A merger is not required to be notified to the Competition Commission of South Africa (“Commission“) where the acquiring firm has sole control in a target firm, and the acquisition of additional shares still maintain the status quo. Failure to notify the Commission of a notifiable merger (where there is a change in the control that is being acquired) or implementing a notifiable merger before approval being obtained is a contravention of the South African Competition Act No. 89 of 1998 (as amended) (the “Competition Act“) and exposes the parties to administrative penalties as well as potential injunctions on implementation.
“(a) beneficially owns more than one half of the issued share capital of the firm;
(b) is entitled to vote a majority of the votes that may be cast at a general meeting of the firm, or has the ability to control the voting of a majority of those votes, either directly or through a controlled entity of that person;
(c) is able to appoint or to veto the appointment of a majority of the directors of the firm;
(d) is a holding company, and the firm is a subsidiary of that company as contemplated in section 1(3)(a) of the Companies Act, 1973;
(e) in the case of a firm that is a trust, has the ability to control the majority of the votes of trustees, to appoint the majority of the trustees or to appoint or change the majority of the beneficiaries of the trust;
(f) in the case of a close corporation, owns the majority of members’ interest or controls directly or has the right to control the majority of members’ votes in the close corporation; or
(g) has the ability to materially influence the policy of the firm in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control referred to in paragraphs (a) to (f).”
(the “control test“).
The Competition Tribunal has described section 12(2)(g) as “a catch-all”. What this provision refers to, in practical terms, is where a minority shareholder has the ability to materially influence the strategic commercial behaviour of the firm, in a manner comparable to a person/entity which exercises the usual forms of control, as provided for in sections 12(2)(a) to (f). Section 12(2)(g) control is usually conferred by virtue of certain veto rights which a minority shareholder acquires in terms of a shareholders’ agreement or MOI and is often referred to as negative control.
Competition authorities typically consider a firm to have material influence over the policy of another firm where the former has a say on issues such as the budget, business plan, appointment of senior management, the direction of the commercial policy of the latter, or a casting vote in the event of a tie in voting in members meetings or board meetings of the latter. The rights, prerogatives or practices giving rise to such influence should be distinguished from standard minority protections, as provided for in terms of company law, which are intended to prevent the oppression of minority shareholders, rather than give them the ability to directly or indirectly control or affect the strategic commercial behaviour of the company. As such, these rights would not ordinarily confer material influence on minority shareholders.
Furthermore, it is commonly accepted that the Competition Act contemplates the acquisition of either sole or joint control. Joint control arises where more than one firm is able to control the firm at the same time. Accordingly, while one firm may exercise one of the elements of control listed in section 12(2) and thus control the target firm, another firm may exercise another of these elements and also control the firm. The acquisition of either joint or sole control will constitute a merger for the purposes of the Competition Act. Furthermore, it has also been commonly accepted by the competition authorities that a change from joint control to sole control triggers a notification, but where a firm already exercises sole control over another firm, any further transactions which increase its majority shareholding would not be notifiable.
In light of the above, a merger would not be notifiable where it currently has sole control, and the proposed transaction merely maintains its sole control status. When entering into such transactions, Mota Attorneys is available to assist in ensuring that the form of control that is acquired by a firm does not lead to the notifiablity of the proposed transaction.
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