Sen­si­ble ex­emp­tions in com­pe­ti­tion pol­icy

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Mark Gar­den & Kevin Mi­nofu

STEVE Jobs fa­mously said that “(t)hings don’t have to change the world to be im­por­tant”. Although the re­cent changes to the Com­pe­ti­tion Com­mis­sion’s pol­icy on risk mit­i­ga­tion trans­ac­tions may not have been an­nounced to much fan­fare, the ex­pan­sion of the ex­emp­tion from hav­ing to no­tify the com­mis­sion of cer­tain risk mit­i­ga­tion trans­ac­tions to in­clude state-owned in­sti­tu­tions and not only reg­is­tered banks, is an im­por­tant step in the right di­rec­tion.

Risk mit­i­ga­tion trans­ac­tions con­sist of agree­ments which al­low a fi­nance in­sti­tu­tion to gain se­cu­rity or col­lat­eral in the course of pro­vid­ing fund­ing. Th­ese in­clude, among other things, the gen­eral ex­er­cise of a se­cu­rity in­ter­est; sale and lease­back trans­ac­tions; and gov­ern­ment con­ces­sions in in­fra­struc­ture devel­op­ment. All of th­ese trans­ac­tions in­volve a fi­nan­cial in­sti­tu­tion ac­quir­ing an as­set or in­ter­est of a debtor as se­cu­rity for an un­der­ly­ing obli­ga­tion.

The com­plex­ity and dif­fi­culty with th­ese com­mon­place fi­nan­cial trans­ac­tions is that they fall within the re­mit of the merger reg­u­la­tion pro­vi­sions set out in the Com­pe­ti­tion Act, 1998. When as­sess­ing whether a par­tic­u­lar trans­ac­tion trig­gers merger no­ti­fi­ca­tion obligations, the Com­pe­ti­tion Act does not re­quire an in­ter­ro­ga­tion of the ra­tio­nale be­hind that trans­ac­tion. Pro­vided that rel­e­vant mon­e­tary thresh­olds are met, a trans­ac­tion which in­volves the ac­qui­si­tion of di­rect or in­di­rect con­trol over the whole or part of a busi­ness must be made known to the com­mis­sion in the pre­scribed form. In risk mit­i­ga­tion trans­ac­tions, a fi­nance in­sti­tu­tion will of­ten take con­trol over a par­tic­u­lar as­set, which con­sti­tutes the whole or part of a busi­ness, in the process of ex­er­cis­ing its se­cu­rity in­ter­est in that as­set.

This tran­si­tion of con­trol from a debtor to the fi­nance in­sti­tu­tion of­ten trig­gers the merger con­trol pro­vi­sions in the act and, as such, sub­jects that trans­ac­tion to the statu­tory merger regime. In the early 2000s, the com­mis­sion ac­cepted that if all of th­ese trans­ac­tions trig­gered no­ti­fi­ca­tion obligations, the com­mis­sion would run the risk of be­ing in­un­dated with fil­ings which were un­likely to give rise to any po­ten­tial com­pet­i­tive or public in­ter­est con­cerns.

More­over, the com­mis­sion be­lieved that it could not have been the in­ten­tion of the leg­is­la­ture to re­quire fi­nan­cial in­sti­tu­tions, in the or­di­nary course of busi­ness, to no­tify such trans­ac­tions.

Con­se­quently, the com­mis­sion re­leased Prac­ti­tioner’s Up­date 4, which pro­vided that the com­mis­sion would not re­quire reg­is­tered banks to no­tify a risk mit­i­ga­tion trans­ac­tion, which would oth­er­wise con­sti­tute a “merger” un­der the act, pro­vided that af­ter the ac­qui­si­tion of con­trol of an as­set in such cir­cum­stances, the reg­is­tered bank had dis­posed of such as­set within 12 months. If the reg­is­tered bank had not dis­posed of the as­set within 12 months, how­ever, then the trans­ac­tion would be deemed to be im­me­di­ately no­ti­fi­able.

De­spite this prac­ti­cal and wel­comed con­ces­sion, Prac­ti­tioner’s Up­date 4 has been sub­ject to crit­i­cism. The most pen­e­trat­ing re­volves around the ques­tion: why does the ex­emp­tion only ap­ply to reg­is­tered banks? This is de­spite the fact that myr­iad in­sti­tu­tions from pri­vate eq­uity firms, gen­eral lenders and state-owned in­sti­tu­tions carry out the same risk mit­i­ga­tion trans­ac­tions. The ra­tio­nale, at the time, had been that banks were more closely reg­u­lated than other in­sti­tu­tions and could be closely mon­i­tored to pre­vent the banks abus­ing the ex­emp­tion to sim­ply avoid merger no­ti­fi­ca­tion obligations. A sec­ond crit­i­cism was that the 12-month limit was of­ten un­work­able for many banks and they would reg­u­larly ask for an ex­ten­sion of that time limit to give them­selves fur­ther time to dis­pose of an as­set that they had ac­quired through a risk mit­i­ga­tion trans­ac­tion.

In re­sponse to th­ese con­cerns, the com­mis­sion has re­cently de­cided to ex­pand the scope of Prac­ti­tioner’s Up­date 4. It has done so by not re­quir­ing no­ti­fi­ca­tion of a risk mit­i­ga­tion trans­ac­tion which would be con­sid­ered a “merger” un­der the act if that trans­ac­tion is ef­fected by a state-owned in­sti­tu­tion. Fur­ther, it has in­creased the time pe­riod re­quired for a fi­nan­cial in­sti­tu­tion to dis­pose of an as­set from 12 to 24 months.

It is of in­ter­est to note that the com­mis­sion has only opted to ex­tend the ex­emp­tion to sta­te­owned in­sti­tu­tions and not to other firms which en­gage in risk mit­i­ga­tion trans­ac­tions. This is par­tic­u­larly rel­e­vant con­sid­er­ing that the com­mis­sion at the same time chose to up­date Prac­ti­tioner’s Up­date 5, which deals with as­set se­cu­ri­ti­sa­tion schemes.

In the pre­vi­ous ex­emp­tion on as­set se­cu­ri­ti­sa­tion schemes, the com­mis­sion stated that it did not re­quire reg­is­tered banks to no­tify the com­mis­sion of such a scheme. The up­date, how­ever, extends this ex­emp­tion to all non-bank­ing in­sti­tu­tions en­gaged in as­set se­cu­ri­ti­sa­tion schemes, pro­vided that those schemes are com­pli­ant with South African Re­serve Bank reg­u­la­tions.

While the de­vel­op­ments will come as wel­come news to sta­te­owned in­sti­tu­tions, they will prob­a­bly be met with dis­ap­point­ment from other fi­nan­cial in­sti­tu­tions which en­gage in such trans­ac­tions on a regular ba­sis.

Given that the need to no­tify a merger, par­tic­u­larly in cases where an as­set is only tem­po­rar­ily ac­quired and held as se­cu­rity, is a time-con­sum­ing and costly ex­er­cise, the con­tin­ued ex­clu­sion of non­banks and non-state-owned in­sti­tu­tions from the ambit of Prac­ti­tioner’s Up­date 4 may well have the un­in­tended con­se­quence of un­fairly ad­van­tag­ing the par­ties to whom the re­vised pol­icy ap­plies, at the ex­pense of the firms to which it does not.

New mea­sures gov­ern­ing risk mit­i­ga­tion trans­ac­tions could be seen as ad­van­ta­geous to some

Mark Gar­den is a direc­tor and Kevin Mi­nofu a can­di­date at­tor­ney in ENSafrica’s com­pe­ti­tion depart­ment.

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