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7 April 2014
The hostile takeover bid by South African investment holding company Hosken Consolidated Investments (HCI) for control of its rival Johnnic Holdings should be of more than passing interest to UK corporate lawyers: first for its sheer drama, and second for the cautionary lesson that it provides regarding potential pitfalls in South African competition law for hostile bidders.
Johnnic and its iconic chairman Cyril Ramaphosa are widely recognised as pioneers of black economic empowerment (BEE) in South Africa. HCI grew from the investment arm of the South African Clothing and Textile Workers' Union (SACTWU). HCI chief executive Johnny Copelyn is the former general secretary of the SACTWU, while chairman Marcel Golding formerly served as Ramaphosa's deputy at the National Union of Mineworkers.
By late 2004, both HCI and Johnnic were aggressively pursuing gaming investments through the same vehicle, Tsogo Investment Holdings (Proprietary) (TIH), which holds a 51 per cent interest in the Tsogo Sun group, South Africa's foremost hotel and casino operator. By early 2005, HCI, Johnnic and Nafcoc Investment Holdings (Nafhold) were the only significant shareholders in TIH. As all the shares in TIH were effectively spoken for, HCI began purchasing shares directly in Johnnic to increase its effective holding in TIH.
At a meeting of Johnnic shareholders on 30 June 2005, HCI (then holding a 30 per cent interest in Johnnic) failed in an attempt to place three HCI appointees on Johnnic's board. On 1 July 2005, HCI increased its shareholding in Johnnic to 40 per cent, triggering a mandatory offer to the remaining Johnnic shareholders in terms of the rules of the Securities Regulation Panel (SRP). The offer was duly made on 2 August 2005. While Johnnic mounted a number of legal and commercial defences, proceedings under the 1998 Competition Act subsequently took centre stage in the battle and are worth considering in some detail.
Section 12(1) of the South African Competition Act provides that a merger occurs when one firm acquires or establishes "control" over the whole or part of the business of another company. Section 12(2) lists a number of instances of control, including the "standard" examples, such as majority shareholding, the ability to control the majority of votes at a shareholder meeting and to appoint or veto the appointment of the majority of directors. Section 12(2)(g) provides that control is also established through the ability to "materially influence the policy of the company in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control", referred to in the preceding portion of Section 12(2). Section 13A(3) goes on to provide that the parties to a merger may not implement the merger until it has been approved.
The interpretation and application of Section 12(2)(g) is a subject of some controversy. The Competition Appeal Court (CAC) had previously found in the matter between gold mining giants Harmony and Goldfields that a potential holding by Harmony of a 34.9 per cent interest in Goldfields (leaving it just short of the obligation to make a mandatory offer in terms of the SRP rules), coupled with an undertaking from another 20 per cent shareholder to vote in unison with Harmony, constituted control over Goldfields for the purposes of Section 12(2)(g). The CAC also seemingly endorsed the proposition that the parties to a merger are obliged to notify the Competition Commission of the merger as soon as they have formed an intention to merge, and are then prohibited from taking any steps to implement the merger (including exercising voting rights in the target company) pending its approval.
Taking its cue from the reasoning in the Harmony/Goldfields decision, Johnnic launched proceedings in the Competition Tribunal aimed at preventing HCI from acquiring any further Johnnic shares outside of the offer and from exercising voting rights in respect of any of its Johnnic shares pending approval of the merger by the tribunal (which HCI had notified on 3 August 2005). Johnnic's first contention was that HCI's 40 per cent interest already constituted the ability to "materially influence" Johnnic's affairs in terms of Section 12(2)(g) of the 1998 Competition Act, and that the votes of the approximately 3.7 per cent of Johnnic shareholders who had already undertaken to accept the HCI offer should be attributed to HCI, with the resultant combined shareholding of some 43.6 per cent constituting "joint control" over Johnnic.
Johnnic's second contention was that HCI had formed an intention to acquire control over Johnnic by at least 1 July 2005 (when it acquired the further 10 per cent shareholding triggering the mandatory offer), and that it was thus prohibited from taking any further steps to "implement" the merger (in the sense referred to) pending its approval. This reasoning also relied heavily on certain provisions of the Competition Act, such as Section 11(5), which contains references to a "proposed" merger.
The tribunal rejected both of Johnnic's contentions. Regarding control, it noted that approximately 90 per cent of Johnnic's shareholders were represented at the 30 June 2005 meeting and that HCI's failure to secure board representation in fact pointed to the antithesis of control. The tribunal further noted that Johnnic's institutional shareholders still outnumbered HCI in voting power and refused to accept that HCI's status as the single largest shareholder in Johnnic established control in these circumstances.
Regarding the second contention, the tribunal rejected the notion that the intention to merge could give rise to an obligation to notify, noting that this would place a potential hostile suitor (which may not yet have acquired any shares in the target firm) on the same footing as an acquiror in terms of a friendly merger contained in a binding agreement endorsed by the shareholders and boards of both companies. In the tribunal's view, the term "proposed merger", in the context of the merger notification requirements, did not create a different category to a 'merger' - it simply meant that a merger could be prospective at the time of notification.
While the tribunal's decision provides some valuable guidelines regarding the application of Section 12(2)(g) and the time at which an obligation to notify a merger is triggered, this issue is likely to remain controversial until such time as the CAC has an opportunity to clarify its position by way of an authoritative ruling thereon.
Julius Oosthuizen is a senior associate at Sonnenberg Hoffmann Galombik in Cape Town