On 31 October 2014, the supranational competition authority for the Common Market of Eastern and Southern Africa (“COMESA”), the COMESA Competition Commission (the “Commission”), published its finalised Merger Assessment Guidelines (the “Guidelines”).
The following 19 countries make up the COMESA member states (“Member States”): Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe.
The Guidelines are not legally binding, but rather are intended to offer general guidance on the interpretation of the merger control provisions in the COMESA Competition Regulations 2004 (the “Regulations”), published in January 2013. In particular, the Guidelines have introduced new guidance to assist in determining if a “merger” needs to be notified to the Commission in accordance with merger control provisions in the Regulations. The purpose of such a merger notification is to allow the Commission to assess whether the merger would have the effect of substantially preventing or lessening competition in the COMESA region, in particular through the creation or strengthening of a dominant position.
So what is a “merger” and when does it need to be notified?
For the purposes of the Regulations, the term merger means the direct or indirect acquisition or establishment of a controlling interest by one or more persons in the whole or part of the business of a competitor, supplier or other person (“Merger”). A Merger is subject to the merger control provisions in the Regulations (and so needs to be notified to the Commission) where:
- both the acquiring undertaking and target undertaking or either the acquiring undertaking or target undertaking operate in two or more Member States; and
- the threshold of combined annual turnover or assets specified in the Regulations is exceeded.
A big problem with the Regulations as drafted, is that the threshold referred to at (ii) above is currently set at USD 0! This means that, as far as the Regulations are concerned, all Mergers satisfying condition (i) above are notifiable, no matter how small. However, the Guidelines have addressed this issue by introducing separate threshold requirements in the context of the meaning of the term “operate”. Accordingly, now an undertaking will only be deemed to be operating in a Member State if its annual turnover or value of its assets in that particular Member State exceeds USD 5,000,000.
For the purposes of the Guidelines, annual turnover and value of assets in a particular Member State will be calculated by adding together, respectively, the annual turnover and value of assets of:
- the undertaking concerned;
- it subsidiaries;
- its parents; and
- other subsidiaries of its parents,
in the concerned Member State.
Furthermore, the Guidelines have clarified that only Mergers having a regional dimension are notifiable. The regional dimension test will not be met if an undertaking does not operate in any Member State and or more than two thirds of the aggregate annual turnover or value of the assets of each of the merging parties is achieved within one and the same Member State.
Accordingly, a Merger is only notifiable if:
- at least one merging undertaking operates in two or more Member States (i.e. has an annual turnover in that Member State of USD 5,000,000;
- the target undertaking operates in a Member State; and
- it is not the case that each of the merging parties achieves or holds more than two-thirds of its COMESA-region turnover or assets in one and the same Member State.
When a Merger is technically notifiable, but it is clear that it will not have an appreciable effect on Competition, the Guidelines have formalised the procedure by which the Commission can issue a comfort letter confirming that the Merger in question does not need to be formally notified.
“Other means of control” and “joint ventures”
In instances where control over an undertaking or asset is not established by any of the specific means specified in the Regulations (e.g. by a purchase of shares) but by other means, a decisive influence test applies. Joint ventures are subject to a full functionality test, meaning that the joint venture must perform, for a long duration (typically more than 5 years) all the functions of an autonomous entity. These tests are designed to the mirror the EU competition regime’s equivalent concepts.
Two stage review process
The Guidelines have also introduced a two phase review process. If a Merger does not raise any significant issues and may be easily determined it may be dealt with within 45 days, whilst investigations into more complex cases may last up to the full 120 day period provided for by the Regulations. These time limits only start to run when Commission has received a complete application.
The Guidelines set out a procedure by which Member States can request referral of a Merger for consideration in accordance with their national regimes. The decision to make a referral will be made by the Commission. Before a referral is made, the Commission will require the Member State concerned to confirm that no penalties will be imposed on a completed transaction, as closing is allowed before notification or completion of an assessment by the Regulations.
The Guidelines are a welcome development and make clear that the Commission has listened to the suggestions of other competition authorities for improvements to the merger control provisions. However, there are still some problem areas:
In particular, the filing fees (set at the lower of (i) 0.5% of the combined annual turnover or combined value of assets of the merging undertakings (whichever is higher) or (ii) USD 500,000) are still very high. By contrast, the maximum filing fee in the US is only USD 280,000, and this only kicks in for transactions valued at more than USD 758,000,000. Neither the EU nor China have any filing fees at all. However, it is understood by some commentators that any such amendments need to be approved by the COMESA Council of Ministers (the “Council of Ministers”). Hopefully, the Council of Ministers will legislate for a fee which corresponds more closely with those of its international peers sometime soon.
In theory at least, the Commission is intended to operate as a “one-stop shop”. Therefore, if a Merger has been notified to the Commission and that Merger would also be caught by a Member State’s domestic merger control rules, then any requirement to notify that Member State should be dispensed with. However, ambiguity with the way that the Regulations have been drafted has meant that it is unclear if Member States are able to maintain parallel jurisdiction over merger control. In addition to placing unnecessary regulatory burdens on undertakings involved in Mergers, this also creates the risk of conflicting decisions. The Commission has made clear that it believes that it has exclusive jurisdiction unless it agrees to refer a Merger to a Member State for assessment (see above). However, not all Member States have embraced this position. Notably, the Kenyan competition authority still requires a parallel notification to be made if a Merger meet its national criteria.
Note that, if no COMESA notification is required, then notifications may still be required in any of the eight Member States which have active merger control regimes.
The Commission has made clear that, thus far, its focus has been on clearing notified Mergers as efficiently as possible and identifying any gaps in the Regulations. It is yet to institute any enforcement proceedings against undertakings involved in Mergers which are in breach of its merger control provisions. However, undertakings considering a Merger in COMESA should not make the mistake of thinking that the Commission’s bark is worse than its bite. Non-compliance means that a Merger will be void of any legal effect in the COMESA region and may also lead to the imposition of penalties of up to 10% of either or both of the merging undertakings’ annual turnover (calculated in the manner described above) in COMESA. Now that the Commission has introduced the Guidelines and dealt with some of the issues presented by its nascent merger control regime, it is anticipated that the Commission will be changing tack and so dedicating more resources to enforcement of its rules.