DealMakers AFRICA Q3 2019
Merger control process in Kenya and COMESA takes
private equity firms’ concerns into account
by Kerubo Ombati
Transactions with an international dimension accounted for 55.3% of merger notifications in Kenya in 2017/18, and a majority of these involved private equity firms, according to the annual report for this period from the Competition Authority of Kenya (CAK). This statistic underlines the important role that private equity fulfils in mergers and acquisitions in Kenya, and hence the necessity to address some of the concerns raised by private equity firms.
Merger control for transactions involving private equity firms has become increasingly complex as more of these firms are concentrating their investments in specific sectors, for instance, manufacturing, health and education. The scope of mandatory notification has also increased with more jurisdictions, particularly in Africa, establishing competition authorities.
While each jurisdiction adopts a different approach to merger assessment, the key consideration for private equity firms in merger assessments is how control is viewed regarding the private equity firm’s economic group and how turnover is calculated. The three main contentions that private equity firms have, particularly in Kenya, and in the region are:
• the requirements to file with both the Kenyan national regulator and regional regulators;
• the period within which transactions are assessed; and
• how the regulators define control.
Some of the concerns that private equity firms have over the merger control process in Kenya are being addressed – perhaps not in the exact manner that these firms would like, but constructively attended to nevertheless.
The recent East African Venture Capital Association (EAVCA) conference on merger control, organised in conjunction with Bowmans and held in Nairobi on 16 May 2019, proved to be an effective platform for members of EAVCA to raise their concerns directly with both the national and regional competition authorities, the CAK and the COMESA Competition Commission (CCC) respectively. Both were represented; the CAK by its head of mergers, Mr Raphael Mburu, and the CCC by its director and chief executive officer, Dr George Lipimile.
Potential for delays a worry for private equity investors
One merger control issue that crops up often in Kenyan private equity transactions is the possibility of delays in receiving merger approval. When a proposed transaction affects Kenya and at least one other COMESA member state, and the CCC merger notification thresholds are met, there are two sets of merger approvals required, that of the CAK and that of the CCC.
This is an arrangement unique to Kenya, which unlike other COMESA members, requires the CAK to be involved in cross-border transactions. For merger parties, this means two sets of applications and two sets of filing fees. However, Kenya proposes to introduce new merger rules which, if approved in their current form, will designate the CCC as a one-stop shop for regional merger filings, and will remove the requirement to make a submission to both the CCC and CAK for transactions with a regional element that meets the CCC thresholds.
In the meantime, a partial solution is being proposed to deal with the delays that tend to accompany the current dual-application process. This solution can be seen as something of a compromise.
Private equity and venture capital firms in Kenya have previously requested that the CAK consider an expedited approval process for private equity transactions. As the industry has pointed out, private equity transactions are often run under time pressure, and the possibility of delays due to a duplicated approvals process adds to the parties’ anxiety.
The CAK has said it is not amenable to an expedited process for a single industry but, as we heard at the EAVCA conference, it is willing to help parties save time by holding pre-notification meetings. Both the CAK and CCC said they were open to such meetings – via telephone and video conference if necessary – to offer guidance on the merger control aspects of private equity transactions. The idea is that by the time the parties are ready to file, they will have a clear picture of how to present their merger submission, decreasing the likelihood of delays in review of their merger applications.
Assessing turnover another conundrum
An additional request from the private equity industry in Kenya has been for the CAK to reconsider the way it proposes to assess the turnover or asset values of private equity acquiring firms.
Currently, and in the draft Competition (General) Rules, 2018, the CAK proposes using the so-called ‘general partner’ rules to assess turnover and asset values. This means that control of a private equity fund is seen as vesting with the general partner, thus bringing the overall turnover of the wider private equity group into consideration for purposes of turnover or asset value (i.e. all other funds controlled by the same general partner).
The industry, on the other hand, says private equity firms are structured differently to other businesses: each fund within a group may be uniquely structured, having its own differentiated structure to suit its particular purpose. Private equity firms would therefore like to see the CAK assessing each transaction on its own merits, based on the structure of the fund in question. Specifically, where management and control of a fund forming part of a larger equity group is distinct from other funds in its group, the merger assessment should focus on the fund as an independent entity, distinct from its wider group.
The CAK does not appear to be taking a hard line on this request and has expressed the willingness to consider each transaction on its merits. The two authorities’ willingness to save time by holding pre-notification meetings, together with the opportunity for case-by-case assessment on the merits of each merger, is a step in the right direction.
It is to be hoped that these developments will have a positive impact on international private equity-related transactions, which currently make up a significant portion of M&A transactions in Kenya.
Ombati is a Senior Associate, Bowmans Kenya.