Brief Summary

Competition — Merger Approval — New Holdco acquiring control over Edgars Consolidated Stores Ltd — Tribunal conditionally approving merger to prevent Edcon group from liquidation — No substantial lessening of competition identified — Public interest concerns addressed through conditions promoting employment and local procurement.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned large-merger proceedings before the Competition Tribunal of South Africa in which the Tribunal was asked to determine whether to approve a proposed transaction in terms of the Competition Act 89 of 1998.

The primary acquiring firm was New Holdco (later incorporated as K2019216440 (SA) Ltd), and the primary target firm was Edgars Consolidated Stores Ltd (ECSL). ECSL controlled Edcon Ltd, and the Tribunal referred collectively to ECSL, Edcon and their related entities as the Edcon group.

The transaction was notified to the Competition Commission on 13 March 2019 under Commission Case Number 2019Mar0040. The Tribunal heard the matter on 9 May 2019, issued an order on the same date conditionally approving the transaction, and later issued reasons on 13 June 2019 under Tribunal Case Number LM270Mar19.

The general subject matter of the dispute was a financial restructuring of the Edcon group intended to avert the risk of business rescue or liquidation, and the associated assessment of competition effects, risks of information exchange, and public interest considerations (notably employment, local procurement, and black economic empowerment-related issues).

A procedural feature recorded by the Tribunal was that, shortly before the hearing commenced, one Tribunal Member (Mrs Mokuena) was excused due to an emergency; the hearing proceeded with two members, with the agreement of the Commission and the merging parties and without objection.

2. Material Facts

New Holdco was incorporated specifically for purposes of the proposed transaction and did not itself conduct business activities. The Tribunal recorded that New Holdco was comprised of the Edcon group’s creditors, including banks, international private equity firms, property firms, and the Public Investment Corporation (PIC).

ECSL, as the target firm, controlled the Edcon group, which operated in the retail sector through divisions selling men’s, women’s and children’s wear, as well as fragrances, cosmetics, homeware, and cellular products.

The proposed transaction entailed New Holdco acquiring the entire issued shares of ECSL, resulting in New Holdco acquiring control over ECSL post-merger. The Tribunal accepted the merging parties’ characterisation of the transaction as being essentially a financial restructuring, aimed at preventing the Edcon group from being placed into business rescue or liquidation proceedings.

For contextual and counterfactual purposes, the Tribunal recorded that between 2007 and 2016 the Edcon group underperformed relative to the market, with shrinking sales and profit margins. This underperformance resulted in a substantial debt burden, necessitating creditor action to refinance debt into equity to preserve the group. The Tribunal further recorded that the proposed transaction followed a prior restructuring attempt approved in 2016, which had been intended to prevent liquidation or business rescue and had been accompanied by public interest conditions relating to employment and local procurement.

On the competition assessment, the Tribunal relied on the Commission’s finding that the proposed transaction would not result in any horizontal or vertical overlaps, and that the Commission had not definitively defined the relevant market but identified it as relating to the retail of apparel, cosmetics, homeware and mobile cellular products.

The Tribunal also relied on the Commission’s assessment of a potential information exchange concern. This concern arose because certain shareholders in New Holdco were active outside New Holdco in markets where they competed with each other, specifically financial and banking services and rentable retail space. The Commission nonetheless found, on the facts it relied upon, that none of the competing shareholders would have a sufficient shareholding to appoint a board member to New Holdco’s board, reducing the risk of competitively sensitive information being exchanged through New Holdco.

On public interest, the Tribunal recorded that the transaction did not raise public interest concerns in the sense of creating negative effects, and that—given the counterfactual risk of business rescue/liquidation—the transaction was considered to safeguard public interest aspects previously ventilated. The Tribunal noted that conditions imposed in the earlier (2016) restructuring were intended to run for five years, and that the conditions in the present transaction encompassed the principles of those earlier conditions and extended them for a further five-year period from the approval date.

The Tribunal relied on the Commission’s engagement with trade unions representing Edcon group employees, namely the South African Commercial, Catering and Allied Workers Union (SACCAWU) and the South African Clothing and Textile Workers Union (SACTWU). Both unions endorsed the proposed transaction, while suggesting deletion of clause 2.3 of the conditions (and SACCAWU additionally suggesting deletion of clause 5). The Tribunal recorded that the merging parties explained the function of clause 2.3 as contextualising the undertakings and clarified their position on the BEE-related clause; the unions were recorded as being satisfied with those submissions and raising no further concerns.

The Tribunal also recorded that the Economic Development Department (EDD) expressed support for the transaction and considered the conditions to reflect the Edcon group’s commitment to fostering a competitive production environment in South Africa.

3. Legal Issues

The central legal questions were whether the proposed transaction was likely to substantially prevent or lessen competition in any relevant market, and whether it raised concerns relating to public interest considerations contemplated under the Competition Act.

A further legal issue, treated as part of the competition assessment, was whether the post-merger structure could facilitate exchange of competitively sensitive information, given that certain shareholders of New Holdco competed with each other in other markets and might, depending on governance rights, obtain access to sensitive information through the merged entity.

The dispute was predominantly an application of law to fact within the merger-control framework. The Tribunal’s task was to apply established merger assessment principles to the factual record placed before it by the Commission and the merging parties, including the counterfactual context of financial distress and the content of proposed conditions addressing public interest objectives.

4. Court’s Reasoning

The Tribunal’s reasoning proceeded from the standard merger analysis in terms of the Competition Act, addressing both competition effects and public interest considerations, and adopting the Commission’s factual and analytical conclusions where supported by the record referenced in the reasons.

On competition, the Tribunal accepted the Commission’s approach that the transaction did not produce competitive overlaps. In that context, the Tribunal recorded that the Commission had not finally defined the relevant market, but had identified a broad market frame relating to the retail of apparel, cosmetics, homeware, and mobile cellular products. The Tribunal then reasoned that, because there were no overlaps, the transaction was unlikely to substantially lessen or prevent competition, and it found no basis to depart from the Commission’s conclusion.

The Tribunal separately addressed the risk that the structure of New Holdco could be used as a conduit for information exchange among shareholders who competed outside the merged entity, particularly in financial/banking services and retail property space. The Tribunal accepted the Commission’s reasoning that this risk was unlikely to materialise because none of the competing shareholders would hold sufficient rights to appoint a board member to New Holdco’s board of directors. On that basis, the Tribunal agreed with the Commission that the transaction was unlikely to facilitate the exchange of competitively sensitive information.

On public interest, the Tribunal treated the transaction’s context as important, including the counterfactual risk of business rescue or liquidation. Within that framing, it reasoned that the merger did not raise public interest concerns in the form of negative effects, and instead was aligned with safeguarding employment and domestic supply-chain considerations previously identified. The Tribunal placed weight on the continuation and extension of public interest commitments through conditions that incorporated the principles of the earlier (2016) conditions and extended their operation for an additional five-year period from approval.

The Tribunal’s discussion of the conditions reflected three focal areas. First, on employment, the merged entity’s commitments (qualified by reference to financial and trading circumstances) were aimed at avoiding job losses at non-management level and offering alternative placements in equivalent positions where store consolidation resulted in job losses. Second, on procurement of South African brands, the conditions contemplated expansion of procurement from South African suppliers through an import replacement programme and engagement with governmental and other stakeholders. Third, on BEE, the Tribunal recorded that the Edcon group’s financial distress had eroded the value and benefits attributable to the Edcon Staff Empowerment Trust, and that the transaction included a replacement scheme intended to safeguard the rights and interests of beneficiaries.

In considering union submissions, the Tribunal recorded the contentions regarding clauses 2.3 and 5, the merging parties’ responses, and the fact that the unions were satisfied thereafter. The Tribunal also recorded EDD’s supportive stance. Evaluatively, the Tribunal accepted that, taken as a whole, the transaction entailed no adverse competition or public interest effects and that conditional approval was appropriate.

5. Outcome and Relief

The Tribunal conditionally approved the proposed transaction in terms of which New Holdco would acquire control over ECSL.

The approval was granted subject to conditions attached as Annexure A, including provisions that replaced the earlier (2016) conditions from the approval date, and which addressed commitments relating to South African inputs (local procurement and supplier development), BEE (replacement scheme for the Edcon Staff Empowerment Trust beneficiaries), and employment (best endeavours to avoid involuntary retrenchments, especially among non-management store staff, and to offer equivalent alternative positions where stores are closed). The conditions also included monitoring and reporting obligations to the Commission and the EDD for a five-year period, and a variation clause permitting applications to the Tribunal on good cause shown.

No costs order was recorded in the reasons.

Cases Cited

Parentco/Edcon (LM117Sep16) Competition Tribunal of South Africa, order dated 23 November 2016.

Legislation Cited

Competition Act 89 of 1998 (as amended).

Broad-Based Black Economic Empowerment Act 53 of 2003 (as amended).

National Small Enterprises Act 102 of 1996.

Rules of Court Cited

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

Held

The Competition Tribunal held that the proposed transaction, being a financial restructuring in which New Holdco would acquire control over ECSL, was unlikely to substantially prevent or lessen competition in any relevant market, particularly because the transaction did not give rise to competitive overlaps.

The Tribunal further held that the transaction was unlikely to facilitate the exchange of competitively sensitive information among New Holdco shareholders who competed with each other outside the merged entity, because none of those competing shareholders would have the requisite shareholding to appoint a board member to New Holdco’s board.

The Tribunal held that no public interest issues arose in the sense of negative public interest effects, and that the transaction—considered against a counterfactual risk of business rescue or liquidation—supported public interest objectives through conditions addressing employment, local procurement, and BEE-related arrangements.

LEGAL PRINCIPLES

Merger control under the Competition Act requires an assessment of whether a transaction is likely to substantially prevent or lessen competition, and also requires consideration of public interest factors where relevant on the facts placed before the decision-maker.

Where a merger produces no competitive overlaps, this is a strong indicator supporting a finding that the transaction is unlikely to substantially lessen or prevent competition, subject to any other competition concerns that may arise on the particular facts.

Even in the absence of overlaps, a competition authority may assess whether the ownership and governance structure of a merged entity could facilitate information exchange between parties that compete with each other in other markets. Governance rights, including the ability to appoint board members, are relevant factual considerations in evaluating whether an information exchange concern is likely to arise.

In merger evaluation, the counterfactual (what is likely to occur absent the transaction) can be material, particularly where the parties contend that the target firm faces a credible risk of business rescue or liquidation and where that context informs the evaluation of public interest effects and the appropriateness of conditions.

Public interest conditions may be imposed to advance objectives such as employment protection, local procurement and supplier development, and BEE-related measures, and such conditions may include reporting and monitoring mechanisms and may replace earlier conditions where the Tribunal orders accordingly.

New Holdco v Edgars Consolidated Stores Ltd (LM270Mar19) [2019] ZACT 30 (13 June 2019)