MAKONI
JA: This
is an appeal against a decision of the Administrative Court upholding
the penalty imposed on the appellant by the respondent for the
non-notification of a merger that it was a party to.
FACTUAL
BACKGROUND
The
appellant is a holding company registered and operating in Zimbabwe
whose shares are tradable on the stock market. The respondent is a
statutory body which administers the Competition Act [Chapter
14:28]
('the Act').
In
2012, a company styled Afrifresh Holdings Limited acquired a
controlling interest in the appellant. The transaction which resulted
in this development was between Emvest Holdings (Pvt) Ltd, one of the
appellant's controlling shareholders and Origin Global Holdings
(Pvt) Ltd a subsidiary of Afrifresh Holdings Limited. Emvest Holdings
sold its shares in the appellant to Origin Global Holdings (Pvt) Ltd
through the Zimbabwean Stock Exchange. The merger had a value
exceeding the prescribed threshold and was thus subject to
notification to the respondent.
Upon
becoming aware of the merger, the respondent notified the appellant
of its intention to penalise it for non-notification of the merger.
The respondent regarded the transaction as a notifiable merger which
the appellant was obliged to notify in terms of section 34A(3) and
(4) of the Act. The
appellant paid part of the merger notification fee and requested a
payment plan for the balance which was approved by the respondent.
However,
the appellant failed to adhere to the payment plan following which
the respondent expressed its intention to penalise it for failing to
give notification of the merger. In response, the appellant took the
position that the transaction was not a merger and that it had no
legal obligation to notify the respondent of the transaction or to
pay any penalty for non-notification. Consequently, the respondent
penalised the appellant on the basis that the transaction was a
merger and that the appellant was a party to it and was thus obliged
to notify the same.
Aggrieved
by that decision, the appellant noted an appeal to the court a
quo.
SUBMISSIONS
IN THE COURT A
QUO
The
appellant argued that the process in which Afrifresh Holdings
acquired shares in the appellant did not constitute a merger as
defined by the Act since, at the time of the acquisition of its
shares, Afrifresh Holdings was not a competitor, customer or supplier
relationship with the appellant. However, the appellant abandoned
this argument in light of the decision of the High Court in Innscor
Africa Limited & Anor v
The Competition and Tariff Commission HH
486/17.
The
appellant further averred that it could not be penalised in respect
of a transaction it was not a party to. The appellant highlighted
that the transaction that resulted in Afrifresh acquiring the
controlling interest in it was concluded by separate parties in an
open market deal. Thus it denied being under any legal duty to notify
the appellant of the merger.
Per
contra,
the respondent argued that the appellant was a party to the merger
with Afrifresh Holdings and had a duty to notify that transaction. It
reasoned that the appellant, being the party which relinquished its
controlling interest or the party in whose business the controlling
interest was acquired, was a party to the merger in the context of
section 34A(1) of the Act. It further argued that the appellant was
involved in the merger and could not escape the consequent penalty
for non-notification.
THE
DETERMINATION OF THE COURT A
QUO
The
court a
quo
dismissed the appellant's appeal on the basis that it lacked merit
since, by abandoning its first ground of appeal, the appellant was
admitting the existence of a merger. As such, the court reasoned that
the appellant could not argue that it did not participate indirectly
in the merging of the entities.
The
court a
quo
highlighted that both Assessors in the matter were of the view that
the appellant was not a party to the transaction in terms of which
Afrifresh Holdings acquired shares in the appellant. As a
consequence, it applied the provisions of section 10(1) of the
Administrative Court Act [Chapter
7:01]
which states that where the President and Assessors' opinions are
divided, the decision of the President of the court prevails.
Aggrieved
by the decision of the court a
quo,
the appellant noted an appeal to this Court on the following grounds.
GROUNDS
OF APPEAL
1.
The court a
quo
erred in law and misdirected itself in making a decision contrary to
section 10(1) of the Administrative Court Act [Chapter
7:01],
in (sic) circumstances where the decision to be made was a matter of
fact, and where the President did not, or could not have found that
the issue was a matter of law.
2.
The court a
quo
erred in law and misdirected itself in dismissing the appeal by
relying on the High Court decision of Innscor
Africa Limited and Anor versus The Competition and Tariff Commission
HH 486/17.
3.
The court a
quo
erred in law and misdirected itself in holding that since the
Appellant has abandoned one of its grounds of appeal, it could not
have argued then that it was not a party to the transaction.
4.
The court a
quo
erred and misdirected itself in law and in fact in finding that the
Appellant was party to the transaction when in fact and in law it was
not, and in dismissing the appeal on this and the aforementioned
grounds.
SUBMISSIONS
IN THIS COURT
Before
the appellant addressed this court, Mr
Mapuranga
for the respondent raised a preliminary point that the appeal was
improperly before the court having been served on the appellant
outside the time frame stipulated by the order granting condonation.
Consequently, counsel for the appellant, Mr
Lunga
sought condonation for the late service of the notice of appeal,
which we granted.
On
the merits, Mr
Lunga
initially argued that the
question of whether or not the appellant was a party to the merger
was a question of fact. Since the assessors had taken the position
that the appellant was not a party to the merger, their decision
ought to have been the decision of the court in terms of section 10
of the Administrative Court Act [Chapter
10:28].
Upon
engagement with the court, Mr
Lunga
conceded, properly so, that the question of whether or not the
appellant was a party to the merger, in the circumstances of this,
was one of law, after which he confined his argument to the issue of
whether or not the appellant was a party to a merger as defined by
the Act.
The
concession was properly made given that it is common cause that the
appellant was not directly involved in the transaction that resulted
in the merger. A determination of who had the legal obligation in
the circumstances necessitates a finding of whether the appellant is
a party as defined in terms of the Act. The court a
quo
needed to determine who constituted the various parties to the
merger. This called on it to interpret the relevant provisions of the
Act, thereby constituting a question of law.
Mr
Lunga
submitted that section 2 of the Competition Act ought to be
interpreted narrowly to mean that parties to a merger are the parties
who engage in the transaction which results in a merger. He further
highlighted the difficulty associated with a broad categorisation of
parties to a merger, envisaging a scenario in which the party in whom
the controlling interest is acquired is not aware that a merger has
been formed.
Mr
Lunga,
however, admitted that the appellant had a share register and would
have known of the change in its shareholding.
In
rebuttal,
Mr
Mapuranga
submitted that the appellant was a party to a merger as it was the
entity in whose business a controlling interest was acquired. He
insisted that the determinant factor is the change in shareholding
control as opposed to the immediate parties to the transaction. He
further argued that the appellant was encompassed in the definition
of a merger and, as such, was a party to a merger. To buttress his
point, Mr
Mapuranga drew
the court's attention to the South African Competition Act 89 of
1998, which classifies the several parties to a merger.
That
Act provides that “a party to a merger is an acquiring firm or
target firm,” the former being the entity which
establishes a controlling interest in another (Afrifresh) and the
latter, the party in whose business the controlling interest is
acquired (the appellant).
In
conclusion, he argued that the penalty imposed on the appellant was
proper in the circumstances as the appellant was obliged to notify
the respondent of the transaction.
ISSUE
FOR DETERMINATION
The
sole issue for consideration is whether the appellant fits into the
description of the possible parties to a merger envisaged by section
2 of the Act. Put differently, whether the entity in which a
controlling interest is acquired can be described as a party, even if
it took no part in the transaction which resulted in the merger.
If
the answer is in the affirmative, the obligation to notify the
respondent attaches in terms of section 34A(1), as does the
consequent penalty for non-notification.
THE
LAW
Section
13A(1) of the South African Competition Act No. 89 of 1998, which is
strikingly similar to our section 34A, provides:
“13A.
Notification and implementation of other mergers
(1)
A
party to
an intermediate or a large merger must notify the Competition
Commission of that merger in the prescribed manner and form.”
Section
59(1)(d)(i) and (iv) of the Act provides as follows:
"(1)
The Competition Tribunal may impose an administrative penalty only-
(d)
if the parties to a
merger
have -
(i)
failed to give notice of the merger as
required
by Chapter 3;
(iv)
proceeded to implement the merger without the approval of the
Competition
Commission or Competition Tribunal, as
required
by this Act."
A
party to a merger is defined in section 1(1) (xvii) of that Act as
'an acquiring firm or a target firm', which entities are jointly
obliged to notify the Commission of a proposed merger.
An
acquiring firm as defined in section (1)(i) is:
“...
a firm –
(a)
that, as a result of a transaction in any circumstances set out in
section 12, would directly or indirectly acquire, or establish direct
or indirect control over, the whole or part of the business of
another firm;
(b)
that has direct or indirect control over the whole or part of the
business of a firm contemplated in paragraph (a); or
(c)
the whole or part of whose business is directly or indirectly
controlled by a firm contemplated in paragraph (a) or (b).”
A
target firm is described in section 1(1) (xxxiii) as:
“(xxxiii)
'target firm' means a firm –
(a)
the whole or part of whose business would be directly or indirectly
controlled by an acquiring firm as a result of a transaction in any
circumstances set out in section 12;
(b)
that, as a result of a transaction in any circumstances set out in
section 12, would directly or indirectly transfer direct or indirect
control of the whole or part of, its business to an acquiring firm;
or
(c)
the whole or part of whose business is directly or indirectly
controlled by a firm contemplated in paragraph (a) or (b);”
Applying
these provisions to the present case would mean that the appellant
and Afrifresh are the merging parties, the appellant being the target
firm, in whose business a controlling interest is established, and
Afrifresh Holdings as the acquiring firm, which establishes control
over the appellant's business.
The
obligation to notify rests upon the merging parties.
Similarly,
the Common Market for Eastern and Southern Africa (COMESA) Merger
Assessment Guidelines, 2014, state:
“'merging
party' means any acquiring undertaking or target undertaking;
'party'
means any merging party, if a merger has been implemented, any merged
undertaking.”
However,
our Act does not define who can be a party to a merger, thus this has
to be construed from the description of a merger.
Section
2 of the Act defines a merger as:
“the
direct or indirect acquisition or establishment of a controlling
interest by one or more persons in the whole or part of the business
of a competitor, supplier, customer or other person whether that
controlling interest is achieved as a result of —
(a)
the purchase or lease of the shares or assets of a competitor,
supplier, customer or other person;
(b)
the amalgamation or combination with a competitor, supplier, customer
or other person; or
(c)
any means other than as specified in paragraph (a)
or (b).”
The
obligation to notify a merger and the consequence of non-notification
is provided for in section 34A which states as follows:
“34A
Notification of Proposed Merger
(1)
A party to a notifiable merger shall notify the Commission in writing
of the proposed merger within thirty days of —
(a)
the conclusion of the merger agreement between the merging parties;
or
(b)
the acquisition by anyone of the parties to that merger of a
controlling interest in another.
(2)
…
(3)
The Commissioner may impose a penalty if the parties to a merger —
(a)
fail to give notice of the merger as required by subsection (1);
(b)
proceed to implement the merger without the approval of the
Commission as required by subsection (2).”
Neither
section 2 nor 34(A) state in specific terms which among the merging
parties is obliged to notify the respondent of an intended or
concluded merger transaction.
From
the definition of a merger in section 2 of the Act, it is evident
that one of the ways through which a merger comes into existence is
where a party directly or indirectly acquires a controlling interest
in a business of another through the purchase of shares, as in
casu.
Given
its ordinary grammatical meaning, two broad categories of the parties
to a merger emerge from the aforementioned definition of a merger.
There
is the party which establishes a controlling interest in the business
of another and the 'other party' in whose business that interest
is established.
On
the facts of the case, Afrifresh befits the former description whilst
the appellant suits the latter. The participation in the merging of
the entity in whose business a controlling interest is acquired need
not be active or direct, it can be passive as was in the appellant's
case.
Whilst
the transaction upon which the penalty was imposed was initially
between Emvest Holdings and Origin Global, the appellant was a party
to the merger to the extent that it is the “other person” in whom
Afrifresh Holdings acquired a controlling interest. It equally had an
obligation to notify the respondent of that transaction.
The
interpretation I have taken accords well with the approach taken by
this Court in Innscor
Africa Limited & Anor v Competition and Tariff Commission
SC52/18, where the court, in defining a merger as defined in section
2 and its various classifications, had this to say regarding the
importance of merger regulation, at pages 6, 8 and 12 of the
judgment:
“Mergers
may cause the elimination of effective competition, thereby creating
dominant companies that have the capacity and potential of engaging
in anti-competitive practices detrimental to consumer welfare, such
as price increases and poor service delivery.
For
the reason that all mergers recognised under competition law have the
potential to negatively affect competition in the market, special
laws have been designed to regulate mergers.
What
determines the applicability of the definition of 'merger' for
purposes of the Act is the existence of a controlling interest by one
or more persons in the whole or part of the business of another
person.
The
definition is inclusive. In other words, the definition was
deliberately widened to include all types of mergers. Without the
words 'or other person', the definition of 'merger' would
have been exhaustive as it would apply only to businesses or
undertakings falling within each of the categories specifically
stated. The word 'other' describes a person who would not belong
to any of the categories of persons specifically mentioned.
It
is clear from this title that, among other things, the
Act aims to promote and maintain competition in the economy by
regulating anti-competitive mergers. Merger regulation is at the core
of competition law and in the spirit of regulating anti-competitive
mergers,
the Legislature enacted the current wide definition which covers all
mergers which must be notified to the respondent.”
(Emphasis
added)
In
Competition
and Tariff Commission v Iwayafrica Zimbabwe (Private) Limited
SC 58/19, in dealing with the matter before it, the court stated what
ought to be established in determining the existence of a merger. It
mentioned thus, at page 5, paras 19 and 22:
“[19]...for
a court to grant absolution from the instance in a suit in which a
merger under the Act is alleged, it must therefore be satisfied that
there is no evidence before it showing that the respondent acquired
or established an interest in the business of another which interest
enables it to control the assets or activities of that other.
[22]
For instance, the court a
quo found
that the respondent and Africa Online did not fish from the same
point. This was an unnecessary finding to make. In the suit a
quo,
it was not necessary for the appellant to aver and prove that the
respondent and Africa Online were not in competition for the same
market. This
is because a merger in terms of the Competition Act can be
established between any persons who may not be in any recognised
relationship.
It was therefore not necessary that the appellant lead evidence to
show that the respondent and Africa shared the same market as this is
not a requirement of the law.” [Own emphasis]
The
cited authorities are agreed that what determines a merger is the
establishment of a controlling interest by one or more persons in the
whole or part of the business of another person. Such acquisition of
control may be through various processes and between persons who may
not be in any recognised relationship.
If
the determinant factor in ascertaining the existence of a merger is
acquisition of a controlling interest, the entity being divested of
that interest is clearly a party to the merger.
“There
is considerable authority for the proposition that our law examines
the substance of the transaction and 'will not be deceived by the
form of the transaction: it will render aside the veil in which the
transaction is wrapped and examine its true nature and substance';
Kilburn
v Estate Kilburn 1931 AD 501
and
507. In Dadoo Ltd and Others v Krugersdorp Municipal Council 1920 AD
530
and
547 Innes CJ stated;
'[the]
rule is merely a branch of fundamental doctrine the law regards the
substance rather than the form of things – the doctrine common, one
would think, to every system of jurisprudence and conveniently
expressed in the maxim plus
valet quod agitur quam quod simulate concipitur'.
This
approach followed an earlier judgment of Innes
J (as
he then was) in
Zandburg
v Van Zyl 1910
AD 302
at 309 in
which he said:
'The
Court must be satisfied that there is a real intention, definitely
ascertainable, which differs from the simulated intention. If the
parties in fact mean that a contract shall have effect in accordance
with its tenor, the circumstances, that the same object might have
been obtained in another way will not necessarily make the
arrangement other than it purports to be. The enquiry, therefore, is
in each case one of fact, for the right solution of which no general
rule can be laid down.'”
It
follows that there is a need to look beyond the parties to the
transaction and ascertain the substance and true nature of the
transaction.
The
appellant is a party to the merger as the resultant entity in whose
business the controlling interest was established by another.
Consequently,
once it is established that a merger was formed without prior
notification, the party divested of that control is equally liable to
notify the respondent if that merger exceeds the prescribed
thresholds. Pre-notification affords the respondent, as the
competition and merger regulating authority, to ascertain whether the
merger will have a detrimental impact on competition.
Before
concluding, I wish to observe that there might be need for our Act to
be amended to include the definition of 'a party to a merger' as
was done in the South African Act through The Competition Second
Amendment Act, 2000. This would bring clarity to the issue and might
obviate the need for parties to engage in litigation such as the
present one.
DISPOSITION
In
light of the foregoing, the appellant cannot be absolved from the
obligation to notify the respondent simply because it was not an
active party to the transaction that resulted in it being divested of
its shares. As earlier highlighted, the
appellant fits into the description of the parties to a merger
envisaged by section 2 of the Act and therefore should have notified
the respondent of the merger. In
any event, the appellant cannot argue that it was unaware of the
transaction as its share register would reflect the alteration in its
shareholding structure. The merger was a potentially anti-competitive
event which was subject to notification to the respondent by the
appellant in terms of section 34A.
The
court a
quo's
decision is insurmountable.
As
regards costs there is no reason to depart from the general rule that
costs follow the cause.
In
the result, I make the following order:
“The
appeal be and is hereby dismissed with costs.”
GWAUNZA
DCJ: I
agree
PATEL
JA: I
agree
Lunga
Attorneys, appellant's legal practitioners
Chihambakwe,
Mutizwa & Partners, respondent's legal practitioners
