ARTICLES

The impact of post-merger cross-shareholdings on South African merger control policy¹

Chris Charter

Cliffe Dekker Incorporated

ABSTRACT

There is a concentration of EU and US standards in the South African economy. In addition, a number of large industries have been undergoing consolidation. As a result, the phenomenon of cross-holdings, both within and across industries, is not unusual.
In cases where the level of cross-holding falls short of joint control, the competition authorities have at times sought to apply the co-ordinated effects doctrine or some variation thereof hoping to lessen potential competition. More recently, the Tribunal has also considered the possible unilateral effects of the acquisition of a minority stake in a rival.
A number of cases has emerged that to a greater or lesser degree explores the impact of cross-holdings and cross-directorships on the competitive behaviour of the firms concerned. This paper includes a review of some of these decisions with a view to determining whether any clear policy seems likely to emerge from the competition authorities.
The authorities' approach to date, reveals an evolution from reflex suspicion to a more reasoned, fact-based outlook. Cross-holdings and directorships are treated in the same way as any other evidence relevant to an analysis of a given merger.
However, despite the Tribunal's willingness to wrestle with various economic theories, the most recent decision suggests that the acquisition of a non-controlling cross-holding in a company may not fall under the analysis of South African merger regulation at all. Should that position change, following clarification by the Tribunal or an unequivocal ruling of the Competition Appeal Court, the body of case law goes some way to indicating the type and manner of analysis the authorities will employ.

JEL: G34, L41

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Endnotes
1 A version of this paper was initially presented at the 1^st Annual Competition Commission, Competition Tribunal and Mandela Institute Conference on Competition Law, Economics and Policy in South Africa - 21 May 2007
2 In the EU, coordinated effects are sometimes also referred to as giving rise to "joint dominance" while unilateral effects relate to "single firm dominance".
3 Certainly, that is the overwhelming concern with horizontal mergers (ie, those involving competitors). In the case of vertical or conglomerate mergers, others factors will be important, such as the levels of possible foreclosure, although it can be said that the ultimate question remains as to whether such factors will eventually result in increased market power, which in simple terms ought to translate into increased market share.
4 Indeed, it may be interesting to note that in those cases where an argument for coordinated effects was advanced and eventually rejected, there was a marked absence of alleged unilateral effects. This could indicate that coordinated effects are more likely to raise concern in conjunction with unilateral effects, rather than in isolation.
5 These conditions were set out by the EU Court of First Instance in the Airtours case (Case T-342/99)
6 See M Motta (2004), Competition Policy Theory and Practice page 421 for a detailed list of structural factors which may come into play.
7 Op cit pg 144
8 This provision is not particularly well drafted and it has yet to be relied upon by the competition authorities in prosecuting an alleged cartel. However, the Tribunal has on a number of occasions sought to highlight the section as indicating a broader legislative purpose extending to merger analysis.
9 Tribunal Case no 87/LM/Sep05
10 Paragraph 37 of the judgement
11 As indicated by the Tribunal's statement at paragraph 42 that "given the size of the First Rand group and its abundance of executive talent, it can presumably find other suitable directors to replace those to the board the present incumbents elect to resign from."
12 Case no 58/CAC/Dec05
13 Paragraph 13
14 Case no 14/LM/Feb06
15 As to 66 per cent. Anglo also appointed 5 directors out of a total of 15
16 Main Street 333 (Pty) Ltd or "BEE Holdco"
17 It was suggested that Anglo had in no small measure staked its reputation on the success of Exarro and its association with it, particularly on the board, was required to give the new company credibility. To a lesser extent, BHP remained involved for similar reasons.
18 Thermal or steam coal is used in power generation
19 Separately from Kumba, although, for the purposes of analysing unilateral effects, the authorities correctly treated Kumba and Anglo as a single economic entity
20 As emphasised and edited by the Tribunal in paragraph 38 of the judgment
21 I.e. conditions that allow would-be coordinators to monitor one another's adherence to the coordination and punish deviation within a market in which coordination is feasible, such as an oligopoly with high entry barriers.
22 At paragraph 42. It does strike one that such an observation, at least in part, may be designed to pre-empt any criticism, previously levelled at the Tribunal, of slavishly applying foreign jurisprudence.
23 Independent Music Publishers and Labels Association (Impala) v European Commission, judgment of 13 July 2006 - Case number T-464/04
24 At paragraph 48
25 At paragraph 54
26 This shows a marked departure from the view taken by the Tribunal in the first Momentum case above
27 This is in keeping with the CAC decision in Momentum, which viewed interlocks at holding company level more benign than at operational level.
28 Of an enterprise value of R24 billion, the coal assets represented only R1.6 billion. By comparison, Exarro's 20 per cent interest in SIOC was worth 3.8 billion.
29 Paragraph 78
30 Paragraph 69
31 Indeed, at paragraph 67 the Tribunal stated that the relegation of BHP was "probably the most significant fact in the merger."
32 See paragraphs 55 and 56
33 Case no 39/AM/May06. See also the CAC decision, Case no 68/CAC/MAR/07
34 This case is also significant for confirming the right of an intervenor in merger proceedings to bring a review application against the ruling of the Tribunal.
35 See Phillip Areeda and Donald Turner, Antitrust Law (1980) at 322, cited at paragraph 53 of the CAC decision. In fairness, the Tribunal has clarified Areeda and Turner's view as relating not to the absence of a competitive threat arising our of partial holdings, but rather to fact that the nature of the threat is fundamentally different to when two independent firms become subject to a single controlling mind. Whilst the latter poses an inherent threat to competition, the former is more difficult to quantify.
36 Daniel O'Brien and Steven Salop, "Competitive Effects of Partial Ownership: Financial Interest and Corporate Control", Antitrust Law Journal, Volume 67, 2000, page 559.
37 The authors furthermore posit a modification of the Herfindahl-Hirschman Index (MHHI) to measure the effects of a passive investment with reference to the structure of the market in which the target and acquirer participate. Essentially, the post merger change in concentration (delta) for a passive investment is measured by multiplying the respective market shares of the acquiring and target firms by the percentage economic interest that the acquiring firm has in the target.
38 See at paragraph 84 of the Tribunal decision where an existing wide discrepancy in rates was seen as evidence that Kaya did not, pre-merger, act as a competitive restraint on Primedia and was therefore unlikely to be the next best substitute for advertisers.
39 Note that this theory still requires Kaya FM to be the next best substitute in comparison to other available outlets, which the intervenors were unable to convincingly indicate.
40 O'Brien, supra, page 582, quoted by the Tribunal at paragraph 26.
41 Ibid
42 Ibid
43 See paragraph 120 of the Tribunal decision
44 This observation is largely on all fours with Motta's views quoted (Motta, 2004:144)
45 See paragraph 143 of the Tribunal judgement.
46 The Tribunal as well as O'Brien and Salop note that section 7 of the Clayton Act covers the acquisition of any part of a company's stock where the effect may be to lessen competition.
47 See paragraph 15 of the Tribunal decision.
48 At paragraph 164 of the Tribunal decision.
49 This puts the South African authorities someway behind the US, where cross-directorships may be per se prohibited, and not even as far as commentators like Motta, who show an a priori distrust with cross-holdings.