The Competition Act 89 of 1998 (“Competition Act”) is the primary legislation governing competition in South Africa. Its central objective is to promote and maintain competition in the market, prevent anti-competitive conduct, and regulate mergers to ensure that market concentration does not substantially lessen or prevent competition.
The Competition Commission is responsible for investigating, evaluating, and, in certain instances, approving mergers. The Act’s intended merger regulation is directed at the external market effects of transactions rather than their internal corporate validity. The enquiry is not whether a transaction is properly constituted in corporate law terms, but whether it results in a merger which may affect competition within a relevant market.
The Act therefore contains a specific, and wide, definition of what exactly a merger is.
Definition
Section 12(1) of the Competition Act provides that a merger occurs when one or more firms directly or indirectly acquire or establish control over the whole or part of the business of another firm. This definition is deliberately broad and substance-based, capturing a wide range of commercial arrangements including share acquisitions, asset transfers, joint ventures, and amalgamations, provided that they result in a change of control.
The emphasis is accordingly placed on the effect of the transaction rather than its form. Even where a transaction is structured in a manner that does not resemble a traditional corporate merger or acquisition, it may still constitute a merger if there is a change of control as contemplated in section 12.
Control
Control is the central principle underscoring merger analysis under the Act. It extends beyond legal ownership and includes both direct and indirect forms of influence. The Act adopts a functional approach, recognising that control may arise through a variety of mechanisms, including contractual rights, shareholder arrangements, or governance structures.
Section 12(2) provides a non-exhaustive list of instances in which control is deemed to exist. These include where a person beneficially owns more than 50% of a firm’s issued share capital, controls the majority of voting rights, or has the ability to appoint or veto the appointment of the majority of the board of directors. However, the list is not closed, and the decisive question remains whether the acquirer obtains the ability to materially influence the policy or strategic direction of the firm.
A critical implication of the definition assigned to a merger under section 12 of the Competition Act is that control may be acquired without the acquisition of a majority shareholding in the target firm. The competition law assessment is not confined to formal ownership percentages, but rather focuses on whether a firm acquires the ability to exercise material influence over the strategic or commercial conduct of another firm.
Accordingly, minority shareholdings may confer control where accompanied by rights enabling the holder to exercise decisive influence over the target firm. For example, veto rights relating to budgets, business plans, the appointment of senior management, strategic investments, or operational policy may be sufficient to establish control for purposes of the Competition Act.
Importantly, control may also arise through a wide range of contractual or financial arrangements, even where no shares, or only limited shares, are acquired. A loan agreement containing restrictive covenants, a partnership arrangement granting decision-making authority, the issue of preference shares with enhanced voting or governance rights, or any other commercial arrangement conferring the ability to materially influence the affairs of a firm, may constitute a change in control for merger control purposes.
The analysis is therefore fundamentally substance-driven. It requires an assessment of the practical rights, powers, and influence obtained through the transaction, rather than a purely quantitative evaluation of shareholding percentages. This broad approach ensures that the Competition Act captures transactions which, although not involving outright majority ownership, nonetheless alter the competitive structure of the market through the transfer of control or decisive influence over a firm by defining such transactions as mergers for purposes of the application of the Act.
Unintentional Mergers
The wide definition of a merger, under section 12, has the important consequence that firms may, in certain circumstances, “accidentally” conclude mergers for purposes of the Competition Act. In practice, parties may not intend to merge formally or acquire a target firm, but may instead merely seek to obtain financing, issue shares, restructure governance rights, or enter into commercial arrangements that confer control, whether temporarily or permanently, on or over another firm.
Because the Competition Act focuses on the substance and effect of a transaction rather than its form, transactions which shift material influence, strategic control, or decision-making authority may nevertheless constitute mergers requiring notification and approval under the Competition Act.
Accordingly, it is essential that firms carefully scrutinise and analyse any agreement, financing arrangement, or commercial transaction that may have the effect of transferring control to another firm or acquiring control in another firm, in order to properly assess the implications of the Competition Act on such transactions.
Conclusion
The Competition Act adopts a broad and commercially substantive approach to merger control, grounded primarily in the concept of control rather than formal ownership or the labels assigned to transactions by the parties. Section 12(1) ensures that a wide range of commercial arrangements may constitute mergers where they result in the acquisition of direct or indirect control over another firm, while section 12(2) illustrates that such control may arise through diverse legal, financial, or contractual mechanisms.
Importantly, the merger analysis under the Competition Act extends beyond conventional mergers and acquisitions involving majority shareholding. The enquiry is therefore fundamentally substance-driven and focuses on the practical ability to materially influence the strategic or commercial conduct of a firm.
For this reason, careful legal analysis remains essential whenever parties enter into transactions capable of altering control dynamics between firms. Ultimately, merger control under the Competition Act seeks to ensure that changes in market structure capable of affecting competition are properly scrutinised and regulated, irrespective of the form adopted by the underlying transaction. Contact an expert at SchoemanLaw Inc in Cape Town or Paarl for assistance with your commercial legal needs.
