Clarity on merger rules in South Africa for ‘internal restructuring’

Under the proposed guidelines, transactions between parent companies and their wholly-owned subsidiaries within the same group, known as ‘purely internal’ transactions, are excluded from merger notification. This is the case, notwithstanding the observation by the Competition Appeal Court that internal restructurings are not expressly excluded from constituting a merger under South Africa’s Competition Act.

However, restructurings involving external minority shareholders could trigger the requirement for notification to the South African competition authority.  The draft guidelines distinguish between minority shareholders with and without control rights. Minority shareholders’ control rights, such as veto powers over strategic matters like the approval of annual budgets or hiring of executive management, are a key consideration for the Commission.

Minority veto rights for purposes of investment protection, such as changing the share capital or incurring of debt are not a concern to the Commission unless they confer control over the target company. Accordingly, restructurings involving external minority shareholders without control rights will not require notification. However, where external minority shareholders with control rights are involved, and these rights are altered by the proposed intra group transaction, then notification may be required.

Competition law expert Anthony Crane of Pinsent Masons in Johannesburg said: “The draft guidelines are an important move towards providing clarity and certainty for merger notifications related to internal restructurings, aligning South African competition law with international best practices.”

Paragraph 6.2 of the draft guidelines outlines the approach the Commission will generally adopt when assessing whether a transaction constitutes an internal restructuring and changes the control rights of external minority shareholders, thus requiring notification under the Competition Act. It highlights three main factors the Commission will examine in their assessments.

Firstly, the commission will look at whether the proposed restructuring results in a change or acquisition of control, and if this change affects the control rights of external minority shareholders. If so, the parties should notify the Commission.

Secondly, when the restructuring results in a loss or gain of any form of negative control by a shareholder who is part of the group of companies, it usually triggers the need for merger notification. Finally, the Commission will evaluate if there is an external shareholder with minority rights that confer control, such as veto rights, in one or more firms within the group. If the restructuring changes these control rights, notification may be required.

The use of the words ‘change’ and ‘loss’ of control will undoubtedly raise concerns, as they suggest that an internal restructuring may be classified as a notifiable merger without any enquiry as to whether control has been established or acquired, as required under the Competition Act.

“Assessing the control rights of minority shareholders and the impact of restructurings on these rights can be complex. While any guidelines finalised and published by the Commission will not be binding, the  final stance adopted by the Commission could influence how businesses structure their groups, and potentially reduce regulatory hurdles for businesses engaging in internal restructurings,” said Crane.

Caroline Bergmann of Pinsent Masons added that although the guidelines provide an indication of how the Commission will interpret internal restructurings within corporate groups, firms should take note that the Commission still has a discretion to consider other factors which do not appear in the guidelines on a case by case basis.

“If firms fail to notify the Commission of an internal restructure which the Commission deems as having been notifiable, they firms may be liable for a penalty of up to 10% of their annual turnover in South Africa during their preceding financial year,” she said.

The draft guidelines by the South African competition authority are still being finalised, with 21 February the closing date for comments from interested parties.