By Ettienne Carstens, Associate – Competition Law
In media statements released by the Competition Commission (“Commission”) on 23 September 2022 and 28 September 2022, the Commission reiterated its concerns that potential anti-competitive acquisitions in the digital or technology markets may escape regulatory scrutiny. These concerns emanate from such acquisitions usually taking place at an early stage in the life of the target companies. This results in target companies not having generated sufficient turnover or assets for purposes of monetary thresholds which would trigger mandatory merger notification in terms of the Competition Act, Act 89 of 1998 (the “Act”).
In terms of the Act, the monetary thresholds for intermediate mergers are:
- The asset value or turnover of the transferred firm must be at least R100 million; and
- The combined asset value or turnover of the transferred firm and acquiring firm must equal or exceed R600 million.
For large mergers, the above thresholds are raised to R190 million (in relation to 1 above) and R6.6 billion (in relation to 2 above).
The Commission is concerned that a digital or technology company in its early stages may not breach these thresholds, escaping mandatory merger notification, even though the shares in the company may be valued in excess of such thresholds, taking into consideration the “… future value of the concept, technology, intellectual property or skills of the target firm.”
According to the Commission, acquisitions of this nature may substantially prevent future competition or lessen competition where such acquisition strengthens the portfolio of dominant companies. The dominant companies in question need not be classified or be operating in the digital markets.
Criteria for when a small merger should be notified
Parties to a small merger must inform the Commission if, at the time of entering into the transaction, any firm involved in the merger, or firms with their group:
- are subject to an investigation by the Commission in terms of Chapter 2 of the Act; or
- are respondents to pending proceedings referred by the Commission to the Competition Tribunal in terms of Chapter 2 of the Act.
The Commission also requires to be informed of all small mergers and share acquisitions where the acquiring firm’s turnover or asset value alone exceeds the large merger threshold (which is currently R6.6 billion), and at least one of the following criteria in respect of the target firm is met:
- the consideration for the acquisition or investment exceeds the target firm asset or turnover threshold for large mergers (which is currently R190 million); or
- the consideration for the acquisition of a part of the target firm is less than the R190 million threshold, but the target firm is effectively valued at R190 million or more.
Procedure for notification
Even though small mergers do not require mandatory notification, section 13(3) of the Act allows the Commission to require parties to a small merger to notify the Commission thereof for up to six months after the small merger has been implemented.
In the media statement of 23 September 2022, the guidelines published by the Commission stated that parties to a small merger, which satisfies the above criteria, are advised [own emphasis] to inform the Commission in writing of their intention to enter into the transaction. However, the media statement that followed on 28 September 2022 replaced “advised” with “must”, which may now place an obligation on parties to a small merger which meets the above criteria to inform the Commission of their intention to enter into the transaction.
The notice to the Commission need not comply with the prescribed manner and form for mandatory merger notification forms, however, it requires the reporting of certain fundamental elements.
The Commission will then reply in writing to the parties within a period of 30 business days and inform them whether they would be required to notify the small merger in the prescribed manner and form, in terms of section 13 of the Act.
The guidelines will have an impact for large firms which intend on expanding their portfolio into the digital or technology market by acquiring or investing in small digital or technology companies. It is clear from the guidelines that the acquiring firm need not be classified or operating in the digital market.
The approach by the Commission is in line with other merger control regimes, where start-up technology companies are acquired by large firms which escapes merger control scrutiny due to target firms’ size, after which the target firm expands into a powerhouse in the digital or technology markets. This results in anti-competitive effects since large firms expand their dominance in the respective economies.
It is advised that parties to a small merger enlist the advice of experts prior to entering into small mergers with digital or technology companies in order to ensure compliance with the guidelines.