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Johnnic Holdings Limited and Hosken Consolidated Investments Limited CC (65/FN/Jul05) [2005] ZACT 69 (21 October 2005)

.RTF of original document


COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA


Case No: 65/FN/Jul05


In the matter between:

Johnnic Holdings Limited                                            Applicant

and

Hosken Consolidated Investments Limited           First Respondent
Competition Commission                                      Second Respondent

______________________________________________________________

Decision
______________________________________________________________



Tribunal's order

1.      
The Tribunal issued an order on 23 September 2005 dismissing this application with costs.

2.      
This decision sets out the reasons for the order.


Introduction

3.      
On 21 July 2005 Johnnic Holdings Ltd (“Johnnic”) filed an application with the Tribunal for a declaratory order and an interdict relating to action which Johnnic perceived was being or would be taken by Hosken Consolidated Investments Ltd ("HCI") in alleged implementation of a large merger which had not received the approval of the competition authorities. The merger in question is between HCI (acting through a wholly owned subsidiary, Mercanto Investments (Pty) Ltd ("Mercanto")) as the acquiring party, and Johnnic as the target company.

4.      
HCI, the first respondent in the application, opposed the application. The second respondent, the Competition Commission ("the Commission") did not oppose the application or file evidence.

5.      
The matter was heard on 22 September 2005.




HCI's undertaking, and the relief ultimately sought

6.      
A considerable terrain was in dispute at the time when HCI had filed its answering evidence (on 8 August 2005) and Johnnic responded with replying evidence, filed on 23 August 2005 This terrain was however considerably diminished when HCI's attorneys gave Johnnic an undertaking on HCI's behalf on 7 September 2005 to the effect that HCI would refrain from carrying out certain actions which Johnnic had decried as unlawful. At the hearing, Johnnic's counsel undertook to reframe the relief originally sought in order to take this undertaking into account, and the revised version was duly provided.

7.      
In the revised version, what Johnnic seeks is an order for:

A declaration in these terms:

The purchase by the first respondent of any shares in the applicant, and/or the exercise by the first respondent of any voting and/or other rights attaching to such shares as it may have acquired in the applicant, prior to the approval of the first respondent’s merger, alternatively proposed merger, with the applicant constitutes implementation, alternatively further implementation, of such merger, alternatively proposed merger, without approval in contravention of the provisions of the Competition Act (No. 89 of 1998)(the “Act”);

and an interdict in these terms:

Pending the final approval, if any, of the merger, alternatively proposed merger (with or without conditions), between the first respondent and the applicant, by the Competition Tribunal or the Competition Appeal Court, as the case may be, in terms of the Act, the first respondent shall be and is hereby interdicted and restrained from implementing, alternatively further implementing, the merger, alternatively proposed merger, including, without limitation, by exercising the voting and/or other rights attaching to such shares as it may have acquired in the applicant.


Fundamental questions in the application

8.      
The remaining questions in dispute include some which traverse thorny ground, but on the view we have taken of the application what requires resolution comes down to two fundamental points:

1)      
Does HCI control Johnnic in the sense in which control is envisaged in s. 12(2)(g) of the Competition Act, 1989, as amended ("the Act")?

2)      
Does HCI's intended merger with Johnnic amount to a ‘proposed’ merger which, on the basis of the decisions of the Competition Appeal Court ("the CAC") in the cases referred to below as the Gold Fields/Harmony cases, disentitles HCI from exercising voting rights in its current holding of Johnnic shares before the merger has received the approval of the competition authorities?

9.      
The relevance of these questions will be apparent once we have set out some of the essential facts.


Factual background

10.     
The dispute originates from the desire of both HCI and Johnnic to become significant owners of assets in the gaming industry, and the consequent strategy which both HCI and Johnnic adopted of targeting for acquisition the shares of a holding company in this sector, Tsogo Investment Holdings ("TIH"). TIH is the majority shareholder of a substantial casino and hotel operator, Tsogo Sun Holdings Ltd ("TSH"), said to be the largest in this field in South Africa.

11.     
Johnnic, originally a conglomerate, undertook the unbundling of Johnnic Communications Ltd (“Johncom”) in March 2004. Johnnic’s assets after the unbundling consisted of:1

•         A 100% interest in Gallagher Estate and Johnnic Properties;
 •         An effective interest of 28.6% in Suncoast Casino; and
 •         And effective interest of 9.55% in TIH, with the acquisition of a further effective 9.5% interest subject to regulatory approvals;
 •         (Apparently, according to HCI, but not mentioned by Johnnic in its list of these assets in its founding affidavit) some R1.3 billion in cash.2

12.     
Following the unbundling of Johncom, Johnnic set out to acquire further gaming investments.

13.     
As illustrated in the accompanying diagram, which was supplied by Johnnic as an annexure to one if its affidavits, Johnnic, during the latter part of 2004, acquired 25% of the ordinary share capital of Fabcos Investment Holding Company Ltd (”FIH"), a 38% shareholder in TIH. This is described in the papers as "the first tranche". Johnnic also purchased a further 25% shareholding in FIH, "the second tranche”, which is subject to certain regulatory approvals.

14.     
HCI resisted Johnnic’s acquisition of the second tranche and has entered into a transaction to acquire Fabvest Investment Holding Ltd ("Fabvest"), currently a 75% shareholder in FIH. This acquisition by HCI is also subject to regulatory approval. Fabvest disputes Johnnic's acquisition of the second tranche and this dispute is the subject of arbitration between Johnnic and Fabvest.

15.     
HCI clearly sought ways to circumvent what appears to be a tumultuous scramble for ownership of TIH and TSH which, on the description given at the hearing by HCI's counsel, has generated a swathe of litigation in various High Courts and before the gambling regulatory boards of several provinces. Johnnic asserts that from the outset HCI intended to acquire control of Johnnic. HCI denies this, if somewhat obliquely, and asserts that this intention was formed only later, at a point we shall identify.

16.     
The first step taken by HCI to get around its head-to-head contestation with Johnnic was the acquisition by HCI during March 2005 of 20.72% of the issued shares in Johnnic. Soon after, HCI took the next step, being the acquisition of a further 9%, bringing its total shareholding in Johnnic to approximately 30%.

17.     
During May 2005, and on strength of its 30% interest, HCI requisitioned a meeting of Johnnic shareholders in terms of section 181 of the Companies Act, its purpose being to secure the appointment of three of HCI's nominees as directors of Johnnic. This would have enlarged Johnnic's board from six to nine members. At this meeting, which was held on 30 June 2005, the majority shareholders voted against the appointment of HCI’s nominees, thereby defeating HCI’s proposal.

18.     
On 1 July 2005, the day after the requisitioned shareholders' meeting, HCI announced that it had acquired an additional holding of approximately 10% in Johnnic, raising its total shareholding to 39.75% – a holding to which we shall refer below, for convenience, as 40%. Mercanto holds all of these shares.

19.     
The web of holdings in this corporate matrix is illustrated in the accompanying diagram. Companies which have not been identified above but which are named in the diagram have no part in the dispute before the Tribunal between Johnnic and HCI.

















20.     
Before the requisitioned shareholders' meeting of 30 June 2005, HCI and its corporate advisors had met with Johnnic’s institutional shareholders and presented a plan to them in terms of which it was proposed that HCI’s three nominees be appointed to Johnnic's board, and that Johnnic, with HCI's co-operation, set out to become the vehicle through which the TSH group would be listed on the JSE. In essence, TIH would sell all of its shares in TSH to Johnnic in return for shares in Johnnic, and SABSA Holdings (Pty) Ltd, the minority shareholder in TSH, would sell its holding to Johnnic in return for cash or shares in Johnnic. This course of action was only to be pursued once HCI's nominees had been appointed to the Johnnic board.3

21.     
This plan fell apart when Johnnic’s other shareholders voted down HCI’s resolution at the requisitioned meeting.

22.     
This rebuff led HCI to change course and to increase its stake in Johnnic to the extent where it could contend for control. HCI asserts that it was only at this point that it formed the intention of controlling Johnnic.4 Its former strategy, if we understand it correctly, had been to co-exist with Johnnic, each holding substantial direct or indirect stakes in TIH/TSH but preserving its own identity, with HCI retaining what was by 30 June 2005 a significant but not a controlling holding in Johnnic.5

23.     
The attainment by HCI of its 40% shareholding in Johnnic, exceeding the 35% which triggers a mandatory offer in terms of the Securities Regulation Code on Takeovers and Mergers and the Rules of the Securities Regulation Panel ("the SRP Code”), led HCI to announce on 4 July 2005 its firm intention to make such a mandatory offer for the balance of the shares in Johnnic. HCI also announced that it would invoke s. 440K of the Companies Act, if it obtained acceptance of 90% of the shares bid for in the mandatory offer, in order to take its holding to a full 100%. Thereafter, HCI announced, it would cause Johnnic to be delisted.6

24.     
In the light of this announcement Johnnic's attorneys sent a letter to HCI on 5 July 2005 informing HCI that Johnnic regarded HCI's latest acquisition of Johnnic shares and the mandatory offer as a "proposed merger" in terms of the Competition Act. In the letter, Johnnic put HCI on terms to notify the competition authorities of the "proposed merger", and pending their approval to refrain from:

•         implementing the "proposed merger";
 •         taking transfer of any of the latest 10% of Johnnic shares acquired by HCI;
 •         acquiring and taking transfer of further Johnnic shares other than in terms of the mandatory offer; and
 •         voting or otherwise exercising any rights attaching to the shares constituting the latest 10% acquisition or attaching to any further Johnnic shares acquired by HCI.7
 •        
25.     
For convenience we set out here the relevant provisions of s. 13A of the Act:
 •        
1)      
A party to …... a large merger must notify the Competition Commission of that merger in the prescribed manner and form.
2)      
……
3)      
The parties to …….[a] large merger may not implement that merger until it has been approved, with or without conditions, by ……. the Competition Tribunal in terms of section 16(2) or the Competition Appeal Court in terms of section 17.
•        
26.     
HCI's attorneys responded on 6 July, largely refuting Johnnic's contentions but stating that HCI considered that its mandatory offer might lead HCI to boost its shareholding in Johnnic beyond 50%, which would in HCI's view constitutute a notifiable merger. In anticipation of acceptance above this level, HCI had informed the Commission of HCI's mandatory offer and the merger which would ensue if an appropriate level of acceptance was achieved. However, HCI denied that it had control of Johnnic at that stage, and asserted that it had not entered into any voting pool or other arrangement with others which would amount to control. Accordingly HCI denied that it was obliged to comply with Johnnic's demands and declined to submit to them.8

27.     
A letter from HCI's attorneys to the Commission was indeed sent on 6 July 2005 informing it of HCI's shareholding in Johnnic and of HCI's intention to make a mandatory offer for the remaining shares, on the basis that acceptance in respect of another 10% of the shares would lead to a notifiable merger.9

28.     
An offer document was circulated by HCI to Johnnic's shareholders on 1 August 2005 in compliance with the requirements of the SRP Code, and on 3 August 2005 Mercanto filed a statutory notification of a merger with the Commission in terms of section 13A(1) of the Competition Act. It appears that Johnnic has also filed a merger notification document in its capacity as a target company in a merger.1

29.     
It is common cause that the merger contemplated in the notifications is a large merger.


Some features of the parties' evidence

30.     
According to Johnnic's main deponent, Ms Ramon, HCI had a "calculated, deliberate and ongoing strategy to implement an actual, or at least proposed merger with Johnnic through a series of inter-related steps, without the approval of the competition authorities". She asserts that the acquisition by HCI of the 10% shareholding on 1 July 2005, taking HCI's holding to 40%, was "merely the final step of a strategy to acquire control of Johnnic which commenced with its acquisition of an approximately 20.72% interest … in March 2005."1

31.     
Ms Ramon states that HCI is the largest single shareholder in Johnnic, with twice as many shares as the next largest shareholder. She identifies the other material shareholders in Johnnic and their approximate percentage interests as follows:1

Coronation                                           16.54
Old Mutual                                           14.94
Public Investment Commission ("PIC")     4.17
Sanlam                                       3.87
African Harvest ("AHFM")                           4.7

32.     
It emerged from a supplementary affidavit by Ms Ramon, dated 21 September 2005, that Sanlam has in the interim sold its holding and that another institutional investor, Peregrine, has acquired a holding of 5%.1 This most recent information is reflected in the array of shareholders identified in the accompanying diagram.

33.     
In her founding affidavit Ms Ramon stated, in language which we find highly equivocal, that she had been advised that HCI's current shareholding of 40% in Johnnic "may itself constitute an acquisition of control, and hence the implementation of an actual merger, within the meaning of s. 12 of the Act, and in particular the ability to materially influence the policy of Johnnic within the meaning of section 12(2)(g)."1

34.     
For convenience, the terms of s. 12(2), as it relates to companies, are stated at this point:

12(2) A person controls a firm if that person –

(a)     
beneficially owns more than one half of the issued share capital of the firm;
(b)     
is entitled to vote a majority of the votes that may be cast at a general meeting of the firm, or has the ability to control the voting of a majority of those votes, either directly or through a controlled entity of that person;
(c)     
is able to appoint or veto the appointment of a majority of the directors of the firm;
(d)     
is a holding company, and the firm is a subsidiary of that company as contemplated in section 1(3)(a) of the Companies Act, 1973 (Act No. 61 of 1973);
(e)     
…….
(f)     
…….
(g)     
has the ability to materially influence the policy of the firm in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control referred to in paragraphs (a) to (f).

35.     
It seems from various parts of the founding affidavit, but specially paragraph 37, that Johnnic regards the mere acquisition of its shares by HCI, with the ultimate goal of securing control, as the implementation of a merger in contravention of the Act. Although this too is stated only obliquely in the affidavit, it seems that this alleged implementation is considered to extend collectively to all the transactions by which parcels of shares leading up to the current holding of 40% were obtained, and also to certain and later attempts of HCI to acquire additional shares, manifested by approaches to some of the institutional shareholders.1 Ms Ramon mentions in particular the PIC and AHFM.

36.     
Ms Ramon also set out in her founding affidavit the extent of shareholder participation in the voting at a number of the most recent general meetings of Johnnic, identified in the table below. 1




Date of meeting
% of issued share capital represented
Purpose of meeting

3/6/2003
76.28%
 General meeting to consider unbundling of Johnnic assets

30/9/2004
64.36%
Annual general meeting

27/10/2004
</