The role of ‘control’ in M&A transactions

In an earlier article, we examined the requirements for notifying the Competition Commission about your merger. One of the aspects touched on was the requirement of ‘control’ as an indicator of whether a transaction is reportable or not. In this article, we will delve deeper and examine the ‘control’ element as contemplated in the Competition Act 89 of 1998 (“Act”).

According to Section 12 of the Act, a merger takes place when one or more firms directly or indirectly acquire or establish direct or indirect ‘control’ over all or a portion of another firm’s operations. The term ‘firm’ in this sense refers to not only companies but to a person, partnership, or trust. The term ‘control’ is a critical factor to take into account as having control may equate to having the ability to affect how a corporation is run.

The definition of the term ‘merger’ highlights two integral elements that may occur during a merger and acquisition (“M&A”) transaction, namely – 

(i) the acquisition of control; and 
(ii) the interest that is acquired.

The element of ‘control’ is arguably the most significant element as the presence of ‘control’ will determine if an M&A transaction is notifiable and its presence may affect how a firm operates. Accordingly, the Act stipulates that a ‘merger’ can be achieved in the following instances –

a) purchase or lease of the shares, interest, or assets of a competitor, supplier, customer or other person;
b) amalgamation or combination with that competitor, supplier, customer or other person; or
c) any other means.

The above instances of a merger indicate that ‘control’ is viewed broadly with the Act providing further clarity as to when a change of ‘control’ or taking of ‘control’ by a person of firm takes place. Section 12(2) of the Act elaborates as follows:

  • Beneficially owning more than one half of the issued share capital in the target firm.
  • Enabling the control of a firm by means of a majority of votes within such firm, in a general meeting.
  • The ability to approve or reject the appointment of a majority of the directors or members.
  • In the event that the firm in question is a trust, the ability and power to appoint the majority of trustees and amend the beneficiaries of the trust.
  • The ability to either influence or significantly change policies within the firm. This last indicator provides a broad umbrella for actions that could also result in a change of control despite no significant ownership changes. This even implies that if a minority shareholder can influence material change and receive benefits, such could qualify as ‘control’ for merger notification.

Our courts have had opportunity to assess the definition of control and when the transaction is notifiable. In Distillers Corporation (SA) Ltd and Another v Bulmer SA (Pty) Ltd and Another 2002 (2) SA 346 (CAC) the Competition Appeal Court confirmed that M&A transactions are notifiable as soon as ‘control’ changes. 

In Anglo American Holdings Ltd v Kumba Resources Ltd and Another 46/LM/Jun02 [2003] ZACT 45 (4 September 2003), the Competition Tribunal was tasked with determining if subsequent transactions that would eventually equate to a firm purchasing a combined shareholding of 34,9% would be construed as a ‘merger’ and if the element of ‘control’ was present. The Tribunal confirmed that Anglo American Holdings Ltd, had a shareholding of 9.6% and continued to acquire minority shareholding. It was clear that this continued purchasing of shares would lead to them having ‘control’ and being able to influence material change to the ‘firm’, as per Section 12(2)(g) of the Act. 

In addition, ‘control’ is not only a crucial component in terms of the Act, but also comes into play in respect of Broad-Based Black Economic Empowerment (B-BBEE), where the B-BBEE Commission also evaluates the B-BBEE impact of an M&A transaction and how the newly merged firm addresses South Africa’s commitment to transformation of the economy.

To summarize, as soon as the element of ‘control’ is met, an M&A transaction is one step closer to being notifiable. The next step is then to determine whether the monetary thresholds applicable to notifiable mergers are present. If any M&A transaction conforms to the thresholds of an intermediate or large merger, such M&A transaction is then notifiable to the Competition Commission. 

If you are considering an M&A transaction or are concerned whether restructuring could become a notifiable transaction, make contact with our M&A team that can provide the necessary advice and support should you need to notify the Competition Commission of your transaction.

Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s). 

January 28, 2024
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