Primedia ltd



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Postscript

[134] This merger has raised a paradox about the application of merger control to so-called indirect mergers in consequence of the Competition Appeal Court decision.

[135] Its seems clear that in order for the competition authorities to have jurisdiction over a transaction it must constitute a merger – i.e. there must have been an acquisition of control by an acquiring firm over the business or part of the business of a target firm. Thus if there is a transaction in which A acquires control over T, that will constitute a merger. It seems clear as well that if as a result of a direct transaction that may be described as a merger, A by virtue of acquiring control over T (we will refer to this as the triggering transaction) also acquires control over firms controlled by T – let us say firms T1, T2 and T3, then a merger between A and those firms occurs and as part of the same triggering transaction, the competition authorities are entitled to examine the consequences of A’s acquisition of T1, T2 and T3, and to do so without the need for this series of indirect mergers to be notified and evaluated separately. They can be treated as part of the same enquiry.

[136] What is less clear, and arose in this case, is if T does not enjoy control over T1, but has some passive investment in it, does the fact that the triggering transaction constituted a merger in respect of A’s acquisition of T, make the indirect acquisition ( we will refer to this from now as the secondary acquisition) of a non controlling interest by A in T1, a merger as well?

[137] In our February decision our answer to this question was no. Unless you could show that the secondary acquisition constituted a merger itself i.e. lead to an acquisition of control, you did not need to proceed to examine it under section 12A. What is good for the triggering transaction must be good for the secondary acquisition. It would be wholly anomalous if the triggering transaction required control for the competition authorities to have jurisdiction over it, while a secondary acquisition could be reviewed even if control was absent.

[138] As Primedia pointed out in argument before us, but not it appears before the Court, it would mean that if it had acquired the Nail stake directly, instead of indirectly, this would not have been a transaction that required notification. It would be an extraordinary anomaly if our Act was interpreted as creating two merger regimes – a triggering transaction having control as a sine qua non and a secondary acquisition where it was not.

[139] For that reason we take the view that for the competition authorities to exercise jurisdiction over a secondary acquisition, it must be shown that the acquiring firm will directly or indirectly acquire control over the subject matter of the secondary acquisition. Absent such a showing one need not proceed to examine the secondary acquisition in terms of section 12 A.

[140] This is not a question of conflating jurisdiction with the section 12A enquiry. Clearly the intention of the Act is if a firm acquires control by virtue of the triggering transaction it need not re-notify separately each distinct secondary acquisition if they constitute control. Indeed, the Act may be read as requiring their disclosure so that the Competition Commission can take a view about whether the secondary acquisition leads to an acquisition of control. It is however another matter to dispense with control as a requirement for deciding whether the secondary acquisition should be considered a merger.

[141] It is as it were a residual issue of jurisdiction which if not expressly provided for in the Act seems obviously there by implication. We say on an ordinary reading of section 12 this is there by implication. In terms of section 12(1) (a) “…a merger occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of business of another firm” ( Our emphasis)

[142] A merger is about control, direct or indirect. It follows that if you have, as a consequence of a transaction that triggers a merger notification, a secondary acquisition in which the acquiring firm acquires a non-controlling investment in another firm, that secondary acquisition does not meet the definition of a merger, and need not, once this has been determined, be proceeded with under 12A. We have jurisdiction, as part of the jurisdiction assumed over the triggering transaction, to enquire as to whether the secondary acquisition constitutes a merger, and then, if it does, to examine it under section 12A. Sometimes, as in this case, those enquiries may be simultaneous – but if, as a matter of fact, control is not established, there is no need to consider section 12A. It is on this latter point that our views appear to diverge with those of the Court. We see control as a sine qua non of all mergers direct and indirect – they appear to see control as a sine qua non of the triggering merger, because this is a question of jurisdiction, but not the indirect merger, because jurisdiction has already been established by the triggering transaction. It seems that for the Court in the secondary merger, control becomes relevant as a factor in the analysis, but is not a prerequisite to that analysis being made. It could be entirely absent and there still might be an anticompetitive effect as a result of a passive investment.

[143] Does our approach mean that passive investments by way of a secondary acquisition would not be capable of adjudication even though economic theory suggests that there may be instances of anticompetitive effects? Yes, that is what it means. However, it appears to be the only way of addressing the paradox that if the same effects on competition were part of a direct acquisition then the competition authorities would not have jurisdiction in any event. But this is a policy problem of applying a control based merger system – it is not a problem capable of being solved by reading in a separate jurisprudence for secondary acquisitions that does not apply to the triggering acquisition.73

[144] Nor does the literature of those who advocate concerns about the anticompetitive effects of passive acquisitions suggest that the problem is necessary curable in terms of current merger control systems.

[145] Salop and O’Brien it must be noted are writing in the context of US law.

[146] Unlike our law the triggering mechanism of US antitrust – the Clayton Act and the Hart- Scott- Rodino Act (HSR) - do not impose a requirement of control:

Section 7 of the Clayton Act covers the acquisition of ‘any part’ of the stock of another company. The statute does not require the acquisition of stock sufficient to confer control; nor does it contain a threshold or minimum stock purchase amount. It simply acquires acquisition of any part of a company’s stock where the effect may be to substantially lessen competition. For example, acquisitions of less than 25% of a company’s stock have been found to violate section 7.”74



[147] The HSR Act, which provides for pre-merger notification, exempts from reporting, acquisitions solely for the purpose of investment when the securities acquired do not exceed 10% of the outstanding voting securities of the issuer.75

[148] The closest these provisions get to notions of control are the regulations made under the HSR Act which have to define when an acquisition falls under the “solely for investment’ exemption. These regulations state that this applies when the acquirer has no intention of participating in the formulation, determination or direction of the basis business decisions of the issuer.

[149] Yet even so the authors suggest legal certainty is lacking in respect of partial acquisitions:

Thus, the HSR Act and regulations add some clarity in distinguishing partial ownership acquisitions that are merely passive investments from those that confer control over the acquired firm. But the law remains highly uncertain and provides very little guidance for antitrust practitioners trying to assess the antitrust risk of partial stock acquisitions. The economic paradigm set forth below provides a more systematic, principled approach to evaluating partial ownership acquisitions.”



[150] What Salop and O’Brien are trying to achieve in their article is to suggest that, as a matter of economics, the pessimism expressed by Areeda and Turner regarding the quantification of the effects of partial ownership was no longer valid.76 Their article both suggests that partial acquisitions may be susceptible to anticompetitive effects and that these effects can be quantified. Whilst US legislation as we noted is much more susceptible to adjudicating these issues as part of conventional merger regulation even then the authors do not suggest this is happening, because in their conclusion they state:

Unlike merger analysis, where the acquiring firm automatically controls the acquired entity after the merger, the analysis of partial ownership involves a careful assessment of the degree of corporate control conferred by the ownership interest.”77



[151] By contrast in the European Union, merger notification, as with our law, is triggered by a change of control. Section 3 of Article 3 of the EC merger regulations establishes sole or joint control as “rights, contracts or any other means which either, separately or in combination ... confer the possibility of exercising decisive influence on an undertaking”

[152] Ezrachi and Gilo who in their article are examining the question of whether European merger regulation can be used to monitor the acquisition of passive investments conclude that it cannot:

Consequently a passive investment falling short of establishing joint or sole control would not fall under the realm of the ECMR” 78



[153] They go on to note the reasons why in a discussion of the European Commission’s Green paper of 2001:

As part of the consultation ... the Commission explored the possibility that ‘minority shareholding (potentially coupled with interlocking directorships) may alter the linked companies’ incentive to compete and may thus have an impact upon market conditions.’ Nevertheless the Commission, backed by Member States, concluded that the regulation of passive minority shareholding under the new Merger Regulation should be outside the scope of the merger regime. Most member states agreed with the Commission’s position, saying it would be disproportionate to extend the Merger Regulations application to passive investment. The Commission and Member states thus vowed to retain control as the criterion for assessment under the Merger regulations, and favoured it over alternative tests based on shareholdings.”79



[154] The authors consider the problems associated with dispensing with the control standard and suggest by way of reform an ex post jurisdiction over this species of transaction.80

[155] Thus what we have in sum is an acknowledgement by some writers that passive financial investment can give rise to anticompetitive effects and the belief that these effects can be quantified. But, there is also an acknowledgement that these issues are not subject to present merger analysis premised as it is on notions of control. There is recognition that at present under EC law, there is no jurisdiction to consider such transactions as mergers, because control is a jurisdictional requirement for the ECMR to operate. Under the US law, which is section 7 of the Clayton Act, authorities acquire jurisdiction over a transaction because it is an acquisition that has ‘effects’ that substantially lessen competition. The provision makes no reference to control and indeed courts have held that a company need not control another in order to violate the Clayton Act.81

[156] As Areeda and Turner have explained:

Nor should the courts hesitate to find that section 7 confers jurisdiction to consider the anticompetitive effects of partial acquisitions, even where control is neither attained nor contemplated.”82



[157] The requirements for what transactions must be notified to the authorities as a merger, again do not require control as an element for determining whether the transaction must be reported. Because of the way US law operates, the fact that a transaction is not notifiable does not mean it falls outside the scope of the Clayton Act. Thus, unlike in our system, what constitutes a merger, and what constitutes a transaction that must be notified, are not coterminous. Control is relevant under the reporting rules in relation to certain subsidiary issues such as the determination of what entities are to be included the acquiring or target firm when calculating whether the transaction meets ‘size of person’ thresholds.83 Indirectly notions of what constitutes control are animated by an exemption for passive investments.

[158] But significantly the US agencies can take enforcement action against a transaction even if they cleared it initially. Private parties may take action as well. This means that mergers can be evaluated ex post as well, and this is significant, as Ezrachi and Gilo suggest that if passive investments are to be evaluated as part of merger control, ex post is the time to do it. Thus conceptually notions of control play a different role in US merger law, the context in which O’Brien and Salop write, than they do in our own. But even those authors note that to the extent that notions of control have been considered in the context of whether a transaction is exempt from notification as a passive investment (note, not exempt from the jurisdiction of merger control in terms of section 7 of the Clayton Act), notions of what transactions confer control remain highly uncertain. There is therefore no consensus that passive investments should be a subject of merger law. Indeed, as noted, the Europeans have considered and rejected this as casting the net too wide on business. Even writers like Gilo and Ezrachi, who recognise the anticompetitive effects of these transactions, do not see the solution coming from ex ante analysis, as our system requires – but recommend a post facto analysis. Areeda and Turner as we noted earlier, whilst recognising that control is not a jurisdictional prerequisite for merger review under the Clayton Act, nevertheless recognise the problems this may cause for the sound administration of a merger system, and suggest the adoption of per se rules and presumptions – the effect of which are to eliminate some transactions that fall below the threshold from consideration and treat others which exceed the threshold as if they were full mergers – a fiction, since they are not. Notably their proposed solution does not advocate applying special formulas to analyse this type of merger. Whatever the merits of the debate O’Brien and Salop have with them over the reliability of such formulas, the underlying caution of Areeda and Turner remains undiminished – testing for the effects of such transactions is ‘ much more subtle’ when control is neither attained nor contemplated.

[159] What concerns us is a likely interpretation of the Court’s decision that may result in a confusing dichotomy in merger analysis. Direct or triggering acquisitions are judged by the control standard – no control, no merger, no need to notify, and, short of a prohibited practice, no subsequent remedy even if it was a transaction that gave rise to the anticompetitive effects that have been associated with passive investments. By contrast, indirect acquisitions of a passive financial investment that come to us in the jet stream of a triggering transaction are subject to scrutiny for their anticompetitive effects.

[160] Regrettably this anomalous outcome was not argued before the Court – indeed Primedia on appeal appears to have made concessions that did not require the Court to consider this issue – and so the Court accepted as common cause that it did not need to look at this merger as creating a secondary acquisition anomaly. Critically as well, it is unclear what role control still plays in section 12A enquiries. The Court in one remark suggests that control remains a consideration, but what is meant by this if control is absent, is unclear. The Court on the other hand endorses the O’Brien and Salop approach which as we noted would find that passive, i.e. non- controlling investments, may in the instances cited by them have anticompetitive effects. AME reads into this that we therefore have jurisdiction to use merger control to remedy this problem, whilst Primedia does not. As Primedia stated in this heads of argument submitted after the matter had been referred back to us by the Court:

It is critical to acknowledge that the CAC did not hold that it was illegitimate for the Tribunal to have considered the issue of control to have decisive cogency of the theories of harm presented in the case. Indeed the CAC made it clear that ‘the question and nature of the scope of control which [Primedia] could exercise over Kaya is an important consideration in this part of the enquiry’ (i.e. the part considering the impact of competition –par 51). What it held was that the Tribunal wrongly assumed that, without such control, there was no need for it even to assess the theories of competition harm put forward by those attacking the merger. The CAC therefore did not suggest that the question of control was to feature only in the first of the enquiries it identified. Its reference to an “holistic enquiry’ (para48) clearly shows that. It merely held that the role played by control ( whether as part of the jurisdictional enquiry or as part of the enquiry into harm) should be clearly separated as between these two enquiries and that appreciation of the distinction between these roles and the enquiries did not appear from the Tribunals’ reasons.”84



[161] Contrast that with the reading of AME who state in their heads of argument in the light of the CAC’s decision:

The acquisition, by a firm, of a non-controlling interest in a competitor firm, even of an entirely passive investment, is likely to give rise to anti-competitive effects.”85



[162] It is more likely that when the Court referred to the “nature and scope of control being an important part of the enquiry”, it had in mind the approach of O’Brien and Salop - not that it is a prerequisite to the finding of an anticompetitive effect, but that if it is present, it alters the manner of analysis in terms of section 12A. Thus if control was found to be absent then the acquisition would amount to a passive financial interest, which, the theory suggests, only changes the incentives of the acquiring firm and not the target. Conversely, if control was found to be present, both the acquiring and target firms’ incentives might change post-merger, and as a result we would analyse the competitive harms associated with control differently from the way we would a passive financial interest. Also as we have shown above the formulas used to calculate the concentration index would vary, depending on whether the acquisition gives rise to control and, if so, the extent of control.86 What we understand the Court to mean is that control is not a prerequisite to conducting substantive analysis of secondary transactions. However it is important as a “factor” in the analysis, because where it is present, it influences how you conduct the analysis. On this reading, the relevance of control is that it answers ‘how’, not ‘whether’ we conduct an enquiry under section 12A.

[163] This however creates a separate problem. The standard for the evaluation of direct and indirect mergers must be the same. We respectfully request that if this issue comes before the Court again that this aspect be considered and clarified. It obviously has far-reaching implications, not only for the law governing merger review, but for the entire administration of Chapter 3 of the Act. The Commission receives countless merger notifications in which passive, non-controlling investments are embedded. Are these now all to be subject to a full Section 12A review because of the possibility that such an acquisition may lead to anti-competitive effects of the variety considered here, despite the fact that the triggering event for consideration of a merger, a change in control, has manifestly not occurred? If so, at what level of shareholding should such a consideration be triggered? Given that as Areeda and Turner observed, the effects of such mergers are ‘subtle’, can our merger control system, constantly under pressure to clear mergers expeditiously, afford the luxury of the lengthened enquiries this would entail, given that the possible anticompetitive effects of such transaction are rare?

[164] We should clearly have considered the issue more expansively in our February decision, because by not doing so, we have made ourselves vulnerable to the suggestion that we had conflated the jurisdictional and substantive enquiries. Rather what we were recognising was that the triggering transaction and the secondary acquisition must be adjudicated by the same standard that requires control as an antecedent. That anticompetitive effects may arise out of transactions that fall short of control we recognise as theoretically sound, but it does not form part of our merger review regime which has control as its centre piece. Not to recognise this creates a dual system, where jurisdiction over passive financial investments is assumed by chance, not by legal requirement, an outcome that undermines the integrity of law enforcement and the legal value that the law should apply consistently to like situations.

[165] There is a further problem which is also severe. We have to ask ourselves how a change from a passive shareholding to control is to be treated for the purposes of merger review. On our approach a finding that there is no control means that the secondary transaction is not considered by us as a matter of substantive law, and hence, if the passive investment later becomes a controlling one, the firms would have to notify it, as we indicated Primedia would need to do in this case .87

[166] If we follow the Court’s approach the situation becomes more blurred. If we approve a merger where a secondary acquisition as here, is only a passive investment, would the firm be obliged to notify that again if it acquired control? The merged firm might argue that the competitive assessment has been adjudicated and that we have no jurisdiction to hear the merger again. We have previously decided that a change from joint control to sole control would trigger a new notification, even if the new sole controller was part of the joint control previously approved or deemed to have been approved. We would it seems have to treat a move from a passive investment to control, be it solely or jointly, in the same way. Thus were Primedia’s stake in Kaya FM to become a controlling one, they would have to notify the transaction to the Commission.88




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