Presentation on the Merger Provisions of the Competition Act and Property Transactions

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Presentation on the Merger Provisions of the
Competition Act and Property Transactions

• _______________________________
• The Property Law Conference
• Indaba Hotel, Fourways
• 26 February 2002
• Organised by Institute for International Research
  (IRR)

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Presenter

• Zodwa Ntuli
• Head Corporate Compliance
• Compliance Division
• Competition Commission of South Africa

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Food for thought Competition is an evasive
term that can be understood to mean different
things. Perhaps the problem comes from the very
nature of competition people or enterprises
compete to outbeat their competitors. In this
context it is often said that competition kills
competition.Monographs on Investment and
Competition Policy 6 Compiled by Pradeep S.
Mehta and Manish AgarwalCUTS Centre for
International Trade, Economics Environment
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Objectives

• To highlight the effect of merger provisions of
  the Act on property transactions by looking at
  the following
• rationale for notification requirements
• The types of property transactions that require
  notification
• The market definition and the potential
  competition concerns that may arise in property
  transactions and
• The Commissions approach to property
  transactions and the fast-tracking processes
  vis-à-vis other jurisdictions internationally

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Rationale for Merger Control
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Why control Mergers?

• Merger control regime is an essential element of
  competition law and policy
• Mergers form an integral part of the competitive
  process as a mechanism through which control of
  assets can be transferred for efficiency reasons
• Mergers may, depending on the the market and how
  they are structured, result in anticompetitive
  effects, efficiency or technological gains or may
  impact negatively on public interests
• Merger control is therefore aimed at detecting
  mergers that potentially have anticompetitive
  effects as a result of a competitor being removed
  in a market or that impact negatively on public
  interests such as creation of barriers for SME
  participation in a market
• The purpose is that where negative effects are
  found either on competition or public interests
  grounds, or both, the authorities must prevent
  such merger from taking place
• The aim is not to prevent mergers from taking
  place or unreasonably hamper the running of
  business

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When does a Merger occur?

• Term merger used broadly to include, inter
  alia, amalgamations, takeovers, acquisitions or
  combinations
• 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
• Based on legal and factual considerations, which
  may include acquisition of de facto control or a
  change in the quality of control
• Particularly concerned about control as it
  relates to the ability to influence the behaviour
  of a firm in a particular market
• Act does not require actual control to be
  exercised to determine if control exists, ability
  to exercise such control may suffice particularly
  in cases of scattered shareholding

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What are the compulsory requirements of the Act?

• Parties to an intermediate or large merger
  must
• notify the Commission at anytime before
  implementation of such a merger
• Must serve the notice of such merger to a
  registered trade union or employee
  representative

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Merger Provisions and Property Transactions
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What is meant by Property Transactions?

• Transactions involving properties such as office
  blocks, shopping malls, retail outlets, taking
  place between firms in the property market or
  business, for instance
• Sale or lease of properties, property business,
  activities, units or other interests of or in a
  property
• Increase or reduction of units held in a property
  company
• Sale and lease-back property deals
• Include both movable and immovable property
• Does not appear to include ordinary course
  transactions for competition law purposes

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Why are property transactions notifiable?

• Property transactions may involve a change of
  control through, inter alia, acquisition or
  transfer of shares, interests, units or assets as
  contemplated in section 12(1) of the Act
• While they may not raise competition concerns
  currently, the compulsory merger notification
  requirements need to be fulfilled as required
• Only those mergers falling within the specified
  threshold categories are notifiable
• Competition authorities need to assess the impact
  of all merger transactions before they are
  implemented
• Act does not exclude them from notification -
  notification is not only required for
  anti-competitive mergers

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What transactions would constitute mergers?

• Acquisition of shares, assets and/or interests
  in another property company, thus acquiring the
  whole of the business
• A property company acquires a separately
  registered property from another property
  holding company, for instance a shopping mall,
  thus acquiring control over that specific
  property and not the entire business.
• A property investment company acquires the
  activities, such as rental collection or
  management services of a real estate company,
  without acquiring any other interests
• A company that holds, but does not control,
  properties that are registered separately as
  companies on behalf of various owners, may sell
  those properties on behalf of the owners.

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What transactions would constitute mergers?

• Other examples include
• Sale of property used for leasing purposes
• Sale and lease-back of property among companies
• Lease agreements in respect of property
• Sale or lease of land
• Increase or reduction in shareholding or units
  of property company
• Depending on the structure of the
  transactions, some may not constitute mergers

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Multiple or single notification?

• Multiple filing
• Properties sold to various independent
  acquiring firms by a single controller would
  constitute multiple separate filings same with
  various sellers to one acquirer
• Each transaction, despite the fact that there
  is one seller, will be looked at separately and
  a fee payable for each
• The fact that all transactions are contained in
  a one agreement and are sold at the same time is
  not relevant
• Each transaction needs to be assessed
  separately against its impact on a market

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Multiple or single notification?

• Single filing
• Where the seller sells multiple properties to a
  single buyer
• Such properties would be looked at jointly as a
  transfer of business or assets to one acquirer
• The turnover/asset value to be taken into
  account will be of the combined properties
• This is so irrespective of whether the property
  is separately registered or not
• May also be possible at the discretion of the
  Commission if transactions are interdependent
  and indivisible

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Market Definition in the Property Market
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Market definition

• Market definition is a tool for identifying the
  extent and level of competition among firms not
  straight forward
• Important element of competition law analysis,
  and if not done thoroughly, may lead to
  misleading conclusions
• Takes into account both actual and potential
  competition for particular products or services
  offered by the parties
• Defines relevant market both in terms of product
  and geographic location
• Looks at product market in terms of what the
  customer regards as reasonably interchangeable or
  substitutable, taking into account the intended
  use of product, its characteristics and price
• Geographic market takes into account location of
  buyers and sellers, as well as convenience for
  customers

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Market definition

• Markets in the property sector are distinct - not
  easily substitutable or interchangeable in terms
  of functional uses, size, area, etc.
• E.g, office blocks and shopping malls would not
  fall in the same market category, as they would
  not compete with one another for the same
  customers
• Distinction may be drawn even in properties
  within the same category, e.g shopping malls -
  may differ as some may include entertainment in
  terms of cinemas and clubs, etc, or may be themed
  differently from the others
• Similar types of properties normally compete with
  similar types in close proximity - are normally
  grouped in nodes properties in the same node
  may be considered to compete with another
• Some properties, such as ones used for office
  space, may be sub-categorised into grades

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Any competition concerns to date?

• On average the Commission receives about 2.5
  notifications of property mergers in a month
• Currently do not appear to raise competition
  concerns
• May be due to the current market structure and
  the available substitutes in this market
• However, it is possible for a property company to
  increase its market share and market power to the
  detriment of other players or customers through
  mergers
• Property investment company may also get to own
  substantial parts in a particular area and
  therefore control such market
• May also impact on public interests, but none
  significant has arisen yet

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Comparative Analysis of various jurisdictions
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The approach of the Commission

• All property transactions falling within the
  definition of a merger and meeting the relevant
  threshold are notifiable
• No exemption or exclusion of any such
  transactions from notification
• Notification of sale and lease-backs, exercise of
  pledges, options or cessions in respect of
  property transactions entered into by banks in
  the ordinary course of business not notifiable
  initially
• Fast-tracking procedures have been put in place
  for transactions taking place in the property
  market to expedite the matter
• Although no significant competition concerns
  have arisen in most cases, the Commission
  approaches all transaction with caution

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Approach in other jurisdictions

• Australia
• No compulsory notification required in respect of
  mergers
• Property transactions are treated the same as
  others mergers may be prohibited if they
  substantially prevent or lessen competition
• In respect of assets, acquisitions by way of
  charge and in the ordinary course of business do
  not fall within the ambit of section 50 of the
  Trade Practices Act
• Notice was issued by ACCC to a leading mall
  developer and operator that there will be a
  concern if it increases its activities in certain
  areas

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Approach in other jurisdictions

• Canada
• The Canadian Competition Act deals with
  property transactions the same way as it does
  other mergers
• Notification is mandatory if thresholds are met
• Act only exclude expressly asset securitisation
  and transaction between affiliates
• Policy decision not to require compulsory
  notification in that sector, reviewed from time
  to time
• No competition concerns in this sector, but
  concerned about the growing acquisitions of
  shopping malls and complexes

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Approach in other jurisdictions

• United States of America
• The Clayton Act and the Hart-Scott-Rodino
  Antitrust Improvement Act prohibit
  acquisitions of assets or stock that have the
  effect of substantially preventing or lessening
  competition in the market
• All merger transactions meeting the required
  thresholds are dealt with by the US authorities
• Property mergers, depending on circumstances,
  may be exempted from the notification
  requirements
• Main reason being to relieve the parties and
  the authorities from the burden of notification
• No blanket exemption

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Approach in other jurisdictions

• Norway
• Differentiates mergers from ordinary trade
  transactions
• No reported cases found but property mergers are
  treated the same as all mergers
• The transactions do not raise competition
  problem, given the structure of this market in
  Norway, there is ample space and entry into the
  property business is fairly easy

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Questions Clarification
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Contact details

• Website www.compcom.co.za
• E-mail zodwan_at_compcom.co.za
• Tel [phone]
• Fax [phone]