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The East Africa region has some of the fastest growing economies on the African continent. The M&A market has the potential to drive economic growth. Although the M&A market is currently dominated by Kenya and Tanzania, Rwanda and Uganda are expected to become significant players in the near future.
The M&A market has stagnated in recent years. While this may be attributable to broader economic trends in the region, it may also be a sign of a lack of investor appetite. One cause for the lack of appetite is costs of merger. In order breathe life into the market, it is imperative for the region to reduce red-tape and encourage deals. One way to do this is through effective regulation, which means streamlining processes for cross-border deals to reduce costs and time. In this column I look at recent efforts to regulate cross-border deals in the region.
The M&A framework
On 14 January 2013, the Common Market for Eastern and Southern Africa (COMESA) commenced enforcement of the Competition Regulations (2004) and the complementing COMESA Competition Rules. The COMESA Competition Commission (CCC), a regional body established in terms of Article 6 of the Regulations, is responsible for enforcement. The Commission is based in Lilongwe, Malawi.
According to the explanatory notes, the primary purpose of the Regulations is “to ensure the efficient operation of the markets with the view to enhancing free and liberalized trade as a prerequisite to safeguarding the welfare of consumers.”
On 31 October 2014, the Council of Ministers also issued the Directive on Takeovers And Mergers, a document consisting of guidelines that became effective from the date of publication.
As can be expected, the regional M&A framework does not repeal national regimes. Therefore, the regional framework only applies where a deal has a “cross-border impact”. This is a jurisdictional fact (Art 3).
The Regulations have two further jurisdictional facts: (i) the agreement or conduct must have an appreciable effect on trade between Member States or restricts competition in the Common Market and (ii) the threshold of combined annual turnover or assets in the Common Market is exceeded. Interestingly, the turnover or asset threshold is currently set at zero.
The Regulations are non-suspensory, which means the merging parties must notify the Commission within 30 days after the “decision to merge”. If the deal meets the jurisdictional facts but the parties fail to inform COMESA, the merger will have no legal effect and rights or obligations imposed on the participating parties by any agreement in respect of the merger will not be legally enforceable in the Common Market.
The Commission has the power to impose a non-notification financial penalty of up to 10% of either or both of the merging parties’ annual turnovers in the Common Market.
Currently, the Commission has 120 calendar days after receiving a merger notification within which to finalise its decision.
Challenges
The regional framework faces a number of challenges. I address only three here. (Other issues relate to pre-steps, employees and liabilities. See the discussion here.)
The first challenge is compound regulation. The regional framework is an additional layer of regulation and it does not repeal domestic regimes. More importantly, Member States have not reached agreement on the domestic effect of notification to the Commission. Some States require additional notification to the domestic competition authorities; others accept “comfort letters” from the Commission.
The second challenge is the length of the review process. 120 days is donkeys’ years in the fast-paced business world. The 120-day delay may scuttle negotiations or cause inequity, especially in hostile takeovers.
The third challenge is the notification fee. Currently, the fee is 0.5% of the merging parties’ combined annual turnover or combined value of assets in the Common Market, whichever is higher. Although the fee is capped at US$500,000, it is still very high.
Solutions
While the costs and delay in the review process are excusable in the short-term, the duplicitous effect of regional and domestic regulation is unforgivable. It creates conflict and adds costs. COMESA must seriously consider unification of merger regulations, at least for cross-border mergers. A uniform regional regime will create certainty and streamline the process.
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