MERGER ANALYSIS SHOULD INCLUDE NON-CONTROLLING INTERESTS … OR SHOULD IT? – OMESHNEE PILLAY
The intermediate merger between Primedia, Capricorn Capital Partners and New Africa Investments, recently considered by the Competition Appeal Court, has far-reaching implications in the application of our merger control legislation.
The decision of the Competition Appeal Court (CAC) directs that a full section 12(A) substantive enquiry be conducted for an indirect acquisition of a non-controlling, or passive, interest. Although the Competition Tribunal expressly disagreed with the CAC, the current position is arguably that a section 12(A) substantive enquiry must be conducted whenever there is an indirect acquisition of a passive interest.
The definition of a merger in terms of section 12 of the Competition Act, 89 of 1998, allows competition authorities to investigate the direct acquisition of control of a business by an acquiring firm as well as any consequential indirect acquisitions of control of businesses by such firm.
What is not so clear is the stance our competition authorities’ adopt where one acquires control of a business through a direct acquisition and consequently acquires a passive interest in a business through an indirect acquisition.
The traditional view postulated by American authors, Areeda and Turner, states that unlike a complete merger, an acquisition of a passive interest in an entity does not constitute an intrinsic threat to competition.
American authors Salop and O’Brien argue otherwise, stating that an acquisition by a firm of a passive interest in another could lead to possible anti-competitive effects.
Salop and O’Brien consider various forms of partial acquisitions, ranging from the acquiring firm having a passive financial interest in the target firm to the acquirer enjoying unrestricted control over the target firm – what they term “total control”. They distinguish “total control” from a full merger where full ownership is associated with control and state that whereas with “total control” a firm acquires only a partial financial interest in the target, it nonetheless gets full control of it.
The Tribunal and the CAC recently canvassed the issue of an indirect passive acquisition in an entity in the Primedia merger.
Primedia and Capricorn entered into an agreement to jointly acquire all the shares in New Africa, by virtue of which direct acquisition they would indirectly acquire a 24,9% stake in the company that controls and operates the radio station Kaya FM.
The direct acquisition of New Africa by Primedia and Capricorn did not raise any competition concerns. However, the indirect acquisition of the stake in Kaya FM was contentious, as Primedia is a diversified media company with radio assets.
Although the transaction was conditionally approved by the Competition Commission, the merging parties submitted a request to the Tribunal to reconsider the conditional approval. It was due to this request that the intermediate merger came before the Tribunal for consideration.
The Tribunal concluded that neither sole nor joint control would arise as a result of Primeda’s indirect acquisition of the passive interest in Kaya FM. It held that it was therefore unnecessary for it to consider whether, if Primedia acquired control over New Africa, this would lead to an anti-competitive outcome resulting in the substantial prevention or lessening of competition in the market (the section 12(A) substantive analysis). It therefore approved the transaction unconditionally.
The decision was taken on review to the CAC, where it was held that the Tribunal’s decision was based on a material error of law as it conflated the issue of control, which was an enquiry used to determine whether or not the Tribunal had the requisite jurisdiction to consider a matter, with the substantive enquiry set out in section 12(A) of the Act, which was an enquiry into whether or not the proposed transaction would result in the substantial lessening or prevention of competition.
The CAC held that there were two distinct enquires which needed to be made. The first was whether a merger existed. In order to provide an answer to this query, it is necessary to look at whether or not the acquiring firm would acquire control over the target firm. If control, whether sole or joint, would be acquired, a merger as defined in the Act existed and the Tribunal had jurisdiction to conduct the second enquiry, being the section 12(A) substantive enquiry into the effects of the merger.
The CAC maintained that where a firm acquired an indirect passive interest in an entity through acquiring direct control of another, the Tribunal had jurisdiction to conduct the substantive section 12(A) enquiry in relation to the indirect passive interest by virtue of its jurisdiction to consider the direct acquisition. The CAC accordingly sent the matter back to the Tribunal for a rehearing on the effects of the merger.
The Tribunal limited its rehearing investigation to the effects of the indirect acquisition by Primedia and Capricorn of the passive interest in Kaya FM.
The Tribunal maintained that no control, sole nor joint, would exist as a result of the merger but it nonetheless conducted the section 12(A) substantive enquiry mandated by the CAC. It concluded that the passive investment by Primedia in Kaya FM would not lead to a substantial lessening or prevention of competition in any market and unconditionally approved the merger.
The Tribunal added a postscript to its decision to the effect that where a firm (Primedia) acquired direct control over another (New Africa) and, through that direct acquisition, indirectly acquired a passive interest in another (Kaya FM), that the direct acquisition constituted a merger did not render the indirect acquisition a merger as well.
The Tribunal stated that if a firm acquired control in terms of the direct acquisition, that constituted a merger and the competition authorities would have the requisite jurisdiction to conduct the section 12(A) substantive enquiry as set out in the Act. The indirect acquisition was irrelevant unless it also constituted a merger, thereby giving the authorities jurisdiction to proceed with the section 12(A) substantive enquiry. The indirect acquisition did not become a deemed merger simply because the direct acquisition constituted a merger.
It is respectfully submitted that it is on this point that the Tribunal’s reasoning prevails over the CAC’s. Our merger regime is a control based merger regime and in order for our authorities to conduct a merger investigation in terms of section 12(A) it must first be established that there is a merger.
Where the indirect acquisition does not constitute a merger, the authorities cannot proceed with a section 12(A) substantive enquiry even if the passive acquisition, based on economic theories, may lead to anti-competitive effects post merger. In such circumstances the authorities would have to use means other than merger legislation to regulate the behaviour of the merging parties.
If the CAC’s decision is correct, two separate merger regimes will emerge – one applicable to direct acquisitions, where control is a sine qua non for a merger to exist, and the other applicable to indirect acquisitions, where control is not a sine qua non for a merger to exist.
The effect would see indirect acquisitions, which would not qualify as mergers in terms of the direct acquisition regime for lack of control, qualify as a merger under an indirect acquisition regime as control would not be required.
It is submitted that it is not the intention of the legislature to have two separate merger regimes; nor is it its intention to impose a more stringent merger regime on an indirect acquisition in an entity as opposed to a direct acquisition.
Another problem with adopting the CAC’s approach is that it does not indicate at what level of shareholding one would begin to engage in the section 12(A) substantive enquiry.
The dilemma of how to deal with an indirect acquisition of a passive interest in an entity is not unique to South Africa. In the EU, merger control legislation is similar to that of South Africa. EU authors acknowledge that the acquisition of passive interests in entities could lead to anti-competitive effects but that merger legislation cannot be used to monitor the acquisition of a passive interest in an entity because of the control based nature of the regime.
The US merger regime, on the other hand, is not control based. A merger occurs in the US where the acquisition has the effect of substantially lessening or preventing competition. However, even in this non-control based regime, there is legal uncertainty as to the approach to be taken to partial interest acquisitions.
In the UK, a case similar to that of Primedia’s came before the UK Commission. British Sky Broadcasting Group (BSBG) acquired a 17,9% stake in rival ITV Plc (ITV). The UK Commission held that BSBG had acquired control of ITV as it could materially influence the policy of the target firm.
The UK test for material influence is similar to ours. However, the facts of the UK and Primedia cases are distinguishable and it is for this reason that the competition authorities reached different conclusions on whether the transactions in question amounted to a merger.
Firstly, ITV was a publicly listed company and not a private company like Kaya FM. Secondly, BSBG was ITV’s largest shareholder, with the second largest stake comprising a mere 5% of the shares in ITV. BSBG could therefore block a special resolution. Primedia was not Kaya FM’s largest shareholder, Kaya FM’s largest shareholder held 45,2% of its shares. Primedia’s shareholding on its own was therefore insufficient to block a special resolution.
The Tribunal’s view on indirect passive acquisitions is that where a party has acquired a passive interest via an indirect acquisition, no substantive analysis should be conducted into the indirect acquisition. However, if the passive shareholding changes to one of control, the firms would be bound to notify the transaction.
It is at that point that the competition authorities would have the requisite jurisdiction to conduct a substantive investigation into whether or not the proposed transaction would be anti-competitive.
Although it is not clear what status the Tribunal’s postscript has in view of the CAC’s decision, it is submitted that the Tribunal’s approach to the issue of indirect passive acquisitions is surely the more preferable.
Omeshnee Pillay is an associate at Bowman Gilfillan.