DealMakers AFRICA Q1 2019
Navigating merger control complexities
by Shawn van der Meulen
Merger control complexities in Africa can undermine the commercial value of a proposed transaction - we take a look at some of the potential stumbling blocks to doing business in Africa.
As an acquisitive business or private equity fund manager, you've found the perfect pan-African business to buy, with operations in many countries. You've done your due diligence, the terms and price are agreed with the sellers, and now it's just getting those final conditions precedent (CPs) fulfilled to seal the deal. But then, you later realise that you need competition merger approvals in half a dozen countries before you can close the deal; some of which could take up to six months (or more!) and you haven't even started preparing the filings yet (which could themselves take weeks). If only you had known all of this sooner…
First, Africa is the "new frontier" for competition laws and merger control. New competition legislation and authorities are established on nearly a monthly basis. There are currently 21 countries in Africa (including Mauritius and the Seychelles) which have their own competition legislation and regulators. Many of these were put in place in the last five years. Countries are in the process of adopting new competition laws for the first time (such as Ghana), or have very recently done so but are still establishing their new regulators (e.g. Mozambique, Nigeria, Comoros, Madagascar and the DRC). Others still may not have their own competition law regimes (yet), but are members of regional bodies such as the Community for Eastern and Southern Africa (COMESA), whose Competition Commission exercises regional jurisdiction over member states. Other regional authorities such as the East African Community (EAC), Economic Community of West African States (ECOWAS), Central African Economic and Monetary Community (CEMAC), and West African Economic Monetary Union (WAEMU) have been established and exercise some form of merger oversight. This rapidly evolving environment creates a regulatory minefield for M&A activity on the continent, particularly where the inadvertent failure to notify a merger could lead to substantial administrative penalties or even personal or criminal liability for directors.
Second, the thresholds for notifying a merger to all these regulators are inconsistent, sometimes illogical, very low or non-existent. This creates great complexity in analysing and deciding where to file a merger. For example, COMESA's merger control regime was ostensibly set up to be a "one stop shop" for merger control for all COMESA member states. In other words, instead of needing to obtain merger approvals in five or six countries, a single filing could be made to COMESA and this would cover all member states. While this has worked to some degree, due to inconsistencies between local and COMESA's filing thresholds, it often doesn't. On occasion, in practice, the thresholds for a COMESA filing are not satisfied, but the local thresholds in member states are still met. The result is that one has to file in multiple countries even though they are all COMESA member states, seemingly contrary to the purpose of COMESA. Kenya, which is a COMESA member, has taken the view that it requires a local merger notification even if one is filed with COMESA; although, moves are underway to address this. In addition, in some countries the thresholds for notification are very low, such as Botswana where the target firm threshold is a mere BWP10m (around R14m). Certain countries, such as the Kingdom of Eswatini (formerly Swaziland), have no thresholds at all, meaning that the acquisition of a business that has any presence or sales in that country - no matter how negligible - may be notifiable.
Third, and unfortunately, many regulators in Africa view merger control as a "business tax". Merger filing fees are often overlooked by parties and advisers when negotiating a transaction, but they can be significant. In some jurisdictions, the applicable merger filing fees are calculated as a percentage of the parties' worldwide turnover or assets, regardless of their turnover or assets in country, with inflated filing fee levels and "caps" (often in USD). This is the case for countries such as Eswatini and Tanzania, where the filing fees payable for the merger filing can easily exceed the total turnover generated by the parties in those countries. Tanzania has also taken an arbitrary and unjustified position that where an acquirer purchases a holding company which controls multiple subsidiaries in Tanzania, a separate merger filing is required for each subsidiary in Tanzania and, of course, the applicable filing fee based on the merger parties' worldwide group turnover or asset values must accompany every filing. These issues need to be considered when looking at the commercial value of a business in certain countries.
Finally, things in Africa often take time. While established and more experienced regulators such as South Africa, Namibia, Botswana and Zambia generally have quick turnaround times for investigating and approving mergers, newer authorities may have systemic problems that can cause delays. Some regulators investigate the mergers relatively quickly, but then there are serious delays at the final decision-making step. In many countries, the regulators' final decision-making bodies comprise "boards" of appointed officials. Delays can occur when the board only meets irregularly, a quorum for a decision cannot be reached at a scheduled meeting, or even that the board has been disbanded, with no replacement appointed for weeks. To avoid frustrations for all parties, other practical solutions need to be carefully considered and structured into the transaction to allow it to close. This may include ring-fencing arrangements for certain countries that can be raised and agreed with the regulators timeously, or seeking other forms of consent to implement the transaction pending a final approval.
Merger control in Africa is complex. Involving a competition law expert from the outset will allow parties to avoid or mitigate some of these common frustrations through adopting proactive strategies to manage risk and allow for the competition approval CPs to be fulfilled more quickly.
Van der Meulen is a Partner in the Competition Practice at Webber Wentzel. He specialises in merger control (particularly for private equity clients) and has assisted parties with merger control filings in South Africa, Namibia, Botswana, Zimbabwe, Eswatini, Zambia, Malawi, Tanzania, Kenya, Ethiopia and COMESA.