HOSTILE TAKE-OVERS: TOO MUCH POWER TO THE PREY
Significant powers are vested in the competition authorities under the Competition Act, 89 of 1998, as amended (“Act”) in respect of mergers. All mergers meeting the prescribed thresholds for mandatory notification1 are required to be notified to the competition authorities, who are tasked with investigating and approving, or prohibiting, such mergers. Notifiable mergers may not be implemented until the competition authorities grant approval.
The Act sets out the merger notification and review process. A joint notification by the parties is contemplated in the ordinary course. In terms of the merger notification procedure, each party is required to submit to the Competition Commission (“Commission”) certain documents (including financial statements, business plans and board reports) as well as detailed statements of information relating to the parties’ respective business activities. In addition, the practice before the Commission is for the parties to also submit a joint report on competitive conditions in the markets in which they operate, assessing the potential effect of the merger on competition in those markets.
Joint notification relies on the merging parties’ co-operating to compile the documents and information needed for a single, joint merger filing, to be submitted by one of the merging firms. This procedure is effective in “friendly mergers” where the parties’ shared goal is to facilitate the review process before the authorities. In hostile takeovers, however, a joint notification is not suitable as it is not in the target firm’s interests to co-operate with the acquirer in preparing a joint merger filing.
Given that the subject of a hostile takeover does not support the proposed bid, it is understandable that a target would not wish to facilitate the process by co-operating with the acquirer and, therefore, provision is made under the Act for separate merger notifications. Although the Act has in place a procedure for separate notifications, this procedure is equally unsuitable for hostile takeovers. In particular, it does not address the commercial realities of a hostile takeover, where timing is crucial, and it affords the target significant power to abuse the review procedure by employing delay tactics.
Separate Notifications in Hostile Takeovers - Difficulties with Progressing the Review
In South Africa, a merger filing can be submitted as soon as the parties have sufficient detail for the preparation of a complete filing, i.e. there is no need to wait for an offer to be accepted. The most recent version of all documents constituting the merger agreement are required to be submitted as part of a filing, and are sufficient to "trigger" a filing. It is possible to file a merger (and the authorities have accepted mergers) on the basis of a draft agreement, including a document such as a non-binding memorandum of In South Africa, a merger filing can be submitted as soon as the parties have sufficient detail for the preparation of a complete filing, i.e. there is no need to wait for an offer to be accepted. The most recent version of all documents constituting the merger agreement are required to be submitted as part of a filing, and are sufficient to "trigger" a filing. It is possible to file a merger (and the authorities have accepted mergers) on the basis of a draft agreement, including a document such as a non-binding memorandum of understanding; provided that the competitive impact of the transaction will not change when the agreement is concluded.
Under the Act, merging parties must submit a joint merger notification unless they obtain the Commission’s permission to make separate filings. In terms of Rule 28(1) of the Commission’s Rules,2 a party to the merger may apply to the Commission for permission to file separate notification of a merger if it is “reasonable and just to do so in the circumstances”.3 As such, the Act provides that the Commission may grant an acquirer in a hostile takeover permission to make a separate notification upon application. However, the Act does not prescribe a time period for the Commission to make its decision in respect of separate filings. This leaves scope for significant undue delays.
When considering applications for separate filings, the Commission may contact the target firm for comment. Again, this allows for significant delays as the target need not respond to the Commission immediately and no time period is prescribed for such a response. Ordinarily, the target will ultimately support an application to file separately, although it would do so at its own pace if it wishes to play for time. The target benefits from making its own filing as this delays the beginning of the review period, which only starts once the target’s filing is submitted. An application to file separately also affords the target the opportunity of making submissions as to why the proposed takeover will prevent or lessen competition and/or why the merger should be prohibited on the basis of public interest considerations set out in the Act. In Gold Fields Limited v Harmony Gold Mining Company Limited4 (“Gold Fields v Harmony”), for example, the target firm made submissions that the proposed transaction would result in 1500 retrenchments and would thus have a negative effect on employment. The Commission recommended conditional approval of the merger to the Competition Tribunal (“Tribunal”) and ultimately the Tribunal approved this larger merger subject to employment-related conditions.
In the above case, Harmony (the acquiring firm) filed its merger notification with the Commission on 8 November 2004 after it had launched a hostile takeover bid for Gold Fields (the target firm) in October 2004. The merger was eventually approved by the Tribunal on 10 May 2005.
In the Barrick / Placer case,5 a “hostile-turned-friendly” merger, a joint merger filing was submitted to the Commission on 9 November 2005, the offeror having signed the Statement of Merger Information on the target’s behalf. The Commission then deliberated as to whether or not the filing was indeed “complete” and reverted to the offeror on 15 November 2005, indicating that it was not. Upon receipt of this notice, the offeror immediately applied for permission to make a separate notification. The Commission granted permission and on 25 November the Commission ultimately directed the target to submit its separate notification.6
Only once the Commission has decided to allow separate notifications does it direct the target to prepare and file the relevant documents. Rule 28(1)(b) provides for the Commission to give appropriate directions to give effect to the requirements of the Act and, in particular, to specify which firm is required to satisfy the relevant filing requirements.7
Once it is directed to file, the unwilling target in a hostile take-over may then indicate that it has not started to prepare a filing, even if it has been aware of the imminent obligation to be part of the review process. This leaves scope for further delays as the Commission will allow the target what it considers a reasonable time to prepare and submit its filing.
Where the target defies the Commission’s instruction to submit its filing in a certain period of time, the only option available to the acquirer is to make further application to the Commission for an order, on good cause shown, allowing it to file a document on the target’s behalf if the target has failed to file any within 10 (ten) business days.8 This option provides limited recourse for the acquirer, resulting in further extensive delays. Significantly, the merger review period will only begin when both parties have submitted their merger notifications.
Once the parties have filed, there is scope for further delays. Where the Commission believes that a document filed contains false, misleading or incomplete information, it may demand corrected information. Although the party in question must comply with such demand, no provision is made for a time period within which corrected information must be given. An obstructive target is able to file incomplete or incorrect information as a delay tactic. Where corrected or complete information is demanded, the Commission’s review period begins anew on the day after the corrected or complete information is filed.
Once a complete filing has been submitted, the ordinary review periods apply. The review process for intermediate and large mergers differs and is longer in the case of large mergers than it is for intermediate mergers. The Act stipulates that the review period for intermediate mergers includes an initial period of 20 business days, calculated from the date of notification. However, the Commission may extend this period by a single period not exceeding 40 business days. Thus, the maximum period for review of intermediate mergers, once the Commission has been duly notified, is 60 business days. In the case of large mergers, the Commission must within 40 business days of being notified of a merger make a recommendation to the Tribunal to either approve or prohibit its implementation. The Commission can, however, extend this period by a maximum of 15 business days at a time, provided the Tribunal grants its consent. Once the Commission has made a recommendation to the Tribunal, the Registrar of the Tribunal must schedule a date within 10 business days for either the commencement of the hearing of the matter or a pre-hearing conference in relation to the larger merger, should circumstances require this. The Chairperson of the Tribunal may extend this 10 business day period by a further 10 business days (or longer, but in this event the parties’ consent would be required). After completing its hearing in respect of the merger, the Tribunal has 10 business days within which to issue its decision and 20 business days within which to issue written reasons for its decision.
Hostile takeovers are not afforded an urgent review under the provisions of the Act. Few hostile mergers have been notified to the South African competition authorities. The cases referred to above, however, reflect the difficulty that an acquirer may face in terms of timing. Even in Barrack / Placer, where the hostile transaction turned “friendly”, the acquirer originally sought to submit a joint filing on 9 November 2005 and clearance was granted ultimately by the Tribunal, some 2 (two) months later on 11 January 2006. In that case, the merging parties’ activities overlapped in the production and supply of gold and, therefore, the competition enquiry and investigation by the competition authorities was limited, to some extent, as the Tribunal had previously accepted that no single gold producer has the ability to influence the gold price and that gold producers are essentially “price takers”, with the price being determined by reference to the daily price fixings of the London Bullion Association. Further, the Tribunal has previously accepted that the international gold price is influenced by factors such as the sale of new production by worldwide producers, global economic trends, currency exchange fluctuations, expectations of investors and the sale of reserves by financial institutions such as international central banks, the World Bank and the IMF.
In the hostile takeover by WPP Group plc of TNS plc, notified as an intermediate merger in South Africa, the acquirer applied for permission for separate merger filings in mid-July 2008. The Commission granted permission for the acquirer to file on the target’s behalf on 28 July but subsequently withdrew this permission, allowing the target to submit its own filing. The target ultimately filed on 20 August 2008. The Commission’s decision in this intermediate merger was provided in November 2008, approving the merger subject to conditions. The WPP Group plc / TNS plc merger reflects that even in a hostile takeover which is an intermediate merger, it may take significant time for the Commission’s decision to be granted. The Commission may make use of the extension period for its investigation of the merger, albeit where timing is critical.
In Europe, a takeover which falls within the scope of the EC Merger Regulation9 must be notified to the European Commission (“EC”) following announcement of a public bid. Most acquisitions must not be implemented prior to notification or clearance by the EC, but there is an exception to this in the case of public bids which have been duly notified. Such bids can proceed, provided that the transaction is notified to the EC without delay (for example, as soon as possible after public announcement).
In many other jurisdictions, such as France, the securities laws provide relatively short, fixed periods for the making and acceptance of a public offer, and these cannot be extended, even where foreign regulatory approvals are outstanding. In the case of a transaction subject to French securities laws, the offer must be unconditional at closing, so that if the offer is accepted, the purchaser must perform. In our experience, in South Africa the Commission has been impervious to these commercial realities in other jurisdictions and has not expedited the South African merger review process to address these realities. This means that an acquirer may be left in the invidious position of having to close (and thus implement in contravention of the Act) under foreign securities laws, whilst the South African competition authorities have yet to start the clock for their review. In these situations, ring-fencing and “hold separate” arrangements may have to be considered, which may not always be easy to implement effectively.
An Expedient Procedure Needed
Despite the negative perceptions around hostile takeovers, they may be beneficial to shareholders by allowing a potential acquirer to bypass the target’s management where the target’s management is not acting in the shareholders’ best interest. Such acquisitions allow shareholders to choose the option that may be best for them, rather than leaving approval solely with management. With this in mind, the merger review process, which is aimed at assessing competition concerns, should not be used to frustrate a hostile acquisition.
Currently, under the Act, the target of a hostile takeover has significant power to obstruct an acquirer’s notification endeavors by means of deliberate delays. Since the clock for review of the merger does not start until a complete filing has been made, it is in the target’s interests to play for as much time as possible before submitting its notification. In the Gold Fields case, Lewis P noted that “management of target companies may well seek to use the provisions of the Competition Act to chill hostile mergers, in effect to prevent their own shareholders from exercising the rights that attach to their shares in the ownership of the company in question. Hostile mergers – red of tooth and claw though they may be – are an important part of the very competitive process that we are mandated to defend to promote.”
In light of the above, it is submitted that the Act should provide for specific, expedited review procedures in hostile takeover situations, where timing is critical. Improvements to the current provisions of the Act could include the following:
- An acquirer should be able to call a pre-notification meeting with the Commission to brief the Commission case team about the merger, the relevant markets in which the parties operate and the likely effect, if any, on competition. This would allow for an expedited review once both parties have filed their merger notifications.
- The need for an acquirer to apply for permission to make a separate filing should be eliminated in hostile takeover situations. If the transaction is hostile, there need for separate notifications is obvious as a joint notification is not appropriate.
- Once the acquirer submits its separate notification, the target should have a prescribed time period within which to submit its filing, if it wishes to do so.
- If the target fails to submit any documents or information, the acquirer should be permitted to file such documents on behalf of the target immediately, without having to first apply to the Commission for permission to file such documents or information.
- It is submitted that such amendments would limit the target’s ability to delay the notification process unnecessarily and, more importantly, allow the competition authorities to focus on the substance of the matter over which they have jurisdiction, namely whether or not the transaction notified is likely to prevent or lessen competition.
- The thresholds for mandatory merger notification were increased significantly with effect from 1 April 2009. Prior to 1 April, a transaction was required to be notified as an intermediate merger if the merging parties had combined assets or turnover of ZAR 200 million and the target firm had assets or turnover of ZAR30 million. This combined figure of ZAR 200 million has been increased to ZAR 560 million and the target firm figure of ZAR 30 million has been increased to ZAR 80 million. A transaction was required to be notified as a large merger if the merging parties had combined assets or turnover of ZAR 3,5 billion and the target firm had assets or turnover of ZAR 100 million. The combined figure of ZAR 3,5 billion has been increased to ZAR 6,6 billion and the target firm figure of ZAR 100 million has been increased to ZAR 190 million.
- Rules for the Conduct of Proceedings in the Competition Commission.
- Rule 28(1)(a) of the Commission’s Rules.
- Harmony Gold Mining Company Limited / Gold Fields Limited, Case No: 93/LM/Nov04. The Tribunal approved the merger on 10 May 2005.
- Barrick Gold Corporation / Place Dome Incorporated, Case No: 118/LM/Dec05. The Competition Tribunal cleared the merger on 11 January 2006.
- Thereafter, the timing of the procedure becomes academic in Barrack / Placer, as the parties reached agreement.
- Broadly, the relevant documents to be filed are a Merger Notice and a Statement of Merger Information on behalf of each of the parties, satisfying all of the filing instructions set out in the prescribed forms and attaching all documents required by those instructions. See Rule 27(1)(a) and (b) of the Commission’s Rules.
- Rule 28(2) of the Commission’s Rules provides for one of the parties to the merger to apply to the Commission for an order on good cause shown allowing it to file any document on behalf of the other party if that other party has failed to file within 10 (ten) business days has failed to file a document which the Commission or Competition Tribunal has ordered it to file, or any other document or information which the Commission has ordered it to file in terms of the Commission’s Rules on Merger Procedures.
- Regulation 139/2004 on the control of concentrations between undertakings.
- Following notification, the European Commission may either approve the transaction, conditionally or unconditionally, following a "Phase I" investigation, or, if it identifies serious competition concerns, it may initiate proceedings under section 6(1)(c) of the Merger Regulation to conduct a more detailed "Phase II" investigation. Following such investigation, the European Commission may approve the transaction unconditionally, approve it subject to conditions or prohibit it.