Health groups settle over unlawful merger
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.