By Michael-James Currie and Joshua Eveleigh

Participation by third parties in merger control proceedings has long been a fundamental aspect of South Africa’s merger control regime. In this regard, section 53(c)(v) of the Competition Act, 89 of 1998 (“Act”) broadly permits that that any person whom the Tribunal has recognized as a “participant” in a merger hearing, may “participate” in that hearing.

The scope of section 53(c)(v), however, has recently been ventilated before the Tribunal, Competition Appeal Court (“CAC”) and the Constitutional Court (i.e., South Africa’s top court) in respect of Lewis Stores (Pty) Ltd’s (“Lewis”) application to intervene in the proposed merger between Pepkor Holdings Limited (“Pepkor”) and Shoprite Holdings Limited (“Shoprite”) (collectively, the “Merging Parties”)(“Proposed Transaction”).

Background

In brief, the Proposed Transaction relates to Pepkor’s acquisition of the furniture business of Shoprite, consisting of OK Furniture and House & Home retail brands, which will subsequently be incorporated into Pepkor’s existing furniture, bedding and plugged goods retail business.

As part of its investigations, the South African Competition Commission (“SACC”) found that the Proposed Transaction would give rise to horizontal overlaps in the supply of:

• Furniture products; and
• Bed sets and mattresses.

The SACC also received concerns about the potential effects of the Proposed Transaction from different market participants, including Lewis. Nevertheless, the SACC found that there would continue to be several alternatives within the product markets which would serve as a competitive constraint against the merged entity post-implementation. It was on this basis that the SACC concluded that the Proposed Transaction would not give rise to a substantial lessening or prevention of competition (“SLC”) and recommended that the Proposed Transaction be approved, subject to public interest commitments.

Lewis’s basis for intervening

During the Tribunal’s consideration of the Proposed Transaction, Lewis brought its application to intervene in the Proposed Transaction on the basis that:

• Shoprite will be removed as a key competitive constraint on Pepkor and, therefore, resulting in a 3-to-2 merger at the national level in relation to the retail of household furniture; and
• that the Proposed Transaction will likely result in increased provided for low-to-middle-income consumers.

Lewis also submitted that the SACC did not properly consider the effects that the Proposed Transaction would have on different local geographic markets and, concomitantly, whether any SLC would arise within those specific catchment areas.

Accordingly, Lewis argued that in its capacity as the only national furniture retail chain that competes with both Pepkor and Shoprite on a national basis, it has important knowledge and insights into the furniture retail industry which would assist the Tribunal in assessing the Proposed Transaction.

Tribunal’s reasons for permitting Lewis’s intervention

Lewis’s application to intervene was brought in terms of section 53(c)(v) of the Act, read with rule 46 of the Rules for the Conduct of Proceedings in the Competition Tribunal (“Tribunal Rules”).

Tribunal Rule 46(1) provides that any person who has a “material interest” in the relevant matter may apply to intervene in the Tribunal proceedings.

Importantly, the Tribunal nevertheless stated that an intervening party is not entitled to rights that would “displace or supplant” the role of the SACC. Rather, the Tribunal must assess whether the intervening party would be able to assist it in understanding whether the Proposed Transaction gives rise to an SLC or adverse public interest effects.

In this regard, the Tribunal summarized the three-fold test required for a successful intervention application. In this regard, the Tribunal must consider whether the information to be provided by the proposed intervenor:

• relates to matters within the Tribunal’s jurisdiction;
• is not already available to the Tribunal; and
• whether the potential benefits of such assistance outweigh any adverse effects the intervention might have on the speed and resolution of the proceedings.

The Tribunal must also inquire as to whether the intervenor will provide the Tribunal with meaningful assistance for its purposes of assessing the competition and public interest effects of the particular transaction.

In assessing Lewis’s application, the Tribunal found that there are significant and material disputes of fact that have to be ventilated for the Tribunal to understand the relevant market dynamics and that Lewis could assist the Tribunal in this regard.

Accordingly, the Tribunal permitted Lewis as an intervening party on the basis that it demonstrated its ability to provide “significant and material evidence” on the:

• nature of competition in the market(s);
• closeness of competition, and
• characterisation of regional or localised markets.

The Tribunal did, however, limit the scope of Lewis’s intervention rights on the relevant market definitions and whether the Proposed Transaction is likely to lead to an SLC. Lewis was also admitted to assist the Tribunal in respect of potential remedies and/or the imposition of any conditions that might be imposed.

The CAC’s assessment of merger intervention rights

While there were several aspects of the Merging Parties appeal to the CAC, one of the substantive concerns raised was the Tribunal’s supposed outsourcing of the SACC’s functions in merger hearings to Lewis, as an intervenor. This is particularly because the Tribunal granted Lewis with broad powers including: rights to participate in all prehearing conferences; full discovery rights; the right to require the Tribunal to summon people and documents; full participation rights in any and all interlocutory proceedings; the right to adduce evidence and present argument and the right to cross examine any witnesses; the right for Lewis’s legal and economic advisors to access the merger record and all documents filed.

Considering the extensive rights afforded to Lewis, the CAC stated that the scope of rights afforded to Lewis would “retard an expeditious hearing”. The CAC also went on to state that:

“In the light thereof and in the required balancing exercise, this Court must surely take account of these factors together with the possible vested interest of a competitor in the merger proceedings to slow matters down in order to subvert the merger. It must then be satisfied that the contribution which a respondent can bring to the proceedings meets the test laid down by this Court. In particular, that the respondent has shown that it has unique knowledge of the market and can provide evidence in relation to the overall enquiry as to whether a merger should be permitted in order to justify admission.” (own emphasis)

On the latter inquiry, and after a review of Lewis’s affidavits, the CAC found that Lewis had not demonstrated that it was in possession of evidence which would not otherwise be available to the Tribunal after requiring further assistance from the SACC and would assist the Tribunal in understanding the effects of the Proposed Transaction. 

Accordingly, the CAC found that the Tribunal’s reasons for admitting Lewis as an intervenor:

• did not properly consider to what extent Lewis was likely to assist the Tribunal in circumstances where the information and evidence it was intending to provide could not have been obtained elsewhere; and
• failed to find a balance between an order which did not undermine the objective of an expeditious resolution of the matter, the interests of the Merging Parties to an expeditious hearing as compared to the value of Lewis’s contribution to the Tribunal.

Importantly, the CAC also confirmed that orders by the Tribunal which relate to applications for intervention are ‘final’ in nature and are subject to appeal.

In sum, the CAC set aside the Tribunal’s order and dismissed Lewis’s application to intervene, stating that:

“It must be emphasised that the approach adopted in this judgment does not represent the end of the road for the respondent. The Tribunal possesses inquisitorial powers. It is more than entitled to summon the respondent to appear before it to provide it with any information and argument relevant to this proposed merger. It also has the power in terms of its inquisitorial powers to require the [SACC] to gather and present additional evidence in relation to the topics which it identified; being market shares, the effects of the merger on specified identified local markets and the role of online sales and economic surveys, demand side analyses of consumer preference. These are matters which clearly represent the kind of investigations that should be undertaken by the [SACC]. It has been alerted to the type of investigations which the Tribunal requires in the reasons provided by the Tribunal. To the extent that the [SACC] or the Tribunal considers that the respondent could be of assistance in this regard it could require the respondent to provide it with further evidence which would be of assistance.”

Further and final appeal to the Constitutional Court

Following the CAC’s order, Lewis approached the Constitutional Court on an urgent basis.

The central tenet of Lewis’s appeal to the Constitutional Court is that the CAC had effectively imposed a new and burdensome threshold for intervention applications for purposes of section 53 of the Act. In brief, Lewis submits that the CAC required that the potential intervenor’s material interest and ability to assist the Tribunal in a proposed transaction was insufficient and that the intervenor must rather demonstrate that its submissions would be “unique” and “could not be obtained elsewhere”. 

Lewis also raised the following key arguments in its appeal to the Constitutional Court:

• that the CAC’s judgment violated meaningful procedural fairness and constitutional rights; and
• that the CAC improperly overrode the Tribunal’s specialist discretion, breaching institutional deference.

The Constitutional Court upheld Lewis’s appeal, permitting Lewis to intervene in the Tribunal proceedings, however, its reasons for doing so have not been published at the time of publishing of this article.

Conclusions and Insights

The protracted saga in Lewis’s application to intervene in the Proposed Transaction has raised much debate as to whether intervention by third parties unduly frustrates the finalization of merger hearings in South Africa. It would make little sense, however, for market participants, with direct and substantial knowledge of the potential effects of a particular transaction, from being precluded from participating in merger hearings before the Tribunal. In this regard, ‘rubber stamping’ a contested merger without affording interested parties to ventilate potential competition and/or public interest concerns before the Tribunal may have the consequence of increasing prices, lowering output and quality, foreclosing competitors – all of which the SACC would be hard placed to remediate post-implementation of the merger.

Rather, it should be incumbent on the Tribunal to find a balance between allowing third parties to provide limited assistance to it, on specific disputes of fact, while ensuring that merger hearings do not become extensively protracted.