Bal­anc­ing Com­pe­ti­tion Act para­dox

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Justin Balkin & Michael Mbikiwa

Pub­lic in­ter­est cri­te­ria can at times un­der­mine ef­fi­cien­cies and ob­jec­tives of com­pe­ti­tion law pol­icy

UN­DER South African com­pe­ti­tion law, pub­lic in­ter­est fac­tors can be used to per­mit an an­ti­com­pet­i­tive merger, or to pro­hibit a pro-com­pet­i­tive merger. The in­clu­sion of a pub­lic in­ter­est test has been the sub­ject of con­tro­versy for a long time. It seems to us that in re­cent years the com­pe­ti­tion au­thor­i­ties have given un­due promi­nence to pub­lic in­ter­est con­sid­er­a­tions in their anal­y­sis of merg­ers, par­tic­u­larly where the pub­lic in­ter­est con­cern is that of em­ploy­ment.

The fun­da­men­tal prin­ci­ple un­der­ly­ing com­pe­ti­tion reg­u­la­tion is the en­hance­ment of con­sumer wel­fare through the com­pet­i­tive process. This is based on the the­ory that rivalry be­tween com­peti­tors achieves ben­e­fits to con­sumers through lower prices, ex­panded out­put and en­hanced in­no­va­tion. This, of course, ul­ti­mately ben­e­fits the broad “pub­lic in­ter­est”.

But this is not the sense in which “pub­lic in­ter­est” is used in the Com­pe­ti­tion Act. The closed list of pub­lic in­ter­est fac­tors set out in the Com­pe­ti­tion Act com­prises: the im­pact of the merger on a par­tic­u­lar in­dus­trial sec­tor or re­gion; em­ploy­ment; the abil­ity of small busi­nesses or firms con­trolled by his­tor­i­cally dis­ad­van­taged per­sons to be­come com­pet­i­tive; and the abil­ity of na­tional in­dus­tries to com­pete in­ter­na­tion­ally.

As a point of de­par­ture, it must be em­pha­sised that there is good rea­son for the in­clu­sion of the pub­lic in­ter­est cri­te­ria in the Com­pe­ti­tion Act, par­tic­u­larly in a de­vel­op­ing econ­omy such as ours, where in­dus­trial pol­icy has an im­por­tant role to play, in which un­em­ploy­ment is rife, and in which the dis­tri­bu­tion of wealth and own­er­ship is un­equal.

How­ever, de­spite their im­por­tance, the in­clu­sion of th­ese fac­tors in the Com­pe­ti­tion Act leads to a para­dox, in that they are of­ten di­vorced from and, at times, di­rectly at odds with the pri­mary ob­jec­tives of com­pe­ti­tion law and pol­icy. A fo­cus on pro­tec­tion of em­ploy­ment, for ex­am­ple, par­tic­u­larly where job losses are the re­sult of ef­fi­cien­cyen­hanc­ing syn­er­gies be­tween two merg­ing firms, can of­ten pre­vent a merged en­tity from be­ing as ef­fi­cient as it oth­er­wise would be, re­sult­ing in less com­pe­ti­tion and knock-on ef­fects of higher prices and less in­no­va­tion. In other words, giv­ing pri­or­ity to the spec­i­fied pub­lic in­ter­est cat­e­gories can serve to un­der­mine the pri­mary com­pet­i­tive anal­y­sis in merg­ers, thus harm­ing the broad “pub­lic in­ter­est” that com­pe­ti­tion pol­icy aims to pro­mote.

The com­pe­ti­tion au­thor­i­ties’ pub­lic in­ter­est man­date is not di­vorced from their com­pe­ti­tion anal­y­sis: the fac­tors are an­a­lysed in a holis­tic in­quiry with re­gard to one another, in which the com­pe­ti­tion as­sess­ment has rel­e­vance to the ques­tion of jus­ti­fi­ca­tion in re­spect of the pub­lic in­ter­est in­quiry. But sec­tion 12A it­self does not pro­vide any guid­ance on bal­anc­ing the com­pe­ti­tion and pub­lic in­ter­est as­sess­ments, other than re­quir­ing that coun­ter­vail­ing pub­lic in­ter­est grounds must be “sub­stan­tial” be­fore they can con­sti­tute a valid ba­sis upon which to pro­hibit a merger or im­pose con­di­tions.

In our view, two in­ter-re­lated ques­tions arise in this con­text. First, are the com­pe­ti­tion reg­u­la­tors the cor­rect au­thor­i­ties to de­ter­mine pub­lic in­ter­est is­sues, such as em­ploy­ment? If so, have they ap­plied the “sub­stan­tial­ity” test cor­rectly?

It has been ar­gued that the com­pe­ti­tion au­thor­i­ties are the in­cor­rect fo­rum for the eval­u­a­tion of pub­lic in­ter­est is­sues be­cause pub­lic in­ter­est ob­jec­tives are not nec­es­sar­ily aligned with those of com­pe­ti­tion pol­icy, and the ex­er­cise re­quired by com­pe­ti­tion reg­u­la­tors thus re­quires a con­sid­er­a­tion of con­tra­dic­tory prin­ci­ples.

Th­ese con­cerns are not with­out merit. How­ever, with all its flaws, it is surely prefer­able to al­low for the si­mul­ta­ne­ous con­sid­er­a­tion of com­pe­ti­tion and pub­lic in­ter­est is­sues by the com­pe­ti­tion au­thor­i­ties in the course of analysing a merger.

As David Lewis noted in May 2002, for one au­thor­ity to take a de­ci­sion on com­pe­ti­tion grounds, and another to take the pub­lic in­ter­est de­ci­sion, would in­vite mas­sive lob­by­ing, and would lack the open­ness and trans­parency of our uni­fied process. The sin­gle, uni­fied fo­rum, and the holis­tic in­quiry that ac­com­pa­nies it, al­lows for the im­po­si­tion of con­di­tions — ei­ther to pro­tect the pub­lic in­ter­est where a pro-com­pet­i­tive merger would oth­er­wise be pro­hib­ited due to its neg­a­tive im­pact on pub­lic in­ter­est, or to pro­tect com­pe­ti­tion where an oth­er­wise anti-com­pet­i­tive merger is ap­proved due to its pos­i­tive pub­lic in­ter­est im­pact. The al­ter­na­tive would be a bi­fur­cated, dis­jointed con­sid­er­a­tion of th­ese is­sues.

What is cru­cial, how­ever, is to en­sure that pub­lic in­ter­est con­cerns only en­ter the com­pe­ti­tion fray when they are sub­stan­tial.

In our view, the pen­du­lum has swung too far in the di­rec­tion of pub­lic in­ter­est. Par­ties that have been in­volved in a merger no­ti­fi­ca­tion to the com­pe­ti­tion au­thor­i­ties in the last three years will have learnt that even one re­trench­ment will pro­tract an in­ves­ti­ga­tion, and may even re­sult in the im­po­si­tion of a con­di­tion. Two re­cent ex­am­ples of the im­po­si­tion of con­di­tions aimed at pro­tect­ing em­ploy­ment are par­tic­u­larly note­wor­thy.

In AON/Glen­rand, the merg­ing par­ties es­ti­mated the re­trench­ment of a max­i­mum of 220 out of ap­prox­i­mately 1,500 em­ploy­ees due to a du­pli­ca­tion of roles. Some of the em­ploy­ees were highly skilled, and it was com­mon cause that their prospects of find­ing al­ter­na­tive em­ploy­ment were good. De­spite this, the com­mis­sion rec­om­mended the ap­proval of the merger sub­ject to the im­po­si­tion of a cap on re­trench­ments of any em­ployee earn­ing be­low R30,000 a month. Such a con­di­tion would have made the merged en­tity un­com­pet­i­tive,

For ev­ery merger to be ham­strung by the pos­si­bil­ity of a few re­trench­ments … can­not be said to meet the thresh­old of sub­stan­tial­ity

be­cause it forced it to main­tain an in­ef­fi­cient em­ployee base at a much greater cost than its ri­vals. Fol­low­ing a re­quest for con­sid­er­a­tion, the Com­pe­ti­tion Tri­bunal nar­rowed this to only 24 em­ploy­ees, earn­ing be­tween R15,000 and R30,000 a month, and pro­hib­ited the re­trench­ment of any em­ploy­ees earn­ing be­low R15,000, for a pe­riod of two years. While the merg­ing par­ties them­selves ten­dered this as a set­tle­ment of­fer, on AON’s fore­casts, 54 em­ploy­ees in to­tal were af­fected.

In Glen­core/Xs­trata, the tri­bunal ap­proved the trans­ac­tion sub­ject to the con­di­tion that no more than 80 re­trench­ments of semi-skilled and un­skilled work­ers took place within 90 days of the last an­titrust ap­proval date, and a max­i­mum of 100 re­trench­ments as a re­sult of the merger for­ever (where the ad­di­tional re­trench­ments could take place only two years af­ter the ef­fec­tive date).

Were the pub­lic in­ter­est con­cerns in the above de­ci­sions “sub­stan­tial”? The an­swer to this turns ul­ti­mately on whether sub­stan­tial­ity is as­sessed in the con­text of each trans­ac­tion (mea­sured by ref­er­ence to the pro­por­tion of the merg­ing par­ties’ em­ploy­ees af­fected), or whether it is as­sessed in the con­text of the econ­omy as a whole. The ap­proach adopted by the court in Wal-Mart/ Massmart was to de­ter­mine to­tal so­ci­etal wel­fare; that is, to bal­ance the pos­i­tive ef­fect on con­sumer wel­fare brought about by the merger against the po­ten­tial pub­lic in­ter­est harm aris­ing there­from. In our view, it stands to rea­son that, just as con­sumer wel­fare is mea­sured across the whole rel­e­vant mar­ket, so too must the job losses against which the trade-off is de­ter­mined.

Con­sider, for ex­am­ple, the de­ci­sion in Glen­core/Xs­trata, where the tri­bunal pro­tected 100 jobs in a sec­tor where thou­sands of jobs are lost ev­ery month through mar­ket con­di­tions. While any em­ployee who loses his or her job as a re­sult of a merger de­serves great sym­pa­thy, for the com­pe­ti­tion au­thor­i­ties to im­pose pub­lic in­ter­est con­di­tions, there must surely be a sub­stan­tial im­pact in the con­text of the South African econ­omy. For ev­ery merger to be ham­strung by the pos­si­bil­ity of only a few re­trench­ments is, in our view, ir­rec­on­cil­able with broader com­pe­ti­tion ob­jec­tives, and can­not be said to meet the thresh­old of sub­stan­tial­ity. Those em­ploy­ees that are re­trenched are not with­out rem­edy; their pro­tec­tion sim­ply lies else­where: they are pro­tected by SA’s ex­ten­sive labour laws, which en­sure the sub­stan­tive and pro­ce­dural fair­ness of dismissals.

The ques­tion whether the com­pe­ti­tion au­thor­i­ties pro­vide the cor­rect fo­rum for the ven­ti­la­tion of pub­lic in­ter­est is­sues is in­ex­orably bound up with the ques­tion as to whether the cor­rect test is ap­plied. That is to say, the com­pe­ti­tion au­thor­i­ties are (at least in our view) the ap­pro­pri­ate fo­rum for the con­sid­er­a­tion of pub­lic in­ter­est is­sues pro­vided that they ap­ply the cor­rect test, and thus limit them­selves to pub­lic in­ter­est con­cerns that are sub­stan­tial.

Justin Balkin is a di­rec­tor and Michael Mbikiwa is a can­di­date at­tor­ney in the ENSafrica com­pe­ti­tion law depart­ment.

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