Insolvency and Business Rescue Update

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MERGERS MEANING OF CONTROL

• By
• Cape Law Society
• Competition Law Committee

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Background
Competition Law
Prohibited Practices
Merger Control
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Merger Control
the ability of the competition authorities to
control the degree of merger activity taking
place in the country, through the evaluation of
merger transactions
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Mergers Definitions
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Mergers Definitions
Section 12(1)
12(1)(a) For purposes of this Act, 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.
(b) A merger contemplated in paragraph (a)
may be achieved in any manner, including through
(i) purchase or lease of the shares, an
interest or assets of the other firm in
question or (ii) amalgamation or other
combination with the other firm in
question.
A firm is defined in section 1 of the
Competition Act as including a person,
partnership or trust
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Mergers Instances of Control
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Mergers Instances of Control
Section 12(2)
A person controls a firm if that person
(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 (Act
No. 61 of 1973)
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Mergers Instances of Control - cont
Section 12(2) cont
(e) 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 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
(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)
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Mergers Instances of Control - cont
Distillers (CAC)
That section 12(2) is not exhaustive is
illustrated by the fact that it does not provide
for the simplest of merger transactions
contemplated in section 12(1)(a) where A acquires
control over the business of B by way of a
purchase of assets. As a matter of common law A
now controls what was the business of B but this
transaction, clearly a merger as contemplated in
section 12(1), is not to be found in the list
contained in 12(2). The clear inference is that
12(2) is not exhaustive and only intended to be
illustrative of some instances of control.
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Mergers Instances of Control - cont
Caxton
if a transaction fails to find a label to fit in
with section 12(2) it may still be a merger if it
falls within a definition of section 12(1)(a).
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Section 12(2)
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Mergers Instances of Control - cont
12(2)(a) - Beneficially own more than one half of
the issued share capital

• ordinary and preference shares should be taken
  into consideration (Cape Empowerment Trust)

• only those share interests over which that firm
  has sole control - joint shareholdings should not
  be added (Caxton)

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Mergers Instances of Control - cont
12(2)(b) - Voting a majority of the votes that
may be cast at a general meeting of the firm
"One company may control another despite the fact
that it owns less than one half of its voting
shares. Typically, in widely held public
companies, shareholder disposal or apathy is such
that byno means 100 of the shareholders vote.
But this is a question a fact in each case".
(Goldfields)
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Mergers Instances of Control - cont
12(2)(c) - Appoint or to veto the appointment of
a majority of the directors

• A person may not own the majority of the shares
  of a firm, but may by virtue of a shareholders
  agreement (or the articles of association) have
  the right to appoint the majority of directors or
  veto the appointment of the majority of directors
  of that firm.

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Mergers Instances of Control - cont
12(2)(d) - Holding company and subsidiary as
contemplated in the Companies Act
we note the only matter in which the 'single
economic entity' concept has thus far been
considered by the Tribunal was in respect of a
claim that a merger of two firms, allegedly part
of a single economic entity, was not subject to
the scrutiny of the Act in other words
(Patensie)
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Mergers Instances of Control - cont
12(2)(d) - Holding company and subsidiary as
contemplated in the Companies Act cont.
Section 4(5) "(a) a company, its wholly owned
subsidiary as contemplated in section 1(5) of
the Companies Act, 1973, a wholly owned
subsidiary of that subsidiary, or any combination
of them or (b) the constituent firms within a
single economic entity similar in structure to
those referred to in paragraph (a)."
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Mergers Instances of Control - cont
12(2)(d) - Holding company and subsidiary as
contemplated in the Companies Act cont.
transactions within the ambit of 4(5)(b) may be
recognised as a single economic unit for the
purposes of section 12, but the provision must be
interpreted strictly. The less something looks
like a wholly owned parent subsidiary
relationship the more cautious we need to be. To
put it another way, the more ambiguous the case
for a single economic entity the less scope there
is for rebutting the influence that the direct
acquisition has led to a change of control
(Distillers)
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Mergers Instances of Control - cont
12(2)(d) - Holding company and subsidiary as
contemplated in the Companies Act cont.
section 12(1) makes no express provision for the
exclusion of transactions between a company and
its wholly owned subsidiary, from the definition
of merger
And
"the purpose of merger control envisages a wide
definition of control, so as to allow the
relevant competition authorities to examine a
wide range of transactions which could result in
an alteration of the market structure and in
particular reduces (sic) the level of competition
in the relevant market."
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Mergers Instances of Control - cont
12(2)(e) - Has the ability to control the
majority of the votes of the trustees, to appoint
the majority of the trustees or to appoint or
change the majority of the beneficiaries of the
trust
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Mergers Instances of Control - cont
12(2)(f) - Owns the majority of members' interest
or controls directly or has the right to control
the majority of members' votes in the close
corporation
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Mergers Instances of Control - cont
12(2)(g) - 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)
relevant influence or control involves the
attribute of effecting a permanent and
irreversible change to the very structure at the
very least it will be able to materially interest
(sic) a key policy . (Goldfields)
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Mergers Instances of Control - cont
12(2)(g) - Ability to materially influence the
policy of the firm cont.
a firm must have a form of voting control, board
representation and perhaps management contracts
or voting pool arrangements
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Joint Control
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Section 12(1) one or more firms
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incentives of co-owners are different to those
of sole owners
Iscor / Saldanha Steel

• single owners have no need of restraints to
  regulate competition between firms controlled by
  them

• vertical effects, such as more favourable terms
  negotiated between a related/co-owned supplier
  and retailer, might be involved

• sole control allows the owner to change the firm
  according to his personal requirements taking
  account of all his other interests

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As the Competition Act provides for more than
one firm (solely or jointly) to exercise control
over another firm at the same time (concurrency
of control), it conceptually must follow that it
is possible that firms can acquire control over
that firm even though others continue to control
that selfsame firm jointly.
Ethos / Tsebo

• Sole control must be distinguished from joint
  control and it is accordingly possible that a
  firm may simultaneously be subjected to joint and
  sole control

• If a person already in control of a firm acquires
  other and/or further control as meant in terms of
  the Competition Act, it is not necessary to give
  notice of those additional powers as"a change in
  control is a once-off affair"

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Joint Control

• dampening effect on the business of a firm
  compared to a firm under sole control due to the
  necessity of considering the requirements of each
  co-owner

• usually found to exist between, for example,
  shareholders, each holding half of the issued
  shares of a company

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Mergers Application of the Principles
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Mergers Application of the Principles
Caxton - case
That more than one party can exercise control
over a firm simultaneously That the same
party can simultaneously be regarded as a sole
controller and a joint controller of a firm in
respect of different 'instances' of
control That if the same party which
controlled a firm jointly later also acquired
sole control, albeit simultaneously with the
continued joint control, this would amount to an
obligation to notify in terms of the
Act That if a party beneficially owns more
than 50 of the issued shares of a firm it is
deemed, by virtue of section 12(2)(a), to
control that firm regardless of whether they
confer the right to vote the majority of shares
in that firm.
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Mergers Application of the Principles - cont
Ethos - case
there is nothing in the language of section
12(2) to suggest that its specific instances
operate exclusively at any one time. Indeed
given the range of possibilities section 12(2)
canvasses, it is likely that more than one
controller subsists at any given time in any
complex commercial structure.
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Mergers Application of the Principles - cont
Ethos - case
section 12(2) instances certain bright lines
of when control will be assumed. When firms cross
that line, as Ethos has, they must notify, albeit
that they have not traveled very far in crossing
it
This does not mean that section 12(2) sets out
only bright lines. The parties correctly observe
that section 12(2)(g) is anything but bright.
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