the investment.

The Tribunal concluded that these imposed conditions, together with compliance and monitoring mechanisms (including reporting to the Commission, annual compliance affidavits, and provision of confidentiality undertakings), adequately addressed the post-transaction concerns around information exchange and cross-directorships. On public interest, it recorded that there would be no negative impact on employment and no other public interest issues arose on the facts presented.

5. Outcome and Relief

The Tribunal approved the proposed transaction subject to conditions set out in an annexure to the decision (“Annexure A”). The conditions regulated the treatment of competitively sensitive information, restricted cross-directorships and governance arrangements that could facilitate information flow between competitors, and imposed monitoring and compliance obligations, including notice of implementation, provision of confidentiality undertakings, and annual compliance affidavits.

No adverse public interest findings were made, and the Tribunal recorded that no negative employment impact was anticipated. The text provided does not record a separate costs order in these reasons.

Cases Cited

No cases were cited in the reasons provided.

Legislation Cited

Competition Act 89 of 1998 (as amended), section 4.

Rules of Court Cited

Rules for the Conduct of Proceedings in the Commission, Rule 39.

Held

The Tribunal held that, although the Commission recommended unconditional approval and the combined market shares of Investec Life and Assupol were below 5% in the assessed long-term insurance markets, the transaction created a sufficient risk of harm through post-transaction information exchange and cross-directorships given existing structural links and the acquisition of de facto control.

The Tribunal held that these risks could be adequately addressed through enforceable behavioural conditions aimed at preventing competitively sensitive information from reaching decision-makers at competing Investec entities and preventing governance arrangements that could act as channels for information exchange. On that basis, the merger was approved conditionally, with monitoring and compliance obligations imposed, and no public-interest impediment (including employment effects) was found to arise on the record.

LEGAL PRINCIPLES

The decision applied the principle that competitive harm from horizontal relationships can arise not only from increased concentration reflected in market shares, but also from structural links—including shareholdings, information rights, and board representation—that may facilitate the flow of competitively sensitive information between competitors.

The decision applied the principle that information exchange between competitors can undermine competition by facilitating coordination, including collusion, and that collusion between horizontal competitors is per se prohibited in terms of section 4 of the Competition Act.

The decision further applied the principle that merger review is an appropriate stage to address competition concerns linked to control and governance structures. The Tribunal treated the fact that certain links existed pre-notification as not determinative against intervention, particularly where a transaction results in de facto control and where conditions can be tailored to prevent identified risks.

Finally, the decision applied a remedial principle that identified competition risks can be addressed through targeted conditions (including information barriers, recusals, redactions, confidentiality undertakings, and restrictions on cross-directorships), coupled with monitoring and reporting measures to support compliance.

IEP Portfolio 1 (Pty) Ltd v Assupol Holdings Limited (LM042May18) [2018] ZACT 76 (22 August 2018)