POSSIBLE STRICTER MEASURES INTRODUCED FOR ENTITIES SEEKING TO MAKE ACQUISITIONS IN INNOVATIVE DIGITAL MARKETS
16 June 2021
The Competition Commission is a statutory body created in terms of the Competition Act No 89 of 1998 (“the Competition Act”) whose legislative mandate is to investigate, control and evaluate restrictive business practices, abuse of dominant positions and mergers in order to achieve equity and efficiency in the South African economy.
As part and parcel of the Competition Commission’s role alluded to above, it exercises certain oversight in relation to mergers. What is a “merger” you may ask? For purposes of this article, the Competition Act (simply speaking) defines a merger as a transaction in terms of which one or more entities directly or indirectly acquire or establish control in relation to the business of another entity. Mergers can take several different forms and shapes; and can occur by way of the conclusion of inter alia a lease, sale of assets, sale of shares, joint ventures and/or amalgamation agreement entered into amongst the relevant transacting parties.
The Competition Act (by way of a non-exhaustive list) lists the following instances in which an entity will be deemed to have acquired “control” over the other:
- beneficially owns more than one half of the issued share capital of the entity concerned;
- is entitled to vote a majority of the votes that may be cast at a general meeting of the entity concerned, or has the ability to control the voting of a majority of those votes, either directly or through a controlled entity of that person;
- is able to appoint or to veto the appointment of a majority of the directors of the entity concerned;
- is a holding company, and the entity concerned is a subsidiary of that company;
- in the case of an entity that is a trust, has the ability to control the majority of the votes of the trustees, to appoint the majority of the trustees or to appoint or change the majority of the beneficiaries of the trust;
- in the case of a close corporation, owns the majority of members’ interest or controls directly or has the right to control the majority of members’ votes in the close corporation; or
- has the ability to materially influence the policy of the entity concerned in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control referred to the preceding subparagraphs.
The Competition Act distinguishes between three types of mergers viz:
- Small Mergers;
- Intermediate Mergers; and
- Large Mergers.
The categorisation of a merger as a “small’, “intermediate” or “large” merger is determined with regard to thresholds published pursuant to the provisions of the Competition Act in relation to the combined asset value and/or turnover of the transacting entities. The current merger thresholds are as follows:
|THRESHOLDS||COMBINED TURNOVER / ASSET VALUE||TARGET TURNOVER / ASSET VALUE|
|Lower threshold||R 600 000 000||R 100 000 000|
|Higher threshold||R 6 600 000 000||R 190 000 000|
- the value of the proposed merger equals or exceeds R600 000 000 (calculated by either combining the annual turnover or asset values of both entities), and
- the annual turnover or asset value of the transferred/target entity is at least R100 000 000
the merger will be categorized as an intermediate merger.
- the value of the proposed merger exceeds R6 600 000 000 (calculated by either combining the annual turnover or asset values of both entities), and
- the annual turnover or asset value of the transferred / target entity is at least R190 000 000
the merger will be categorized as a large merger.
The Competition Commission must be notified of all intermediate and large mergers and transacting parties are absolutely prohibited from implementing an intermediate or large merger prior to such merger being approved by the Competition Commission in the manner envisaged in the Competition Act.
The Competition Commission is not required to be notified of small mergers. It is however vested with a discretion to require (in a period of 6 months following the merger) transacting parties in relation to a small merger to notify and seek approval from the Competition Commission in instances where the Competition Commission believes that the merger may substantially lessen or prevent competition or is incapable of being justified on the grounds of public interest.
In the draft guidelines for small merger notification published on 7 May 2021, the Competition Commission seeks to widen its net in relation to small mergers. These guidelines have been brought about following the Competition Commission’s view that there is an increasing risk that the growth of digital players through the rising number of acquisitions of new, innovative companies may have a detrimental impact on innovation particularly where these digital companies act as gatekeepers in multiple markets and that these potentially anti-competitive acquisitions are escaping regulatory scrutiny due the acquisitions taking place at an early stage in the life of the target entity before they have generated sufficient turnover that would trigger merger notification as set by the turnover thresholds discussed above.
The draft guidelines which have been circulated for public comment, contain the following salient terms:
The Competition Commission will evaluate whether a small merger requires notification on its own merits, within the guidance provided by section 13(3) of the Competition Act. The Competition Commission will however require the notification of all small mergers which meet any of the following criteria:
- at the time of entering into the transaction any of the entities, or entities within their group, are subject to an investigation by the Competition Commission in terms of Chapter 2 of the Competition Act; or
- at the time of entering into the transaction any of the entities, or entities within their group, are respondents to pending proceedings referred by the Competition Commission to the Competition Tribunal in terms of Chapter 2 of the Competition Act;
In addition, the Competition Commission will require that it be informed of all small mergers and acquisitions where either the acquiring entity, the target entity, or both, operate in one or more digital market(s) provided at least one of the following criteria are met:
- the consideration for the acquisition or investment exceeds R190 000 000 provided the target entity has activities in South Africa,
- the consideration for the acquisition of a part of the target entity is less than R190 000 000 but effectively values the target firm at R190 000 000 (for example, the acquisition of a 25% stake at R47 500 000) provided the target entity has activities in South Africa and, as a result of the acquisition, the acquiring entity gains access to commercially sensitive information of the target entity or exerts material influence over the target entity within the meaning of section 12(2)(g) of the Competition Act,
- at least one of the parties to the transaction has a market share of 35% or more in at least one digital market, or
- the proposed merger results in combined post-merger market share at which the merged entity gains or reinforces dominance over the market, as defined by the Competition Act.