The competition authorities have been established in terms of the Competition Act 89 of 1998 (as amended) (the “Competition Act“) to promote and maintain competition in South Africa. This includes the role of assessing proposed mergers for the effects that such mergers may have on competition in any relevant markets. In addition, the competition authorities have been assigned a role in assessing the effect that a particular merger may have on relevant public interest considerations.
All significant mergers must therefore be notified to and assessed by the authorities before they may be implemented. However, the responsibility for ensuring that the competition authorities are aware of all mergers that must be assessed lies with the parties to the merger themselves and a failure to notify the authorities of a notifiable merger may result in the parties being levied with a fine equalling up to 10% of annual turnover of the merging parties and other remedies that may be imposed include retrospective unbundling of a merger transaction. There are of course other consequences, such as reputational damage that may also have a massive economic impact on the parties involved. It is therefore imperative that the notifiability of a merger to the competition authorities is considered in respect of all transactions and that all notifiable mergers are in fact notified to the competition authorities in the appropriate form.
A transaction constitutes a notifiable merger when all of the below criteria are met:
- the transaction falls within the jurisdiction of the competition authorities;
- the transaction meets the definition of a merger as defined in the Competition Act; and
- the transaction meets the financial thresholds as prescribed by the Minister of Economic Development from time to time.
The Competition Act applies (subject to certain exceptions) to all activity within, or having an effect within South Africa. This requirement will be met in respect not only of a transaction that occurs between South African entities, but in any case, where the transaction will have any effect in South Africa.
The Competition Act defines a merger as occurring where “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“.
In this regard, we note that the concept of “control” is broad for purposes of establishing a merger and does not only extend to cases of over 50% shareholding / voting rights / the right to appoint or veto the appointment of over 50% of the directors of an entity but extends to minority rights that grant a party the right to materially influence the policy of a firm in a manner comparable to a person who exercises majority control (this may include, for example, a minority right to veto material strategic decisions).
It is therefore not always a straightforward matter to determine whether control is established and it is best to seek legal advice in this regard. We note, for example, that in 2016 the Competition Tribunal found that a merger had occurred between Life Healthcare Group (“Life Healthcare“) and Joint Medical Holdings (“JMH“) where, despite Life Healthcare’s minority stake of 49% in JMH, it was found to have, in practice, exercised strategic influence over JMH. The parties were fined a penalty of R10 million for failing to notify this merger.
It is also worth noting that the definition of a merger refers to the acquisition of the whole or part of a business. A merger does therefore not only occur where there is a sale of business as a going concern / a sale of shares, but may also occur where, for example, an asset constituting a part of a business is sold. A merger may also occur where a joint venture is formed.
The final criteria that must be met is that a merger must meet the relevant financial thresholds. Mergers are categorised into small, intermediate and large mergers – all intermediate and large mergers must be notified to the competition authorities. The current merger thresholds for an intermediate merger are that the combined assets / turnover of the merging parties must meet or exceed R600 million and the assets / turnover of the target firm must meet or exceed R100 million. The current thresholds for a large merger are that the combined assets / turnover of the merging parties must meet or exceed R6.6 billion and the assets / turnover of the target firm must meet or exceed R190 million. Where the thresholds for either an intermediate or large merger are met, the merger meets the financial threshold criterion.
Any transaction that meets all three of the above criteria must be notified to the competition authorities. As discussed above, whether a merger is notifiable is not always straightforward and it is best to seek expert legal advice in this regard.