A pre­dic­tive ap­proach to merger anal­y­sis

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Mark Gar­den & Ru­tendo Hlatshwayo

Con­flict­ing de­ci­sions serve to high­light the com­plex­i­ties in­volved in mak­ing the cor­rect fac­tual as­sump­tions in or­der to de­ter­mine the rel­e­vant coun­ter­fac­tual

TO BE or not to be: that is the ques­tion. This of­ten quoted line is ar­guably the best known in­tro­duc­tory state­ment from Shake­spearean lit­er­a­ture. Through Ham­let’s trou­bled mono­logue, Shake­speare ex­plores the dilemma faced in mak­ing a de­ter­mi­na­tion on whether the cer­tainty of life is prefer­able to the uncer­tain­ties of death.

This de­bate, which at­tempts to weigh up the here-and-now ver­sus an un­cer­tain fu­ture event, serves to il­lus­trate (with some po­etic li­cence) the un­en­vi­able task that the com­pe­ti­tion au­thor­i­ties face in con­sid­er­ing the rel­e­vant coun­ter­fac­tual sce­nario in South African merger anal­y­sis.

The coun­ter­fac­tual is an an­a­lyt­i­cal tool that as­sists in an­swer­ing the ques­tion of whether a par­tic­u­lar merger gives rise to a sub­stan­tial less­en­ing or preven­tion of com­pe­ti­tion, or gen­er­ates pub­lic in­ter­est harm. The coun­ter­fac­tual, which typ­i­cally de­scribes a fu­ture world ab­sent the merger, is com­pared against the fac­tual, which is a world in which the merger goes ahead. The im­por­tance of a coun­ter­fac­tual sce­nario in a given merger will de­pend on the facts of each case, and in par­tic­u­lar, may be used where the prospect of harm to com­pe­ti­tion or pub­lic in­ter­est is high.

The con­flict­ing de­ci­sions of the Com­pe­ti­tion Tri­bunal and the Com­pe­ti­tion Ap­peal Court (CAC) in the pro­posed merger be­tween Pi­o­neer Hi-Bred In­ter­na­tional Inc and Pan­nar Seed (Pty) Ltd serve to high­light the com­plex­i­ties in­volved in mak­ing the cor­rect fac­tual as­sump­tions in or­der to de­ter­mine the rel­e­vant coun­ter­fac­tual.

The dif­fer­ence in ap­proach by the Tri­bunal and CAC was founded on the op­pos­ing ar­gu­ments pre­sented by the merg­ing par­ties and the Com­pe­ti­tion Com­mis­sion. The merg­ing par­ties sub­mit­ted that the pro­posed merger would pro­vide Pan­nar with ad­vanced breed­ing tech­nolo­gies from Pi­o­neer, which would pre­vent Pan­nar’s de­cline as a com­pet­i­tive force in the hy­brid maize seed breed­ing mar­ket in SA. The Com­mis­sion, on the other hand, ar­gued that anti-com­pet­i­tive harm would arise by virtue of two out of the three sig­nif­i­cant com­peti­tors in the hy­brid maize seed mar­ket be­com­ing a merged en­tity.

The tri­bunal’s de­ci­sion in the Pan­nar mat­ter sup­ports a more con­ser­va­tive ap­proach to the ap­pli­ca­tion of a coun­ter­fac­tual sce­nario to merger anal­y­sis, pre­fer­ring the as­sess­ment of cur­rent mar­ket con­di­tions to an as­sess­ment of a fu­ture (al­beit some­what fore­see­able) sit­u­a­tion. The tri­bunal noted that the rel­e­vant coun­ter­fac­tual in this mat­ter could ei­ther be (i) the sta­tus quo, ie a sce­nario where the merger does not hap­pen, thereby main­tain­ing the pre­vail­ing pre-merger mar­ket con­di­tions; or (ii) an al­ter­na­tive fore­see­able sit­u­a­tion that was sig­nif­i­cantly dif­fer­ent from the sta­tus quo.

The tri­bunal held that the Com­pe­ti­tion Act al­lows for only one per­mis­si­ble de­par­ture from the sta­tus quo as an ap­pro­pri­ate coun­ter­fac­tual proxy, and that is where the busi­ness of a party to the merger has failed or is likely to fail — the so-called fail­ing firm de­fence.

The tri­bunal de­cided that the rel­e­vant coun­ter­fac­tual in this mat­ter was the sta­tus quo, as, even though the facts in­di­cated that Pan­nar was in de­cline, the na­ture and ex­tent of its de­cline did not seem to ne­ces­si­tate a fail­ing firm anal­y­sis (nor did the merg­ing par­ties raise the fail­ing firm de­fence). Of im­por­tance to the anal­y­sis of the sta­tus quo was that Pan­nar had al­ter­na­tive strate­gies that it could pur­sue that may ame­lio­rate or re­move the pos­si­bil­ity of its de­cline in the mar­ket, such as part­ner­ships with other firms that would not give rise to an­ti­com­pet­i­tive ef­fects in the rel­e­vant mar­ket. There­fore the tri­bunal pro­hib­ited the pro­posed merger.

In over­turn­ing the tri­bunal’s de­ci­sion, the CAC ap­pears to crit­i­cise the tri­bunal for fail­ing to have due re­gard to the cor­rect fac­tual as­sump­tions to be used in con­struct­ing the rel­e­vant coun­ter­fac­tual. In par­tic­u­lar, the CAC noted that the al­ter­na­tive part­ner­ships that Pan­nar may have pur­sued with other firms iden­ti­fied by the tri­bunal were not in fact vi­able, as there was very lit­tle com­ple­men­tar­ity be­tween the firms that would al­low Pan­nar to continue de­vel­op­ing hy­brid maize seed.

In­ter­est­ingly, while the CAC af­firmed that the Pan­nar mat­ter could not be de­cided in terms of the con­cept of a fail­ing firm, the CAC held that the rel­e­vant coun­ter­fac­tual was the con­tin­ued de­cline and exit from the mar­ket by Pan­nar.

While not ex­plic­itly dis­miss­ing the tri­bunal’s in­ter­pre­ta­tion of the coun­ter­fac­tual sce­nar­ios per­mit­ted un­der the Com­pe­ti­tion Act, the CAC ap­peared to put for­ward the propo­si­tion that a “for­ward look­ing” coun­ter­fac­tual, which con­tem­plated an al­ter­na­tive fore­see­able sit­u­a­tion to the sta­tus quo ab­sent the merger, could be used in a “less than” fail­ing firm sce­nario (ie where the fail­ing firm de­fence is not for­mally raised by the merg­ing par­ties).

The CAC con­cluded that the pro­posed merger would pre­vent the loss of a valu­able com­pet­i­tive force, and would in­crease com­pe­ti­tion and the na­ture and qual­ity of seeds pro­duced in SA. Con­se­quently, the CAC ap­proved the merger, sub­ject to var­i­ous con­di­tions.

The chal­lenges high­lighted in the de­ci­sions of the tri­bunal and CAC in the Pan­nar mat­ter — in which the com­pe­ti­tion au­thor­i­ties must some­how eval­u­ate the present ver­sus the un­cer­tain fu­ture and de­ter­mine which “world” is more com­pet­i­tively de­sir­able — find echo in Ham­let’s dilemma. To ap­prove or not to ap­prove? That is in­deed the trou­ble­some ques­tion.

Mark Gar­den is a di­rec­tor and Ru­tendo Hlatshwayo a can­di­date at­tor­ney in the ENS com­pe­ti­tion law depart­ment.

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