What You Should Know About Mergers, A Legal Perspective

Mergers are the consolidation of companies, which occur when two or more entities voluntarily unite to form a single entity. Mergers are governed by the Competition Act 89 of 1998 (“the Act”), with section 12(1)(A) of the Act defining a merger as follows: “A merger occurs 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.”

Section 11(5) of the Act categorizes mergers into three distinct groups: 

• (a) A small merger refers to a merger or proposed merger with a value at or below the lower threshold established in terms of subsection (1)(a); 
• b) An intermediate merger refers to a merger or proposed merger with a value between the lower and higher thresholds established in terms of subsection (1)(a);
• (c) A large merger refers to a merger or proposed merger with a value at or above the higher threshold established in terms of subsection (1) (a).

Mergers are most commonly done to gain market share, reduce operational costs, expand to new territories, unite common products, grow revenues, and increase profits all of which should benefit the firms’ shareholders. After a merger, shares of the new company are distributed to existing shareholders of both original businesses.

Determination of Merger Thresholds and Method of Calculation:

In accordance with sections 11(2) and 11(3) of the Act, “The Minister may make a new determination in terms of subsection (1) in consultation with the Competition Commission and must publish in the Gazette a notice setting out the proposed threshold and method of calculation for the purposes of this section, inviting written submissions on the proposal.”

The revised determination of Merger Thresholds became effective as of 1 October 2017. Two critical considerations arise in determining merger thresholds: firstly, identifying the firms to be included in the calculation; and secondly, establishing the basis for the computation.

There exist two thresholds, namely the Lower and Higher thresholds. The combined annual turnover and/or assets of the acquiring and transferred firms for a lower threshold into or from the Republic of South Africa is valued below R600,000,000.00 (Six Hundred Million Rand). In contrast, the higher threshold reflects combined annual turnover and/or combined assets of the acquiring and transferred firms valued at or above R6.6 billion.

Thus, mergers are classified based on their monetary value. If the merger value falls below the lower threshold, it constitutes a small merger. If the merger value meets or exceeds the lower threshold but remains below the higher threshold, it constitutes an intermediate merger, and if the merger value equals or exceeds the higher threshold, it constitutes a large merger.

Legal Framework:

All notable mergers must be formally notified and reviewed by the relevant authorities prior to implementation.

It is incumbent upon the parties to the merger to ensure that the competition authorities are duly notified of all assessable mergers. Failure to notify the authorities of a notifiable merger may result in severe repercussions, including fines of up to 10% of the annual turnover of the merging parties. Additional remedies may include retrospective unbundling of the merger transaction.

Failure to notify the Commission about a notifiable merger denies the competition authorities the opportunity of investigating transactions and making the determination at the time of the merger whether the merger is likely to give rise to a substantial lessening of competition that may permanently alter the structure of the market and raise public interest issues.

The Commission has the initial 20 business days to investigate intermediate and small mergers. The Commission can, however, extend the investigation days by 40 business days.

With regards to large mergers, the Commission has the initial 40 business days to investigate, the investigation days can be extended with a maximum of 15 days per request with consent from the merging parties and the Competition Tribunal.

What Steps Should Companies Take To Ensure Compliance? 

Companies must acquaint themselves with the relevant laws and regulations, such as the Competition Act and merger-related provisions, in order to ascertain the applicable procedures and determine whether the merger falls under the category of small, intermediate, or large, based on monetary thresholds. 

Companies are required to conduct thorough due diligence. This entails evaluating the financial metrics of the acquiring and transferring firms, including annual turnover and asset value, to ascertain whether notification is mandated.

Furthermore, companies are obliged to consult with competition law specialists to ensure accurate interpretation of legal requirements. Additionally, engagement with financial experts is necessary to calculate merger thresholds with precision.

It is imperative for companies to compile all requisite documentation for the notification process, including but not limited to the merger agreement, financial statements, and compliance declarations, ensuring the accuracy and completeness of all submitted information.

Upon collection of all relevant documentation and accurate computation of thresholds, companies must notify the competition authorities promptly and cooperate fully with any inquiries or requirements from the authorities.

By adhering to these prescribed steps, companies can effectively mitigate legal risks and ensure full compliance with applicable laws and regulations governing mergers.

Types of Mergers and Restrictions:

The Competition Act explicitly refers to two primary types of mergers: Horizontal and Vertical mergers. However, two additional types, namely Conglomerate and Market Extension mergers, also warrant consideration. 

A horizontal merger takes place between two firms operating within the same industry, typically as competitors offering similar goods and services. The primary objective of such mergers is to reduce competition and increase market share. The Act closely scrutinizes horizontal mergers due to their potential anti-competitive implications.

• A vertical merger occurs between two companies that may not directly compete but operate within the same supply chain. For instance, a merger between a car dealership and a parts supplier exemplifies a vertical merger. These mergers aim to enhance efficiency and reduce operational costs.
• A conglomerate merger involves the consolidation of two firms from entirely unrelated industries. The purpose of this type of merger is generally for expansion into new markets.
• A market extension merger transpires when two firms within the same industry but serving distinct markets combine. This merger seeks to extend market reach and access new customer bases.

Section 4 of the Act explicitly prohibits horizontal relationships between two firms if such relationships substantially prevent or lessen competition in the market. Activities prohibited under this section include direct or indirect price-fixing, collusive tendering, and the division of markets through the allocation of market shares, customers, suppliers, territories, or specific goods and services.

In instances where the competition authorities determine that a merger would result in a significant lessening of competition, the proposed transaction may be prohibited.

Section 12A (3) of the Act mandates competition authorities to evaluate whether a merger can be justified on public interest grounds. This evaluation considers factors such as the merger’s impact on particular industrial sectors or regions, the ability of small businesses owned by historically disadvantaged persons to compete, employment, and the effect on South Africa’s global competitiveness.

Notwithstanding their regulatory powers, competition authorities are also empowered to grant conditional approval for proposed mergers. Remedies may be utilized to address anti-competitive effects identified during merger assessments.

These restrictions aim to strike a balance between fostering economic growth and ensuring fair competition while safeguarding public welfare.

Conclusion:

At Cuthbertson & Palmiera Attorneys, we specialize in guiding companies through the complexities associated with mergers. Should you require professional legal advice or assistance in relation to mergers, we invite you to contact us without hesitation.