The legal position on whether internal restructurings within South African businesses require prior approval from the competition authorities has been uncertain for some time. In a welcome development, on 24 January 2025, the Competition Commission took steps to clarify this issue by publishing draft guidelines on internal restructurings.
As a key starting point, the draft guidelines confirm that not all internal restructurings require competition approval. However, there may be "limited and narrow circumstances" where parties may be required to notify restructurings. This is a positive development for businesses engaging in internal restructurings, as it provides a clear measure to rule out notifications from the outset or determine whether restructurings may be notifiable.
Historically, parties have argued in several cases before the South African competition authorities that transactions involving a change in direct control over a business, but with no resulting change in ultimate control, should not require merger approval. For example, this could occur where one wholly owned subsidiary within a group transfers its business to another wholly owned subsidiary within the same group. While many competition law practitioners regard this approach as practical, the Competition Appeal Court has stated that such transactions are not expressly excluded under the Competition Act, which makes "no express provision for the exclusion of transactions between a company and its wholly owned subsidiary." The Commission has, in several cases, relied on the Appeal Court's statements to support its argument for jurisdiction over transactions that many would argue should otherwise be regarded as pure internal restructurings.
According to the draft guidelines, the Commission will not require notification of transactions that are "purely internal." Transactions between parent companies and their wholly owned subsidiaries within the same group will therefore be excluded from notification. However, restructurings involving external minority shareholders with certain control rights in one or more entities within the group may still require approval.
From a merger control perspective, minority control rights typically manifest as veto powers over strategic matters such as budgets, business plans, or senior management appointments, commonly referred to as negative control. If a restructuring alters any of these control rights, approval may be required, even if the ultimate controller of the group remains unchanged. Importantly, the draft guidelines distinguish between ordinary minority shareholders and minority shareholders with control rights. This suggests that restructurings involving groups with minority shareholders, arguably not 'purely internal', could still be excluded from notification if the minority shareholders do not hold any control rights. The Commission supports this position in the draft guidelines, stating that it is 'not concerned with ordinary minority investment protections'.
Parties involved in internal restructurings where minority shareholders are present must carefully assess the control rights of these shareholders and the impact of the restructuring on those rights. This assessment can become complex, as it depends on the specific business and the nature of the rights held by minority shareholders. The draft guidelines also suggest that the loss of control by a minority shareholder, for example, the loss of veto powers, could trigger the need for approval. This creates further complexity, as the Competition Act dictates that there must be an acquisition or establishment of control to constitute a notifiable transaction, meaning a loss of control would not ordinarily trigger notification. It appears this provision is intended to address scenarios where a minority shareholder’s loss of control results in a majority shareholder moving from joint control to sole control. In such cases, the restructuring would arguably no longer be “pure.”
While the merger control implications of internal restructurings must still be assessed on a case-by-case basis, considering the transaction steps and their impact on minority rights, the draft guidelines offer much-needed clarity. This is particularly important for businesses that need to restructure quickly and efficiently to remain agile in the current economic climate. By formalising its position on internal restructurings, the Commission will potentially provide businesses, particularly those involving “pure” restructurings, with one less regulatory hurdle to navigate.
The Commission has invited interested parties to submit comments on the draft guidelines by 21 February 2025.
