ARTICLES

The battle for truth: Control and non-voting preference shares

Daryl A Dingley^I; Phumlani MP Ngcongo^I; Paul BJ Farlam^II; Jeremy C Marwell^III

^ICompetition Law Department, Webber Wentzel
^IIHigh Court of South Africa

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Endnotes
JEL: G34, L41
1 [2006] 1 CPLR 410 (CT), Case No. 05/X/Jan06; judgment handed down on 15 March 2006 (per Reyburn TM, Lewis TC and Bhoola TM concurring).
2 At par. 8.
3 At paragraph 60 of its determination.
4 If there is not considered to be a merger for competition purposes when the preference shares are first acquired, there can be little question that there would be a direct or indirect acquisition of control when voting rights are acquired with respect to those preference shares as a result of a default. That scenario accordingly need not be addressed.
5 [2001]-[2002] CPLR 36 (CAC) at 43j.
6 Henochsberg on the Companies Act at 170.
7 See s 75(1)(i) of the Companies Act, a section which deals with the power of companies to alter their "share capital".
8 See s 194 of the Companies Act.
9 See items 8(c) and 37(c) of Schedule 3 and items 8 and 9 of Schedule 4.
10 Vol 1 at 5-175.
11 Par. 47.
12 Par. 47.
13 Regarding the test for simulated transactions, see Zandberg v van Zyl 1910 AD 302 at 309 and Erf 3183/1 Ladysmith (Pty) Ltd v CIR 1996 (3) SA 942 (A) at 952C.
14 Par. 44.
15 This accords with what the Tribunal said in the Ethos case at paras 37-42, commenting on the impracticality of requiring the Commission to enquire into every change in shareholder relations, an observation made in the context of arrangements between shareholders pertaining to voting.
16 [2003] 2 CPLR 371 (CT) at par. 32.
17 [2004] 1 CPLR 217 (CT) at par. 29.
18 At par. 30-31.
19 The Ethos case at par. 35, 42, and Caxton v Naspers at par. 43.
20 Par. 52.
21 See 46b.
22 See also the comments of Davis JP in Distillers at 46f: "the purpose of merger control envisages a wide definition of control, so as to allow the relevant competition authorities to examine a wide range of transactions which could result in an alteration of the market structure and in particular reduce the levels of competition in the relevant market".
23 At par. 29, in the passage quoted above.
24 See also Distillers at 46e, where Davis JP quotes from Richard Whish (Competition Law 4ed at 742) to the effect that "merger control is not, or not only, about pre-emptively preventing a merged entity from abusing its dominant position in the future; it is also about maintaining a market structure that is capable of producing the kind of outcome that follows from competition."
25 At par. 63.
26 Par. 64.
27 See Practitioner Update issue The Application of the Merger Provisions of the Competition Act 89 of 1998, as amended, to Risk Mitigation Financial Transactions ("The Financial Transactions Practitioner Update"). However, this provision is similar to Article 3(5) of the Council Regulation (EC) No. 139/ 2004 of 20 January 2004 on the Control of Concentrations between Undertakings [OJ 2004, No. L 24/ 1] ("the Merger Regulations"), which provides that
A concentration shall not be deemed to arise where: (a) credit institutions or other financial institutions or insurance companies, the normal activities of which include transactions and dealing in securities for their own account or for the account of others, hold on a temporary basis securities which they have acquired in an undertaking with a view to reselling them, provided that they do not exercise voting rights in respect of those securities with a view to determining the competitive behaviour of that undertaking or provided that they exercise such voting rights only with a view to preparing the disposal of all or part of that undertaking or of its assets or the disposal of those securities and that any such disposal takes place within one year of the date of acquisition; that period may be extended by the Commission on request...
28 Published in [1989] OJ C66/5.
29 Article 3 of the Merger Regulations provides that a concentration occurs pursuant to an acquisition of control. Article 3(2) of the Merger Regulations provides guidance on the meaning of control, stating inter alia that ".control shall be constituted by rights, contracts or any other means which, either separately or in combination and having regard to the considerations of fact or law involved, confer the possibility of exercising decisive influence on an undertaking, in particular by: (i) ownership or the right to use all or part of the assets of an undertaking; (ii) rights or contracts which confer decisive influence on the composition, voting or decisions of organs of an undertaking".
30 ICI/ Tioxide [1991] 4 CMLR 792.
31 Case M.259 (Dec. of 27 November 1992).
32 See 15 U.S.C. §§ 1-7.
33 See 15 U.S.C. §§ 12 - 27, 29 USC. §§ 52 - 53.
34 See 15 U.S.C. § 18a.
35 15 U.S.C. § 18.
36 This paragraph and the following paragraph draw on Kenneth R. Logan & Jack D'Angelo, US Merger Control, Mar. 3, 2003, available at http://www. stblaw.com/content/Publications/Publication14_0.pdf.
37 15 U.S.C. § 18a(a).
38 Id. § 18a(b)(3)(A) (emphasis added).
39 Id. § 18a(c)(2).
40 15 U.S.C. § 18 (emphasis added).
41 387 U.S. 485, 501 (1967).
42 353 U.S. 586, 606 (1957).
43 United States v E.I. du Pont de Nemours & Co., 366 U.S. 316, 331 (1961) (du Pont II).
44 Id. at 331-332.
45 426 F.3d 850, 861-62 (6th Cir. 2005).
46 426 F.3d at 861-63.
47 426 F.3d at 862.
48 (supra) at par. 36-37.
49 See also Caxton v Naspers (supra) at paras 42, 44 & 45; Brassey et al Competition Law 2002 p. 239.
50 See Iscor Limited and Saldanha Steel (Pty) Ltd (67/LM/Dec01.
51 European Commission IV/M0023, decision of 28 November 1990.
52 At par. 60 of its determination.
53 There are a number of contextual considerations that favour this view: (i) Section 12(1)(b) refers to the manner of "achieving" a merger, and all the forms given as examples in s12(1)(b) are instances of bilateral or multilateral transactions. (ii) The Competition Act throughout speaks of the "parties" to a merger. (iii) With reference to mergers, the Competition Act defines the terms "acquiring firm" and "target firm". These definitions are based on the acquisition or establishment of control "as a result of a transaction in any circumstances set out in s12". (iv) In regulating the important aspect of retrospectivity, the legislature in items 4A to 4C of schedule 3 refers to the date on which a "transaction" takes place, and envisages that it is the "transaction" which is notifiable. (v) The Competition Act prohibits the parties to a merger from "implementing" it pending approval (s13A(3); cf s13(4)). This means that a "merger" must be something which exists and can be identified separately from its implementation. In other words, a "merger" is not the factual acquisition of control. It is the transaction pursuant to which control (perhaps at a later time) is acquired.
54 Cf. Ethos at par. 41.
55 See The Financial Transactions Practitioner Update.
56 See endnote 32 hereof and accompanying text.