Brief Summary

Competition Law — Merger Approval — Conditional approval of merger between Boundary Terraces 042 (Pty) Ltd and Bravo Group (Pty) Ltd — No competition concerns identified, but public interest concerns regarding past retrenchments — Tribunal imposing conditions including a moratorium on post-merger retrenchments and establishment of a Development Fund for affected employees — Approval granted subject to conditions aimed at mitigating negative effects of retrenchments.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings concerned a large merger before the Competition Tribunal of South Africa in which the Tribunal was required to determine whether to approve, prohibit, or approve with conditions a proposed acquisition, and in particular whether any public interest conditions were warranted notwithstanding the absence of competition concerns.

The primary acquiring firm was Boundary Terraces 042 (Pty) Ltd (“Boundary Terraces”), a newly incorporated investment vehicle established for purposes of the transaction and jointly controlled by MIG Investment Holdings (Pty) Ltd and Corvest 12 (Pty) Ltd. The primary target firm was Bravo Group (Pty) Ltd (“Bravo Group”), wholly owned by Rockwood Private Equity.

The matter followed the ordinary merger control pathway. The merger was notified to the Competition Commission, and the Tribunal conducted a hearing on 21 August 2019. The Tribunal issued an order on 26 August 2019 conditionally approving the merger, and subsequently furnished written reasons on 21 October 2019.

The general subject-matter of the dispute was not market power or competitive harm, but rather whether retrenchments that occurred shortly before notification (and while the transaction was being negotiated) gave rise to public interest concerns relating to employment, and what conditions (including a moratorium on post-merger retrenchments and remedial measures for affected employees) were appropriate.

2. Material Facts

Boundary Terraces was a special purpose vehicle created to implement the transaction and, as such, did not itself conduct business activities. It was jointly controlled by MIG and Corvest 12 (each holding 43.7% shareholding), with the remaining issued share capital held by members of Bravo Group’s management team. MIG was part of a broader investment structure ultimately linked to the Mineworkers Investment Trust, and Corvest 12 was controlled through RMB Corvest within the FirstRand group.

Bravo Group conducted its business through manufacturing operations in lounge furniture and sleep products. Through its Lounge Division, it manufactured lounge suites and related products under brands including La-Z-Boy, Grafton Everest, Alpine Lounge, and Gamma Gomma. Through its Sleep Division, it manufactured mattresses and base sets and imported certain sleep accessories under brands including Sealy, Edblo, Slumberland, and King Koil.

The proposed transaction entailed Boundary Terraces acquiring 100% of the issued share capital of Bravo Group from Rockwood, resulting in Boundary Terraces wholly owning and controlling Bravo Group post-merger. The stated commercial rationale was that the acquiring side viewed the investment as an attractive co-investment opportunity in an established business, while Rockwood sought liquidity and value maximisation for its shareholders and investors.

It was common cause on the record that Bravo Group had engaged in a restructuring process shortly before notification, resulting in retrenchments at the Alpine and Grafton Everest factories. The Tribunal recorded that these retrenchments occurred approximately two months prior to the merger being filed with the Commission, and at a time when the transaction was being negotiated. The retrenchments took place on 18 January 2019 and 7 February 2019, and the Commission received the merger notification on 12 March 2019.

The Tribunal recorded the position presented in the merger filing that no retrenchments would arise as a result of the proposed transaction, but also recorded that the merging parties disclosed that retrenchments had already occurred (the “past retrenchments”). The parties stated that some retrenchments were not compulsory and that others involved acceptance of voluntary severance packages or early retirement.

The public interest concern was raised by trade unions (SACTWU and SAFAWU) and echoed by NUFAWSA, who expressed concern that the pre-merger retrenchments may have been a prerequisite for the sale or otherwise merger-specific. The Minister of Economic Development also filed a notice of intention to participate and urged prohibition absent remedies to mitigate job losses.

The merging parties contended that the retrenchments were not caused by the merger but by broader industry difficulties, and that the retrenchments would have continued regardless of whether the transaction proceeded.

The Commission investigated the timeline of the merger negotiations and the restructuring, and it found that the timing suggested a potential link between the retrenchments and the transaction; however, it conceded it could find no evidence proving direct involvement by the acquiring firm in the pre-merger retrenchments. The Commission nonetheless adopted a cautious approach and recommended conditional approval to address the potential public interest harm.

During the hearing, it emerged that there was not full alignment between the merging parties regarding conditions, in particular a proposed moratorium on merger-related retrenchments. The acquiring firm maintained it had not agreed to those conditions and expressed unwillingness to accept conditions said to arise from retrenchments in which it contended it was not involved.

In relation to identifying the affected employees, the Tribunal recorded that a list of retrenched employees was provided, and it became apparent that 45 of the retrenched employees had since been re-employed, reducing the total number of retrenched employees (including voluntary and non-voluntary) to 253. The Tribunal also addressed whether beneficiaries of remedial measures should include both compulsorily retrenched employees and those who accepted voluntary packages, and recorded that the merging parties were comfortable that both categories should benefit. The Tribunal further addressed that responsibility for a re-employment remedy was more appropriately placed on the target firm rather than the acquiring firm, and recorded agreement to that effect.

3. Legal Issues

The central legal questions were whether the proposed merger, despite raising no competition concerns, nonetheless triggered public interest concerns (specifically employment-related concerns) warranting the imposition of conditions, and if so what the appropriate nature and allocation of those conditions should be.

A further issue concerned the appropriate treatment of post-merger retrenchments, namely whether a moratorium on merger-related retrenchments should be imposed, and how to address the acquiring firm’s objection to conditions given its denial of involvement in the pre-merger retrenchments. This required the Tribunal to make an evaluative assessment of risk and appropriate safeguards, rather than to resolve a pure factual dispute on causation on a balance of probabilities.

The dispute therefore primarily concerned the application of merger control principles to the facts (especially public interest considerations), alongside an element of value judgment or discretion as to the necessity and proportionality of conditions directed at employment impacts in the context of temporal proximity and uncertainty regarding causation.

4. Court’s Reasoning

On the competition assessment, the Tribunal reasoned that the transaction raised no competition concerns because Boundary Terraces (as a newly incorporated vehicle) was not active in the relevant markets for lounge furniture and sleep products. On that basis, the Tribunal concluded that the merger would not substantially prevent or lessen competition in any relevant market.

The Tribunal’s reasoning focused on public interest. It considered that retrenchments had occurred shortly before notification and during the period when the transaction was being negotiated, and it took account of the concerns raised by unions and the Minister that these job losses might have been linked to the merger process. Although the Commission could not establish evidence proving the acquiring firm’s direct involvement in the retrenchments, the Tribunal accepted that the timing and surrounding circumstances justified a cautious approach and warranted remedial conditions directed at potential employment harm.

A significant aspect of the Tribunal’s reasoning related to the debate about a moratorium on post-merger retrenchments. The Tribunal noted that the acquiring firm had not agreed to the proposed moratorium and advanced the position that it should not be bound by conditions arising from pre-merger retrenchments it said it did not cause and regarded as a risk. The Commission, however, maintained that a moratorium was appropriate and suggested that operationally justified retrenchments would not, in practice, be treated inflexibly, provided appropriate information was supplied.

The Tribunal evaluated the acquiring firm’s stance as seeking to avoid meaningful constraints (“nothing other than a blank cheque”) and rejected that approach. The Tribunal reasoned that, if retrenchments were truly operationally justified, the merging parties should be able to provide a sworn statement to that effect. In the Tribunal’s assessment, the public interest in protecting against merger-related job losses outweighed inconvenience to the merging parties associated with compliance and disclosure. On this basis, it found that a moratorium on post-merger retrenchments was warranted.

In dealing with remedies directed at past retrenchments, the Tribunal considered practical implementation questions, including whether affected employees were identifiable (and accepted the provision of an employee list), the reduced number of retrenched employees due to subsequent re-employment, and whether recipients of remedial measures should include both compulsory retrenchees and those who accepted voluntary severance or early retirement. It accepted that both categories would benefit. The Tribunal also reasoned that the obligation to notify and potentially re-employ affected employees in suitable roles was, as a matter of appropriateness, better placed on the target firm, and it recorded that this was agreed by the Commission and the merging parties.

Overall, the Tribunal’s reasoning reflects an approach that, in circumstances where competition concerns were absent but public interest employment risks were credibly raised and not fully dispelled (even if not proven as merger-specific), it was appropriate to approve the merger subject to conditions aimed at ameliorating negative employment effects and guarding against merger-related retrenchments.

5. Outcome and Relief

The Tribunal conditionally approved the proposed transaction.

The approval was subject to public interest conditions intended to address employment-related concerns arising from the pre-merger retrenchments and to prevent merger-related job losses post-merger. The reasons describe conditions including a moratorium on merger-related retrenchments, the establishment of a development fund aimed at reskilling affected employees (or supporting small business start-ups), and a mechanism requiring that affected employees be notified of relevant job opportunities and be re-employed if they meet relevant criteria, with responsibility for the re-employment remedy situated with the target firm.

No costs order is recorded in the reasons.

Cases Cited

No cases are cited in the reasons.

Legislation Cited

Labour Relations Act 66 of 1995, section 189 (referred to in relation to consultation meetings during retrenchment processes).

Rules of Court Cited

No rules of court are cited in the reasons.

Held

The Tribunal held that the proposed acquisition of Bravo Group by Boundary Terraces did not raise competition concerns because the acquiring vehicle had no activities in the relevant markets, and therefore the merger would not substantially prevent or lessen competition.

The Tribunal further held that, notwithstanding the absence of competition concerns, the merger raised public interest concerns relating to employment due to the close temporal proximity between pre-merger retrenchments and the merger negotiations and notification, and the inability to exclude a potential link. It accordingly held that conditional approval with employment-related conditions was appropriate, including a moratorium on merger-related retrenchments and remedial measures for affected employees.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger control assessment includes both competition effects and public interest considerations, and that a merger may be approved subject to conditions where public interest risks require mitigation even if competition harm is absent.

In applying public interest principles concerning employment, the Tribunal proceeded on a precautionary evaluative basis: where retrenchments occur in close proximity to merger negotiations and notification, and where concerns are raised that job losses may be merger-related, conditions may be justified even if direct causation is not proven, provided the conditions are directed at ameliorating identified public interest harm.

The Tribunal applied the principle that protective conditions relating to retrenchments must be meaningful. Where merging parties assert that any post-merger retrenchments would be operationally justified, the Tribunal treated it as appropriate for parties to substantiate that position (including, on the Tribunal’s reasoning, by providing a sworn statement), and it weighed the public interest in job protection more heavily than compliance inconvenience to the merging parties.

The Tribunal also applied a practical implementation principle in crafting conditions: remedial measures should be administrable, with affected employees being identifiable, beneficiaries clearly determined, and obligations allocated to the entity best placed to perform them (in this matter, the target firm in relation to notification and re-employment opportunities).

Boundary Terraces 042 (Pty) Ltd v Bravo Group (Pty) Ltd (LM272Mar19) [2019] ZACT 74 (21 October 2019)