APPELLANTS CASE:
Mr. Kuper, who appeared together with Mr. Bhana on behalf of appellant’s attacked the reasoning employed by the Tribunal on
a number of different bases. Firstly he submitted that it was only partly correct to conclude that section 12(2) was not exhaustive
of the definition of control. He contended that section 12(2) dealt with changes that occur in the structure or shareholding of a
company or artificial person that owns a business. Where section 12(2) so legislates, it is exhaustive. Thus the threshold shareholding
that the legislature determined to be relevant for the purpose of defining the change of control was 50,1%. If the change of shareholding
was less than that threshold, such change would not be relevant in assessing any change of control. Were it intended to be otherwise
there would have been little purpose in specifying with precision the quantitative criteria specified in section 12(2)(a), (b) and
(c). Mr Kuper’s second attack was that the Tribunal had employed an overly literalist interpretation of section 12(1) in disregard
of the fact that ultimate control had not changed. To so illustrate this submission, he employed an example. Assume B(Pty) Ltd sold
its business to C(Pty) Ltd. A(Pty) Ltd held a 100% of the shares in both B(Pty) Ltd and C(Pty) Ltd. On a literal interpretation of
section 12(1), there would be a change of control. On the approach employed by the Tribunal, this transaction would entail a change
of control. Recognizing that such a transaction could not be intended to fall within section 12(1), Mr. Kuper suggested that the
Tribunal is constrained to employ a subjective test such as the single economic entity test to exclude such a transaction from the
ambit of the section. By contrast the legislature intended the section to provide for a clear ascertainable set of criteria to determine
whether the transaction was a merger for the purposes of s13.
The test of ultimate control represented such an objective, ascertainable test and obviated recourse to a subjective test such as
a single economic entity test.
Applying this test to the facts, Mr Kuper submitted that the effect of the sale of the business from second to first appellant resulted
in the transfer of the business from a firm controlled by either Rembrandt KWV Investments Limited or Rembrandt, KWV and SAB into
another firm controlled by the same company/ companies .
Mr. Kuper also referred to section 12(2)(d) of the Act in which it is provided that a holding company controls a firm if that firm
is a subsidiary of the former. No change of control had occurred by reference to this section in that the holding/subsidiary relationship
remained unchanged after the agreement of 20 September. Ultimate control remained with the same holding company.
In the alternative Mr. Kuper submitted that even if the Tribunal was correct to adopt the test of a single economic entity, it had
failed to apply the test correctly to the facts of the present case. Had it so applied the concept correctly, it would have found
that appellants together with their common controlling shareholders formed a single economic entity.
In this regard Mr. Kuper relied upon a dictum of the US Supreme Court in Copperweld Corp v Independence Tube Corp 467US752(1974) at
771, namely:
‘A parent and its subsidiary have a complete unity of interest. Their objectives are common not disparate; their general corporate actions are guided or determined not by two separate consciousness
but by one. If the parent and a wholly owned subsidiary do agree to a cause of acting, there is no sudden joining of economic resources that had previously served different interests’.
In the present case, common control of the boards of each of the appellants ensured a unity of interest. The corporate actions of
appellants were determined ultimately not by the independent actions of the two appellant companies but by the entities which control
the directors and thereby controlled their boards.
Mr. Unterhalter, who appeared on behalf of first respondent submitted that, following an application of the plain words of section
12(1), first appellant had acquired direct control over the whole of the business of second appellant. All the elements of section
12(1) were present namely first appellant was a person within the meaning of one or more persons, the assets of second appellant
constituted ‘all significant interests in the whole or part of the business the competitive, supplier, customer or other person’, first appellant acquired direct control over second appellant’s business as a result
of acquisition of the assets of second appellant pursuant to the agreement of 20 September. Thus, on a plain application of the words
of section 12(1) the transaction fell within the definition of a merger.
Mr. Unterhalter also attacked the unitary or ultimate concept of control adopted by appellants, namely once a person controls by reason
of one of the circumstances provided for in section 12(2), such control is exhaustive of the question of control and thereby precludes
any other form of control from being relevant for the purposes of s13. He submitted that this interpretation rested upon the postulate
that, if the control of the ultimate shareholders is not altered by a merger, control cannot be acquired in any other form by another
party.
Mr. Unterhalter submitted that this unitary concept of control was fundamentally flawed. If section 12(2) is dispositive of the meaning
of control, it would then contemplate that one person may control a firm by reason of the fact that such person beneficially owns
more than half of the issued share capital of the firm (section 12(2)(a)) while another person controls the firm because that person
is able to veto the appointment of a majority of directors of the firm (section 12(2)(c)). Thus on appellants very argument, section
12(2) contemplates that, at one and the same time, different persons can control the firm by reason of different powers that they
may enjoy and the recognition of one species of control does not oust the recognition of another.
Mr. Unterhalter also contended that section 12(2) did not refer to a change of control but simply defined the circumstances in which
a person controlled a firm. According to this submission, there was nothing in the language of section 12(2) which suggested that
once control resided with a person for the purposes of the sub-section, that for the purposes of s13, all questions of control had
been determined. On the contrary, section 12(1) refers to the acquisition or establishment of control “by one or more persons” It was clear that section 12(1) provides a general definition of a merger and refers to a general concept of control. Section
12(2) does not exhaustively provide for circumstances in which a person acquires or establishes control but simply tabulates circumstances
in which a person is deemed to control the firm. Accordingly, section 12(2) does not operate to define circumstances which exclude
the notion that other persons may acquire or establish control nor does it define how a change of control might take place.
On the basis of this argument, the proper relationship between section 12(1) and 12(2) can be defined thus: section 12(1) refers to
the means by which control can be achieved. S12(1)(c) provides examples of a residual class by which control may be achieved. This
is indicative of and indeed, supportive of the general provision. Put another way, section 12(2) then instances circumstances of
control but does not define nor limit the circumstances in which a person may acquire of establish control over a firm.
On this line of argument, in the case where a parent company makes use of a subsidiary company to acquire the assets of another business,
there will simultaneously be a direct acquisition of control of the subsidiary over the business so acquired and an indirect acquisition
of control by the parent company. Section 12(1) refers to both indirect and direct acquisitions of control and thus recognizes different
but complementary ways in which control can be acquired. The indirect acquisition of control by the parent company as a shareholder
of the subsidiary does not exclude the direct acquisition by the subsidiary over the assets of the business in question. For this
reason, section 12(1) does not envisage a unitary concept of control.
Applying this approach to the facts of the present dispute, Mr. Unterhalter submitted that, prior to the transaction, the shareholders
of first and second appellant exercised indirect control as shareholders over the assets of these two companies. The effect of the
merger was that first appellant acquired direct control over the assets of second appellant. The acquisition by first appellant of
the assets of second appellant constituted an acquisition of direct control by first appellant as between first and second appellant
whether or not this transaction disturbed the control which the shareholders of first and second appellant may have continued to
exercised. Thus, the acquisition falls within the meaning of section 12(1).
Mr. Newdigate, who appeared together with Mr. Butler on behalf of second respondent , submitted that the argument of appellant had
failed to take account of the very facts of the case. There was no evidence to the effect that the shareholders of first and second
appellants had in fact exercised control over the business of the companies. To the contrary, it was common cause that, prior to
the transaction, appellants were separate companies, each having its own board of directors with the usual fiduciary duties towards
the particular company of which they were directors. Each company was listed separately on the JSE. Each company competed with the
other in various areas of the liquor industry. As an illustration of their operational practice, he referred to a circular to shareholders
dated 21 October 1988 in which CWD set out proposals for the separate listing of CWD to be renamed second appellant and OMG to be
renamed first appellant where the following appeared: ‘Since its establishment in 1979 it has been Cape Wines firm policy that SFW and OMG operate as completely separate and competing
companies. Each handles its own production, marketing and distribution and under separate directors and management they compete with
all other producers in the market as well as each other. This policy stimulates healthy competition between SFW and OMG and the industry
as a whole to the advantage of the public and the industry. The board of Cape Wine wishes to ensure that this position be further
strengthened and has consequently decided to implement the proposals as set out in this circular.”
The circular further stated that ‘shareholders in Cape Wine will not be affected in any way in that their shareholdings in Cape Wine will be replaced by identical shareholdings
in both SFW and OMG (via Distillers). This will afford shareholders the opportunity of assessing the performance of both companies
in a competitive environment’.
According to Mr. Newdigate these facts supported the argument that the shareholding of company A in company B did not exclude the
acquisition of control of company B over the assets or interest of another company or entity. This would only occur, hypothetically,
in the extreme example of the directors of company B being no more than puppets of company A who do its bidding without regard to
the separate existence of company B or their fiduciary duties to it.
The approach to ss12 and 13
Chapter 3 of the Act deals with merger control. Section 11 empowers the Minister to determine the threshold for the classifications
of mergers as either being large or intermediate which, in turn, regulates the size of the transaction which requires scrutiny by
the Commission, Tribunal or Minister.
Section 13 obliges any party to an intermediate or large merger (as defined in terms of section 12) to notify the Competition Commission
of that merger within the prescribed period. Section 14 empowers the Competition Commission to consider and approve such a merger
save in the case of a large merger, as defined, where it must refer that notice to the Tribunal or the Minister and within the prescribed
period must forward a recommendation as to whether the implementation of the merger should be either approved, with or without conditions,
or prohibited.
Section 16 provides that, whenever required to consider a merger the Competition Commission or, where applicable, the Tribunal must
initially determine whether or not the merger is likely to substantially prevent or lessen competition. A set of factors are then
set out in section 16(2) which serve as guidelines in terms of which the Commission and Tribunal must assess whether or not a merger
is so likely to substantially prevent or lessen competition. The factors listed in section 16(2) would appear to include a transaction
between a holding and two subsidiary companies where such a transaction is likely to exhibit any of the factors listed in s16(2)
such that the consequences of the transactions may prevent or lessen competition in a particular market. Such a transaction may remove
an effective competitor in the relevant market and give rise to higher levels of concentration or increase the danger that barriers
the entry in the market are extended.
The applicable sections of the Act thus provide a clear indication of the purpose of chapter 3, namely that transactions which are
likely to substantially or lessen competition should be carefully examined by the competition authorities. This interpretation is
supported by the preamble to the Act which provides, inter alia, that the Act ‘restrain particular trade practices which undermine a competitive economy and establish independent institutions to monitor economic
competition’. Section 2 of the Act provides that the purpose of the Act is to promote competition in the Republic. It follows that the Act was
designed to ensure that the competition authorities examine the widest possible range of potential merger transactions to examine
whether competition was impaired and this purpose provides a strong pro-pointer in favour of a broad interpretation to section 12
of the Act.
By contrast, appellants contend for a narrow interpretation of the definition of merger. The basis of their argument is that when
section 12(1) refers to “the direct or indirect acquisition or direct or indirect establishment of control” it refers exclusively to ultimate control. Unless ultimate control changes as a result of the transaction in question, such
a transaction falls outside of the scope of section 12 and accordingly the provisions of section 13 are inapplicable. It follows
that on the basis of this argument, only one form of a control is relevant, being ultimate control.
Such an interpretation is not mandated by the express wording of section 12(1). To the contrary, section 12(1) makes no express provision
for the exclusion of transactions between a company and its wholly owned subsidiary, from the definition of merger.
The wording of section 12(2), clearly contemplates a situation where more than one party simultaneously exercises control over a company.
This situation can be illustrated with the following example:
A beneficially owns more than half of the issued share capital of the firm. He concludes an agreement with B in order that the latter
may run the business. B agrees provided that he obtains control over the appointments to the board of directors as well as of senior
staff and marketing policy. In such a situation A would control the firm as defined in terms of section 12(2) (a) and B would exercise
control as defined in term of section 12(2)(g). In short, while A would have ultimate control, B would have control of a sufficient
kind to bring him within the ambit of control as defined in section 12.
A similar example to be found in Richard Whish Competition Law (4th edition) at 746 namely: ‘were one undertaking acquires more than 50% of the voting capital of another, this would normally give rise to sole control unless,
for example, the shareholders agreement gave the minority shareholder(s) joint control with the majority shareholders, for example,
through rights of veto”.
As Whish notes at 742 “merger control is not, or not only, about preemptively preventing a merged entity from abusing its dominant provision in the future;
it is also about maintaining a market structure that is capable of producing the kind of outcome that follow from competition.”
For this reason 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 reduces the
level of competition in the relevant market.
The facts in the present provide a good illustration of the importance of such a conclusion to the purpose of the Act in general and
chapter 3 in particular.
Prior to the proposed merger, appellants were separately listed on the JSE. They were separately legal entities, controlled by different
boards of directors and had totally separate operating structures.
When the proposed merger was announced, Mr. Scannell, the managing director of first appellant issued a statement on 11 October 2000
in which he said that the marketing administration, IT and sales operations of the two companies would first be merged into a single
structure. He then went on to state that the merging of the production bottling and distribution activities could take at least take
18 months to complete.
At best for appellants case, prior to the transaction, the shareholders of appellants might have exercised indirect control over the
assets of the two companies. The effect of the transaction was that first appellant acquired direct control over the assets of second
appellant and that two distinct business would effectively be merged into one. Thus, the acquisition of the assets by first appellant
would bring about the acquisition of control as between first appellant and second appellant, irrespective of what effect the transaction
itself might have on the ultimate control that the shareholders of the two appellants exercised.
For this reason, the transaction falls within the meaning of section 12(1) in that there was an acquisition of control pursuant to
a transaction by which first appellant acquired the assets of second appellant. Accordingly appellant were required to provide notification
in terms of section 13 of the Act.
For these reasons the appeal is dismissed with costs, such costs in the case of second respondent to include those of two counsel.
__________________
DAVIS, JP
Selikowitz AJA and Mailula A JA concurred.
