The decision by governments to impose restrictions on businesses to slow the spread of COVID-19 has had a severe impact on the global and South African economy. Statistics South Africa's (Stats SA) COVID-19 business impact survey shows that the turnover of nine in ten businesses was lower during the lockdown period than expected with estimates of SA gross domestic product decline of at least 5%.
Financially distressed firms will be considering different options to ameliorate their financial position including the disposal of assets or (parts of) their business, often under severe time constraints with merger control approval playing an important role in the parties’ transaction timetable. Given the inherent difficulty of successfully running a competitive sale process within short deadlines (due to the inherent short term liquidity requirements of a financially distressed seller), often these "forced sales" result in purchasers acquiring assets or business units at a price which is below full market value or on terms favorable to the purchaser. This could present an opportunity for firms with a strong balance sheet to acquire the business or assets of a competitor.
The nature of any distressed sale is likely to be impacted by the amount of debt the selling entity is required to settle in the short to medium term, the more short term liabilities owing to a seller's creditors the more influence those creditors are likely to be able to exert on any business or asset sale process. Accordingly the best time to approach a financially distressed entity which may be looking to dispose of certain of its assets can vary from case to case, depending on whether the prospective purchaser believes the seller's board, business rescue practitioner or liquidator (as the case may be) will be more receptive to the transaction. A potential purchaser will need to bear in mind the influence major creditors may have on the selling entity's ability to conclude an asset disposal transaction, especially in circumstances where the selling entity is under business rescue or in the process of liquidation. Generally the implementation of a major asset or business unit disposal will be more straight forward in circumstances where an entity has yet to commence formal business rescue or liquidation proceedings (although both parties will need to consider the possibility of a liquidator having the ability to set a disposal aside on the basis of it being deemed a voidable disposition in terms of the Insolvency Act, 1934).
The above considerations will also play a role in determining the structure of a potential disposal transaction. When deciding on the optimal structure of a transaction, some of the key questions arising are, can parties to an asset purchase avoid needing to apply for merger control approval, and if parties are required to apply, will the Commission prioritize and expedite merger control approval?
When is merger control approval required?
Only transactions which constitute a “merger” and meet the prescribed financial thresholds require approval. A “merger” is defined in the Competition Act as the direct or indirect acquisition of control over the whole or part of the business of another firm. The acquisition of so-called bare assets would therefore not constitute a business and would fall outside the scope of the merger control provisions - but when would an asset constitute a business?
The Competition Act does not define a business, but decisions by the Competition Tribunal and Competition Appeal Court (CAC) provide useful guidance.
In Competition Commission v Edgars Consolidated Stores Ltd, Edgars Consolidated Stores Ltd (Edcon) purchased the book debts of the Retail Apparel Group (RAG). Initially, the parties did not notify the transaction and argued that the transaction amounted to a mere acquisition of assets and not a part of the RAG business. The Tribunal disagreed and found that the purchase of RAG’s debtors book constituted a merger given that Edcon would be acquiring an asset which would i) enhance its competitive position and ii) result in the permanent transfer of productive capacity and an increase in Edcon’s market share.
The test in Edcon was amplified by the CAC in Caxton and CTP Publishers and Printers Limited and Others v Multichoice Proprietary Limited and Others where the CAC had to decide whether a "Commercial and Master Channel Distribution Agreement" concluded between MultiChoice and the SABC constituted a merger. The Tribunal found that the agreement did not result in a merger given that i) there was no transfer of productive capacity or market shares and, ii) the agreement was of limited duration (five years). On appeal, the CAC upheld the Tribunal's decision, but also considered whether there was a "transfer of a business as a going concern", which is ordinarily a labour law concept. In doing so, the CAC considered whether there was a transfer of an identified set of activities and structures which can now be identified as a separate business undertaking and which could be pursued by the purchaser.
The Edcon and Caxton cases illustrate that the acquisition of assets may in certain circumstances not amount to a merger, but that careful consideration is still needed. Even if the transaction constitutes a merger, it is still necessary to consider whether the relevant financial thresholds are met. Implementing a notifiable merger before it has been approved by the competition authorities is a contravention of the Competition Act. Administrative penalties may be imposed and there is likely to be severe reputational harm for the parties involved.
Timeline for merger control approval
In terms of the Commission’s Service Standards, the Commission undertakes to complete the assessment of non-complex mergers within one to two months from the date of filing. This turnaround time could prove to be a significant obstacle in transaction negotiations between parties. However, the Commission recently indicated that it is committed to prioritizing mergers in sectors that have been severely impacted by COVID-19. This, together with the fact that certain businesses could be considered “failing firms” may result in an expedited review process by the Commission. A "failing firm" is a firm that is not able to meet its financial obligations and is at risk of exiting the market in the near future if not for the merger. Parties to a transaction which involves a failing firm should therefore request that the merger be reviewed on an expedited basis given that further job losses in the current economic climate will have a significant detrimental impact on the livelihood of people. However, this is not to say that all mergers involving a failing firm will be approved on an expedited basis. The Commission will still need to carry out a competition and public interest assessment which may result in delays if the Commission identifies any concerns.
The current economic climate could therefore present an opportunity for firms to acquire assets or businesses at a price which is below full market value. However, the structure of the transaction and whether merger control approval is required should be considered carefully.