“The purpose of this letter is also, as a courtesy, to inform you that Edcon has, as a separate agreement with the liquidators, agreed
to purchase the book debts (“book debts”), that is the claims against trade debtors, of Retail Apparel (Pty) Ltd and
certain of its subsidiaries. This sale has been concluded in advance of the proposed merger and will be implemented immediately and
was necessitated by the fact that Edcon’s ability to recover the book debts is entirely dependent on it being afforded the
opportunity as a matter of urgency. The sale of the book debts is not dependent on the proposed merger, will be implemented even
if the proposed merger does not proceed and therefore does not form part of the proposed merger. As such, Edcon’s purchase
of the book debts does not constitute a merger or part of a merger and does not require approval in terms of the Competition Act.
Edcon’s purchase of the book debts is akin to a situation in which a creditor discounts its book debts to a financier.”
9.
The Commission did not respond to the letter. The parties proceeded to implement the first leg and, in due course, notified the second
as an intermediate merger on 25 July 2002. At that stage the Commission queried the notification. It contended that the bifurcation
sought to be achieved by the agreement was artificial, and that there had been a single transaction, which included the first leg,
and hence, with the added attributable turnover, constituted a large, not intermediate, merger. The parties then conceded this point
and notified both legs of the transaction as a large merger. They did so on a without prejudice basis in order, they allege, to expedite
clearance. The Tribunal considered both legs of the transaction as a single notification, and approved the merger unconditionally
on the 23rd of September 2002.
10.
The Commission then brought the present application before us in which they seek the following relief:
1)
That the purchase by Edgars Consolidated Stores Ltd (“Edcon”) of certain claims against trade creditors of the Retail
Apparel (Pty) Ltd and certain of its subsidiaries, as described in Edcon’s offer to purchase dated 13 June 2002 (“the
book debts”) constitutes a merger as contemplated in section 12 of the Competition Act No. 89 of 1998, as amended (“the
Act”).
2)
That the Respondents contravened section 13(A)(3) of the Act in that they have implemented the merger prior to approval by the Applicant;
3)
Ordering that the Respondents jointly pay an administrative penalty of R 85 552 610 in terms of sections 59(1)(d)(i) and/or 59(1)(d)(iv)
of the Competition Act 89 of 1998 (as amended) and;
4)
Further and/or alternative relief.
11.
Section 13A(3) states the following:
The parties to an intermediate or large merger may not implement that merger until it has been approved, with or without conditions,
by the Competition Commission in terms of section 14(1)(b), the Competition Tribunal in terms of section 16(2) or the Competition
Appeal Court in terms of section 17.
12.
Section 59(1) of the Act sets out the circumstances in which an administrative penalty may be imposed. For our purposes the following
sub-sections are pertinent:
59(1) The Competition Tribunal may impose an administrative penalty only-
(d) if the parties to the merger have
(i)
failed to give notice of the merger as required by Chapter 3;
(ii)
…
(iii)
…
(iv)
Proceeded to implement the merger without the approval of the Competition Commission or Competition Tribunal, as required by this
Act.
DISCUSSION
13.
Initially the Commission was of the view, when it issued its notice of non-compliance to the parties after notification of the second
leg, that the first and second legs constituted a single transaction.
14.
Yet in Paragraph 5.4 of his founding affidavit, in the present application, the Commission’s deponent alleges that:
“..the first transaction between the First and Second Respondents constitutes a notifiable merger as contemplated in section 12 of
the Act, as amended. ..”
15.
Later in Paragraph 5.5 of the affidavit, after all the facts have been set out, he states:
“I submit that the transaction between the First and Second Respondents constitutes a notifiable merger as contemplated in section
12 of the Act in that the second transaction has the effect of ….”. (Our emphasis)
16.
Not surprisingly this latter paragraph led the first respondent, in its answering affidavit, to query what is meant by the reference
to the second transaction and whether the Commission was alleging, in contrast to what it had stated in earlier 5.4, that the transactions
constituted a single transaction.
17.
Regrettably the Commission does not deal with this in its replying affidavit. In its Heads of Argument, however, it appears to consider
them as “separate and discrete”. Yet in oral argument in response, the Commission warns of the dangers of piecemeal notification, which would again suggest that it
considers there to have been one transaction.
18.
We have approached this decision in a manner that does not require us to resolve this question. We have analysed the first leg as
a stand-alone transaction in order to decide whether it constitutes a merger. As we answer this question in the affirmative, the
question of whether the two legs constitute a single or discrete transactions is not one we are required to determine, since on either
approach there would have been a transgression of the Act - i.e. either a merger or part of a merger had been implemented without
prior approval. We nevertheless express the view that the two legs constitute elements of a single merger.
19.
For this reason the crisp issue that we have to decide is whether the first leg constitutes a merger. To be crisper still, what we
have to determine is whether the rights sold in terms of the first leg constitute the sale of part of a business.
20.
The reason for this comes from the definition of a merger in section 12 (1):
(a) For purposes of this Act, a merger occurs 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. (Our emphasis).
(b) A merger contemplated in paragraph (a) may be achieved in any manner, including through –
(i)
purchase or lease of the shares, an interest or assets of the other firm in question; or
(ii)
amalgamation or other combination with the other firm in question. (Our emphasis)
21.
The first respondent does not dispute that the first leg gave it control over the book debt and that a book debt is an asset, what
is in dispute is whether the rights acquired constitute part of a business.
22.
The mere acquisition of an asset, assuming it otherwise falls within the thresholds of capture in section 11 of the Act, does not
constitute a merger. What the Act clearly sets out, as a limiting feature, is that which is taken control of is a “business” or “part of a business”.
23.
Now if one reads sections 12(1) and 12(2) together, clearly the Act contemplates that the acquisition of an asset may constitute the
acquisition of a business. It also contemplates that a business is divisible, and hence a merger can be accomplished by the acquisition of “part of the business of another firm.”
24.
When an asset becomes a business and when it is just to be considered an asset, is a subject for interpretation. Too wide a notion
of business would make any number of ordinary transactions notifiable as mergers, too narrow, would risk creating a loophole for
regulatory avoidance.
25.
The Act does not define what a business is. Black’s Law Dictionary defines a business as:
A commercial enterprise carried on for profit; a particular occupation or employment habitually engaged in for livelihood or gain.
26.
While the word business has been interpreted frequently by our courts in relation to other statutes, this has not been of assistance, since the word has a
chameleon-like quality– its meaning is usually coloured by the context of the statutory framework in which it is located.
27.
More useful guidance comes from other jurisdictions where the principle of when asset acquisitions qualify for notification as mergers
is examined.
28.
In the European Union in the case of Blokker v Toys R Us, the Commission stated:
“…Therefore, acquisition of control is not limited to cases where a legal entity is taken over but can also happen through the acquisition
of assets. In this situation the assets in question must constitute a business to which a market turnover can be clearly attributed.”
29.
The Commission proceeded to analyse the assets being acquired:
“In this operation Blokker takes over all the assets (leases, fixtures and inventory, personnel, use of brand name) which make up the
business of Toys ‘R’ Us in the Netherlands. To this business, a turnover can be clearly attributed.
30.
The Commission concluded that the transaction constituted a concentration within Article 3(1)(b) of the Merger Regulation.
31.
In the United States mergers are governed by section 7 of the Clayton Act. Historically this statute applied only to stock acquisitions,
but the Act was amended in 1950 to cover acquisitions of assets.
32.
In Antitrust Law Developments the authors note that:
“Section 7 applies to a wide variety of asset acquisitions – not only those resembling mergers (i.e., acquisitions of substantially
all of a business’ assets), but also to acquisitions of certain key assets such as patents, trademarks, or sales volume, leases,
and to transactions resulting in control of decision making.”
33.
Herbert Hovenkamp in discussing the problem presented by partial asset acquisitions observes that:
“Antitrust policy becomes concerned with partial asset acquisitions when the asset that changes hands represents a measurable and relatively
permanent transfer of market share or productive capacity from one firm to another”.
34.
He then goes on to observe that:
“.. no shorter analysis has yet appeared that will effectively separate harmless from dangerous asset acquisitions.”
35.
He does however formulate a general approach:
“ In general, if the asset acquisition appears on its face not to affect industrial concentration or the market share of its buyer,
the acquisition will be treated as outside the scope of section 7. If it does tend to enlarge the market share or productive capacity
of the acquiring firm, or if it increases concentration in the industry, then its effects on competition must be assessed.”
36.
He makes the salient point that:
“Certain asset acquisitions may tend to increase concentration or give the acquiring firm a larger market share even though the asset
itself does not increase productive capacity. Acquisition of a trademark will fall into this category.”
37.
The Hovenkamp approach seems the one closest to serving the purpose of understanding what is contemplated by business in section 12.
38.
We turn now to analyse the first leg of the transaction, which the parties contend amounted to no more than the acquisition of a debtors'
book i.e. an asset but not a business.
39.
.RTF of original document