On Friday 10 April 2015, the Competition Commission (the “Commission”) amended its Practitioner Update on risk mitigation financial transactions (“Practitioner Update 4”) following its earlier amendment to its Practitioner Update on asset securitisation schemes (“Practitioner Update 5”).
The Commission has articulated its expectation that these amendments will contribute towards the lowering of transaction costs in respect of risk mitigation financial transactions and asset securitisation schemes.
Practitioner Updates provide guidance on the Commission’s likely approach to policy matters, but are not binding on it or other competition authorities.
Section 12(1)(a) of the Competition Act defines a “merger” as occurring 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.
Risk mitigation financial transactions can result in the acquisition of an interest in the assets or the business of another company at the time of sale and/or upon default by such firm. Similarly, asset securitisation schemes legally isolate assets from the institution that transferred the assets, such that the assets and benefits thereof are placed beyond the reach of the transferring institution.
If the interest acquired by the financier / provider of funding is a controlling one, risk mitigation financial transactions technically fall within the ambit of the merger control provisions. Similarly, the special purpose vehicle in a securitisation may acquire control over the transferred assets. Where the monetary merger thresholds are met, notification to and approval by the competition authorities of these risk mitigation financial transactions and asset securitisation schemes would be required.
This creates a regulatory and financial burden for banks and other financial institutions seeking to mitigate their risk through the acquisition of control of the debtor’s assets or business, as well as those involved in asset securitisation schemes. It also burdens the competition authorities, which are required to analyse every merger notified to them.
Practitioner Update 4
The Commission has indicated that it does not wish to burden itself and the parties involved in risk mitigation financial transactions and asset securitisation schemes in the ordinary course of business in regulating such transactions and agreements. The Commission highlights that it could not have been the intention of the legislature to include risk mitigation transactions, entered into within the ordinary course of business, to fall within the ambit of the merger provisions. Importantly, if a bank or state-owned enterprise intends holding the asset permanently or for a longer period of time, the exemption will not apply.
Prior to the amendment of Practitioner Update 4, only registered banks engaging in risk mitigation financial transactions which acquired control over the whole or part of the business of the debtor upon default were exempted from notifying the acquisition of control (the merger) to the Commission, provided that the bank disposed of the assets or its interest in the business of the debtor within twelve months from the date of the acquisition.
In terms of the amendment to Practitioner Update 4, state-owned finance institutions authorised to provide finance in the ordinary course of business will now also be exempt from notifying such transaction, and the twelve months period for the disposal of the assets or the business of the debtor will be extended to twenty-four months. The following classes of transactions are included: (i) the general exercise of a security interest; (ii) sale and leaseback transactions; and (iii) Government concessions in infrastructure development.
The Commission has indicated that the failure to notify the transaction upon expiry of the twenty-four months period will be construed as an implementation of a merger without competition approval and, as a result, may attract an administrative penalty of up to 10% of turnover of the merging parties. However, parties may apply for an extension of the twenty-four month period, provided they show a substantial basis for non-disposal of the asset or control over the firm in question.
Practitioner Update 5
The Commission accepts that Special Purpose Institutions (“SPI”) that acquire control through assets securitisation schemes cannot enjoy a competitive position, due to the limitations imposed upon it, and asset securitisation schemes would thus not likely have any impact on competition (this gives rise to the question as to whether the definition of a merger is properly met in the case of asset securitisation schemes, but the issue is not considered by the Commission in the Practice Notes).
Prior to the amendments, Practitioner Update 5 exempted registered banking institutions from notifying acquisitions of control over the whole or part of another business, when such acquisitions of control arose from asset securitisation schemes.
A securitisation scheme is defined in the update as “a scheme whereby a SPI issues commercial paper and where the payments by the SPI in respect of the commercial paper so issued are made from the cash flows arising from or proceedings derived from the assets, consisting of claims sounding in money, transferred to such SPI by an originator, remote originator or repackager”. In a securitisation scheme, the transfer of assets to the SPI, may result in the SPI acquiring control over “part of the business of another firm” and may therefore constitute a merger as contemplated in section 12 of the Competition Act.
In terms of the amendment to Practitioner Update 5, the Commission has extended the exemption from the merger provisions of the Competition Act to asset securitisation schemes entered into by non-banking institutions, provided the asset securitisation scheme is in accordance with the South African Reserve Bank’s regulations. The purpose of this amendment to Practitioner Update 5 was to, inter alia, align the Commission’s policy approach to the current regulatory framework governing asset securitisation.