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[2018] ZACAC 7
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Murray & Roberts Holdings Limited v Aton GMBH and Another (166/CAC/Jul18) [2018] ZACAC 7; [2018] 2 CPLR 519 (CAC) (28 October 2018)
THE
COMPETITION APPEAL COURT OF SOUTH AFRICA
HELD
IN CAPE TOWN
In
the matter between: 166/CAC/Jul18
MURRAY
& ROBERTS HOLDINGS LIMITED Appellant
and
ATONGMBH First
Respondent
THE
COMPETITION COMMISSION Second
Respondent
JUDGMENT
DATE:
29 October 2018
THE
COURT
Introduction
[1]
This appeal concerns the question of whether a shareholder is
entitled to exercise certain of its voting rights
pursuant to its
shareholding in a target company once it has exhibited a firm
intention to acquire sufficient shares in the company
which would, if
the intention is implemented, constitute a merger as defined in the
Competition Act 89 of 1998 ('the Act').
[2]
The immediate reason for this Court having to answer this question is
that appellant has appealed against
the order of the Competition
Tribunal in which it dismissed an urgent application to interdict
first and second respondents (collectively
'Aton') from voting
certain of its shares in appellant until such time as it obtained the
requisite approval from the competition
authorities
[1]
to acquire control of appellant in terms of the Act.
The
factual matrix
[3]
In 2015, Aton acquired 9 974 339 shares in appellant which amounted
to approximately 4.49% of its issued share
capital. Between February
and April 2017, Aton acquired a further 113 440 000 shares in
appellant which approximated 25.51% of
appellants issued share
capital. In this manner, Aton's shareholding in appellant had
increased to 29.9985%.
[4]
On 23 March 2018, Aton acquired a further 13 671 480 shares in
appellant (being a further 3% of the issued
share capital) which
increased its shareholding in appellant to 33.1%, with voting rights
of approximately 33.2%. On 23 March 2018,
Aton notified appellant of
its intention to make a voluntary offer to appellant's shareholders
to acquire all of the issued shares
in appellant which were not
already owned by it. Six days later, on 29 March 2018, it irrevocably
agreed to acquire an additional
29 005 926 shares in appellant which
would have meant that it would then own 39.6% of appellant's issued
share capital.
[5]
On 18 May 2018, appellant released a cautionary statement in which it
announced that it had reached "an
in principle" agreement
with Aveng Limited regarding a proposed transaction between the two
companies. A cautionary statement
announced that a general meeting
would be held on 19 June 2018 to consider a resolution concerning
appellant's proposed transaction
with Aveng. On 24 May 2018, Aton
notified the Competition Commission of its proposed merger with
appellant, seeking approval for
the merger as required by the Act. A
day later, on 25 May 2018, the Takeover Regulation Panel required
Aton to withdraw its voluntary
offer and to make a mandatory offer,
which it duly did on 04 June 2018 at a higher price than had been the
case with its voluntary
offer.
[6]
At the meeting of 19 June 2018, Alon's exercise of its voting rights
in appellant did not represent a majority
of the votes cast and thus
it was outvoted on the proposed Aveng transaction which was
considered at that meeting.
[7]
The transaction with Aveng, which was to be voted upon at the
shareholders meeting of 19 June 2018, caused
appellant to institute
an urgent application on 15 June 2018 before the Competition
Tribunal, in which it sought to interdict and
restrain Aton or their
agents from voting or otherwise exercising any rights attached to any
shares in the ordinary share capital
of appellant in excess of the
approximately 29.99% of the shares it held as at 23 March 2018. This
translated into approximately
33.2% of the voting rights.
[8]
A limited interdict was granted by the Competition Tribunal which had
the effect of restraining Aton and their
agents from voting any
shares which it held in the ordinary share capital of appellant in
excess of 50% less 1 of the votes cast
in respect of the Aveng
transaction which was to be voted on at the shareholders general
meeting of appellant on 19 June 2018.
[9]
Notwithstanding that the events which gave rise to the urgent
application before the Tribunal have come and
gone, and that Aton was
unsuccessful in its bid to vote down the Aveng transaction, it was
common cause between the parties that
the dispute between the parties
was not moot. Whether Aton may vote so-called affected shares (that
is to say shares acquired by
Aton after it held a firm intention to
acquire control of the Appellant) is still a live question in that
what shares Aton might
vote at a further shareholders' meeting, prior
to a decision on the proposed merger by the competition authorities,
requires a
definitive answer. There was also some debate as to the
scope of an earlier decision of this court in Goldfields Limited v
Harmony
Gold Mining Company Limited
[2005] 1 CPLR 774
(CAC) which,
according to the parties, requires clarification. We are satisfied
that the appeal before us is not moot and we should
determine whether
the approach adopted by the Tribunal and its decision was correct.
The
relevant provisions of the Act
[10]
The key section of the Act which is relevant to the determination of
this dispute is s 13 A(3) which provides:
'The parties to an
intermediate or large merger may not implement that merger defined in
12(1)(a) until it has been approved, with
or without conditions, by
the Competition Commission in terms of s 14 (1) (b), the Competition
Tribunal in terms of s 16(2) or
the Competition Appeal Court in terms
of s 17.'
[11]
As observed, Aton has notified 'a large merger' to the Competition
Commission which is still considering the merger in
terms of s 12 A
of the Act. Appellant contends that, a party in the position of Aton
cannot vote any shares which it acquired after
23 March 2018, once it
had addressed a firm intention letter to appellant indicating that it
intended to make an offer to appellant's
shareholders to acquire 100%
of the total issued share capital of the company. In short, the
contention was that, while Aton could
vote shares acquired prior to
the firm intention letter and which represented the voting rights of
29.99% of the issued share capital
of appellant, it could not
exercise voting rights in respect of any shares acquired after it
held a firm intention to acquire control
of appellant.
[12]
Mr Harris, who appeared together with Mr Golz and Mr Ismail of behalf
of appellant, placed emphasis on the following
words ins 13 A (3):
'the parties to an intermediate or large merger may not implement
that merger'. According to Mr Harris, the
words 'that merger' refer
to an intermediate or large merger. In terms of s 11 (5) of the Act,
a large merger is defined and 'includes
a proposed merger'. As the
facts of this case indicate, Aton proposed to effect a merger from
the lime that it sent the firm intention
letter. In Mr Harris' view,
s 13 A (3) prohibited Aton from implementing 'that merger'; that is
voting those shares acquired pursuant
to its proposed acquisition of
control of appellant.
[13]
In support of this argument, Mr Harris referred to the Goldfields
judgment which, in his view, supported appellant's
case. To
understand this submission, it is necessary briefly to consider the
facts of that case. Goldfields Limited ("Goldfields")
reached an agreement with IAMGold to merge their assets outside of
South Africa. A meeting of Goldfields' shareholders was convened
to
approve the transaction. Prior to the meeting, Harmony Gold Mining
Company ('Harmony') proposed a merger between itself and
Goldfields.
In its public announcement and circular Harmony had structured its
bid in two steps: an early settlement offer and
a subsequent offer.
In terms of the early settlement offer, Harmony offered to acquire
34.9% of the share capital of Goldfields,
the only condition
attaching thereto being that certain resolutions would be passed at a
meeting of Harmony's shareholders. A subsequent
offer would be made
for the balance of the shares. Significantly, the largest shareholder
in Goldfields, Norilsk (holding 20% of
the share capital) provided an
irrevocable undertaking to Harmony that it would vote against the
IAMGold transaction, that it would
not accept the early settlement
offer and that it would accept the subsequent offer.
[14]
On the basis of these facts, Goldfields instituted an application
seeking an order to prevent Harmony from implementing
a merger within
the meaning of the Act. The question for determination, as the Court
defined it, was as follows.
'Whether on the facts
there was a proposal to implement a transaction that, when so
implemented, will involve the acquisition of
control by first
respondent either on its own or with another party over the whole of
party of the business of appellant. If the
answer is positive then,
on the basis of s 13 A (1) there is an obligation to notify.' (at 84)
[15]
Mr Harris emphasised the following passage from the judgment:
'Mr Unterhalter conceded
that there was an obligation in terms of s 13 A (1) read with s 13 A
(3) for first respondent to notify
and obtain approval of its
prooosed merger before the merger was implemented. That conclusion
clearly followed from the definition
of large mergers in s 11 of the
Act which provided that 'for purposes of this Chapter ... a large
merger means a merger or proposed
merger with a value at or above the
higher threshold established in terms of sub-section (1) (a).' (at 84
our emphasis). On the
basis of this passage, he contended that this
Court had interpreted s 13 A (3) as prohibiting the implementation of
a proposed
merger, in addition to an actual merger.
[16]
However, this interpretation of the case does not take account of the
essential argument with which the Court was confronted
in Goldfields,
namely that the effect of the early settlement offer and the
irrevocable undertaking of Norilsk, permitted Harmony
the ability to
enjoy de facto control over Goldfields in terms of s 12 (2) (g) of
the Act. This species of control comes about
if a person acquires the
ability materially to influence the policy of a firm in a mariner
comparable to a person who, in ordinary
commercial practice, can
exercise an element of control referred to in paragraphs (a) to
(f)
[2]
. Thus, the central
holding in Goldfie/ds rests upon the finding that Harmony had
acquired de facto control and was not permitted
to exercise this
control until the merger was approved. Goldfields does not hold that
the firm intention of Harmony to gain control
of Goldfields placed
Harmony under a disability not to vote the shares it acquired
pursuant to the early settlement offer. The
disability arose from the
position of de facto control that Harmony secured as a result of the
early settlement offer, taken together
with Norilsk's irrevocable
undertaking. This is made clear in the following passage in the
judgment:
'As a result of the early
settlement offer and the irrevocable undertaking from Norilsk, first
respondent will be able to effect
a permanent and irreversible change
to the very structure of its competitor; at the very least it will be
able to materially interest
key policy of appellant by ensuring that
appellant's log-term strategy of entering into IAMGold transaction
could not be implemented....
The early settlement, if
implemented, would constitute a large merger that must be notified in
terms of s 13 A(1). For this reason
the acquisition by first
respondent of 34.9% of the issued share capital of appellant read
together with the irrevocable undertaking
of Norilsk would constitute
an assumption of control in terms of s 12(2) (g) of the Act.' (at 92)
[17]
The dictum in Goldfields that an acquiring firm can continue with its
proposal to effect a merger but 'it will be prohibited
in terms of s
13 A from implementing the merger until the latter has been approved'
(at 81) needs to be read with the facts of
the Go/dfields case. As
the passage cited makes plain, if the proposal to effect a merger
gives rise to an acquisition of control,
then the acquirer may not
exercise that control or, to use the language of the Act , may not
implement the merger, before obtaining
the required approval.
[18]
It is for this reason that the Court found that the acquisition by
Harmony of 34.9% of the issued share capital of Goldfields,
taken
together with the irrevocable undertaking of Norilsk, constituted an
acquisition of control in terms of s 12 (2)(g) of the
Act. Read
accordingly, the decision in Go/dfie/ds is not authority for the
proposition that the voting of shares is prohibited
in terms of s 13
A (3), where the shares so voted cannot give control to the voting
shareholder over the target company in terms
of any of the provisions
of s 12 (2) of the Act .
[19]
S 13 A (3) of the Act prohibits the implementation of a merger until
it has been approved. This provision does not prohibit
a merger from
taking place until it is approved. That is so whether a person
acquires control or proposes to do so. As this Court
explained in
Caxton
[3]
, the various types of
control set out in s 12 (2) confer a power to steer the firm or
appoint those who may do so. The acquisition
of such a power is not
the same thing as the exercise of that power. A power must be
acquired to be exercised, but a person may
acquire a power and not
exercise it. S 13A (3) prohibits the exercise of the powers by which
control comes about. That is whys
13A (3) references and prohibits
the implementation of a merger, absent approval; the sub-section does
not prohibit mergers from
taking place. If that were so, the language
of s 13A (3) would have prohibited parties to an intermediate or
large merger from
merging. That is not what the sub-section provides.
[20]
On a proper reading of Gofdfiefds and s 13A(3}, a party is not
prohibited from acquiring and voting shares in a target
company up
until the point that these shares vest the acquirer with control of
the target company, control being defined in terms
of s 12 of the
Act, and even then what s 13A(3) prohibits is the implementation of
the control acquired.
[21]
To return to the phrase "that merger" as it appears in s
13A (3), appellant contended that the interpretation
of these words
must be read in the light of s 11 (5) of the Act, which refers to an
intermediate or large merger as 'a merger or
proposed merger'. By
contrast, merger, is defined ins 12, as follows 'a merger occurs when
one or more firms is directly or indirectly
acquired or established
direct or indirect control over the whole or part of the business of
another firm'.
[22]
The correct interpretation of s 13A (3) must, in the first place,
engage the text. The reference to "that merger"
may mean,
by extension, the proposal to merge, as the appellant would have it.
Or it may mean the merger that is proposed. On this
reading, it is
the merger that is proposed and not the proposal to merge that may
not be implemented. This interpretation is the
more compelling.
First, the legislative purpose of a prohibition upon prior
implementation is to prevent a person exercising control
over a firm,
and thereby ( at least potentially) affecting the firm's prospective
power to exercise competitive constraint in a
relevant market ,
before the competition authorities have been able to make a proper
assessment. There seems little point in preventing
a person from
engaging in conduct to pursue a proposal to acquire control, when
that conduct can have no competitive effects in
a relevant market.
Nor is this what the competition authorities investigate when the
approval of a merger is sought.
[23]
Second, the place of s 11(5) in the scheme of the merger control
provisions in the Act is to differentiate small, intermediate
and
large mergers; and to do so by reference to the value of a merger or
proposed merger. The controlling definition of a merger
is to be
found in s 12. The language of "that merger'' in s 13A(3), more
naturally references the controlling definition of
a merger in s 12,
which is the true subject matter of regulatory approval.
[24]
Thirdly, there is a textual reason to prefer the interpretation
suggested by us. Had the legislature wished to expand
the scope of
the prohibition against implementation to a proposal to merge it
would have more clearly said so or at least adopted
a formulation
along the following lines: the parties may not implement an
intermediate or large merger until it has been approved.
The
legislature did not do so. Rather it adopted a formulation that
references "that merger". If "that merger''
means
simply that parties may not implement the merger that falls within
the definition of s 12, then the scope of the prohibition
against
implementation pending approval is the same as the scope of the
regulatory approval that is sought from the competition
authorities.
This conceptual identity makes sense because a party to a merger may
then not do what it seeks permission from the
competition authorities
to do. If a wider construction is given to the prohibition than to
the permission, as the appellant seeks
to argue, it is hard to
understand why the legislature would have sought such asymmetry.
[25]
Lastly, merger control aims to prevent harm to competition and
defined public interests. The interpretation of s13A(3)
and s11(5)
should not be read so expansively so as to yield unintended
consequences. One of these is to skew the terms of engagement
in a
hostile takeover. Hostile takeovers or the threat of such takeovers
can be a wholesome antidote to the complacency of incumbent
management. Sterilizing shares acquired after a firm intention to
acquire control is announced would broaden the scope of the
prohibition against implementation and thereby place a thumb on the
scale in favour of incumbency. That is not what the legislature
intended.
[26]
While it is possible to qualify the phrase 'that merger' with the
words 'a proposed merger', this interpretation leads
to significant
difficulties. Does a proposal to merge suffice, in that a proposal to
merge may never be translated into a merger,
or does 'proposed
merger' indicate that there is already a measure of inevitability in
respect of this proposal such that the merger
will, in effect, take
place subject to approval from the competition authorities? Secondly,
the purpose of s 13 A (3) is to cater
for the situation that
confronted this Court in Goldfields, that is power possessed by a
firm which already enables it to assume
control in terms of one of
the tests as set out in s 12 (2). Were ii not for s 13 A (3) of the
Act, the acquiring firm would then
be able to implement the merger
without more. The Act did not envisage, as is evinced from its clear
purpose, that, an interdict
can be sought from the Tribunal, where
there is no evidence that control, on any of the bases as set out in
s 12 (2), has taken
place.
[27]
This case provides a luminous justification of this conclusion.
Notwithstanding the fire and the fury of the litigation
between the
parties, prior to 19 June 2018 Aton did not possess the voting power
sufficient to vote down the Aveng transaction.
Had Aton, as was the
case in Go/dfields, been shown, on a factual basis, to be able to
materially influence the policy of appellant
in a manner comparable
to a person in ordinary commercial practice, as where it owned more
than one half of the issued share capital
of the company or was
entitled to vote the majority of the votes that may be casted at a
general meeting of the firm, the result
would have been entirely
different.
The
Bright line argument
[28]
Mr Harris submitted, in support of his main submission, that there
were compelling policy considerations to create a
bright line,
whereby notification of an intention to merge froze the voting rights
of a shareholder in respect of shares after
the disclose of the
intention. In his view, this interpretation would mean that s 13 A
(3) would prohibit the exercise of any voting
rights that attached to
shares so acquired by a party, although it could continue with its
proposal to gain control before the
approval of the competition
authorities had been obtained. This result would ensure that there
would be no potential for implementation
of a merger, whether
inadvertently or by a party seeking to exploit the uncertainty of the
factual position. In his view, this
construction of s 13 A (3)
facilitated the monitoring and the compliance duties of the
Competition Commission, pursuant to its
overall regulatory function.
This approach would recognise that it might be extremely difficult to
determine precisely the level
of shareholding in terms of which de
facto control is acquired or whether, in relation to any particular
meeting of shareholders,
a party such as Aton holding, as in this
case approximately 44.1% of the voting rights in appellant, would be
vested with de facto
control.
[29]
The problem with this submission is that s 12 (2) (g), on which the
submission is essentially based, invariably involves
a fact intensive
inquiry in order to determine whether, on the facts of the particular
case, a party has the ability lo materially
influence the policy of
the target firm in a manner comparable to a person in ordinary
commercial practice exercising control over
the target company.
Section 12 (2) (g), by reason of the wording employed therein and the
varieties of ways in which de facto control
may come about, can never
give rise to bright lines. That is to say, it is extremely difficult
to conceive of a 'one stop' test
which would constitute a line over
which a party cannot step, if it is to be found to exercise control
over the target firm as
set out in s 12 (2) (g) of the Act.
Each case must be determined on its own facts in order to determine
whether the acquiring
firm has the power to influence the policy of
the company as is envisaged in this provision. There is no reason to
give the prohibition
against implementation a wide remit on
prudential grounds when a proper interpretation of s13A(3) does not
support such a reading.
There is a correct answer to the question as
to whether a person has acquired de facto control, even if there may
be reasonable
differences that can be maintained on the question.
That uncertainty is not best cured by the unwarranted expansion of
the prohibition
against implementation.
The
alternative argument
[30]
As an alternative, appellant contended that Aton had already obtained
de facto control over the appellant in terms of
s 12 (2) (g) of the
Act. Mr Harris contended that Aton was by far the largest shareholder
in appellant, holding 44.1% of the voting
rights. Other than the PIC,
which held approximately 23% of the shares, the remaining
shareholders held small parcels of shares.
Attendance at
shareholder's meetings from 2012 to 2017 indicated that a 44%
shareholding, on average, would have given Aton more
than 50% of the
votes cast of a meeting of appellant's shareholders. By contrast,
first respondent contends that only at .three
meetings during this
period would Aton's shareholding have given it more than 50% of the
votes cast. Furthermore, at the meeting
on 19 June 2018, where the
attendance was above 92% and notwithstanding that Aton voted its full
complement of shares, the resolution
passed by 52.06%. The outcome of
this meeting evidences that Aton's current shareholding did not vest
it with de facto control
of appellant in respect of a strategically
important resolution. There is insufficient evidence to suppose that
the outcome would
be any different if any further such resolutions
were to arise (of which there is no direct evidence), prior to merger
approval
being obtained by Aton for its proposed merger.
[31]
This disputed evidence does not provide a sufficiently sound basis,
on the probabilities, to conclude that, in terms
of s 12 (2) (g) of
the Act, Aton already had control of appellant. As the European
Commission's Consolidated Jurisdictional Note
on the Control of
Concentrations between Undertakings (208/C 95/01 at para 59) states:
'Where, on the basis of
its shareholding, the historic voting pattern at the shareholders'
meeting and the position of other shareholders',
a minority
shareholder is likely to have a stable majority of the votes at the
shareholders' meeting, then that large minority
shareholder is taken
to have sole control.' (our emphasis)
[32]
A further consideration in this regard is the undertaking given by
Aton that, pending a decision on its merger notification
by the
competition authorities, it will not vote any percentage of voting
rights that represents more than 50% less 1 of the votes
cast in
respect of any resolutions proposed at any future ordinary or extra
ordinary general meeting of appellant's shareholders
within this
timeframe. Under all these circumstances, the alternative argument
must fail.
Costs
[33]
Appellant contends that the Tribunal should have granted an order
that it was entitled to costs. By contrast respondent
refers to the
decision of the Constitutional Court in Competition Commission of
South Africa v Pioneer Hi Bred International
Inc and others
2014
(2) SA 480
(CC) to the effect that the Tribunal has no power to award
costs against the Commission as; 'The Act prescribes that, as a
general
rule, each party in proceedings before the Tribunal must pay
its own costs.' (para 31) The Court later said in respect of s 57 of
the Act; 'The correct interpretation is, therefore, that the Tribunal
has no powers to award costs against the Commission under
the Act.'
(para 40)
[34]
Section 57 (2) of the Act deals only with costs awards under Chapter
2 of the Act and hence does not deal with merger
cases which fall
under Chapter
3.
Therefore, there does not appear to be a legal basis for the Tribunal
to have awarded costs, however
partially, to appellant.
[35]
That having been said, the Tribunal ordered extremely limited relief
and hence no order as to costs appears to be a justifiable
conclusion.
[36]
n the result, the appeal is dismissed with costs, such costs to
include the costs of two counsel.
DAVIS
JP
VICTOR
JA
[1]
By competition authorities is meant the Competition Commission, the
Competition Tribunal and on appeal this Court.
[2]
Section 12 (2) provides as follows:
(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 to 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 ins 1(3)(a) of
the Companies Act, 1973 (Act No. 61
of 1973);
(e)
in the case of a firm that is a trust, has the ability to control
the majority of the votes of the
trustees, to appoint the majority
of the trustees or to appoint or change the majority of the
beneficiaries of the trust;
(f)
in the case of close corporation, owns the majority of members'
interests' or controls directly
or has the right to control the
majority of members' votes in the close corporation; or
(g)
had 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).
[3]
Caxton and CTP Publishers and Printers v Media 24 (Ply) Ltd {
2015]
2 CPLR 354
(CAC) at 366-367