It appears that the Commission has had numerous requests from stakeholders, which have necessitated the publishing of the Guidelines due to the uncertainty in practice as to whether these requirements apply to internal restructurings, particularly in cases where the parties involved are closely related or effectively the same.
What counts as a change in control?
The decisive factor in determining whether a transaction constitutes a merger is whether it results in a change in control. Section 12(2) of the Competition Act deals with instances of control and expresses that control can be established if a person:
- Beneficially owns more than half of the issued share capital of the target firm.
- Is entitled to vote a majority of the votes at a general meeting of the target firm or can control the voting of a majority of those votes, either directly or through a controlled entity
- Can appoint or to veto the appointment of the majority of directors of the target firm.
- It is a holding company, and the target firm is a subsidiary of that company.
- In the case of a trust, can 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.
- In the case of a close corporation, owns the majority of the members’ interest or controls directly or has the right to control the majority of the members’ votes in the close corporation.
- Can materially influence the policy of the target firm.
Where a transaction is recognised under any of the above-mentioned instances, it will then be considered a merger and, subject to monetary thresholds being met, will be notifiable.
The Competition Act does not specifically regulate mergers within a group of companies, and arguments in practice generally rely on the fact that in such transactions there is no change of effective control between the subsidiaries and therefore it is not notifiable. However, a remark made by the Competition Appeal Court (“CAC”) in the case of Distillers Corporation SA (Ltd) and Another v Bulmer (SA) (Pty) Ltd and Another 2002 (2) SA 346 (CAC) (“Distillers case”) suggests that merger notification is necessary in such instances.
According to the CAC in the Distillers case, the definition of a merger in terms of section 12(1) of the Competition Act does not exclude transactions concerning a firm and its wholly owned subsidiary. Issues of notification may also arise in instances where there is a buy-out of minority shareholders. The effect of merger approval on the legitimacy of joint venture agreements between competitors also creates uncertainty regarding notification of such transactions to the Commission.
Key tests for notification in internal restructuring
The final guidelines, taking their lead from the European Commission, however, have indicated that it is only in limited circumstances that an element of an internal restructuring may require notification to the Commission. Generally, the Commission will not concern itself with purely internal transactions.
The Commission will apply the following method to determine if a transaction qualifies as an internal restructuring, alters the control rights of current minority shareholders, and whether it might trigger a notification requirement:
- Where the proposed restructuring amounts to a change of control in line with the instances listed in section 12(2) above and thus changes the control rights of external minority shareholders.
- Where the proposed restructuring would result in a loss or gain of negative control by a shareholder not forming part of the group of firms.
- Where an external shareholder holding minority rights confers control (through veto rights relating to strategic matters of the target firm in one or more firms in a group), who will have their control rights altered as a result of the transaction.
Practical implications for businesses
Ultimately, when the Commission determines whether a transaction constitutes an internal restructuring, the Commission will examine the current and intended control structure. However, where a transaction falls within the ambit of the control elements listed in section 12(2) of the Competition Act, the transaction will automatically be considered as a notifiable merger, subject to the respective monetary thresholds.
While some solace can be drawn that pure internal restructurings are free from merger requirements, each case will need to be judged on its own merits and the effect that transactions have on control, and structuring should be carefully scrutinised to ensure that the internal restructuring does not trigger notification requirements.
It is important to note that these Guidelines are not binding on the Commission, the Competition Tribunal or the courts; however, any party intending to interpret or apply section 12 of the Competition Act should consider the Guidelines. The Guidelines merely present a general methodology that the Commission will observe when assessing whether an internal restructuring qualifies as a merger and will require notification to the Commission. Furthermore, the discretion to consider other factors on a case-by-case basis remains with the Commission, should it be required. That said, the Guidelines have been welcomed by M&A practitioners as assisting in ironing out some of the uncertainties created by the interpretation of section 12 of the Competition Act.
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