Introduction
By Ettienne Carstens, Associate – Competition Law
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The acquisition of an asset / business may trigger various regulatory obligations on the entities to the transaction, which generally involve observing the provisions of the Companies Act and the respective Tax Acts. In certain instances, the entities may also be required to notify the Competition Commission (“Commission”) of the acquisition transaction.
In terms of the Competition Act, Act 89 of 1998 (the “Act”), a “merger” breaching the prescribed thresholds (the “Prescribed Thresholds”) requires notification to the Commission. A “merger” is defined in section 12(1) as:
“when one or more firms [entity] directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm [entity].” (own emphasis)
Section 12(1)(b) of the Act further provides for the manner how a merger can be achieved:
“A merger… may be achieved in any manner, including through –
- (i) purchase or lease of the shares, an interest or assets of the other firm [entity] in question; or…”
(own emphasis)
The definition of a merger for the purpose of this article, is limited to one entity purchasing / acquiring specific assets from another entity (referred to as the “Target Firm”) and the acquiring firm establishes a form of control over the specific assets.
On the assumption that the acquisition of the specific assets falls within the ambit of the merger-definition, a further enquiry is required to determine whether the Prescribed Thresholds are breached. Simply stated, to breach the Prescribed Threshold, the asset value or turnover of the parties at the time of the acquisition transaction should be above the threshold values.
The Legal Question
The question is whether the Prescribed Thresholds refer to the Target Firm, or simply to that which is acquired from the Target Firm, namely the assets, and under what circumstances is the acquisition transaction notifiable in term of the Act?
The summated facts of the following case study represents an acquisition transaction which may be notifiable under the Act:
- The acquiring firm is a company with a turnover or asset value breaching the Prescribed Threshold of R500,000,000.00 (Five Hundred Million Rand).
- The Target Firm is a company with a turnover or asset value breaching the Prescribed Threshold of R100,000,000.00 (One Hundred Million Rand).
- The acquiring firm intends to purchase certain assets from the Target Firm worth R40,000,000.00 (Forty Million Rand).
The Legal Position
In considering the above case study and to determine whether the above acquisition transaction is notifiable, sections 11 and 12 of the Act, as well as the regulation promulgated under section 11 of the Act (the “Regulation”) need to be interpreted.
The Regulation provides for the determination of merger thresholds [Prescribed Thresholds] and the method of calculation of such thresholds.
It is worthy to note that in the Regulation, reference is made to the “transferred firm” and not a Target Firm to determine whether the Prescribed Thresholds are breached. The “Transferred Firm” is defined in the Regulation as:
“ … -
- (a) a firm, or the business or assets of the firm, that as a result of a transaction in any circumstances set out in section 12 of the Act, would become directly or indirectly controlled by an acquiring firm; and
- (b) any other firm, or business or assets of the firm, the whole or part of whose business is directly or indirectly controlled by a firm contemplated in paragraph (a).” (emphasis added)
Therefore, considering the definition of a “Transferred Firm”, a key definitional element to be considered is the inclusion of business. Thus, where the asset that is acquired constitutes a business, such asset is regarded for the purpose of the Act to be the Transferred Firm. A business is not defined in the Act, therefore case law should be considered to determine whether the assets constitutes a business.
In the case of The Competition Commission / Edgars Consolidated Stores Limited and Retail Apparel (Pty) Limited (95/FN/Dec02), the Competition Tribunal (the “Tribunal”) states that useful guidance can be obtained from European and US jurisdictions whether asset acquisitions qualify for notification as mergers.
In paragraph 28, the Tribunal refers to Blokker / Toys R Us, where it is stated that:
“…acquisition of control is not limited to cases where a legal entity is taken over but can also happen through the acquisition of assets. In this situation the assets in question must constitute a business (own emphasis) to which a market turnover can be clearly attributed.”
Furthermore, and in paragraph 33, the Tribunal refers to author Herbert Hovenkamp in discussing the problem presented by partial asset acquisitions and observes that:
“Antitrust policy becomes concerned with partial asset acquisitions when the asset that changes hands represents a measurable and relatively permanent transfer of market share or productive capacity from one firm to another.”
A general approach to the question is then formulated:
“In general, if the asset acquisition appears on its face not to affect industrial concentration or the market share of its buyer, the acquisition will be treated as outside the scope of section 7. If it does tend to enlarge the market share or productive capacity of the acquiring firm, or if it increases concentration in the industry, then its effects on competition must be assessed.”
Once it is established that the specific assets of the Target Firm, constitutes a business, [Transferred Firm], the Prescribed Thresholds of the Transferred Firm will be considered for the purposes of the Act and whether the acquisition transaction is notifiable to the Commission.
In determining whether the acquisition transaction breaches the Prescribed Thresholds both of the following monetary thresholds for intermediate mergers must be present:
- The asset value or turnover of the Transferred Firm must be at least R100million; and
- The combined asset value or turnover of the Transferred Firm and acquiring firm must equal or exceed R600million.
Both of these thresholds must be breached for the acquisition transaction to constitute an intermediate merger. It must be borne in mind that higher thresholds also exists for a large merger.
Once it has been determined that the Prescribed Thresholds have been breached, it must be determined whether control is established over the assets [Transferred Firm] by the entity that acquired the Transferred Firm.
Application of the Legal Position
In applying the summated facts of the case study above the acquisition transaction is not notifiable for the following reasons:
- The asset value or turnover of the Transferred Firm is only R40,000,000.00 (Forty Million Rand) and the Prescribed Threshold of R100,000,000.00 (One Hundred Million Rand) is not breached; and
- The combined asset value or turnover the Transferred Firm and the acquiring firm is R540,000,000.00 (Five Hundred Forty Million Rand), therefore, the R600,000,000.00 (Six Hundred Million Rand) Prescribed Threshold is also not breached.
Where the Prescribed Thresholds are not breached, control over the Transferred Firm by the acquiring firm is irrelevant.
The Tribunal adopts the above approach, commenting that it is closest to serving the purpose of understanding what is contemplated by section 12 of the Act (i.e. the establishment of direct or indirect control over a business).
Thus, should it be able to attribute a turnover to the asset, or should the acquisition of the asset result in a transfer of market share or productive capacity to the acquiring firm, such asset will constitute a business. Once this is established, it should be determined whether the monetary thresholds (discussed above) are breached.
Conclusion
As delineated above, there are various considerations to be taken in account. Caution should be exercised when determining whether the Commission should be or should not be notified of a transaction involving an asset that constitutes a business. As a point of departure, the following questions can serve as a guideline:
- Does a merger occur?
- Does the asset constitute a business?
- Are the prescribed thresholds breached?
- Is there some form of control exercised?
Where all four of the above questions are answered in the affirmative, the transaction will be notifiable to the Commission, failing which will result in prior implementation of the merger. Failure to notify the Commission of a merger and prior implementation may result in administrative penalties being imposed by the Commission.