Mergers and Acquisitions topic 5 notes PDF

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MERGERS AND ACQUISITIONSWhat do we hear when we think of M&A?  Different firms coming togetherQuestions to think about in the context of M&A  What is the effect on competition?  How are consumers affected?  How are other players within specific industry affected?What does our law...

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MERGERS AND ACQUISITIONS What do we hear when we think of M&A?  Different firms coming together Questions to think about in the context of M&A  What is the effect on competition?  How are consumers affected?  How are other players within specific industry affected? What does our law say about this?  Does the CA have any requirements? does it prescribe anything?  Can companies of their own accord simply merge? Mergers Viewed from a perspective of equally sized companies coming together to merge their assets to become one entity: equal merger Company A: asset value of R1million Company B: asset value of R1.3million Both operate in the entertainment sector Simply put, two companies that may be on a similar footing that come together to constitute a merger Acquisitions  Very lopsided transactions i.e one firm swallows up another firm  Legal point that target company that has been acquired ceases to exist  The stock this company had will stop trading and begin trading under the other firm  One big company swallowing up another company i.e Google and Facebook Regulation  Currently regulated by the Competition Act of 1998 o Sections 12, 12A, 13, 13A  Section 12 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. 1. Direct or indirect: They may not have acquired the shares for example, but they may have acquired control Important to look at the type of transaction that took place – shareholding, control? 2. In whole or part of the other firm: It is important to differentiate between the two – M & A Mergers – merging of two firms Acquisition – in whole It will depend on the nature of the transaction, so you would have to look at each transaction on its own merits on a case by case basis [Slide 2]

 Slide 2 continued: This is how these firms may be acquired A merger envisioned in s 12 may be achieved, in any manner, including through – (i) the purchase or lease of the shares, an interest or assets of the other firm in question. (ii) an amalgamation or other combination with the other firm in question.  The Competition Commission, via its mergers and acquisition division, conducts merger reviews in terms of Chapter 3 of the Act (merger control). 

Pursuant to s 13A of the CA, intermediate or large mergers are required to notify the Commission of such merger in a prescribed manner and form.

 Section 12A(2) [Slide 3]  Lists factors the Competition Commission takes into account when considering intermediate or large mergers  The drafters of the act decided to go with a list of factors – one factor will not override one factor. These factors must all be accessed in determining these types of mergers.  This is significant in relation to the ‘failing firm defence’- whether the business or part of the business of a party to the merger or proposed merger has failed or is likely to fail

[Slide 4] If it appears that the merger is likely to substantially prevent of lessen competition it must then be determined – (i) whether or not the merger is likely to result in any technological, efficiency or other pro-competitive gain which will be greater than, and off-set, the effects of any prevention or lessening of competition, that may result or is likely to result from the merger, and would not likely be obtained if the merger is prevented, and (ii) whether the merger can or cannot be justified on substantial public interest grounds by assessing the factors set out in subsec 3 or otherwise determine whether the merger cannot be justified on substantial public interest grounds by assessing the factors set out in subsection 3:  Reasons why we could still allow this particular merger to take place  Are there reasons that could make a case for why this merger could still go through even though there is an effect on competition in the market Subsection 3 [Slide 5] The tribunal then considers the public interest grounds such as: (a) Particular sector (b) Employment (c) Ability of small businesses or firms controlled or owned by historically disadvantaged persons to become competitive; and d) The ability of national industries to compete in international markets   

The interpretation given is that even where a merger has passed the efficiency test in section 12A, it must still be considered in public interest provisions. Serves as a check to ensure the efficiencies gained align well with public interest Even if the merger has passed the efficiency test – potential effects on competition (technological etc), it must still pass the litmus test of public interest grounds

 STEP 1 Will merger affect competition – consider factors in section 12A(2)  STEP 2 Probable justifications for the merger to go take place on efficiency grounds  STEP 3 Effect the merger will have on the public – consider public interest provisions Types of merger • Small merger  Competition Commission does not need to be notified unless there’s an investigation or there are proceedings underway then the merger must be notified first  Pursuant to section 13(3) o Exception: if at the time of the merger or transaction, a firm or group of firms within the group are subject to an investigation by the Competition Commission in chapter 2, the merger has to be notified or if one of the firms is a respondent to the proceedings within matters in the tribunal then the merger might be stopped. •   

Intermediate Competition Commission must be notified Notices must be sent to trade union representing substantial number of employees If no trade unions, the employees must be notified themselves

• Merger threshold Value- wise, what would quantify a small, intermediate merger? - Small Anything under R100 million - Intermediate Target firm (one being acquired) has a value of R100 million but once it has been acquired, the combined asset value of target firm and the firm that acquired stand at R600 million - Large Target turnover or asset value of the firm being acquired is R190 million Combined value of the two firms are R2.2 billion

CASE LAW Massmart v Moresport Massmart – firm deals with different low margin items, sold clothing items as well. A range of sport and recreational goods Wanted to acquire Moresport who operated in the line of sport and recreational goods Q: What would be the effect on competition if Massmart was able to acquire Moresport? Ito the agreement, Massmart wanted to acquire 84.12% of the shares within this particular firm Looking at the transaction: Massmart was stocking a wider range of products than Moresport but the only different between the goods was the price and the perception There was a need to look at economic literature and how the transaction would pan out

Finding: parties would have a very large share of the market post- merger and that the emergent firm would be too strong because Massmart and Moresport were the two firms that were invested within the market – largest, strongest and most experienced market The way t

Iscor v Saldanha Steel IDC and Saldanha Steel owned a firm in equal shares and wanted to acquire another firm Within this particular transaction, they argued that it was simply a matter of control Argued it was simply an issue of control - they were already owners of this particular firm it was just a change in control and not an acquisition Court was of the view this was not the case more so looking at the instance that Saldanha Steel was also a potential competitor to Iscor, so once Iscor had fully acquired Saldanha, it would lead to the effective removal of the competitor although the only challenge that the location of Saldanha was very remote and that it was difficult for it to compete with the same clientele of Iscor Vertical issue: what would happen to Saldanha’s only customer Deferco Steel processing – absorbed 450 thousand of its 1 million tonnes produced yearly – would also be a condition have to be thought about Lastly, issue of failing firm defence Was Saldanha a failing firm? If so, what would be the effect if the CC didn’t allow the merger between Iscor and Saldanha Steel Questions that emerge: What is a failing firm and what is the FF defence? Why is it allowed to sanitise a merger that is otherwise deemed to have anti- competitive effects? Case is important as it sheds light on the above issues Within the 4 countries

EU and the US are more similar but the conditions in the EU are more stringent (3 requirements) Considered in case law as a practice Canada and SA Statutory but the failing firm is just a factor to be considered amongst others factors Question: theoretical framework such as in the assignment How is it applied in different jurisdictions, the developments?

Important sections 12, 13 Take Home Exam Scenario Q: Identify the type of merger – small, intermediate, large Affects type of process Whether the merger should be granted or not

Effects of merger s 12A(2) Merger has significant effect on a particular market – MTN + Vodacom effective removal of a competitor Effect of competition on prices – no longer competing can charge any prices Significant market power and market offering for customers Can change the balance of factors Issue of a failing firm 2 hours...