BACKGROUND AND SUMMARY
| On 1 February 2019, the Constitutional Court of South Africa, upheld an appeal and replaced the order of the Competition Appeal Court, instead ordering that the proposed transaction between Hosken Consolidated Investments Limited (“HCI”) and Tsogo Sun Holdings Ltd (Tsogo) in 2017 did not constitute a notifiable merger in terms of s13A of the Competition Act (“the Act”). Before 2014, Tsogo was subject to the joint control of HCI and SABMiller plc. HCI held 39% while SABMiller held 41% of the shares in Tsogo. In 2014 SABMiller disinvested itself of its shareholding in Tsogo with the effect that HCI’s beneficial shareholding in Tsogo would increase to 47.61%. HCI became the largest shareholder in Tsogo by a considerable margin and the de facto controller of Tsogo. At the time, HCI also had a 51.7% controlling shareholding interest in gaming and leisure activities through its subsidiary Niveus Investments Limited (“Niveus”). The 2014 Merger Notification In 2014, as a result of the disinvestment of SABMiller, HCI approached the Commission and applied for merger approval for the acquisition of sole control of Tsogo (the target firm). HCI also notified the Commission of its intention to acquire more than 50% of the issued share capital of Tsogo as per s12(2)(a) of the Act. The Commission investigated and approved the merger unconditionally, noting that it was the intention of HCI, post-merger, to ultimately increase its shareholding in Tsogo beyond 50% and thus acquire de jure control over Tsogo. The Tribunal unconditionally approved the merger. After the 2014 merger, both Niveus and Tsogo fell under the sole control of HCI in terms of the statutory definition. The Commission noted that the merger did not raise competition concerns nor was there a geographical overlap between HCI and Tsogo in respect of casino gaming. The 2017 Transaction The dispute arose in 2017 when HCI sought to effect its proposed restructuring, whereby HCI would increase its shareholding in Tsogo to more than 50% by consolidating and transferring all of its gaming interests in Niveus to Tsogo. The transaction resulted in HCI increasing its shareholding in Tsogo from 47% to between 50.91% and 51.63%. HCI therefore acquired de jure control of Tsogo after the second transaction as contemplated by s12(2)(a) of the Act. In 2016, HCI approached the Commission for an advisory opinion on whether the proposed consolidation would constitute a notifiable merger for the purposes of s12 of the Act. After consideration, the Commission advised HCI that the transaction amounted to a notifiable merger. Dissatisfied with the advisory opinion, HCI and Tsogo approached the Competition Tribunal (“Tribunal”) on an urgent basis for an order declaring that the proposed transaction was not notifiable. The Tribunal dismissed the application with costs and found that it does not have the power to grant declaratory relief as the Commissions advisory opinion did not constitute a finding by the Commission. Aggrieved by the decision, HCI and Tsogo launched an appeal to the Competition Appeal Court (“CAC”), who identified two issues for consideration. Firstly, whether the Tribunal had jurisdiction to entertain a matter where a party had not notified the Commission of a transaction in terms of s13A of the Act and, secondly, whether an acquiring company, having already obtained prior merger approval from the Commission to acquire sole control of an entity, must obtain merger approval before entering into a subsequent transaction with that entity. Upon consideration, the Competition Appeal Court, upheld the appeal, finding that the Tribunal has powers to grant the declaratory order. The CAC further held that the proposed transaction does not constitute a notifiable merger as the competition authorities had previously approved the acquisition in 2014. The matter was subsequently referred by the Commission to the Constitutional Court. |
HELD
| The Constitutional Court, in analysing the 2017 transaction, noted that the Commission, in 2014, had clearly accepted that a two phased transaction was contemplated which would result in in HCI ultimately acquiring de jure control of Tsogo “somewhere in the future”. This two-staged transaction had been approved by the Commission “on a forward-looking assessment of the likelihood of the likelihood of competition harm, and, in the public interest”. Three reasons were advanced by the Tribunal as to why the latest transaction was a notifiable merger. The first was the fact that HCI would be crossing a bright line by increasing its shareholding to more than 50%. The second was that, due to the lapse in time, the market structures would have changed since 2014. The third was that the transaction involved a different firm and that other factors would be relevant such as the public interest and employment considerations. The Constitutional Court in addressing the first reason put forward by the Tribunal stated that although a transaction becomes notifiable once it crosses a “bright line” in terms of s12(2)(a) of the Act, the principle did not apply to the 2017 transaction, as once control has been acquired there is no need to re-notify simply because the quality of the control changes from de facto to de jure control. This is in line with the once-off principle. In terms of the second issue, the Constitutional Court accepted that the Commission retains its wide powers under the Act to investigate any post-merger transaction. If HCI and Tsogo, in implementing the 2017 transaction, had acted in an adverse manner, then the Commission would be entitled to revoke its approval in terms of s16(3) read with section 15 of the Act. Lastly, the Commission argued that the 2014 transaction merely involved the acquisition of additional shares whereas the 2017 transaction involved a transfer of a business (which held HCI’s gaming interest) to Tsogo. The Constitutional Court gave no merit to this submission, stating that s12(1)(b) contemplates that a merger may be achieved not only by the purchase or lease of shares but also through an amalgamation or other combination of firms/entities. The Constitutional Court thus held that the 2017 transaction was not notifiable in terms of the Act. |
VALUE
Once the Commission is notified and approves of a merger, there is no need to re-notify the Commission simply because the quality of the control in respect of the merger changes from de facto to de jure control.
Written by Justin Howard and Shaun Piveteau
