Brief Summary

Competition — Merger Approval — Conditional approval of merger between Glencore South Africa Oil Investment (Pty) Ltd and Chevron South Africa (Pty) Ltd — Tribunal assessing horizontal and vertical overlaps in market activities — Commission finding no significant market power post-merger — Approval granted subject to conditions aimed at maintaining competition in the petroleum sector.

Comprehensive Summary

Summary of Judgment

1. Introduction

These reasons concern large merger proceedings before the Competition Tribunal of South Africa in which the Tribunal was required to decide whether to approve a proposed acquisition in the downstream petroleum sector, and if so, whether approval should be subject to conditions.

The primary acquiring firm was Glencore South Africa Oil Investment (Pty) Ltd (Glencore SA), part of the broader Glencore group. The primary target firm was Chevron South Africa (Pty) Ltd (CSA), which the Tribunal noted was now trading as Astron Energy (Pty) Ltd. At the time relevant to the merger assessment, CSA was controlled by Off the Shelf 56 (RF) (Pty) Ltd (OTS), with a small non-controlling interest held by the CSA Employee Participation Plan.

The procedural history was material because the transaction formed part of a series of transactions arising from the intended disposal of Chevron Global Energy Inc’s (CGEI) shareholding in CSA. The Tribunal recorded that the Competition Commission had previously considered and the Tribunal had conditionally approved (i) a transaction in terms of which Sinopec intended to acquire 75% of CSA (conditionally approved on 8 March 2018) and (ii) the transaction activated by OTS’s pre-emptive right, resulting in OTS acquiring CGEI’s shares in CSA (conditionally approved on 13 September 2018). The present matter was the third related transaction placed before the Tribunal, involving Glencore SA acquiring 75% of CSA from OTS.

The general subject-matter of the dispute concerned the competitive effects of the merger (including horizontal and vertical overlaps in petroleum products and crude oil supply) and the appropriate response to a range of public interest concerns, including employment, the position of retired employees, the interests of Branded Marketers, BEE shareholding, local procurement, and commitments to investment and development initiatives.

2. Material Facts

CGEI’s intended sale of its shareholding in CSA set in motion a sequence of contemplated and approved transactions. First, the Commission had received a notice of a large merger in April 2017 in which Sinopec intended to acquire 75% of CSA from CGEI, and the Tribunal conditionally approved that transaction in March 2018. The Tribunal further recorded that, under a Shareholders Agreement, OTS held a pre-emptive right to acquire the same shares on the same terms offered to a third party, and that Sinopec’s proposed acquisition triggered this mechanism. CGEI accordingly offered to sell to OTS, and OTS accepted the offer subject to regulatory approval; the Tribunal conditionally approved this OTS transaction in September 2018. The Tribunal noted that which of these transactions would ultimately be implemented lay within the discretion of CGEI, while the Tribunal’s role was to assess the merger before it.

Against that background, the proposed transaction in this case was that Glencore SA intended to acquire 75% of CSA’s issued share capital from OTS, resulting in Glencore exercising sole control over CSA. OTS would revert to a 23% shareholding, with the remaining 2% continuing to be held by the CSA Employee Participation Plan. The Tribunal recorded that there was a contractual arrangement between the parties (the details of which were redacted in the provided text) relevant to the structure and contemplated implementation of the transaction.

The Tribunal described the parties’ activities as context for assessing overlaps. Glencore (through its group) was relevantly active in South Africa in the supply of crude oil, supply of petroleum products (petrol and diesel) to various customers including refineries and traders, the consumption of petroleum products and lubricants in its mining operations, and the purchase of petroleum products for export. CSA, by contrast, had substantial downstream capabilities including a Cape Town crude oil refinery with stated capacity (100 000 barrels per day), distribution infrastructure, a large retail footprint under the Caltex brand (with 797 independent service stations), and a lubricants manufacturing plant in Durban. CSA also operated a Branded Marketer Model in which independent Branded Marketers, assigned territories, procured petroleum products from CSA and supplied retail sites under the Caltex brand, including in rural and peri-urban locations. The Tribunal recorded that these Branded Marketers were independent businesses, with several being majority or wholly black-owned.

On competition effects, the Commission identified both horizontal and vertical overlaps. The Tribunal accepted that there was a horizontal overlap because both Glencore and CSA supplied petroleum products to non-retail customers (including independent retailers, other resellers, and industrial and commercial consumers). The Tribunal also accepted identified vertical linkages, including Glencore’s upstream involvement in crude oil and CSA’s reliance on crude oil as an input; a two-way relationship where both firms could be suppliers and customers in the non-retail petroleum products segment; and Glencore’s mines as industrial customers of products supplied by CSA.

On public interest, it was material that the Economic Development Department (EDD), Branded Marketers, CSA’s retirees, and CEPPWAWU raised public interest concerns to the merging parties, leading to a Framework Agreement with certain government departments comprising an agreed set of conditions. The Tribunal treated these concerns and the agreed conditions as central to the conditional approval ultimately granted.

Where disputes were recorded, the Tribunal noted a disagreement concerning whether OTS had an agreement with Glencore enabling OTS, during a specified period, to acquire a greater (controlling) stake in CSA by purchasing shares from Glencore. The Tribunal did not resolve this dispute, describing it as a matter to be resolved between the parties.

3. Legal Issues

The central legal questions were the standard merger control questions arising in Tribunal proceedings, namely whether the proposed transaction was likely to substantially prevent or lessen competition in any relevant market, including through unilateral effects or foreclosure theories, and whether any such concerns warranted prohibition or could be addressed through conditions.

A further set of legal questions concerned public interest considerations raised by stakeholders and government, and whether the merger should be approved subject to public interest conditions dealing with (among other matters) employment effects, the protection of retired employees’ benefits, the position of Branded Marketers, and the implications for BEE shareholding and small business participation.

The dispute largely concerned the application of law to fact and the exercise of an evaluative judgment on competitive effects and the adequacy of proposed remedies. The Tribunal’s assessment also entailed a discretionary and evaluative component in determining whether the tendered conditions (with enhancements) adequately addressed merger-specific public interest concerns.

4. Court’s Reasoning

The Tribunal’s reasoning proceeded on the basis of the Commission’s competitive assessment, which separated the analysis into horizontal effects and vertical effects, and then addressed public interest concerns through a package of conditions.

On the horizontal assessment in the downstream national market for the supply of petroleum products to non-retail customers, the Tribunal recorded that the Commission found the merged entity’s post-merger market share and accretion to be low (with figures redacted in the reasons). This low level of concentration, together with the presence of established competitors such as Sasol Oil (Pty) Ltd, BP Southern Africa (Pty) Ltd, Engen Limited, Shell South Africa (Pty) Ltd and Total SA (Pty) Ltd, led the Commission to conclude that the merged entity would not possess market power and that unilateral effects were unlikely. The Tribunal accepted this reasoning, emphasising the continued competitive constraint from alternative suppliers, including firms with their own refineries.

On the vertical assessment, the Commission’s analysis addressed both input foreclosure and customer foreclosure across markets for crude oil, non-retail petroleum products, and lubricants. In the upstream international market for exploration, extraction and supply of crude oil, the Tribunal recorded the Commission’s finding that Glencore was a small player (with a percentage stated in the reasons) and that Glencore’s crude oil sales represented only a small proportion of South African crude oil consumption (with certain values redacted). These findings underpinned the Commission’s conclusion that input foreclosure was unlikely because Glencore lacked market power and downstream competitors had alternative crude oil sources, including within their own corporate groups; moreover, competitors raised no concerns about procuring oil from Glencore post-merger. The Commission also considered customer foreclosure unlikely because CSA was a small customer and already sourced most crude oil within its group, while also purchasing from multiple suppliers.

In the downstream national market for non-retail petroleum products, the Tribunal recorded that the Commission considered foreclosure concerns unlikely given low shares, customer submissions indicating alternative suppliers, and the ability of suppliers to export products as an alternative outlet. A similar conclusion was recorded for the downstream market for lubricants, where the Commission found low shares and the presence of alternative suppliers, and additionally found that Glencore was not a significant customer of lubricants in South Africa, reducing the plausibility of customer foreclosure.

Having accepted the Commission’s competition analysis, the Tribunal’s focus turned to public interest. The Tribunal recorded that a range of stakeholders and government departments raised concerns that resulted in an agreed set of conditions, and that the Commission concluded these conditions addressed the legitimate public interest issues implicated by the merger. The Tribunal considered it unnecessary to reproduce the full conditions in the reasons, but it did discuss key concerns and remedies.

On employment, the Tribunal noted that following engagement, CEPPWAWU no longer wished to persist with public interest concerns. Nevertheless, the merging parties tendered binding undertakings that no retrenchments would occur as a result of the transaction, and that Glencore would maintain at least the aggregate number of CSA employees for no less than five years from implementation. The Tribunal further recorded undertakings aimed at encouraging employment expansion in the broader value chain and increasing indirect employment through investment and a development fund, and accepted the Commission’s view that these undertakings adequately addressed merger-related employment concerns.

On the retirees’ medical aid subsidy, the Tribunal recorded that retired employees asserted an entitlement to a 75% medical aid subsidy continuing for the lifetime of retirees and spouses, and feared that Glencore might terminate these obligations. The Tribunal accepted the proposed condition requiring Glencore/CSA to continue meeting ongoing contractual obligations post-merger, expressly acknowledging the medical aid subsidy as an ongoing legal and contractual obligation for the lifetime of beneficiaries. The Tribunal also recorded an engagement mechanism requiring CSA to meet with retirees and their representatives upon request regarding post-retirement medical aid benefits. It accepted the Commission’s view that this condition safeguarded the retirees’ concerns.

On Branded Marketers, the Tribunal revisited the Branded Marketer Model and noted the concerns raised, including stability of supply, brand management, rebranding costs, and the model’s future beyond 2027. The Tribunal recorded the Commission’s view that Glencore should honour CSA’s existing obligations and accepted undertakings that CSA would not change existing Branded Marketer contracts to their detriment, that contracts would run their course for a minimum stated period, and that CSA would not seek to change contract terms for the remainder of the contract period. The Tribunal also recorded undertakings for regular engagement with Branded Marketers on long-term strategy, and detailed commitments regarding the costs of rebranding service stations to Glencore’s branding requirements, including CSA bearing the costs for certain categories of sites and contributing a portion of costs for other sites not yet upgraded to the latest Caltex standards. The Tribunal treated these measures as responsive to concerns that Branded Marketers not be materially worse off due to the merger.

On BEE shareholding, the Tribunal recorded that the Commission investigated whether the transaction amounted to a dilution of BEE ownership, given that OTS (a 100% black-owned firm) would move from a temporary 98% holding to retaining 23%. The Tribunal noted Glencore’s submission that the on-sale to Glencore was always contemplated as part of the arrangement, implying that OTS’s 98% stake was temporary rather than reflective of a long-term control position. The Tribunal accepted that while there was a reduction, Glencore’s undertaking to ensure a minimum BEE shareholding (figures redacted) and board representation for BEE shareholders addressed the concern identified by the Commission. The Tribunal expressly declined to decide the parties’ dispute about any alleged agreement for OTS later to acquire a controlling stake, indicating it was a matter for resolution between them.

Finally, the Tribunal recorded a suite of additional public interest commitments, including maintaining a head office in South Africa, significant investment in the Western Cape refinery over five years beyond existing plans, local procurement commitments, maintaining baseline levels of independently owned service stations with preferences for small and black-owned businesses, maintenance or improvement of the Economic Return Ratio in favour of retailer-owned stations, LPG supply commitments to black-owned businesses, safeguards relating to terminal and logistics investments, the establishment of a development fund (approximately R220 million over five years), and efforts to improve the B-BBEE scorecard rating by two levels within two years. The Tribunal concluded that the conditions, collectively, adequately addressed public interest concerns arising from the transaction and reflected enhancements imposed by the Tribunal to the tendered package.

5. Outcome and Relief

The Competition Tribunal conditionally approved the proposed transaction in terms of which Glencore SA would acquire 75% of the issued share capital in CSA from OTS, resulting in Glencore exercising sole control over CSA.

The approval was granted subject to a detailed set of public interest conditions, attached to the order as “Annexure A”, which the Tribunal described as the tendered conditions with certain enhancements.

No separate order as to costs was recorded in the provided reasons.

Cases Cited

No judicial decisions were cited in the provided reasons.

Legislation Cited

No legislation was expressly cited in the provided reasons.

Rules of Court Cited

No rules of court were cited in the provided reasons.

Held

The Tribunal held that the proposed merger was not likely to result in a substantial lessening or prevention of competition, given the Commission’s findings of low post-merger market shares in the relevant downstream market and the unlikelihood of input or customer foreclosure in the upstream crude oil market, the non-retail petroleum products market, and the lubricants market.

The Tribunal further held that the public interest concerns raised by stakeholders, including employment protections, continuation of retirees’ medical aid subsidies as ongoing contractual obligations, protections for Branded Marketers (including contract stability and rebranding cost commitments), and measures addressing BEE participation and small business development, were appropriately addressed through a comprehensive set of conditions imposed as part of the approval.

LEGAL PRINCIPLES

The Tribunal applied standard merger assessment principles distinguishing horizontal effects (including whether post-merger shares and competitive constraints indicate likely unilateral effects) from vertical effects (including the assessment of input foreclosure and customer foreclosure based on market power, dependence, and availability of alternatives).

The Tribunal treated the existence of credible alternative suppliers and customers, and the absence of market power in relevant upstream and downstream markets, as key factual indicators undermining foreclosure theories.

In relation to public interest, the Tribunal applied the principle that merger approval may be made conditional to address merger-specific public interest concerns, and that such conditions may include enforceable undertakings relating to employment, continuity of contractual obligations affecting vulnerable stakeholders (including retirees), protections for small businesses and black-owned enterprises participating in a distribution model, and commitments relating to local procurement, investment, and development funding, where these are tendered and found adequate to address the concerns arising from the merger.

Glencore South Africa Oil Investment (Pty) Ltd v Chevron South Africa (Pty) Ltd (LM1850ct18) [2019] ZACT 21 (25 April 2019)