The Competition Act (1998) regulates mergers. A merger is said to occur when 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.

The Act empowers the Minister to set thresholds in respect of the asset values and turnover of parties to a merger, in order for mergers to be categorised into small, intermediate or large mergers. Small mergers do not trigger automatic notification whilst intermediate and large mergers require notification to, and approval by, the Competition Commission¹ before implementation.

The Minister is also empowered to revise the thresholds. Although the threshold values are not indicative of the market power of the merging parties, it provides a relatively simple mechanism to identify mergers which, due to the extent of the economic resources that are to be combined should be considered by the Competition Commission.

Notification of a merger, whether intermediate or large, gives rise to significant costs including legal fees and statutory fees. In addition to these costs, there are often significant opportunity costs as a result of the delays in implementation of a merger arising from the preparation of a merger notification and the consideration of the merger by the competition authorities. Implementing a merger without the necessary approval constitutes a contravention of the Act and is likely to result in a very significant administrative penalty.

The idea would therefore be to strike a balance when setting thresholds in order not to require notification of mergers which involve combined economic resources that are unlikely to have a significant effect on competition, on the one hand, whilst, on the other hand, not allowing mergers which would result in the combination of economic resources which could have a significant impact on competition to be implemented without scrutiny.

Given the significant consequences of notifying a merger to the Competition Commission when it is not strictly required; or of implementing a merger without the necessary approval, it is critical to have clear guidelines in respect of the calculation of the relevant turnover and asset value thresholds.

At the moment merger notification is triggered when any combination of the annual turnover or the asset of the acquiring firm and the target firm in, into or from South Africa equals ZAR 560 million or more; and the annual turnover or assets of the target firm in, into or from South Africa equals ZAR 80 million or more².

An acquiring firm³ is defined in the Act as follows:
(a) a firm that as a result of a transaction in any circumstances set out in s12, would directly or indirectly acquire, or establish direct, or indirect control over, the whole or part of the business of another firm;

(b) a firm that has direct or indirect control over the whole or part of the business of a firm that as a result of a transaction in any circumstances set out in s12, would directly or indirectly acquire, or establish direct, or indirect control over, the whole or part of the business of another firm; or

(c) a firm the whole or part of whose business is directly or indirectly controlled by a firm contemplated in (a) and (b).

The concept of control is central to the definition of acquiring firm and target firm and, it is submitted, should also be the primary consideration when calculating turnover and asset values of merging parties.

Notice 216 of 2009 entitled Determination of Merger Thresholds and Method of Calculation (“the Notice”) was published by the Minister in n accordance with s11 of the Competition Act. The Notice sets out the method of calculating the turnover and asset value, to be used in categorising mergers.

The Notice determines that, subject to its terms, the asset value and turnover of firms are to be determined in terms of the GAAP. In respect of the combined valuation of firms, the Notice states that, if an acquiring firm is a subsidiary of a group of companies as contemplated in the Companies Act, 1973 for the purposes of calculations required in terms of the notice:

(a) the combined assets of the firms that are part of that group, and the combined turnover of those firms, must be consolidated; and

(b) the consolidated assets and turnover of the group are to exclude turnover or assets arising as a result of transactions by one part of the group with another part of the same group.

The acquiring firm potentially includes a number of firms and it cannot in all instances be said that the ‘acquiring firm’ can be a ‘subsidiary of a group’. It is therefore suggested that the reference in the Notice to ‘acquiring firm’ should be read to refer to ‘primary acquiring firm’.

The Notice accordingly gives rise to an enquiry as to whether the ‘primary acquiring firm’ is a subsidiary of a group of companies as contemplated in the Companies Act (1973).
In terms of the 1973 Companies Act, a company shall be deemed to be a subsidiary of another company if (i) that other company is a member of it and (aa) holds a majority of the voting rights in it; or (bb) has the right to appoint or remove directors holding a majority of the voting rights at meetings of the board; or (cc) has the sole control of a majority of the voting rights in it, whether pursuant to an agreement with other members or otherwise; or (ii) it is a subsidiary of any company which is a subsidiary of that other company; or (iii) subsidiaries of that other company or that other company and its subsidiaries together hold the rights referred to in subparagraph (i) (aa); (i)(bb); or (i)(cc).

A subsidiary would include any company which exercises control over another company through its ability to directly or indirectly exercise control over the majority of voting rights, or the appointment of the majority of the board of directors.

In the Companies Act (2008) the concept of control of a juristic person includes, the ability to materially influence the policy of the juristic person in a manner comparable to a person who, in ordinary commercial practice, would be able to exercise an element of control as contemplated in subsections (a) (b) and (c). Subsection (a) which refers to a company, contemplates the ability to exercise the majority of voting rights and the ability to control the board of directors.

The concept of control is also relevant for purposes of determining the nature of a firm and in particular to determine which firms form part of the group for purposes of preparing the consolidated group financial statements. In terms of GAAP Standard IAS 27 (AC132) a subsidiary is defined as an entity controlled by another entity. Control, for the purposes of the standard is defined as the power to govern the financial and operating policy of an entity in order to benefit from the activities of that other entity.

It is apparent from the 1973 Companies Act, the 2008 Companies Act, the Competition Act as well as GAAP, that the issue of control is determinative of whether a company is a subsidiary (or in the case of the Competition Act – whether it forms part of the acquiring firm or target firm). The reference to subsidiary in the Notice is consistent with the definition of acquiring firm and target firm in the Competition Act and there is, accordingly, no problem with identifying which firms’ turnover and asset values are to be taken account when assessing whether the merger thresholds are met.

The Notice prescribes that the assets and turnover of the firms that form part of the group of which the primary acquiring firm is a subsidiary must be combined, and are to exclude turnover or assets arising as a result of transactions by one part of the group with another part of the same group.

In terms of GAAP, the extent to which the turnover or asset value of a subsidiary will be reflected in the group’s consolidated financial statements will be determined with reference to the shareholding of the ultimate holding (parent) company in the subsidiary. In respect of companies in which the holding company holds more than 50% of shareholding, 100% of turnover will be consolidated into the consolidated group financial statements; in respect of companies in which the holding company holds between 20% and 50% of shareholding, only the equity share of profit will be consolidated into the group financial statement; and in respect of companies in which the holding company holds less than 20% shareholding, only the dividends paid by such company will be reflected in the consolidated group financial statements.

Should the group consolidated financial statements be used in order to determine the turnover and asset value of the acquiring firm and target firm, there is a distinct possibility that the asset value and turnover under the control of the acquiring firm or target firm may be understated.

In the European Union, the definition of a “group of companies” is also determined with reference to a broadly defined concept of control . Unlike in South Africa, the turnover of all the companies forming part of the group is added together, subject to the subtraction of sale between companies forming part of the group. This approach results in the full turnover of any company forming part of the group being included in the group turnover figure for the purpose of assessing whether the threshold value is met or not. It is suggested that this approach is in line with the idea that mergers through which a certain threshold value of economic and financial resources are combined should be notified to the Competition Commission and approved before implementation.

By Jac Marais (Senior Associate) and Abena Danso (Candidate Attorney), Adams and Adams, Competition Law

Notes:
1 In the case of large mergers, the transaction requires approval by the Competition Tribunal
2 Notice 215 of 2009
3 The definition of a ‘target firm’ is the mirror image of that of ‘acquiring firm’ save that the definition relates to a firm which will be controlled.
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