The Hidden Merger

What is a merger?

Section 12(1)(a) of the Act provides that a merger takes place "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." This definition makes it clear that “control” is the central consideration in determining whether a transaction is a merger, whether direct or indirect, overt or subtle. Such control can arise from shareholding, voting power, or the ability to influence a firm’s strategic direction behind the scenes.

Section 12(2) of the Act expands on this by setting out a non-exhaustive list of control indicators. These include owning more than 50% of the issued share capital of a firm, controlling the majority of voting rights, having the power to appoint most of its directors, being a holding company, or, in the case of a trust or close corporation, being able to control trustee decisions or members' votes. It also includes having the ability to materially influence the firm’s policy in a manner comparable to the listed forms of control.

The Guidelines seek to clarify how this broad legal framework applies to internal restructurings, particularly where such transactions might appear, on the surface, to be purely administrative or internal. While many internal restructures do not fall within the ambit of merger regulation, some may meet the legal definition of a merger and thereby trigger notification obligations.

What is internal restructuring?

Internal restructuring refers to a transaction or series of transactions within a group of related or commonly controlled entities. These transactions typically involve the transfer of assets, shares, or control between entities within the same corporate group. They are usually intended to reorganise internal structures or operations, without affecting ownership or control by outside parties.
However, internal restructurings are not automatically exempt from merger notification. Where they result in a change in control, even subtly, they may still require notification to the Commission.

How does the Commission assess whether an internal restructuring requires notification?

In determining whether an internal restructuring gives rise to a notifiable merger, the Commission focuses primarily on whether the transaction results in a change in control. While majority control is a key focus, the Commission also scrutinises more discreet shifts in control, particularly where external minority shareholders are involved.

Even where the overall ultimate control remains unchanged, a transaction may be notifiable if it alters the control rights of external minority shareholders. The Guidelines set out its approach to assist legal practitioners and companies in assessing whether notification may be required:

1. Whether the proposed restructuring would amount to a change of control as contemplated in section 12(2)(a) to (g) of the Act, thereby affecting the control rights of minority shareholders;
   
   
2. Whether the restructuring results in the loss or gain of any form of negative control by a shareholder who is not part of the group of firms. Negative control refers to the ability of a minority shareholder to block or veto certain strategic decisions, effectively giving them a measure of control; or
   
   
3. Whether there is an external shareholder with control-conferring rights (such as veto rights) whose influence would be diminished or removed by the transaction.

Why is the Commission concerned about minority shareholders with control rights (effectively negative control)?

The Commission's mandate to safeguard competitive markets extends beyond simply identifying dominant markets. It also requires assessing whether any transaction shifts meaningful decision-making power in a way that could harm competition or unfairly impact stakeholders. Minority shareholders who hold control rights can exercise real influence over critical decisions, such as board appointments, budget approvals, or major investments.

These control rights serve as checks and balances within the governance framework of a firm. If they are diluted or removed through a restructuring, the competitive landscape may be altered. Additionally, because such minority shareholders are external to the group undertaking the restructuring, the loss of their control rights is treated as a change in control.

The Commission is particularly wary of internal transactions that may, on paper, appear administrative but in effect lead to hidden shifts in power. For example, what might innocently appear as transferring assets from one subsidiary to another could reduce a minority shareholder’s veto rights, effectively changing the firm’s decision-making dynamics and shifting the balance of power.

For this reason, the Guidelines emphasise that internal restructurings must not alter the control rights of external minority shareholders, in order to remain outside the scope of the merger notification requirements. Where such rights are affected, notification is likely to be required.
Overall, the Commission acknowledges that internal restructurings are not uniform. Each transaction must be assessed on a case-by-case basis, with particular attention paid to the practical impact on control and influence within the affected entities.

As South Africa’s competition landscape evolves, clear guidance on internal restructurings is vital. From minor intra-group changes to complex reorganisations, Eversheds Sutherland can help you navigate the process.