Summary of Judgment

1. Introduction

This matter concerned merger proceedings before the Competition Tribunal of South Africa in which the Tribunal was required to decide whether to approve a proposed transaction in terms of which one firm would acquire control over another.

The primary acquiring firm was 27Four Holdings (Pty) Ltd (“27Four”), and the primary target firm was Prescient Life Ltd (“Prescient”). The Competition Commission (“the Commission”) investigated the transaction and presented its conclusions to the Tribunal.

The transaction was heard on 12 September 2018, on which date the Tribunal issued an order approving the merger unconditionally. The Tribunal’s reasons were subsequently issued on 25 September 2018.

The general subject-matter of the dispute was whether the transaction raised any competition concerns (including in relation to vertical effects) and whether it had any adverse public interest effects, particularly concerning employment.

2. Material Facts

27Four was described as a financial services provider operating as a multi-manager for institutional and retail investors. In that capacity, it functioned as a conduit between investor clients and asset managers, and it also provided customised fiduciary management solutions to retirement funds. It was stated to be controlled by a private individual and to have five subsidiaries.

Prescient was described as an investment-linked life insurer offering investment products to policyholders and third parties. It held a linked-life licence and was authorised to offer an investment administration platform enabling asset managers, multi-managers, and intermediaries to manage life-pooled portfolios on behalf of clients. Prescient was controlled by Prescient Life Holdings (Pty) Ltd and ultimately by Stellar Capital Partners Ltd, listed on the Johannesburg Stock Exchange, and it did not control any firm.

In terms of the Binding Heads of Agreement, 27Four would acquire 100% of the issued share capital in Prescient and would accordingly control Prescient post-merger. This change of control was the core transactional fact relevant to the Tribunal’s assessment.

On competition effects, the Commission found no horizontal overlap because 27Four did not hold (and did not supply) a linked-life licence. However, the Commission identified a vertical relationship between the firms arising from a pre-merger arrangement: Prescient had leased its investment-linked life licence to 27Four under what was described as a “white-labelling” agreement, enabling 27Four to offer investment policies underwritten by Prescient and to pool client investments.

On public interest facts relating to employment, Prescient had 11 employees prior to the transaction who performed administration duties. In July 2018, 10 of the 11 employees were transferred to Prescient’s sister company, Prescient Fund Services (Pty) Ltd (“Prescient Fund”). The remaining employee, Mr Mohammed, was to be transferred to the merged entity. The merging parties also agreed that, post-merger, Prescient Fund would continue to administer policyholders’ policies for a fee. The Commission contacted Mr Mohammed, who confirmed that there would be no changes to his employment contract or benefits.

3. Legal Issues

The central questions for determination were whether the proposed acquisition was likely to substantially prevent or lessen competition in any relevant market and whether the transaction raised any public interest concerns, specifically in relation to employment effects.

The Tribunal’s task primarily involved the application of competition law principles to the facts found or accepted on the record, including an evaluative assessment of whether the identified vertical relationship could give rise to foreclosure concerns. In relation to public interest, the issue required an evaluative determination based on the employment consequences presented to the Tribunal and assessed by the Commission.

4. Court’s Reasoning

The Tribunal accepted the Commission’s finding that there was no horizontal overlap between the activities of 27Four and Prescient, because 27Four did not hold a linked-life licence and did not supply it. This meant that the analysis did not turn on loss of direct rivalry in the same level of a market.

The Tribunal addressed the vertical relationship identified by the Commission, which arose from Prescient’s leasing of its linked-life licence to 27Four under a white-labelling arrangement. The Commission evaluated whether this relationship, when internalised through common control post-merger, was likely to lead to foreclosure of rivals. The Commission concluded that foreclosure was unlikely because Prescient’s market share in the provision of linked-life licence leasing was less than 1% and Prescient would continue to face competitive constraints from larger market participants. The Tribunal expressly stated that it saw no reason to differ from the Commission’s conclusion that the transaction would not substantially prevent or lessen competition in any relevant market.

On public interest, the Tribunal considered the submissions that there would be no negative effects on employment. It noted the facts regarding the earlier transfer of 10 employees to Prescient Fund and the proposed transfer of Mr Mohammed to the merged entity, as well as the arrangement for Prescient Fund to continue performing policy administration services for a fee. The Commission’s direct confirmation with Mr Mohammed that his terms and benefits would not be adversely affected supported the conclusion that the transaction would not result in adverse employment effects. The Tribunal accepted the Commission’s conclusion that there was no adverse impact on employment and no other public interest concerns arising from the merger.

Taking both the competition assessment and public interest considerations together, the Tribunal concluded that the transaction was unlikely to substantially prevent or lessen competition and that no public interest issues arose, which warranted unconditional approval.

5. Outcome and Relief

The Competition Tribunal approved the proposed transaction unconditionally.

No conditions were imposed in relation to competition or public interest considerations, and the reasons as provided did not record any separate or additional order as to costs.

Cases Cited

No cases were cited in the reasons.

Legislation Cited

No legislation was expressly cited in the reasons.

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Tribunal held that the proposed acquisition by 27Four of 100% of the issued share capital in Prescient was unlikely to substantially prevent or lessen competition, including because there was no horizontal overlap and the identified vertical relationship did not give rise to foreclosure concerns given Prescient’s less than 1% market share in linked-life licence leasing and the presence of competitive constraints.

The Tribunal further held that the transaction raised no public interest concerns, including no adverse effect on employment, given the employment transfers described and the confirmation that the remaining employee’s terms and benefits would not be adversely affected.

On these bases, the Tribunal approved the transaction unconditionally.

LEGAL PRINCIPLES

The decision applied the principle that a merger may be assessed for horizontal effects by examining whether the merging parties compete in the same level of a market, and where there is no horizontal overlap, the analysis focuses on other potential competitive effects.

The decision applied the principle that a merger involving a vertical relationship requires an assessment of whether the transaction is likely to create or enhance the ability and incentive to foreclose rivals. In evaluating foreclosure concerns, the extent of the relevant firm’s position in the relevant activity (including market share) and the existence of competitive constraints from other market participants were treated as key considerations.

The decision also reflected the principle that merger approval involves consideration of public interest factors, including the merger’s effect on employment, and that where the evidence indicates no adverse changes to employees’ terms and benefits and no negative employment effects are expected, public interest does not require conditions to be imposed.