Synergy Income Fund Ltd v Certain letting enterprises owned by SA Corporate Real Estate Fund (103/LM/Nov11) [2012] ZACT 39; [2012] 2 CPLR 548 (CT) (16 May 2012)
- Citation
- [2012] ZACT 39
- Status
- Judgment
- Jurisdiction
- South Africa
- Court
- Competition Tribunal
- Panel
- Andreas Wessels, Medi Mokuena, Taki Madima
- Case number
- 103/LM/Nov11
More details
- Court
- Competition Tribunal
- Panel
- Andreas Wessels, Medi Mokuena, Taki Madima
- Case number
- 103/LM/Nov11
On this page
Professional case brief
Research organized from the available case record
01
Holding and result
The Tribunal found that there was no horizontal overlap between Synergy and the target properties, as Synergy did not own shopping centres in the same or adjacent nodes. However, vertical concerns arose due to Spar's 20% shareholding in the Fund Manager and the existence of exclusive lease agreements with Spar franchisees, which could foreclose small competitors from retail space and harm public interest. The Tribunal concluded that the conditions proposed by the Commission and accepted by the merging parties—namely, Spar's divestiture from the Fund Manager and the negotiation to remove exclusivity clauses—were adequate and proportional to address these concerns. The merger was therefore conditionally approved, with the imposed conditions attached as Annexure A.
Court disposition
The merger is conditionally approved subject to the imposed conditions.
Orders
- Synergy shall procure that Spar Group Ltd disposes of its 20% shareholding in Capital Land Asset Management (Pty) Ltd, the Fund Manager.
- Synergy shall negotiate in utmost good faith with Spar and its relevant franchisees to remove exclusivity clauses from lease agreements at the renewal of leases in the relevant shopping centres.
- No retrenchments or adverse employment effects shall result from the transaction.
02
Material facts
Parties
Synergy Income Fund Ltd
Applicant Counsel: Webber Wentzel AttorneysSA Corporate Real Estate Fund
Respondent03
Procedural history
Posture
Merger Application / Conditional Approval
04
Questions and positions
Legal issues
- 01
Does the proposed acquisition raise competition concerns from a horizontal or vertical perspective?
- 02
Do exclusive lease agreements between Spar franchisees and landlords foreclose competitors and raise public interest concerns?
- 03
Are the conditions imposed by the Tribunal sufficient to address competition and public interest concerns?
Party arguments
- Applicant
- Synergy Income Fund Ltd argued that the acquisition of the target retail properties would not result in any horizontal overlap, as it does not own shopping centres in the same or adjacent nodes as the target properties. The applicant further submitted that the transaction would not negatively affect competition or employment, and agreed to the conditions proposed by the Commission to address any concerns regarding exclusivity and Spar's shareholding in the Fund Manager.
- Respondent
- The Competition Commission contended that Spar's 20% shareholding in the Fund Manager, which would manage the target shopping centres post-merger, could result in the exclusion of small competitors from retail space, particularly due to exclusive lease agreements with Spar franchisees. The Commission argued that these exclusivity provisions could foreclose rivals and harm small businesses, raising public interest concerns under section 12A(3)(c) of the Competition Act. The Commission recommended conditions requiring Spar to dispose of its shares in the Fund Manager and for Synergy to negotiate the removal of exclusivity clauses.
05
Court’s reasoning
Legal principles
- 01
Competition Act No. 89 of 1998, as amended
A merger may be approved subject to conditions that address competition and public interest concerns, including the removal of exclusivity clauses and divestiture of shareholdings that create anti-competitive incentives.
- 02
Competition Act No. 89 of 1998, section 12A(3)(c)
Exclusive lease agreements that foreclose competitors from retail space may contravene public interest provisions and require remedial action in merger proceedings.
06
Ratio, limits and disposition
Ratio decidendi
The Tribunal found that there was no horizontal overlap between Synergy and the target properties, as Synergy did not own shopping centres in the same or adjacent nodes. However, vertical concerns arose due to Spar's 20% shareholding in the Fund Manager and the existence of exclusive lease agreements with Spar franchisees, which could foreclose small competitors from retail space and harm public interest. The Tribunal concluded that the conditions proposed by the Commission and accepted by the merging parties—namely, Spar's divestiture from the Fund Manager and the negotiation to remove exclusivity clauses—were adequate and proportional to address these concerns. The merger was therefore conditionally approved, with the imposed conditions attached as Annexure A.
Obiter and limits
- The Tribunal noted that the transaction would not have any adverse effect on employment, as no retrenchments were envisaged.
- The Tribunal emphasized the importance of proportionality in merger conditions, ensuring that remedies are tailored to the specific competition and public interest concerns identified.
Court disposition
The merger is conditionally approved subject to the imposed conditions.
- Synergy shall procure that Spar Group Ltd disposes of its 20% shareholding in Capital Land Asset Management (Pty) Ltd, the Fund Manager.
- Synergy shall negotiate in utmost good faith with Spar and its relevant franchisees to remove exclusivity clauses from lease agreements at the renewal of leases in the relevant shopping centres.
- No retrenchments or adverse employment effects shall result from the transaction.
Source and reliance status
Competition Tribunal
This page organises the available record for research. Confirm quotations, current status, and subsequent treatment against the official source before relying on the case.
Judgment reading view
Judgment text
The complete available source text.
Competition Tribunal
Judgment
COMPETITION TRIBUNAL
OF SOUTH AFRICA
Case No: 103/LM/Nov11
013706
In the matter between:
Synergy Income Fund Ltd …..................................................................Acquiring Firm
And
Certain letting enterprises owned by
SA Corporate Real Estate Fund …......................................................Target Firms
Panel : Andreas Wessels (Presiding Member) Medi Mokuena (Tribunal Member) Taki Madima (Tribunal Member)
Heard on : 11 April 2012
Order issued on : 11 April 2012
Reasons issued on : 16 May 2012
Reasons for Decision
Conditional approval
On 11 April 2012 the Competition Tribunal (“Tribunal”) conditionally approved the acquisition by Synergy Income Fund Ltd of certain letting enterprises owned by SA Corporate Real Estate Fund. The reasons for this conditional approval follow below.
Parties to transaction
The primary acquiring firm is Synergy Income Fund Ltd (“Synergy”), a variable loan stock company in terms of which each investor acquires linked units consisting of a share and a variable rate subordinate debenture. Synergy does not control any other firm.
Of relevance is that Synergy currently owns certain retail properties classified as shopping centres. Of further relevance to the
competition and public interest assessment of the proposed transaction is that Synergy has an existing management agreement with
Capital Land Asset Management (Pty) Ltd (“the Fund Manager”), which is responsible for the day-to-day management of the fund. The shareholders of the Fund Manager include Spar Group Ltd (“Spar”), which has a 20% interest in the Fund Manager.
The primary target (or transferred) firms consist of a portfolio of seven letting enterprises owned by SA Corporate Real Estate Fund (“SA Corporate”), a collective investment scheme in property, also known as Property Unit Trust. The target properties consist of the following retail shopping centres:
The Village Centre (also known as Richdens) located in Hillcrest in Pinetown;
Hubyeni Shopping Centre located in Elim, Limpopo;
Nzhelele Valley Shopping Centre located in Makhado, Limpopo;
Renbro Shopping Centre located in Hammanskraal, Pretoria;
Van Riebeeckshof Centre located in Bellville, Western Cape;
Highland Mews1 located in Witbank, Mpumalanga; and
Ermelo Game Centre2 located in Ermelo, Mpumalanga.
A Spar franchisee is an anchor tenant in the shopping centres identified in (i) to (v) above.
Proposed transaction and rationale for transaction
In terms of the proposed transaction Synergy will acquire the target properties from SA Corporate each as a going concern. These target properties will post-merger be managed by the Fund Manager.
Synergy’s rationale for the proposed transaction is to generate attractive income and capital appreciation with long term sustainable growth from profitable investments in retail property assets in South Africa.
SA Corporate no longer wishes to hold the to be transferred part of its retail property portfolio.
Assessment
No horizontal overlap
There is no geographical overlap between the activities of Synergy and the target properties since Synergy does not own any community and neighbourhood shopping centres in the same nodes or adjacent to the nodes where the target properties are located. Therefore, the proposed transaction raises no competition concerns form a horizontal perspective.
Vertical competition and public interest concerns
The Commission raised certain concerns relating to Synergy’s relationship with Spar. As stated in paragraph 3 above, Spar currently holds a 20% interest in the Fund Manager which post-merger will manage the target shopping centres. The Commission’s concerns related to the risk that such a relationship may exclude small competitors of Spar franchisees, i.e. so-called “line stores” such as bakeries, butcheries, green grocers and superettes, from the retail space controlled by Synergy.
More specifically, the Commission concluded that Synergy’s strategy to invest in shopping centres that are anchored by Spar is of a concern since it could lead to the foreclosure of certain of Spar’s rivals from these shopping centres. According to the Commission, given Spar’s relationship with the Fund Manager, a Spar franchisee could be put in an advantageous position within a shopping centre and Spar could have the incentive to exclude potential competitors from a local area by denying them access to a particular shopping centre. The Commission noted that this is of particular concern due to certain exclusive lease agreements that are in place between the Spar franchisees and the respective landlord(s). These exclusivity provisions exclude certain rivals from setting up shops within the same shopping centre as the incumbent, i.e. the Spar franchisee.
The Commission further concluded that the proposed transaction raises public interest concerns in terms of section 12A(3)(c) of the Competition Act, 19983 since the above-mentioned exclusive leases explicitly deny space in a particular shopping centre to “part-line” retailers
which are likely to qualify as small businesses in terms of the Act.
Given the above concerns the Commission recommended, and the merging parties agreed, that two conditions be placed on the approval of the proposed transaction:
First, Spar should dispose of its shares in the Fund Manager in order to alleviate the concern around Spar’s relationship with the Fund Manager. Such an undertaking by Synergy has been made a condition for the approval of the proposed transaction. In terms of the Tribunal’s order Synergy shall undertake to procure that the Spar Group shall dispose of its 20% shareholding in the Fund Manager (see paragraph 3.1 of the imposed conditions).
Second, to address the concerns relating to exclusivity the Commission recommended and the merging parties offered to use their best endeavours to negotiate with Spar to have certain identified exclusivity provisions removed from the lease agreements with Spar franchisees in the relevant target shopping centres. This undertaking has also been made a condition for the approval of the proposed transaction. The Tribunal’s order states that Synergy shall negotiate with Spar and its relevant franchisee in the utmost good faith to have the exclusivity clause in the lease agreement removed at the renewal of the lease in respect of the relevant centre (see paragraph 3.2 of the imposed conditions).
Effect on employment
The merging parties confirmed that the proposed transaction will not have any effect on employment in South Africa, more specifically
that no retrenchments are envisaged as a result of the proposed transaction.4
CONCLUSION
We concur with the Commission’s finding that in the context of this merger the imposed conditions adequately address and are proportional to any likely competition and/or public interest concerns arising from the proposed transaction. For the sake of completeness, the full set of the Tribunal’s imposed conditions is attached hereto as “Annexure A”.
____ 16 May 2012
Andreas Wessels DATE
M Mokuena and T Madima concurring
Tribunal researcher: Londiwe Senona
For the merging parties: Webber Wentzel Attorneys
For the Commission: Jabulani Ngobeni and Zanele Hadebe
1Currently anchored by Woolworths.
2Currently anchored by Game.
3Act No. 89 of 1998, as amended.
4Merger record, page 14.
5
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