Date: 26 May 2025
Vusani Sithole (Associate, Mergers and Acquisitions)
Introduction
A merger occurs when two companies combine either forming a new entity or integrating into an existing one. Interestingly, the concept of a merger appears in two separate legislations, the Companies Act 71 of 2008 (“Companies Act”) as well as the Competition Act 89 of 1998 (“Competition Act”). This article explores the key differences between these regimes and explains why statutory mergers under the Companies Act are generally not subject to the scrutiny of the competition authorities similar to the mergers under the Competition Act.
The Companies Act has an elaborate definition of a merger. In summary, the Companies Act defines a Section 113 merger as involving two or more companies combining through an agreement, resulting in either: (a) the formation of new entities absorbing all assets/liabilities of the merging companies (with dissolution of the originals), or (b) the survival of at least one existing company (with optional new entities), where all assets/liabilities vest in the surviving structure. This statutory mechanism facilitates corporate restructuring without external market participation.
Section 113 forms one of the provisions which govern fundamental transactions in the Companies Act. This is provided for in chapter 5A of the Companies Act which is divided into the following transactions, namely:
- proposal to dispose of all or greater part of assets or undertaking;
- a scheme of arrangement; and
- a statutory merger.
These are referred to as fundamental transactions because they have the potential to alter a company in a significant manner, which then affect the shareholders’ interests in the company. The statutory merger in terms of section 113 of the Companies Act (amalgamation or merger) refers to a transaction where two or more companies merge to form a new entity, with the transfer of assets and liabilities.
Section 113(1) of the Companies Act provides that:
“Two or more profit companies, including holding and subsidiary companies, may amalgamate or merge if, upon implementation of the amalgamation or merger, each amalgamated or merged company will satisfy the solvency and liquidity test.”
In addition, the Companies Act contemplates various statutory procedures by which a target can be acquired. The main among these is the process governed by the takeover Regulations. The Companies Act and the regulations thereto are usually the first steps in regulating mergers and acquisition transactions for both public and private enterprises.
Mergers in terms of the Competition Act
In terms of Section 12 of the Competition Act, a merger occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm. Accordingly, control is an important aspect of a merger under the Competition Act. This section provides an exhaustive definition of ‘control’, including: (i) majority shareholding or voting rights; (ii) director appointment/veto powers; (iii) holding-subsidiary relationships; (iv) control over trusts/close corporations; and (v) material influence.
Section 59(1)(d)(i) of the Competition Act provides that the competition tribunal may impose a maximum penalty of up to 10% of a firm’s annual turnover if the merger parties proceed with the merger without first obtaining the required approval. This is known as prior implementation.
For an intermediate merger:
- the target firm has turnover or assets (whichever is the higher) of at least R100 million (the target threshold); and
- the acquiring and target firms have combined turnover or assets (whichever combination is the higher) of R600 million or more (the combined threshold).
For a large merger:
- the target firm has turnover or assets (whichever is the higher) of at least R190 million (the target threshold); and
- the acquiring and target firms have combined turnover or assets (whichever combination is the higher) of R6.6 billion or more (the combined threshold).
A merger may be categorised as a small merger, which is covered in section 13 of the Competition Act, if it does not reach the financial thresholds as provided in this section. The Competition Commission of South Africa (“Commission“) may be notified voluntarily by the parties, but in most cases, notification is not necessary unless, within six months of the implementation of a small merger, (i) the Commission determines that the merger may significantly prevent or lessen competition, or
(ii) the merger cannot be justified on the basis of public interest. Furthermore, notification of small mergers may be required in terms of the Commission’s revised guidelines on small mergers which include, inter alia, digital markets.
When a notifiable merger is carried out without first obtaining approval from the Commission, it is a violation of the Competition Act, and the parties may face administrative fines and potential implementation injunctions. All parties to transactions must be aware of the following requirements for mergers to be deemed notifiable.
In terms of the Competition Act, a merger is notifiable to the Commission if it meets the following three criteria:
- jurisdiction test – the merger must constitute economic activity within, or having an effect within, South Africa;
- control test – the merger must constitute a “merger” as defined in section 12 of the Competition Act; and
- threshold test – the merger must meet the thresholds of assets and turnover values established in the Competition Act.
Jurisdiction
The Competition Act applies to all economic activity within, or having an effect within, South Africa.
Control test
In terms of section 12(1) of the Competition Act, a merger occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the
business of another firm. A merger can be achieved in any manner, including through:
- the purchase or lease of the shares, an interest or assets of the other firm in question; or
- the amalgamation or other combination with the other firm in question. Section 12(2) of the Competition Act sets out a list of situations in which a person will be deemed to control another firm.
Threshold test
An important step in a merger analysis entails determining whether the transaction goes above specified financial limits for purposes of notifying the Commission. Even if it is a merger, a transaction that falls below these limits can move forward without consent from the competition authorities.
