The concept of control as envisaged in the Competition Act (the “Act”) has been a fiercely debated topic with regard to the legislature’s intention of what constitutes control and whether a party to a merger has crossed the proverbial bright line to trigger the notification requirement for a merger.
The question arises whether two parties who jointly exercise control in equal shares are required to notify the Competition Commission (the “Commission”) for the purpose of determining the appropriateness of the merger.
Consideration must be given to what the legislature considers to be a merger with specific reference to control. Section 12(1) of the Act provides that a merger occurs when one or more firms directly or indirectly acquires or establishes direct or indirect control over the whole or part of the business of another firm. The term "firm" includes a person, partnership or trust as defined in Section 1 of the Act.
Therefore, when a firm directly or indirectly exercises control over another firm and the merger thresholds as prescribed in the Regulations to the Act have been met, there is a duty on the parties to notify the Commission of the merger.
The Act, more specifically in Section 12(2) provides the circumstances in which a firm will be deemed to have crossed the bright line and acquired control over another firm. These circumstances are inter alia the following:
- the acquisition of beneficial ownership of more than one half of the issued share capital;
- the acquisition of the right / entitlement to cast the majority of the votes at a general meeting, or the ability to control the voting of a majority of those votes;
- the ability to appoint or veto the appointment of a majority of the directors;
- is a holding company, and the firm is a subsidiary of that company as contemplated in the Companies Act;
- in respect of a trust, the ability to control the majority of the votes of the trustees, to appoint the majority of the trustees or change the majority of the beneficiaries of the trust;
- for close corporations, owning the majority of the members' interest or control of the majority of members' votes in the close corporation; or
- the ability to materially influence the firm’s policies in a manner comparable, in ordinary commercial practice, to the forms of control listed above.
In considering joint control, it is apparent that the manner of control exercised does not meet any of the definitions encompassed in Section 12(2)(a)-(f) of the Act. It is therefore trite that there is no clear crossing of the bright line in respect of control.
However, control can be found in the purpose of a merger through a wide interpretation of Section 12(2)(g) of the Act. In the matter of Distillers Corporation (SA) Ltd v Bulmer (SA) (Pty) (Ltd) it was held that:
“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 the level of competition in the relevant markets”
Section 12(2)(g) captures, in practical terms, situations where a minority shareholder holds the ability to materially influence the strategic day-to-day commercial behaviour of the target firm in a manner similar to a firm which exercises control as per Sections 12(2)(a) to (f) of the Act. Control exercised by a joint shareholder, albeit a minority, may amount to crossing of the bright line given the circumstances.
An assessment of when (and whether) control is acquired will always involve a fact-based analysis of the economic and commercial reality of the details of the merger to determine whether notification is required. This view has been attested to by both the European and South African Competition Authorities in determining control. While the European competition authorities requires ‘decisive influence’ in order to constitute a change of control, the South Africa test relates to ‘material influence’ which is a lesser threshold of control. Material influence must be assessed with regard to materiality and the extent to which it may be applied by a particular firm to ascertain whether the control exercised ultimately crosses the bright line.