The Competition Act 89 of 1998 (“the Act”) was used as reference
Caption:
Momentum Group Limited v African Life Health (Pty) Ltd (CAC) 58/CAC/Dec05 Heard in the Competition Appeal Court Decided 14 February 2006. Judgment written by Malan AJA. Davis JP and Mailula AJA concurring.
Facts:
This case dealt with the review and appeal of the decision of the Competition Tribunal. The applicants in the case are Momentum Group Limited (“MGL”) and two non-executive directors, L. Dippenaar and J Burger, who are the CEO and CFO of First Rand Limited (“FRL”), respectively. The Chairperson of the Competition Tribunal, the Acting Commissioner of the Competition Commission and African Life Health (Pty) Ltd (“ALH”) were respondents. The case concerned a large merger between MGL and ALH, MGL being the acquiring firm and ALH the target firm. The Competition Tribunal (“the Tribunal”) raised concern about the dual directorship held at operating and holding company level between the acquiring firm, MGL, and its parent firm, FRL, and one of FRL’s subsidiary’s, Discovery Holdings. FRL holds 65.6% shares in Discovery and wholly owns MGL.
MGL and ALH operate in the medical scheme administration sector.
The Competition Commission recommended that the merger be approved unconditionally after which it was referred to the Tribunal in terms of s 14A of the Act for approval. The Tribunal imposed a condition on the merger that prohibited cross directorship between Discovery and MGL. The Tribunal was concerned that the relationship between FRL and its subsidiaries, Discovery and MGL, will result in or has the potential of resulting in anticompetitive behaviour.
Both the review and the appeal related to whether or not the conditions were properly imposed.
The review related to whether the conditions could be imposed. The applicants alleged that such conditions should not be imposed as all parties, including the Commission, sought for the merger to be approved unconditionally. The applicants further argued that there was no evidential basis for the condition to be rationally substantiated (i.e. the cross-directorships created no substantial risk of collusion), that the affected directors were not party to the proceedings and that the conditions were too far reaching.
The appeal grounds are based on the contention that the Tribunal exceeded its jurisdiction by imposing conditions where none were sought. Also, that the Tribunal acted arbitrarily by imposing conditions where evidence presented should have led it to approve the merger unconditionally. Furthermore there was no evidence to show that a prohibition on cross directorship would ensure or even aggravate a competitive environment.
Relevant sections of the Act and the Theory of Harm or issues in a merger
The Tribunal approved the merger in terms of section 16(2) of the Act which provides that the Tribunal must, when determining whether a merger is likely to prevent or lessen competition, assess the strength of competition in the relevant market and the probability of how firms will behave post-merger and subject to section 14(3) of the Act, the Tribunal could either approve the merger with or without conditions or prohibit the merger.
The Tribunal’s fear was that because Discovery and MGL are both controlled by FRL and therefore belong to the same economic unit; post-merger there would be an increased risk of co-operation rather than competition. Reason being that post-merger this single unit will command 34.62% of the medical scheme administration market- the consolidation of this market coupled with Discovery and MGL already large players in it- the merger does not bode well for competition in the future. The Tribunal argued that the size and market power under one umbrella could remove competitive pressure from the market and post-merger there is probability that they could behave strategically. Tribunal submitted that it is imperative to maintain rivalry between the entities and the conditions it imposed assists in this objective.
The question was whether the Tribunal had the power to impose conditions where none was sought nor recommended. Tribunal argued that the Act gave it power to adjudicate on any matter considered by it or any order provided for by the Act- i.e. this gave them the jurisdiction to impose conditions even where condition were agreed to by the parties nor imposed by the Commission.
Secondly, at issue was whether the Tribunal imposed these conditions correctly. Section 16 of the Act requires the Tribunal to initially determine whether or not a merger is likely to substantially prevent or lessen competition by assessing the strength in the relevant market and the probability that post-merger, the firms will behave competitively or co-operatively. There are also additional factors the Tribunal has to consider when conducting this initial investigation these include; actual and potential levels of import competition in the market, entry barriers into the market, likelihood of the acquisition resulting in the merged firm having market power, whether the merger would result in the removal of a competitor, etc.
The Competition Appeal (“CAC”) noted that If there had been no link between Discovery and Momentum, the acquisition of ALH would not have raised competition concerns.
Relevant Market: Are there any horizontal or vertical overlaps? What are the relevant market(s)? How are the markets defined?
Section 4 of the Act prohibits horizontal relationship between firms that agree or through a concerted practice or through a decision by an association of firms to substantially prevent or lessen competition in a market unless such firms can provide legitimate reasons as to efficiency and pro-competitive gain to outweigh the anti-competitive effect.
MGL and Discovery are in a horizontal relationship with one another as they are competing at the same level within the health care market. Both Discovery and MGL provide the same health care services to consumers. There is a vertical overlap MGL as well as Discovery share the same parent company. MGL and Discovery aim to penetrate the lower income market. The geographical market is local in nature.
Economic and legal arguments:
The CAC held that sections 14(3), 16(1) (a), 16(2) and 16(3) of the Act empowered the Tribunal to decide whether it would investigate a dispute as it saw fit and impose conditions if necessary. In other words, the Tribunal could apply its mind to a dispute and did not just serve rubber stamp approach. Further, the fact that the Tribunal is empowered under sections 54 and 52 to conduct its own inquires and summon people to appear before it, question them under oath or instruct them to produce evidence was indicative of the fact that the Tribunal was empowered to impose such conditions absent in any dispute.
The CAC then held that the Tribunal did not conduct the initial investigation to substantiate the reasons it had for imposing the conditions. The court’s reasoning was based on the lack of proper understanding by the Tribunal, firstly, of its obligations in terms of relevant sections, which led to its belief in needing to provide conditions. Further that Discovery and MGL would still remain separate entities and their faulty reasoning of impending substantial lessening of competition which it based its removal of cross directorship on, clearly had no basis.
The court also held that the Tribunal did not analyse the corporate governance structure of the parties- on the facts legitimate reason existed for directors to remain in their positions as management at First Rand and as directors on the boards of the relevant subsidiaries; as this ensures an understanding at First Rand level of the activities and positioning of the subsidiaries.
The economic concern was that the merged entity would have an increased potential to partake in anti-competitive activity.
Rationale:
The CAC put it beyond a doubt that the Tribunal does have jurisdiction and the power to adjudicate disputes and to impose conditions even where none were recommended. This approach aligns with the purpose that needs to be fulfilled at each level of interrogation.
The main gripe the Tribunal seemed to have been that this merger resulted in a post-merger market share of almost 35% between Discovery and MGL. However the CAC held that market power associated with such market share is diminished in a market that has a large number of competitors, is fiercely contested, and exhibits relatively low barriers to entry and effective countervailing power, evidence of which was presented to and accepted by the Commission.

The Tribunal imposed the conditions without sufficient evidence to justify why having cross-directorship would result in anti-competitive effects; as there was no substantial lessening of competition in the market. Both Discovery and MGL historically always had cross-directorships. The effect of this is that in order for the Tribunal to impose conditions, especially where none were recommended, it needs provide substantial reasoning to justify it and one of the ways it must provide this is by conducting an initial investigation considering the factors mentioned above.