Download - Cape Law Society

Mergers, Acquisitions & Control
PAULA YOUENS
3 February 2014
© Webber Wentzel 2013
MERGERS WITHIN THE ACT
• Chapter 1 – definitions, interpretation, purpose and application of Act (ss 1,2,3)
• Chapter 2 – prohibited practices
o
o
o
o
Restrictive horizontal (s 4)
Restrictive vertical (s 5)
Abuse of dominance (ss 6 - 9)
Exemptions – from application of Act (s 10)
• Chapter 3 – Merger control (ss 11 – 18). We focus on s 12
•
•
•
•
•
Chapter 4 – Competition Commission (ss 19-25), Tribunal (ss 26-35) and Court (ss 36-39)
Chapter 5 – Investigation and adjudication procedures (ss 44-63)
Chapter 6 – Enforcement (ss 64 - 68)
Chapter 7 – Offences (ss 69 – 77)
Chapter 8 – General provisions (ss 78 – 84)
• Schedules 1,2 and 3
2
MERGERS, ACQUISITIONS & CONTROL
What types of transactions require mandatory notification?
A transaction where:
-
it is a "merger" as defined
-
it meets prescribed asset & turnover thresholds
-
it has an effect within SA
3
MERGERS, ACQUISITIONS & CONTROL
What happens if I don't notify a merger and implement a merger without
approval?
-
-
Face an administrative penalty of up to 10% of firms' annual turnover in SA &
exports from SA during firms preceding financial year (S 59)
(in practice fines for failure to notify have been much lower)
In addition:
- be ordered to sell any shares, interest / other assets it has acquired
pursuant to the merger (divestiture), and
- any provision of an agreement to which the merger was subject may be
declared void
4
MERGERS, ACQUISITIONS & CONTROL
The definition of a merger
What is a merger?
-
S 12(1)(a) defines a merger and provides that:
•
-
“… a merger occurs when one or more firms directly or indirectly acquire or
establish direct or indirect control over the whole or part of the business of
another firm”
S 12(1)(b), provides that a merger may be achieved in any manner including
through:
•
•
a purchase / lease of the shares, an interest /assets of the other firm in
question, or
amalgamation / other combination with the other firm in question
5
CONTROL – SECTION 12(2)
• A person controls a firm if that person:
o
o
o
o
o
o
o
beneficially owns more than one half of the issued share capital of the firm
(a),
is entitled to vote a majority of the votes that may be cast at a general
meeting of the firm / has the ability to control the voting of a majority of
those votes, either directly / through a controlled entity of that person (b),
is able to appoint / veto the appointment of a majority of the directors of the
firm (c),
is a holding company, and the firm is a subsidiary of that company (d),
in the case of a firm that is a trust, has the ability to control the majority of
the votes of the trustees, to appoint the majority of the trustees / to appoint
or change the majority of the beneficiaries of the trust (e),
in the case of a CC, owns the majority of members’ interests / controls
directly / has the right to control the majority of members’ votes in CC (f),
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 above (g)
6
NOTES – SECTION 12(2)
• Minority stakes:
o
The acquisition of a minority stake may amount to material influence if
coupled with veto rights:
• approval of budgets & business plans,
• significant investments; or
• appointment of executive & senior management
(EU approach)
• Asset acquisitions:
o
Do not generally require notification; but where the acquisition could result
in an increase in market share / production capacity – it may require
notification (Edcon)
• Foreign-to-foreign transactions:
o
o
May require notification to the extent that they meet the requirements
Need not have any local subsidiary or branch, only turnover / assets in, into /
from SA (effects based doctrine & international best practice)
7
NOTES – SECTION 12(2)
• Joint ventures:
o
o
o
May need to be notified if a merger (as defined), the thresholds are met &
there is an acquisition of control
Notification requirements are usually triggered by a JV which involves 2 /
more parties jointly forming a new entity & the parties transferring any assets
/ interests to the new entity
Commission has practice note on JV's which helps to guide how these should
be assessed
• Some qualifications: (Practice notes)
o
o
Asset securitisation schemes
Risk mitigation transactions by banks
8
CONTROL & CASE LAW
• How has section 12(2) been interpreted?
• The Tribunal in Distillers:
o
o
o
"… Notification is a 'blunt instrument'. Far more mergers are notified than will
raise substantive competition concerns."
"section 12(2) has a more mundane relationship with 12(1). The circumstances
listed in 12(2) all have in common some examples of indirect control that might
be exercised over a firm. Section 12(1) as we have seen provides for a merger to
be accomplished through the acquisition or establishment of direct or indirect
control. Since direct control is notionally uncomplicated the legislature did not
need to state instances of it. The same cannot be said of indirect control so the
legislature opted through 12(2) to give some examples to provide clarity." [my
emphasis]
"s 12(2) sets out the most commonly occurring situations to be found within the
boundary of the meaning of control"
CONTROL & CASE LAW
• How has section 12(2) been interpreted?
• The CAC in Distillers:
o
"… the Act was designed to ensure that the competition authorities examine the
widest possible range of the potential merger transactions to examine whether
competition was impaired and this purpose provides a strong pro-pointer in
favour of a broad interpretation to section 12 of the Act."
• Conclusion:
o
12(2) wide interpretation, examples of indirect control & not a closed list
CONTROL & CASE LAW
• How has section 12(2) been interpreted?
o
A wide and quite formalistic interpretation has been given (arguably) because:
•
the thresholds refer to business size but not market share – as such market
power is not considered at the preliminary level
•
it is undesirable to have to try & unravel transactions afterwards
CONTROL IN THE EU
• Some suggest that material influence underlies the concept of control – 12(2)(g)
o
o
o
The EU has a similar concept to 'material influence' but called 'decisive
influence'
It's worth looking at how control is determined in the EU – because it is a great
deal clearer than what we have in SA (esp because of the quite confusing case
law)
See The Commission Consolidated Jurisdictional Notice under Council
Regulation (EC) No 139/2004 on the control of concentrations between
undertakings (2008/C 95/01)
CONTROL IN THE EU
•
A distinction is drawn between sole & joint control
•
Sole control: acquired if 1 undertaking ALONE can exercise decisive influence on
an undertaking
o
o
•
Either the solely controlling entity has the power to determine the strategic
commercial decisions of the other undertaking (called positive sole control)
OR
A shareholder is able to VETO strategic decisions in an undertaking, but this
shareholder does not have the power, on its own, to impose such decisions
(called negative sole control)
Sole control can be acquired on a de facto (factual) and/or de jure (legal) basis
13
CONTROL IN THE EU
•
Sole control: de jure (legal)
•
acquired where an undertaking acquires a majority of the voting rights of a
company. If strategic decisions require a supermajority, the acquisition of a
simple majority of the voting rights may not confer the power to determine
strategic decisions, but may be sufficient to confer a blocking right on the
acquirer and - therefore negative control
•
even with a minority shareholding, sole control may occur on a legal basis in
situations where specific rights are attached to the shareholding. Preferential
shares with special voting rights which may allow the minority shareholder to
determine the strategic commercial behaviour of the target company, such as
the power to appoint more than half of the members of the supervisory /
administrative board. Sole control can also be exercised by a minority
shareholder who has the right to manage the activities of the company & to
determine its business policy on the basis of the organisational structure
14
CONTROL IN THE EU
•
Sole control: de jure (legal)
•
Example of negative sole control:
o 1 shareholder holds 50%
o remaining 50% is held by several other shareholders
o a supermajority required for strategic decisions
o confers a veto right on only 1 shareholder, irrespective of whether it is a
majority / a minority shareholder
15
CONTROL IN THE EU
•
Sole control: de facto (factual)
o
Minority shareholder is taken to have sole control when:
• it is likely to achieve a majority at the shareholders’ meeting, given the
level of shareholding & the evidence resulting from the presence of
shareholders in the shareholders’ meetings in previous years,
• it is likely to achieve a stable majority of the votes at the shareholders’
meeting, given the historic voting pattern at the shareholders’ meeting &
the position of other shareholders
NOTE: an option to purchase / convert shares cannot in itself confer sole
control unless the option will be exercised in the near future according to
legally binding agreements
16
CONTROL IN THE EU
•
Joint control: exists where 2 OR MORE undertakings / persons have the
possibility of exercising DECISIVE INFLUENCE over another
o
o
o
Unlike sole control, which confers upon a specific shareholder the power to
determine the strategic decisions in an undertaking, joint control is
characterised by the possibility of a deadlock situation resulting from the
power of 2 / more parent companies to reject proposed strategic decisions.
These shareholders must reach a common understanding in determining the
commercial policy of the JV & must be required to co-operate
DI - power to block actions which determine the strategic commercial
behaviour of an undertaking
Joint control can be established on a de facto or de jure basis
17
CONTROL IN THE EU
•
Veto rights
o
joint control may exist even where there is no equality between the 2 parent
companies in votes / in representation in decision-making bodies. This is the
case where minority shareholders have additional rights which allow them to
veto decisions which are essential for the strategic commercial behaviour of the
JV
o
o
o
veto rights must be related to strategic decisions on the business policy of the
JV. They must go beyond veto rights normally accorded to minority
shareholders in order to protect their financial interests as investors in the JV
veto rights that confer joint control typically include decisions on issues such as
the budget, the business plan, major investments or the appointment of
senior management
in order to establish decisive influence you don’t need all the above. Don’t
need to exercise such rights; possibility of exercising rights = sufficient
18
CONTROL IN THE EU
•
Joint exercise of voting rights
o
o
o
in the absence of specific veto rights, 2 or more undertakings acquiring
minority shareholdings in another undertaking may obtain joint control
where the minority shareholdings together provide the means for controlling
the target undertaking. This means that the minority shareholders, together,
will have a majority of the voting rights; & will act together in exercising these
voting rights. Can result from a legally binding agreement to this effect, or
may be established on a de facto basis
the legal means to ensure the joint exercise of voting rights can be in the
form of a (jointly controlled) holding company to which the minority
shareholders transfer their rights / an agreement by which they undertake to
act in the same way (pooling agreement)
very exceptionally, collective action can occur on a de facto basis where
strong common interests exist between the minority shareholders to the
effect that they would not act against each other in exercising their rights in
relation to the JV
19
CONTROL IN THE EU
•
Joint exercise of voting rights
o
o
o
In the absence of strong common interests, the possibility of changing
coalitions between minority shareholders will normally exclude the
assumption of joint control
Where there is no stable majority in the decision-making procedure & the
majority can on each occasion be any of the various combinations possible
amongst the minority shareholders, it cannot be assumed that the minority
shareholders (or a certain group thereof) will jointly control the undertaking
EXAMPLE: in the case of an undertaking where 3 shareholders each own onethird of the share capital and each elect one-third of the members of the
board, the shareholders do not have joint control since decisions are required
to be taken on a basis of a simple majority
20
CONTROL IN SA
The interpretation of control – SA
•
Distillers (2001 – 2001): different forms of control existing at the same time direct & indirect control
o
o
Facts: Distillers contracted to purchase all the assets of SFW. Each of three
companies, SAB, Rembrandt and KWV, had a 30% interest in both Distillers and
SFW. Distillers and SFW were both listed companies and the remaining 10%
shares in each were held by a range of smaller shareholders. There was also a
voting pool agreement between the three major shareholders. In terms of the
merger, the assets of SFW were transferred to Distillers in exchange for an
issue of Distiller’s shares to the SFW shareholders. After the merger, the
shareholding of KWV, Rembrandt and SAB in Distillers remained the same.
This also reflected the same percentage of shares previously held before.
There was no change to the ultimate controllers of the business that was
previously conducted by SFW
Question: Was there a change of control that would need to be notified in
terms of the Act?
21
CONTROL IN SA
The interpretation of control – SA
•
Distillers: Tribunal
o Counsel for Distillers and SFW contended that the merger was not notifiable, as
the Act was concerned with ultimate / unitary control
o
o
o
rejected the idea that s 12(2) refers to ultimate / unitary control. Tribunal
stated that the Act conceived of “control as an event-based concept which
means that control can be acquired by one person by virtue of one provision
in s 12(2) whilst it still resided in another by virtue of another provision in the
section”
accepted that a transaction in a single economic entity (SEE) (s 4) would not
constitute a merger - where the indirect control remained the same. It,
however, concluded that the firms, in this case, did not form a SEE
accepted that the transaction achieved control as defined in 12(1) – without
defining it and was a notifiable merger. 12(2) provided common examples of
indirect control that might be exercised over a firm
22
CONTROL IN SA
The interpretation of control – SA
•
Distillers: CAC
o
o
o
did not expressly reject the SEE approach, but it did not apply it to the facts
observed that the Act contemplates the possibility that more than one firm
can exercise control over a company at the same time - one company can
exercise control through shareholding & another exercises control through an
ability to appoint the majority of directors to the board
the two firms, SFW and Distillers, were initially separate listed entities with
separate boards of directors and operating structures. Distillers only had
indirect control over SFW through its common shareholders, but Distillers
would now exercise direct control over the assets of SFW & the business
activities of the two businesses would be merged
23
CONTROL IN SA
The interpretation of control – SA
•
Distillers: CAC
o
even though ultimate control did not change – there was a “merger” (as
defined) because direct control changed
• a change of direct control triggers a notification
• it does not matter if indirect control stays the same
24
CONTROL IN SA
The interpretation of control – SA
•
Distillers: CAC
o
Mixed views of the case:
• some people think it was the right decision for the wrong reason
• some people think it adopts an overly formalistic approach
•
What is your view?
25
CONTROL IN SA
The interpretation of control – SA
•
Ethos (2003): the establishment of bright lines section 12(2)
•
Facts: Ethos, Nozola Investments and Siphumele Investments acquired joint
control over Tsebo. This joint control was established through a through a
shareholders’ agreement in terms of which every material decision required
consent of 67% of the votes of the company. Ethos required the consent of at
least one of the other shareholders to pass any major resolution. This transaction
was notified. At the time of the agreement, Ethos had less than 50% of the
shares in the company. At a later stage, Ethos acquired a small number of shares
(less then 5%) which took it across the 50% threshold set out in s 12(2)(a)
•
Question: Did the later transaction constitute a merger?
26
CONTROL IN SA
The interpretation of control – SA
•
Ethos: Tribunal
o
accepted that Tsebo’s “ability to control the firm remains unchanged despite
the fact that it will now own more than 50% of the firm. This is because in
terms of its shareholder’s agreement, the acquisition of the additional shares is
rendered essentially neutral – all decisions of consequence require the assent
of 67% of the shareholders. Since Ethos has still not acquired sufficient equity
to control the firm on its own (i.e. above two-thirds) the situation is no
different to what it was prior to the present transaction. The firm was jointly
controlled prior to the transaction and it will be so subsequently.”
27
CONTROL IN SA
The interpretation of control – SA
•
Ethos : Tribunal
o
o
o
o
o
Sole controller is different to a joint controller
If more than one controller at a time – then a firm may be subject to joint &
sole control (and more than one sole controller)
Ethos is one of the joint controllers & remains such BUT when it crosses a so
called “bright-line” set out in 12(2) – it becomes a sole controller AS WELL
If firm crosses a bright line – it must file, even if nothing in the nature of
control changes – “other jurisdictions adopt bright lines not because they are
perfect in every case but because by and large they are consistent with
commercial reality and, most importantly, they help create certainty for both
regulator and the regulated”
“A change of control is a once-off affair.” Once a firm has control in any of the
senses mentioned in 12(2), it cannot again acquire / establish control over the
same firm
28
CONTROL IN SA
The interpretation of control – SA
•
Ethos: criticism
o
o
o
Considered an overly formalistic approach – where meaningless acts will be
regarded as mergers & firms will incur unnecessary costs in notifying them
Because a particular firm can only acquire or establish control once - a party to
a merger will have to notify it only once, irrespective of whether that change of
control is hollow / real. If this happens at a time when this is irrelevant because
no change of control occurs, a serious anti-competitive consequence that may
arise when a real & effective change of control occurs may be overlooked.
However, competition authorities will not get a second bite at the cherry once a
substantive change of control occurs – the authorities will be deprived of an
opportunity to consider the merger in the most appropriate circumstances
Maybe better for the bright lines to create a rebuttable presumption of control
29
CONTROL IN SA
The interpretation of control – SA
•
Cape Empowerment Trust: (2006) “more than one half of the issued share capital
of the firm”
o
o
o
o
Facts: Sanlam obtained pref shares in a Sancino, which constituted the
majority of the share capital of that company
Question: Does this constitute control? More than half of issued share capital?
Tribunal: found that this constituted control, even though the articles of
Sancino determined that the shares would only have voting rights if Sancino
fell into arrears with its dividends /redemption payments. In the Companies
Act preference shares generally may be deprived of their voting rights, but
they will always be entitled to vote their shares where their dividends are in
arrears
Effect: firms owning pref shares which constitute the majority of the share
capital will be regarded as controllers – even though such shares seldom have
voting rights – Tribunal held the finding was particular to the facts
30
CONTROL IN SA
The interpretation of control – SA
•
Caxton (2004) “beneficially owns more than…”
o
o
o
Facts: Naspers (N) had 3.8% of the shares in M-Net and 50% of the shares in
MNH, which in turn held 52.6% of the shares in M-Net. N exercised joint
control over MNH with other firms in terms of a shareholders’ agreement. N
acquired shares in M-Net to increase its direct interest to 35.8%. It was argued
that N gained control over M-Net, as its 35% holding had to be added to
26.5%, being half of the shares jointly controlled with another firm through
MNH
Question: Does this constitute more than one half of the issued share capital
in terms of s 12(2)(a)?
Tribunal: Transaction did not require notification in terms of s 12 (2)(a). The
shares held by MNH could only be included in the calculation for the purposes
of section 12(2)(a) if they were controlled by N. The provision states that
beneficial holding will be conclusive. Accordingly, shares held through
nominees cannot be included
31
CONTROL IN SA
The interpretation of control – SA
•
Gold Fields (2004) “entitled to vote a majority of votes”
o
o
o
Facts: Applicant argued that “majority” did not mean more than 50% of the
votes. In large public companies only a small number of shareholders attend
meetings, so it’s possible to control the company with less than 50% of the
votes
Question: Does this constitute a majority of the voting rights in terms of
section 12(2)(b)?
Tribunal: The issue was not addressed as it was found that no such control
existed on the facts
NOTE: In the Companies Act “majority” means 50% plus one. This type of control
should not be considered under section 12(2)(a) but rather in terms of
section12(2)(g)
32
CONTROL IN SA
The interpretation of control – SA
•
Gold Fields (2004) and Johnnic (2005) “material influence”
o
o
o
Cases recognised that a firm with less than 50% of the votes in a large public
company may control it, as such a company may have a large number of
apathetic shareholders who do not vote their shares
Johnnic: Tribunal held that this type of control falls within section 12(2)(g)
Goldfields: Tribunal looked at the average attendance of members’ meetings
(over the last 3 years) and statements made by the CEO of the target firm.
Control could not be established on the facts.
33
CONTROL IN SA
The interpretation of control – SA
•
High level summary of SA control currently
o
o
o
o
You can have both joint and sole control at one time
An establishment of either is notifiable
A firm is deemed to establish sole control when it crosses a bright line (even if
you don’t actually have sole control)
Can establish joint control either because of 50:50 or because of veto rights in
respect of:
•
•
•
•
o
business plans
budget
major investments; or
senior employees / management
Notifiability of internal re-structuring?
34
MERGER THRESHOLDS
When must the Competition Authorities be notified of a merger?
RECAP: If it is a "merger" as defined, it has an effect within SA, and financial
THRESHOLDS are met …
Let's look at the thresholds in more detail:
If parties to merger have combined assets / turnover (whichever combination is
higher) of R560m and target firm has assets / turnover (whichever is higher) of
R80m
Merger MUST be notified – intermediate merger
If parties to merger have combined assets / turnover (whichever combination is
higher) of R6.6b and target firm has assets / turnover (whichever is higher) of
R190m
Merger MUST be notified – large merger
BELOW thresholds = small merger
35
MERGER THRESHOLDS
What figures to use / ask for?
-
Most recent audited AFS of the merger parties for the preceding financial year
-
NOTE:
- For assets, only look at assets in SA
- For turnover, only look at turnover in, into / from SA
- For acquiring firm, the entire group must be taken into account in the
calculation
- For target firm, only firm that is transferred & firms it control are taken into
account
-
Other nuances to calculation – see thresholds notice
36
SMALL MERGERS
Small mergers? (s 13)
-
Voluntary notification of small mergers at any time
-
Commission may require parties to a small merger to notify within 6 months of
implementation if, in the opinion of the Commission, …
-
the merger may substantially prevent / lessen competition; or
cannot be justified on public interest grounds
Commission also requires notification of small mergers, if at the time of
entering the transaction (Guideline?):
•
•
subject of an investigation; or
respondents to proceedings before the authorities
37
MERGER NOTIFICATIONS – OTHER Q'S
Who should file the merger?
-
Commission’s Rules:
• Either the primary acquiring firm or the target firm can make a joint filing –
Rule 27
•
A separate filing – Rule 28 (hostile takeovers)
How much does it cost?
o
This excludes legal fees for preparing
38
MERGER NOTIFICATIONS – OTHER Q'S
• Which party is responsible for paying the filing fee?
o
o
The Act is silent on the issue
Usually commercially determined in negotiations
• Does it matter if there is no competitive overlap between merger parties?
o
No – this is not a requirement
• When must notification take place?
o
o
o
Act does not prescribe any time for notification
A transaction which requires mandatory notification MAY NOT be implemented
before approval is obtained
May notify on the basis of an MOU or draft terms
39
MERGER NOTIFICATIONS – OTHER Q'S
• When would pre-implementation / gun-jumping occur?
•
Any actions or undertakings that allow the acquirer to determine the
“fundamentals” of the target business - control s 12(2)
•
Implementing acquiring firm’s strategies at target firm;
•
Allowing acquiring firm to manage the business of target firm;
•
Co-ordinating the business activities of the merging firms through the
exchange of competitively sensitive information
• BECAREFUL: Use warranties to ensure that business continues to be valued – avoid
pre-implementation – same risks as failing to notify
40
MERGER NOTIFICATIONS – OTHER Q'S
• Are 3rd parties involved in the review?
•
Yes – a number of 3rd parties may be involved:
o Commission may contact customers, competitors in its investigation
o trade unions and employee representatives are notified and may
participate (complete a Form CC5(1))
o Ministers of Economic Development & Finance are also notified of certain
mergers & entitled to participate
•
How they intervene between Commission & Tribunal proceedings is different
41
MERGER NOTIFICATIONS – OTHER Q'S
• How do 3rd parties get involved in the review?
•
Commission proceedings:
o Any party (whether or not a participant) may participate & voluntarily file
any document, affidavit, statement / other relevant information - no
formal process
•
Tribunal proceedings:
o Party required to have a material interest (not already represented) & a
notice of motion to (CT 6) intervene must be filed
o If granted intervener status – get full record & rights of participation. May
submit expert reports, & witness statements, lead evidence & crossexamine witnesses
42
MERGER NOTIFICATIONS
How do I notify a merger – the practical steps? (see Commission's practice note) A joint merger must be made in a single filing :
•
A merger notice CC4(1)
Declares the name of:
Acquiring, and
Target firm
Whether it is:
Small, or
Intermediate, or
large
43
MERGER NOTIFICATIONS
Statement of merger information for
acquiring & target CC4(2):
-
-
List of shareholders &
shareholdings, including
minorities. Also for
acquiring firm the %
shareholdings of any
firm that directly /
indirectly controls that
firm
Documents of the
merger parties: business
plans, marketing
documents,
presentations & board
minutes
44
MERGER NOTIFICATIONS
A competitiveness report (part of
CC4(2): Assessing the effect on the
market post merger
Confidentiality claim CC 7: nonconfidential version
CONFIDENTIAL: Trade business industrial
information that belongs to a firm, has a
particular economic value and is not
generally available or known to others,
sales figures, supply agreements, strategic
documents, board minutes
NOT CONFIDENTIAL: Shareholders & area
of business
45
MERGER NOTIFICATIONS
An example CC7 table?
46
MERGER NOTIFICATIONS – OTHER Q'S
How do I notify a merger – the practical steps (continued)?
What does the filing include:
•
•
Proof of delivery of the form to every other party to the transaction
and the relevant registered trade union / employee representative
Proof of payment
Where do I lodge it?
-
Lodge a hard copy at the Registry
Provision is made for electronic filing
Obtain proof of delivery & case no
47
WHAT IS CONSIDERED IN ANALYSING A MERGER?
• FIRST: The authorities must determine whether the merger is likely to
substantially prevent or lessen competition in the relevant markets
• When making this determination, the authorities must assess:
o
o
The strength of competition in the relevant market; and
The probability that firms in the market will behave competitively / cooperatively
• In making this determination they must take into account a range of
factors ….
48
WHAT IS CONSIDERED IN ANALYSING A MERGER?
• The factors the authorities will consider are:
o
o
o
o
o
o
o
o
Actual & potential level of import competition
Ease of entry into the market including tariff & regulatory barriers
Levels & trends of concentration & history of collusion
Degree of countervailing power
Dynamic characteristics of the market including growth, innovation &
product differentiation
Nature & extent of vertical integration
Failing firm doctrine
Whether the merger will result in the removal of an effective
competitor
49
WHAT IS CONSIDERED IN ANALYSING A MERGER?
• THEN: If it appears that the merger is likely to do so then the authorities
must determine whether the merger is likely to result in any
technological, efficiency / other pro-competitive gain that could outweigh
any anti-competitive effects
50
WHAT IS CONSIDERED IN ANALYSING A MERGER?
• Regardless of the outcome of the previous assessments the authorities
must in every merger determine whether the merger can or cannot be
justified on substantial public interest grounds
• This involves assessing the effect the proposed merger will have on:
o
o
o
o
A particular industrial sector or region
Employment
The ability of small businesses, or firms controlled or owned by
historically disadvantaged persons, to become competitive
The ability of national industries to compete in international markets
• These factors have resulted in many mergers being conditionally approved
notwithstanding the fact that no competition concerns were raised (more
later)
(Wal-Mart)
51
MERGER REVIEW PERIODS
How long does it take to process a merger?
-
Intermediate: sections 13(5)(a) and 14(1)(a)
Large: sections 14A(1)(b), 13(5)(a), 14(1)(a) and Rule 34(2)(a) of
Commission’s Rules
52
AFTER THE FILING
What happens after the filing is lodged?
-
Intermediate mergers:
• Complete merger investigation
• Commission will issue certificate approving the merger, approving with
conditions / prohibiting the merger
• Section 16(1)(a):
• If merger parties do not agree with decision, make a request for
consideration to the Tribunal ( CT 4) and then appeal to CAC
-
Large mergers:
• Sections 16(2) and 16(3):
• Commission forwards its recommendations to Tribunal, the Minister of
Econ Dev and the merger parties
• They specify whether the merger should be approved, approved subject
to conditions / prohibited. Tribunal makes the decision on the matter
• Section 17:
- If merging parties do not agree with decision, they can appeal to CAC
- CAC has practice directions for written argument
53
MERGER TRENDS
What kinds of mergers have we seen prohibited?
Mergers considered as either horizontal, vertical / conglomerate
Horizontal:
• Nestle / Pfizer or Glencore / Xstrata
Vertical:
• AECI (Senmin) / Cellulose
Conglomerate: no vertical / horizontal overlap
•
2013: Only 1 prohibition of 324 notified (textbook – Juta & Van Schaik)
177 horizontal & 21 vertical & 77 conglomerate
•
•
2011 – 2012:
2010 -2011:
8 mergers prohibited
2 mergers prohibited
54
MERGER TRENDS
Trends are towards less prohibitions and more conditional approvals:
2012- 2013:
2011 – 2012:
2010 -2011:
Remedies aimed at addressing concerns identified
Structural: Aimed at addressing structure of an industry – i.e. Divestiture,
cross-shareholdings, cross-directorships
Behavioural: Aimed at addressing how merged entity behaves post-merger to
ensure it competes fairly – i.e. requiring the merged entity to keep supplying
to a customer on fair terms
37 conditionally approved of 324 notified
33 conditionally approved of 291 notified
13 conditionally approved of 229 notified
55
MERGER TRENDS
Trends are towards less prohibitions and more conditional approvals:
• Of 37 conditional approvals in 2012 -2013 year:
• 28 to address public interest concerns
• 11 employment
• 17 negative impact on SME's in relevant market
• Property mergers were a real focus – relating to SME's ability to compete in
retail markets (43%)
56
MERGER NOTIFICATIONS
An example? Share sale
Facts:
-
-
Trojan = investment co
Abacus = valve & pressure manufacturer – heavy industry & mining, also
consulting engineers
T wants to acquire 70% stake in A
S/H's – Smith, Jones, Trust
Purchase price R200m
Trojan (acquirer) T/O = R300m & assets = R200m
Abacus (target) T/O = R185m & assets = R30m
57
MERGER NOTIFICATIONS
Notification assessment
Questions:
-
Is it a merger?
Will T acquire control of A?
If yes, are the thresholds met to require mandatory notification?
If not, what about the small merger voluntary notification considerations?
Key documents for prelim assessment:
AFS (acquiring & target co)
Shareholders' agreement
Voting pool (if any)
-
Let's do the assessment….
58
MERGER NOTIFICATIONS
An example? Sale of business
Facts:
-
-
Phoenix Eng (Pty) Ltd – wholly owned sub of JSE listed co
Abacus = valve & pressure manufacturer – heavy industry & mining, also
consulting engineers
Phoenix wants to buy the business – going concern
S/H's – Smith, Jones, Trust
BoD and S/H approves
Purchase price R150m
Phoenix (acquirer) group T/O = R5.7b, subsid T/O = R400m & assets = R3b
Abacus (target) T/O = R185m & assets = R30m + 30 employees
59
MERGER NOTIFICATIONS
Notification assessment
Questions:
-
Is it a merger? Will P acquire control of A? Is this just an asset / a business?
If yes, are the thresholds met to require mandatory notification?
If not, what about the small merger voluntary notification considerations?
Key documents for prelim assessment:
AFS
Shareholders' agreement
Voting pool (if any)
-
Let's do the assessment….
60
SUMMARY
Does the Competition Act apply to the
proposed transaction?
NO
YES
Is the proposed transaction a
"merger"?
(ambit of “control”)
YES
Is the merger notifiable to the
Commission?
NO
Small Merger:
Proceed
NO
(financial thresholds)
YES
Large or intermediate merger
Unless Commission
requires notification in
terms of section 13(3) or
the Guideline on small
merger notification
YES
NO
Notify – Wait
for approval
61
SUMMARY
Is the merger likely to substantially
prevent/lessen competition?
(market considerations)
NO
YES
Is the merger likely to result in any
technological, efficiency or pro-competitive
gains?
Should the merger be prohibited on
public interest grounds?
YES
YES
NO
Concerns
Should the merger be
prohibited on public interest
grounds?
NO
No Concerns
Can the merger be justified on
public interest grounds?
YES
NO
Proceed
Appropriate remedies?
Structural
NO
Should the merger
be outright
prohibited?
NO
YES
Proceed
62
Behavioural
YES
QUESTIONS
CONTACT: Paula Youens, [email protected] Tel : 021 431 7039
63
www.webberwentzel.com
JOHANNESBURG
CAPE TOWN
10, 16 & 18 Fricker Road,
15th Floor, Convention Tower
Illovo Boulevard,
Heerengracht, Foreshore
Johannesburg, 2196, South Africa
Cape Town, 8001, South Africa
T +27 11 530 5000
T +27 21 431 7000
Legal Notice: these materials are for training purposes only and do not constitute legal or other professional advice

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