Merger regulation under the Competition Act - Control determines size
Merger regulation under the Competition Act - Control determines size
In the matter between Tiger Equity (Proprietary) Limited ("Tiger Equity"), Murray & Roberts (Proprietary) Limited ("M&R") and the Competition Commission ("Commission"), Tiger Equity and M&R applied to the Competition Tribunal ("Tribunal") to set aside a decision of the Commission to classify the merger between them as a large merger. The parties contended that the merger was, in fact, a small merger.
The classification of a merger is of actual consequence in: (i) assessing whether the transaction concerned is compulsorily notifiable to the competition authorities; (ii) determining the filing fee payable as well as the relevant investigatory and decision-making time periods where it is mandatorily notifiable; and (iii) evaluating whether the transaction concerned must be adjudicated upon by the Tribunal once the Commission's investigation is complete.
Where merging parties have incorrectly categorised a transaction, the Commission is mandated to issue a "Notice of Incomplete Filing" ("Notice"), the consequence of which is that, pending the rectification of the "deficiency", the time periods would cease to run. However, as indicated in the Tribunal's decision, the merging parties could apply to the Tribunal to set aside the Notice. In such event, "the clock reverts to the original position".
In this transaction, Tiger One sought to acquire the business of Tolcon from M&R. At the time of filing, Tiger One was a shelf company, formed for the purposes of the transaction (with an asset value and turnover of nil).
However, in determining whether the financial thresholds are met (for purposes of classification as a small, intermediate or large merger), it is necessary to count the turnover of not just the primary acquiring firm, but the entire acquiring group (including "the parents, grandparents and antecedants" that directly or indirectly control the primary acquiring firm).
The crisp legal issue in this case was therefore whether Tiger One was controlled by its shareholders for competition law purposes. If so, the asset values and turnovers of its shareholders (one of which is Corvest 5 (Proprietary) Limited ("Corvest"), part of the FirstRand group of companies) would be taken into account, rendering the transaction a large merger. If not, the parties' contention that the transaction ought properly to be classified as a small merger would be legally sustainable.
Having reviewed the shareholders' agreement, the Commission adopted the view that Tiger One was controlled jointly by all its shareholders. On the contrary, the merging parties' contended that no shareholder controls Tiger One for competition law purposes.
Upon an analysis of the shareholders' agreement and accompanying Memorandum of Incorporation, the following is germane to a determination of the identified legal issue –
- Corvest holds 28% in Tiger One;
- Each shareholder has a right to appoint a director to the board – at board level, the director would vote in the same proportion as the shareholder appointing him or her has equity in the company;
- Most decisions are made by ordinary resolution (for which a 50% majority is required);
- Some issues require special resolution (for which a 70% majority is required).
Having regard to the above, the Tribunal noted that –
"…no single shareholder is able to block either an ordinary or special resolution. Even the largest shareholder, Corvest, at 28%, would be unable on its own to veto the passing of a special resolution. Nor would the director nominee of any single shareholder be able to block the board from passing a board resolution for which a simple majority is required. Of course an alliance between two or more shareholders might be able to do so. However, that is not the Commission's case. Its case is that all the shareholders control the company and hence constitute acquiring firms for the purposes of the Act."
The Commission belatedly sought to argue that the joint control arose by virtue of "commonality of interest…between the so-called equity shareholders, as Corvest had a significant minority shareholding in each of…" the remaining shareholders. The Tribunal acknowledged that this may well have been a cogent argument to establish control on the basis of the ability to materially influence the firm. That said, the Tribunal found that this was not the case made out by the Commission in its papers. It found that –
"[s]ince the extent of the Commission's case is limited to the contents of the shareholder's agreement read with the Memorandum of Incorporation, there is no evidence to suggest that all the shareholders will agree all the time on strategic commercial issues. Given the shareholder configurations amongst the six shareholders, at any time some shareholders might ally against others, to get through or block resolutions including special resolutions… the possibility of changing coalitions is evident."
On this basis, the Tribunal found that none of the shareholders had been possessed of the requisite shareholding to veto strategic decisions (and therefore materially influence the firm for competition law purposes). For this reason, there was no need to count the turnover and/or asset values of the shareholders of Tiger One in calculating the financial thresholds relevant to the classification of the transaction. On this basis, the Tribunal's view resonated with that of the merging parties that the transaction was to be properly classified as a small merger and not a large merger, as contended for by the Commission. The Tribunal therefore set aside the Commission's classification.
This case highlights the principle that a commonality of interest between shareholders may form a legitimate legal basis for the argument that shareholders possess joint control over a firm. However, as the Commission did not appropriately make out this case (nor was there evidence to support such a case), this argument did not pass muster.
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