The South African competition authorities have recently had cause to consider two hostile takeovers. The first was the attempted hostile takeover of Gold Fields by Harmony; the second, the takeover of Johnnic by HCI.
In most cases a hostile takeover begins with a sneak attack where the aggressor seeks to acquire as many shares as possible in its target before becoming embroiled with the regulators.
Harmony staged just such an attack with an early settlement offer made to Gold Fields' shareholders which, if fully taken up, would have given Harmony 34.9% of Gold Fields' issued share capital.
The first line of defence from Gold Fields focussed on whether the early settlement offer constituted an acquisition of control over Gold Fields. The Tribunal held that the acquisition of 34.9% Gold Fields' issued share capital would not amount to an acquisition of control. The Competition Appeal Court (CAC) reversed the Tribunal's decision on appeal and interdicted Harmony from voting any shares acquired until the competition authorities had given merger approval. The controversial decision has proved difficult to fully understand. It appeared to hold that as soon as a party formed an intention to merge, any shares held in the target were sterilised until merger clearance had been obtained, making any hostile takeover an unlikely prospect.
The interpretation of the Harmony/Gold Fields case was central in the Johnnic/HCI case where HCI, the aggressor in a hostile takeover, had acquired 40% of the shares in Johnnic and proposed to acquire more than 50% by way of a mandatory offer to minority shareholders. Two main lines of argument were advanced on Johnnic's behalf in requesting the Tribunal to interdict HCI from voting its 40% shareholding in Johnnic.
The first was that the 40% shareholding, alone, gave HCI control. The Tribunal held that while there might be circumstances in which a 40% shareholding gives control, it was not so in this case, noting that, "[s]ome 44.5% of the shareholders of Johnnic were substantial and, in some cases, powerful institutions . . . well capable of advancing and defending their own interests".
The second argument was that since HCI had formed an intention to acquire control of Johnnic, a proposed merger had come into being and, on the basis of the Harmony/Gold Fields case, the exercise of voting rights was prohibited until the merger had been approved. The Tribunal said that the CAC could never have intended to rule that a mere intention to bring about a merger activates the obligations set out in the Act.
In refusing the interdict in the Johnnic/HCI case, the Tribunal said that "while the competition authorities have a clear obligation under the Act to enforce its provisions, … they must …. refrain from interfering with the ordinary governance of firms. A restraint on the voting rights of a shareholder is a drastic form of intervention, which we should only impose where we are convinced that it is warranted".
It remains to be seen whether the CAC, when it again has cause to consider a hostile takeover, shares the views expressed by the Tribunal.
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