There is a tension between the interests of the Competition Commission and commercial entities involved in merger transactions. For various policy reasons, the Commission is eager to cast its net wide and consider and investigate as many merger transactions as possible. Commercial entities, on the other hand, would prefer not to have to jump through the regulatory hoops required by a merger notification and would just like to get on with the business of deal making. Therefore, the recent attempt by the Commission to have a small merger classified as a large should be of concern to business. Fortunately, the decision of the Competition Tribunal in Tiger Equity Proprietary Limited and Murray & Roberts Proprietary Limited v Competition Commission, Case No. 019174 provides some welcome certainty on this issue.
The Commission is the regulatory body tasked with the consideration and investigation of mergers. However, the identity of the ultimate decision making body, and even whether a particular transaction requires notification in the first place, is determined with reference to the merger filing thresholds. Clearly, therefore, how a merger is classified has important consequences for the merging parties and the Commission alike, not only for whether a notification is required or whether the Commission or the Tribunal will have jurisdiction over the approval of the merger, but also for whether or not a merger filing fee is payable, the size of such fee, and the time period in which the Commission has to consider the merger.
The divergent interests of the Commission and merging parties has most recently been observed in the Tiger Equity Case. Briefly, the case involved the acquisition of Tolcon Proprietary Limited by Tiger Equity One Proprietary Limited. Initially, the merging parties filed the transaction as an intermediate merger. However, at the time the shareholders’ agreement in respect of Tiger Equity had not yet been completed and the Commission therefore requested that the merging parties file the merger once the shareholders’ agreement had been finalised. The merging parties accepted this and upon finalisation of the shareholders’ agreement, filed the transaction as a small merger. The merging parties contended that Tiger Equity was a shelf company created for the purpose of the transaction and as such it did not have sufficient assets or turnover at time of notification to meet the lower merger threshold. Furthermore, the merging parties contended that given its shareholding structure, Tiger Equity was not controlled by any shareholder. The merging parties voluntarily filed the transaction as a small merger in accordance with the Commission’s small merger guidelines because the seller, Murray & Roberts Proprietary Limited, was the subject of an investigation pertaining to possible collusion.
The Commission did not share the merging parties view and, having reviewed Tiger Equity’s shareholders’ agreement, concluded that Tiger Equity was jointly controlled by all its shareholders. The Commission concluded that the merging parties had incorrectly classified the transaction as a small merger when in fact it was large and served the merging parties with a Notice of Incomplete Filing.
The merging parties therefore brought an application to the Tribunal to have the Notice set aside and have the Tribunal confirm that the merger was indeed a small merger, which the Commission opposed. In arguing its case, the Commission relied on certain provisions of the Tiger Equity shareholders’ agreement. The shares in Tiger Equity are held by six shareholders, with shareholdings ranging from 5% to 28%. The shareholders’ agreement provided that each shareholder was entitled to appoint one director to the board. Such director would vote in the same proportion as the appointing shareholders’ equity in Tiger Equity. The same would apply to voting at shareholders’ meetings. Most decisions of the company would be made by ordinary resolution with a requisite majority of 50%, although some decisions would need to be passed by a special resolution with a requisite majority of 70%.
Relying on the fact that certain strategic decisions required a special resolution to be passed, the Commission argued that all the shareholders jointly controlled Tiger Equity. However, the Tribunal found that as the requisite majority to pass a special resolution was 70%, none of the shareholders had the ability to veto the passing of such a resolution (since the largest shareholder held 28%) and in this way ‘control’ Tiger Equity.
The Tribunal did recognise that an alliance between two or more of the shareholders could result in the ability to jointly veto the passing of a special resolution which could result in such shareholders being seen as joint controllers of the company. However, the Tribunal found that the Commission incorrectly relied on the fact that the shareholders’ agreement had established a common strategic direction between all signatories thereto. The Tribunal went on to say that “there needs to be something more to glue the respective shareholders together, than this limited agreement”.
The Tribunal found that as the Commission had only relied on the shareholders’ agreement as proof that the shareholders were acting together and had led no further evidence to show that there was a coalition between the shareholders of Tiger Equity, such shareholders could not be considered to control Tiger Equity. Their financial information therefore did not need to be included in the threshold calculation and the transaction was confirmed as a small merger.
This decision provides valuable guidance where a consortium of shareholders acquires a company based on a coalition between them and such coalition controls the target firm. Importantly, for the purpose of determining control and for the calculation of merger filing thresholds, there is no legal presumption that the shareholders of a company jointly control the company. The onus will be on the Commission to prove that a coalition exists between the shareholders that results in joint control.