Summary of Judgment

Introduction

This matter concerned large merger proceedings before the Competition Tribunal of South Africa under case number LM160Dec22. The Tribunal was required to decide whether to approve a proposed transaction in which Incubeta Holdings International Limited (IHI) intended to acquire the issued share capital in three target entities, namely Incubeta SA Operations (Pty) Ltd (Incubeta Ops), Incubeta South Africa (Pty) Ltd (Incubeta SA), and IncuBEE Investments (Pty) Ltd (IncuBEE), from Incubeta Holdings (Pty) Ltd (identified in the reasons as “the seller”).

The primary acquiring firm was IHI, which the Tribunal recorded as being ultimately controlled by The Carlyle Group Inc. (Carlyle). The Tribunal further recorded that Carlyle was not controlled by any firm, and that IHI did not control any firms in South Africa. For purposes of analysis, the Tribunal treated IHI, Carlyle, and Carlyle’s subsidiaries collectively as the Acquiring Group. The target firms formed part of the Incubeta Group, described as a global marketing performance group focused on digital solutions and e-commerce, operating in South Africa through the three target entities.

As to procedural history, the Tribunal heard the matter on 13 March 2023, with the last submission dated 3 March 2023. The Tribunal issued its order on 13 March 2023, and subsequently issued reasons on 3 April 2023. The Tribunal’s order was to approve the merger unconditionally.

The general subject-matter of the dispute was whether the proposed acquisition would likely lead to a substantial prevention or lessening of competition in relevant markets for digital marketing-related services, and whether it would have substantial negative public interest effects, including on employment and on the spread of ownership (including ownership by historically disadvantaged persons and workers).

Material Facts

The Tribunal accepted that the Acquiring Group is a global alternative asset manager headquartered in the United States, managing funds across private equity, credit, and investment solutions. Of relevance to the transaction, the Tribunal identified the Acquiring Group’s global activities through Digital Agency Topholding B.V. (“Dept”), described as a digital agency specialising in digital communications and marketing/branding strategies and solutions.

The Tribunal recorded the ownership structure of the target firms in summary form. Incubeta Ops was solely controlled by the seller, Incubeta Holdings (Pty) Ltd. Incubeta SA was held by the seller together with IncuBEE (with certain shareholding percentages redacted in the reasons). IncuBEE was jointly controlled by the Imvula Trust and the seller (with the relevant shareholding percentages also redacted). The Tribunal further recorded that the beneficiaries of the Imvula Trust are underprivileged black South African students who receive subsidised tertiary education opportunities funded by income generated by the Trust’s investments.

On the competitive facts, the Tribunal relied on the Competition Commission’s investigation, which found an overlap in that both sides were active (globally) in the provision of digital marketing solutions in the e-commerce sector. The Tribunal recorded that the overlap arose more specifically in the following service areas: marketing communication services, media buying services, (big) data analytics, and marketing data services.

However, the Tribunal treated as material the Commission’s finding that the Acquiring Group had not provided these services in South Africa and had not derived any revenue in South Africa relating to these services in 2021 and 2022. The Tribunal also relied on the merging parties’ submissions, confirmed by the Commission, that even if Dept’s South African activities were taken into account, Dept was a new participant with limited South African activities and a small estimated market share (with exact figures redacted), while the target firms’ estimated market shares were also small in each of the four potential markets (with exact figures redacted). The Tribunal further relied on the Commission’s assessment that the markets were fragmented, that switching between suppliers was easy, and that no customers or competitors raised concerns about the transaction.

On public interest facts, the Tribunal recorded that the merging parties stated that the transaction would not give rise to retrenchments in South Africa, and that the employee representative for the Incubeta Group confirmed employees were notified and raised no concerns. The Tribunal further recorded that the Department of Trade, Industry and Competition (DTIC) requested a 36-month moratorium on post-merger retrenchments, but that the merging parties opposed employment conditions as unnecessary given their position that no retrenchments would occur. The Commission concluded, and the Tribunal accepted, that the transaction was unlikely to negatively affect employment and that no employment conditions were required.

Regarding ownership and related public interest considerations, the Tribunal recorded the Commission’s finding that the Acquiring Group did not have shareholding held by historically disadvantaged persons (HDPs), while within the target structure there was HDP ownership linked to the Imvula Trust’s holdings (with specific effective percentages redacted). The Tribunal treated as material the merging parties’ confirmation that the Imvula Trust’s HDP shareholding in IncuBEE and Incubeta SA would remain post-merger, and that the Trust would have better entrenched contractual standing to protect its investment and ownership in IncuBEE.

The Tribunal also recorded a transaction-related step that, prior to completion, Incubeta SA would acquire the entire business and assets of Incubeta Technology SA (Pty) Ltd (“Incubeta Technology”), which was at the time wholly owned by the seller. The Tribunal accepted that this would mean that post-merger the Imvula Trust would have an effective financial interest (via its indirect holding in Incubeta SA) in the business of Incubeta Technology which it did not have before.

The Tribunal further recorded that the seller had an employee benefit trust (the Incubeta Employee Benefit Trust) comprising participating employees across various global entities in the Incubeta group. The DTIC raised concerns that the exit of a South African employee from this trust would dilute worker ownership, and proposed that an employee share ownership plan (ESOP) of 5% be considered for a broad base of the South African employees. The merging parties responded that the employee was a non-HDP senior manager residing outside South Africa (the location was redacted), that the exit was voluntary, and that any reduction in worker ownership in the South African operations was marginal and indirect and not substantial for public interest purposes.

The DTIC additionally proposed that the Imvula Trust’s bursary scheme be scaled up and that the merged entity commit to broader B-BBEE initiatives in the South African technology/media industry, including an initiative proposed at a level of 2% of annual net profit after tax. The merging parties opposed these proposals on the basis that the Imvula Trust was not an active participant in the merger and that conditions must be supported by evidence and must address merger-specific harms, while the B-BBEE initiative was said to be costly, administratively burdensome, and threatening to the commercial viability of the transaction. The Commission concluded, and the Tribunal agreed, that the merger would not have a negative effect on public interest considerations and thus recommended unconditional approval.

Legal Issues

The primary legal issue was whether the merger was likely to result in a substantial prevention or lessening of competition in any relevant market as assessed under the Competition Act framework applicable to mergers. This required the Tribunal to evaluate the overlap between the merging parties’ activities and the likely competitive effects, which is predominantly an exercise involving the application of legal standards to economic and factual material, including market structure, market shares, entry/expansion, and customer behaviour (such as switching).

A further central legal issue was whether the merger was likely to have a substantial negative effect on public interest. This included consideration of employment effects and the spread of ownership, including ownership by historically disadvantaged persons and workers, as reflected in the Tribunal’s engagement with section 12A public interest concerns raised by the DTIC. This aspect involved both factual assessment (what changes would occur) and evaluative judgment (whether any changes were substantial and justified conditions).

A subsidiary issue embedded in the public interest enquiry was whether the Tribunal should impose conditions sought by the DTIC (including an employment moratorium, an ESOP, bursary enhancements, and profit-linked B-BBEE initiatives), which required an evaluative determination as to whether conditions were warranted on the evidence before the Tribunal in relation to the merger’s likely effects.

Court’s Reasoning

On competition, the Tribunal proceeded from the Commission’s finding that there was an overlap between the parties’ activities in relation to digital marketing solutions in the e-commerce sector, and that four potential service markets could be implicated: marketing communication services, media buying services, (big) data analytics, and marketing data services. The Tribunal nevertheless treated as decisive the Commission’s factual finding that the Acquiring Group had not provided these services in South Africa and had derived no South African revenue for such services in 2021 and 2022. This significantly limited any basis for concluding that the merger would materially reduce competitive constraints in South Africa.

The Tribunal also accepted the Commission’s confirmation of the merging parties’ submissions that, even if Dept’s activities were counted as overlapping in South Africa, Dept was a recent entrant with limited South African activity, and both sides’ estimated market shares were low (with redacted figures), yielding a combined share that remained low and an accretion that was not material. The Tribunal placed weight on the Commission’s view that the relevant markets were fragmented with several players, and that switching among suppliers was easy, which reduced the risk of post-merger market power.

The Tribunal further relied on the absence of market feedback raising concern, noting that no customers or competitors raised objections to the transaction. Synthesising these considerations, the Tribunal agreed with the Commission’s conclusion that the transaction was unlikely to lead to a substantial prevention or lessening of competition in any relevant market.

On public interest, the Tribunal dealt first with employment. It accepted the merging parties’ statement that the merger would not cause retrenchments in South Africa, and noted corroboration from the employee representative that employees had been notified and raised no concerns. Although the DTIC sought a 36-month retrenchment moratorium, the Tribunal accepted the Commission’s recommendation that such conditions were not required in the circumstances presented, concluding that the merger was unlikely to negatively affect employment.

Turning to the spread of ownership and related public interest factors, the Tribunal recorded the Commission’s findings on HDP ownership, including the Acquiring Group’s lack of HDP shareholding and the presence of HDP shareholding on the target side through the Imvula Trust. The Tribunal accepted the merging parties’ confirmation that the Trust’s ownership would remain post-merger and that its contractual standing would be strengthened. The Tribunal also treated as relevant the pre-completion step whereby Incubeta SA would acquire Incubeta Technology’s business and assets, with the result that the Imvula Trust would obtain an indirect effective financial interest in that business post-merger.

In relation to the DTIC’s worker ownership concern, the Tribunal recorded the contention that a South African employee’s exit from the employee benefit trust would dilute worker ownership and the DTIC’s proposed ESOP condition. The Tribunal noted the merging parties’ explanation that the exiting employee was a non-HDP senior manager residing outside South Africa and that the exit was voluntary and offered an opportunity to extract value for years of service, and it recorded the merging parties’ view that any reduction was marginal and indirect and not substantial for purposes of the merger’s public interest assessment. The Tribunal ultimately accepted the Commission’s conclusion that, considered holistically, the transaction would not have a substantial negative public interest effect.

As to the DTIC’s further proposals regarding bursary expansion linked to the Imvula Trust and profit-linked B-BBEE initiatives, the Tribunal recorded the merging parties’ responses that such remedies required evidential support and should address merger-specific harms, and that the B-BBEE initiative proposed would be costly and burdensome and could threaten commercial viability. Without adopting additional conditions, the Tribunal aligned itself with the Commission’s overall assessment that public interest concerns did not warrant conditional approval on the evidentiary record reflected in the reasons.

Outcome and Relief

The Tribunal found that the proposed transaction was unlikely to substantially prevent or lessen competition in any relevant market and was unlikely to have a substantial negative public interest effect. It therefore unconditionally approved the merger.

The reasons as issued did not record any costs order.

Cases Cited

No cases were cited in the Tribunal’s reasons as provided.

Legislation Cited

Competition Act 89 of 1998 (as amended), including section 12A(3)(e).

Rules of Court Cited

No rules of court were cited in the Tribunal’s reasons as provided.

Held

The Competition Tribunal approved, without conditions, the large merger in terms of which Incubeta Holdings International Limited (ultimately controlled by The Carlyle Group Inc.) would acquire the issued share capital in Incubeta SA Operations (Pty) Ltd, Incubeta South Africa (Pty) Ltd, and IncuBEE Investments (Pty) Ltd from the seller, Incubeta Holdings (Pty) Ltd.

In doing so, the Tribunal accepted the Competition Commission’s conclusions that the transaction would not result in a substantial prevention or lessening of competition in the relevant (potential) markets for digital marketing-related services, and that it would not produce substantial negative effects on public interest grounds, including employment and the spread of ownership.

LEGAL PRINCIPLES

The Tribunal applied the merger assessment framework in terms of the Competition Act, requiring an assessment of whether a transaction is likely to lead to a substantial prevention or lessening of competition in any relevant market. In applying this framework, the Tribunal treated as material considerations the existence and extent of any horizontal overlap, the parties’ activities in South Africa, the combined market shares and accretion (where relevant), market fragmentation, and the ease of customer switching, as well as the presence or absence of complaints from market participants.

The Tribunal also applied the Act’s requirement to evaluate public interest considerations in merger control, including the effects on employment and the spread of ownership, encompassing ownership by historically disadvantaged persons and workers. Within this enquiry, the Tribunal’s approach reflected that conditions are not imposed in the absence of a demonstrated likelihood of substantial negative public interest effects on the evidence before it, and that the Commission’s investigation and recommendations constitute an important evidentiary foundation for the Tribunal’s determination.

Finally, the Tribunal’s reasoning reflected an evaluative assessment that, where the evidence indicates no retrenchments, no substantial adverse ownership impact, and no substantiated merger-specific public interest harm, unconditional approval is appropriate.