Big Deal Property Transactions Need Competition Commission Approval

The seller could present the buyer with a draft sale agreement which would not come into effect unless the Competition Commission approves the deal. What does this mean? When do parties buying and selling land have to report their transactions to the Competition authorities and what happens if they do not?

South Africa’s economy is protected by the Competition Act which is complex and sophisticated legislation. As everyone who’s read about the bread price fixing scandal knows, the Competition Act aims to stamp out anti – competitive behavior such as cartels and abuses of dominance. Less fashionable are the merger regulation provisions of the Act. Compliance with the merger provisions of the Act has become increasingly important with the Commission’s focus on fining firms who failed to report notifiable mergers and implemented without permission (prior implementation or “gun jumping”) since it published its Guidelines for the Determination of Administrative Penalties for failure to Notify Mergers and Implementation of Mergers Contrary to the Competition Act No 89 of 1998, as amended (AP Guidelines) in March 2019.  Merger notification is required to enable the Competition authorities to evaluate and address any anticompetitive impacts of a transaction (including by refusing permission for the merger) and to increase competition in markets.  Since the amendments to the Competition Act made in 2019, in addition to considering the effect of a merger on competition in a market, the Competition Commission now also has to determine whether mergers can be justified on substantial public interest grounds assessing the factors specified in section 12A (3). Those factors require the Commission to consider the effect that the merger will have on a particular industrial sector or region, employment, the ability of small and medium businesses’ (defined by regulation) or firms controlled or owned by historically disadvantaged persons to enter, participate in or expand within a market, the ability of South African industries to compete internationally and the promotion of a greater spread of ownership, in particular increasing levels of ownership by historically disadvantaged persons and employees.  

So, how does this affect our shopping centre sale? Section 12(1) of the Competition Act says that a “merger” occurs when “one or more firms directly or indirectly acquire or establish control over the whole or part of the business of another form”.

Whether a merger gives rise to a change in control looks like an easy question to answer but can be very complicated in the real world. The Act provides that a change of control can be achieved in any manner, including the purchase of assets or shares or any transaction having a similar effect. In our shopping centre sale example, if the transaction is structured as a sale of the majority of the shares in the company that owns the shopping centre or a sale of the shopping centre business, those sales would involve a change of control of the shopping centre business. And so, we have a merger in terms of the Act.

But that is not the end of the discussion, does our shopping centre transaction give rise to the sale of all or part of a business or is it simply a sale of assets? This is a critical question because unless the sale is of a business or part of a business, the transaction is not a merger as defined by the Act. In dealing with this issue in the case of Competition Commission vs Edgars Consolidated Holdings Limited, the Commission Tribunal said that “when an asset becomes a business and when it is just considered an asset, is a subject for interpretation. Too wide a notion of business would make any number of ordinary transactions notifiable as mergers, too narrow, would risk creating a loophole for regulatory avoidance”. The case does not give the business world clear direction and that is why every transaction  requires careful consideration of the “business” question.

Working out whether a merger has to be notified to the Competition Commission is not a job for the faint-hearted. You have to have a long hard look at the merger thresholds and how the parties’ asset values and turnovers are calculated taking account of the prescribed method of calculation. The price paid for our shopping centre is usually irrelevant in deciding whether or not the parties have to report the merger. The Competition Act determines compulsory notification of transactions based on the assets values and turnovers respectively of the transferring and acquiring firms. And working out those numbers is also not a walk in the park. Sometimes much head-scratching results from trying to work out who falls within the definitions of “acquiring firm” and “transferred firm”. Once again, control is the key. The acquiring firm and all its holding companies and subsidiaries have to be included in the threshold asset value and turnover calculations. When dealing with the transferred firm, the focus is on what is being sold. Upper and lower thresholds have been set and any merger which falls above the lower threshold but below the upper threshold has to be reported to the Commission as an intermediate merger while any transaction which falls above the higher thresholds has to be reported to the Commission for investigation is a large merger but decided by the Competition Tribunal.

Small mergers, that is transactions where the parties’ asset values and turnovers fall below the lower thresholds, do not have to be reported subject to the Competition Commission’s Guidelines on Small Merger Notification (Small Merger Guidelines).  The Small Merger Guidelines were updated by the Competition Commission with effect from 14 October 2022 and the revised Small Merger Guidelines came into operation on 1 December 2022. The Commission has adopted the position in the Small Merger Guidelines that it must be informed in writing before implementation of all small mergers where a firm or any of its group companies is being investigated by the Commission for a prohibited practice or where the firm or any of its group companies is a respondent in prohibited practice proceedings referred by the Commission to the Competition Tribunal at the time of the merger. In addition, the Commission now requires that it be informed of all small mergers “and share acquisitions” where the acquiring firm’s turnover or asset value alone exceeds ZAR6.6 billion and in relation to the target firm, the price for the acquisition or investment exceeds ZAR190 million or the price is less than ZAR190 million but “effectively values the target firm at R190 million or more”.  

The revised Small Merger Guidelines are not clearly drafted. In addition, the revised Small Merger Guidelines are the source of much debate because the Competition Commission is subject to the Competition Act and the Act specifically states that parties to a small merger are not obliged to report a small merger to the Commission unless the Commission requires them to do so in terms of section 13 (3) of the Act. Section 13 (3) of the Act empowers the Competition Commission to require parties to a small merger to notify the Commission of that merger within 6 months after it is implemented if the Commission is of the opinion that having regard to the competitive and public interest considerations prescribed in section 12A of the Act, the merger may substantially prevent or lessen competition or cannot be justified on public interest grounds. The difficulty with the Small Merger Guidelines is that they apply a blanket requirement to all small mergers in circumstances where the Competition Commission cannot have reached the view required to impose on parties to a small merger the obligation to notify the Commission of that transaction. Having said that, very few firms are willing to take the risk of implementing a transaction and then being required to report it to the Commission and possibly having the merger unwound or being subjected to conditions.

Coming back to intermediate and large mergers, the lower compulsory notification threshold is met if the combined South African asset values of the merging parties, or their combined annual turnovers or a combination of their respective assets values and turnovers equal or exceed R600 million and if the annual turnover or the asset value of the transferred business equals or exceeds R100 million. While the thresholds look high, particularly in property transactions, you can hit the thresholds before you blink.

The higher threshold is met using the same test, but the numbers are bigger, for the combined asset value and turnover threshold for both firms, the figure is R6.6 billion and the transferred firm’s asset value or turnover must equal or exceed R190 million.

Check if your property sale must be notified as a merger to the Competition Commission. If it is and you do not notify the Commission, not only can your transaction be reversed which means that you may be forced to sell your property, but there is a very good chance that you will be fined up to 10% of your turnover during the year before that in which the administrative penalty is imposed.  The AP Guidelines start with the base amount equal to double the applicable filing fee (currently R165 000 for an intermediate merger and R550 000 for a larger merger).  For each month that a merger was not reported or was implemented before being approved, the Commission adds to the base amount an amount calculated in accordance with the AP Guidelines (the amounts vary anywhere from 50% of the base amount multiplied by the number of months of the contravention to 100% times the base amount multiplied by the number of months of the contravention).  The Commission then considers aggravating and mitigating factors and then applies the statutory maximum to determine the ultimate administrative penalty applicable for not reporting a merger when you should have or implementing a merger before it is approved by the Competition authorities.  All in all, the financial consequences for failing to report a merger and gun jumping can be enormous.

Merger approval requires that one submit an application in the prescribed form to the Competition Commission together with the non – refundable filing fee. It takes at least 3 months to process a relatively straight-forward application and more complex mergers involving a reduction in competition can take much longer to resolve. Do not implement the merger before approval is obtained or you are in for the divesture orders and fines mentioned earlier.

Having considered the merger, the Commission (or the Competition Tribunal in the case of large merger) must issue a certificate approving the merger with or without conditions or prohibiting implementation of the merger.

Whether the sale of immovable property is a merger for the purposes of the Competition Act is a question that you must consider and answer before implementing your transaction. The Commission is increasingly vigilant and informed about commercial transactions and the last thing you need is to be dealing with an investigation by the Commission into failing to notify a merger or prior implementation or paying hefty fines for noncompliance.

Jennifer Finnigan is a commercial lawyer who heads up the Competition Practice Area at Shepstone & Wylie Attorneys. Sifiso Msomi is the head of Shepstone & Wylie Attorneys Property Department.