In the recent merger involving Tiger Equity and Murray & Roberts (Tiger Equity), the Competition Tribunal held that a SPV owned by six minority shareholders, none of which owned a stake exceeding 28% (the equity spread was 9%, 6%, 5%, 26%, 26% and 28%) is not jointly controlled as was contended by the Competition Commission.
Under the merger control provisions of the Competition Act, the identity of the controllers of a business is relevant for two purposes: (1) to determine the classiﬁcation of the merger as small, intermediate or large; and (2) to identify and deﬁne the scope of the competition impact of the merger.
In Tiger Equity, the Memorandum of Incorporation and Shareholders Agreement entitled each shareholder to appoint a director to the board of the SPV, with a voting entitlement in proportion to the appointing shareholder's equity. The business of the SPV was determined by an ordinary majority, but certain governance issues required a voting majority of no less than 70%. The spread of the shares was such that: (1) no two shareholders could achieve the 70% vote; (2) any two of the three larger shareholders could determine the ordinary business of the SPV; and (3) no single shareholder could block an ordinary or special resolution. Nothing obliged the shareholders to work together in respect of the business of the SPV.
The Tribunal conﬁrmed the possibility that all the shareholders of the SPV may vote together, but absent an agreement to do so, is not sufﬁcient to constitute joint control. Joint control can also not be inferred merely because a special majority on the SPV's governance had been arranged. This is in line with the approach of the European Union (EU) that "the possibility of changing coalitions between minority shareholders will normally exclude the assumption of joint control".
Interestingly in Tiger Equity, the 28% shareholder of the SPV was a subsidiary of the ﬁnancier of all of the shareholders' loans and the guarantor to the seller of the target ﬁrm. The 28% shareholder also held a signiﬁcant minority stake in each of the holders of a 26% stake in the SPV. The question on whether this may constitute sufﬁcient material inﬂuence over the SPV to constitute control as meant under section 12(2)(g) of the Competition Act was neither considered nor decided by the Tribunal. However, the Tribunal's mention of this set of facts, points to a keen awareness that such structural and ﬁnancial linkages may have competition relevance.
A decade ago, in the merger involving Business Venture Investments and Afrox, the Tribunal cast a prospective minority shareholder as a controller of the target company, where the minority shareholder had the right to appoint legal and other advisors to transaction; was a grantor of the loan capital had the right to appoint legal and other advisors to transaction; was a grantor of the loan capital and had control over key competitive, ﬁnancial and operational decisions.
The decision of the Tribunal in Tiger Equity is to be welcomed in that it focussed on the actual facts of the matter in determining the identity of the controller of a ﬁrm, as well as providing some insight on the importance for business and advisors being vigilant of changes in the governance structure of a ﬁrm, which may have relevance under the Competition Act.