HOSTILE TAKE-OVERS: THE POWER OF THE PREY


By Tamara Dini and Clare Wiese

Merger Notifications and Review
The Competition Act, 89 of 1998 (“Act”) requires the competition authorities to investigate and approve, or prohibit, mergers meeting the thresholds for mandatory notification. Notifiable mergers may not be implemented until the competition authorities grant approval.

The Act sets out the merger notification and review process, which contemplates a joint notification by the parties in the ordinary course. In terms of this procedure each party is required to submit documents (including financial statements and board reports) and statements of information relating to their respective businesses. In practice, the parties also submit a joint report on competitive conditions in the markets in which they operate, assessing the potential effect of the merger on competition.

Joint notification relies on the parties’ co-operating to compile the documents needed for a single, joint filing. This is effective in “friendly mergers” where the parties’ shared goal is to facilitate the review process. In hostile takeovers, a joint notification is not suitable as it is not in the target’s interests to co-operate with the acquirer in preparing a joint filing.

Although the Act also prescribes a procedure for separate notifications, this procedure is equally unsuitable for hostile takeovers. In particular, it does not address the commercial realities of a hostile takeover, where timing is crucial, and it affords the target significant power to abuse the review procedure by delaying the process.

Separate Notifications in Hostile Takeovers - Difficulties with Progressing the Review
Under the Act, merging parties must submit a joint filing unless they obtain the Commission’s permission to make separate filings. The Commission may grant an acquirer in a hostile takeover permission to make a separate notification if it is “reasonable and just to do so in the circumstances”. The Act does not prescribe a time period for the Commission to make its decision in respect of separate filings and this allows for undue delays.

Only once the Commission has decided to allow separate notifications does it direct the target to prepare and file the relevant documents. The unwilling target may then indicate that it has not started to prepare a filing and request additional time in which to do so.

The Commission will allow the target what it considers a reasonable time to prepare and submit its filing. However, where the target defies this instruction, the only option available to the acquirer is to make further application to the Commission for an order, on good cause shown, allowing it to file a document on the target’s behalf if the target has failed to file within 10 business days. This option provides some recourse for the acquirer but nevertheless results in significant delays.

When both parties have submitted their notifications, the review period begins. However, where the Commission believes that a document filed contains false, misleading or incomplete information, it may demand corrected information. Although the party in question must comply with such demand, no provision is made for a time period within which corrected information must be given. The review period begins anew on the day after the corrected information is filed.

Once a complete filing has been submitted, the ordinary review periods apply to hostile takeovers as the Act does not provide for an urgent review.

An Expedient Procedure Needed
Despite the negative perceptions around hostile takeovers, they may be beneficial to shareholders by allowing a potential acquirer to bypass management where management is not acting in the shareholders’ best interest. Such acquisitions allow shareholders to choose the option that may be best for them, rather than leaving approval solely with management. With this in mind, the merger review process, which is aimed at assessing competition concerns, should not be used to frustrate a hostile acquisition.

Currently, under the Act, the target of a hostile takeover has significant power to obstruct an acquirer’s notification endeavors by means of deliberate delays. Since the clock for review does not start until a complete filing has been made, it is in the target’s interests to play for time before submitting its notification.

The Act should provide for specific, expedited review procedures in hostile takeover situations, where timing is critical. Improvements to the Act could include the following:

An acquirer should be able to call a pre-notification meeting with the Commission to brief the latter about the merger, allowing for an expedited review once both parties have filed their notifications.
The need to apply for permission to make separate filings should be eliminated in hostile takeover situations.
Once the acquirer submits its separate notification, the target should have a prescribed time period within which to submit its filing, if it wishes to do so.
If the target fails to submit any documents or information, the acquirer should be permitted to file such documents on behalf of the target immediately, without having to first apply to the Commission.
Such amendments would limit the target’s ability to delay the notification process and, more importantly, allow the competition authorities to focus on the substance of the matter over which they have jurisdiction, namely whether or not the transaction prevents or lessens competition.

 
www.bowman.co.za