Health groups set­tle over un­law­ful merger

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Mark Gar­den & Kevin Mi­nofu

ON APRIL 7 the Competition Tri­bunal re­leased its or­der con­firm­ing the set­tle­ment agree­ment en­tered into be­tween the Competition Com­mis­sion and two healthcare groups, Life Healthcare Group and Joint Med­i­cal Hold­ings (JMH) in terms of which they ad­mit­ted to their fail­ure to no­tify the competition au­thor­i­ties of a merger be­tween them and to ob­tain the re­quired ap­proval prior to that merger be­ing im­ple­mented; and agreed to pay an ad­min­is­tra­tive penalty of R10m.

Trans­ac­tions that are de­fined in the Competition Act, No 89 of 1998 (as amended) as “in­ter­me­di­ate merg­ers” and “large merg­ers” may not law­fully be im­ple­mented prior to no­ti­fi­ca­tion to, and ap­proval by, the competition au­thor­i­ties.

Fail­ure to give no­tice of such merg­ers to the com­mis­sion and the sub­se­quent im­ple­men­ta­tion of those merg­ers (with­out ap­proval from the competition au­thor­i­ties) are typ­i­cally re­ferred to as “missed” merger fil­ings and give rise to the pos­si­bil­ity of ad­min­is­tra­tive penal­ties be­ing im­posed on the merg­ing par­ties as a re­sult.

The set­tle­ment deal be­tween the com­mis­sion and Life Healthcare (which op­er­ates hospi­tals on a na­tional ba­sis) and JMH (a com­peti­tor to Life Healthcare, which op­er­ates a group of hospi­tals in the greater Dur­ban area), as con­firmed by the tri­bunal, brings to a close a pro­tracted le­gal history.

Prior to 2004, Life Healthcare had a mi­nor­ity stake of 25% in JMH, which was ac­quired be­fore the Competition Act had come into op­er­a­tion. Not­with­stand­ing its stake, it ap­pears as if Life Healthcare ex­er­cised a de­gree of strate­gic in­flu­ence over JMH. In 2004, Life Healthcare wrote a let­ter to the com­mis­sion where it re­quested an ad­vi­sory opin­ion from the com­mis­sion as to whether it would need to no­tify its ac­qui­si­tion of fur­ther shares in JMH, which would lead to it hold­ing a 49% mi­nor­ity stake in JMH. In this re­quest, how­ever, Life Healthcare does not ap­pear to have in­cluded an ac­count of how, in prac­tice, it ex­er­cised strate­gic in­flu­ence over JMH.

The com­mis­sion, with­out the ben­e­fit of this in­for­ma­tion, con­cluded that be­cause no ad­di­tional as­pect or qual­ity of con­trol was be­ing ac­quired by Life Healthcare in in­creas­ing its stake to 49%, the trans­ac­tion did not war­rant a merger no­ti­fi­ca­tion.

In 2012, Life Healthcare sought to in­crease its share­hold­ing in JMH to 70% and no­ti­fied the pro­posed trans­ac­tion to the com­mis­sion as re­quired. Dur­ing the course of its probe, and dur­ing merger hear­ing pro­ceed­ings be­fore the tri­bunal, it came to light that at the time of the 2004 ad­vi­sory opin­ion, the com­mis­sion was not fully ap­prised of the re­la­tion­ship that ex­isted be­tween Life Healthcare and JMH, in­clud­ing the ex­tent of the strate­gic in­flu­ence ex­er­cised by Life Healthcare. It was also re­vealed that as a re­sult of this re­la­tion­ship, from at least 2004, Life Healthcare had been ne­go­ti­at­ing tar­iffs with pri­vate healthcare fun­ders for and on be­half of JMH.

Pur­suant to these rev­e­la­tions, and af­ter the com­ple­tion of the 2012 merger pro­ceed­ings, the com­mis­sion be­gan in­ves­ti­gat­ing whether or not Life Healthcare’s ac­qui­si­tion of a fur­ther mi­nor­ity stake in JMH in 2004 con­sti­tuted a missed merger fil­ing (in light of the facts and cir­cum­stances dur­ing the 2012 merger pro­ceed­ings). Fol­low­ing this, the com­mis­sion, Life Healthcare and JMH com­menced set­tle­ment ne­go­ti­a­tions.

The set­tle­ment agree­ment con­cluded be­tween the com­mis­sion, Life Healthcare and JMH re­quired Life Healthcare and JMH to pay a fine of R10m for their fail­ure to no­tify Life Healthcare’s ac­qui­si­tion of a fur­ther mi­nor­ity stake in JMH in 2004. The agree­ment was also in­tended to set­tle any pos­si­ble col­lu­sion or price-fix­ing claims the com­mis­sion may have cho­sen to pur­sue against Life Healthcare and JMH for Life Healthcare hav­ing ne­go­ti­ated tar­iffs with pri­vate healthcare fun­ders for and on be­half of JMH.

The ad­min­is­tra­tive penalty of R10m is the largest penalty yet im­posed in SA for a fail­ure to no­tify a merger. For some time, the com­mis­sion has warned that it in­tends ma­te­ri­ally to raise penal­ties for fail­ure to no­tify merg­ers, re­ly­ing on the ar­gu­ment that cor­po­rate SA has had suf­fi­cient time in which to ac­cli­ma­tise to the merger reg­u­la­tion regime since 1998.

The Life Healthcare-JMH case demon­strates two things — that the com­mis­sion is adopt­ing its hard-line ap­proach to missed merg­ers; and not all “merg­ers” as de­fined for competition law pur­poses nec­es­sar­ily look like merg­ers, as the term is gen­er­ally un­der­stood com­mer­cially.

There­fore, ac­qui­si­tions, amal­ga­ma­tions and di­vest­ments should all care­fully be scru­ti­nised and spe­cial­ist competition law ad­vice sought to en­sure that no fil­ings are in­ad­ver­tently missed, with costly con­se­quences.

Life Healthcare and JMH fined R10m over fail­ure to give the au­thor­i­ties no­tice of a merger

Mark Gar­den is a di­rec­tor and Kevin Mi­nofu a can­di­date at­tor­ney in the ENSafrica competition de­part­ment.

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