Legal

Murky waters – the confounding concept of control (part II final)

Lindiwe Vundla, Associate, Deneys Reitz

A question which blurs the lines of when control has been acquired is that of sole versus joint control. It was established in our competition jurisprudence, in the transaction between Iscor and Saldanha Steel, that it may be necessary to notify a change from joint to sole control, as well as a change from sole to joint control.

This concept was expanded in the transaction between the Ethos Private Equity Fund and The Tsebo Outsourcing Group. Prior to the transaction, Ethos had held a shareholding in Tsebo, and exercised joint control together with Tsebo’s other shareholder, Nozala. Ethos then increased its shareholding to over 50% of the issued share capital but, in terms of the shareholders agreement, would still exercise joint control together with Nozala. The question that arose was whether it was necessary to notify Ethos’s increased shareholding to over 50%, despite the fact that it already exercised a form of control over Tsebo.

The Tribunal found that the Act allows for the concept of plurality of control – it is possible for a firm to exercise both sole and joint control over another firm at the same time. In this instance, while Ethos already exercised joint control over Tsebo, by increasing its shareholding to over 50% of the total issued share capital it had crossed a bright line and thus post-transaction also exercised “sole control” over Tsebo. The transaction was thus notifiable.

Total issued share capital was the basis of what has perhaps been the most confounding case on control in South Africa thus far. The case between the Cape Empowerment Trust (‘CET’), Sanlam Life Insurance and Sancino Project raised the question as to whether an acquisition of preference shares becomes a ‘merger’ at the time the shares are issued, or at the time that a party is able to vote on such shares.

Sancino was a firm with two major shareholders, Sanlam and CET. In 1998, before the Act came into effect, Sanlam extended funding to Sancino, receiving preference shares in return. These preference shares granted Sanlam the majority of the issued share capital, but not the majority of the voting rights. After the Act came into effect, Sancino defaulted on its funding arrangement, and Sanlam acquired but did not exercise the voting rights accruing to the preference shares. Sanlam later sought to exercise these voting rights and a dispute arose between Sanlam and CET as to whether control was acquired at the time that the preference shares were issued, or at the time that the voting rights were acquired.

The Tribunal found that when Sanlam acquired the preference shares in 1998 and thus acquired the majority of the issued share capital, they crossed the 50% line, even though no voting rights accrued to the shares at that stage, and such a transaction was notifiable at the time of the share acquisition. The acquisition of the shares, rather than the acquisition of the voting rights, was the trigger for notification.

This approach is different from that taken in other jurisdictions. The Canadian Competition Act specifically states that ‘Acquisitions of non-voting shares…are not notifiable under Part IX of the Act... where non-voting shares are being acquired from a third party holding them and reflecting them on its balance sheet as assets, the acquisition is not notifiable. In the case of an acquisition of convertible securities, such as convertible debentures, convertible non-voting shares, options, warrants and rights, notice of acquisition need only be given where the securities will be converted to voting shares …’

Businesses need to exercise caution when restructuring companies, purchasing assets, or issuing shares, and to seek legal counsel when confronting the confounding question of control.

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