Worldwide: COMESA's Competition Commission Commences Operations

Summary

A new supra-national  merger control regime for Africa comprising 19 eastern and southern African states must now be added to companies' checklist of regulatory approvals needed in global or regional transactions. COMESA's Competition Commission opened for business on 14 January 2013 but many questions about how the new regime will work remain unanswered at this stage and are likely to add uncertainty and complexity for companies that are active in the region. Going forward, COMESA's rules on anti-competitive practices will also need to be factored into the review of business arrangements impacting on the COMESA region. Companies in the region and beyond will now need to take into account this new set of competition law rules and requirements as a part of their business transactions and compliance programmes.

Background

COMESA stands for the Common Market for Eastern and Southern Africa. It comprises the following member states: Burundi, Comoros, the Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, and Zimbabwe. 

COMESA's framework for a regional competition policy is reflected in a first set of competition regulations and rules which were both adopted in 2004 (the Regulations)  as well as in implementing rules adopted at the end of 2012. The Regulations prohibit anti-competitive practices and establish a merger control regime. Implementing rules adopted at the end of last year by COMESA's Council of Ministers have given COMESA's Competition Commission (CCC) the necessary tools to become operational. The CCC is located in Lilongwe, Malawi. 

The CCC is reported to be accepting merger control filings and enforcing competition rules since 14 January 2013. The CCC is expected to make publicly available in the near future its announcement and relevant documents necessary for a full understanding of this new competition regime.

What you need to know

Based on information currently available, key points to note are as follows:

  • Mergers and acquisitions where at least one party (eg acquirer or target) operates in two or more COMESA member states may trigger a merger filing to the CCC, regardless of the parties' turnover and assets or the size of the transaction. In other words, there are no filing thresholds and all transactions that meet the 'operations' test may require the CCC's approval. Non-notifiable mergers may also be reviewed at any time by the CCC at its request.
  • Merger filings to the CCC are mandatory and must be made within 30 days of a decision to merge. A very significant filing fee applies and is set at the following amount, whichever is higher: (i) US$500000 or (ii) the lower of 0.5 per cent of the parties' combined turnover or combined assets in the COMESA region.
  • The CCC has said that its merger review deadline is 120 working days. However the CCC may also request an extension of the timetable to the Board of Commissioners. Until the CCC has approved the transaction, the CCC is of the view that the parties must suspend completion of the deal.
  • The CCC has stated that significant penalties of up to 10 per cent of turnover in the COMESA region would apply for failing to notify or for implementing the transaction prior to clearance.
  • The substantive test that applies for approving a notified transaction is 'whether or not the merger is likely to substantially prevent or lessen competition'. However, a merger raising such concerns can be cleared taking into account efficiency and public interest grounds. A merger may be cleared with or without conditions.
  • COMESA member states may request the CCC to refer back part of, or the entire, transaction. The decision to refer is taken by the CCC but is subject to appeal to the Board of Commissioners. This referral scenario could give rise to significant complication and delays, with potentially multiple reviews by different national competition authorities and the CCC.
  • Merger filing information requirements are potentially onerous: detailed information may have to be provided on each product and service sold by the merging parties, regardless of value or market share. 

COMESA's general competition law provisions prohibit anti-competitive arrangements and abuse of a dominant position. As a result, companies are encouraged by the CCC to review their current business practices which may have an effect in the COMESA region for conformity with these new rules. Individual exemptions can be granted by the CCC, upon request, if public benefits outweigh the anti-competitive effects of a business arrangement.

Institutions

The Regulations establish two competition bodies: the CCC and the Board of Commissioners. 

The CCC is responsible for investigating anti-competitive practices and reviewing merger control filings. The CCC is located in Lilongwe, Malawi. The director and CEO of the CCC is Mr. George K. Lipimile. 

The Board of Commissioners has been created as the adjudicative body responsible, inter alia, for reviewing and hearing appeals of decisions of the CCC. 

Merger control

The Regulations establish a supra-national merger control regime for transactions with a regional COMESA dimension. As announced by the CCC, transactions meeting the requirements set out in the Regulations must now be notified to the CCC.   

Which transactions are caught?

The Regulations provide for the mandatory notification of 'the direct or indirect acquisition or establishment of a controlling interest by one or more persons in the whole or part' of a business, provided at least one of the parties (eg the acquirer or the target) operates in two or more COMESA member states. Newly-adopted implementing rules provide that the notification obligation applies to all mergers and acquisitions, irrespective of the size of the parties or of the transaction. The absence of thresholds means that a large number of transactions will potentially be caught, thereby placing a heavy regulatory burden both on merging parties and on the CCC's resources. When taking a closer look, it is important to note however that the application of the Regulations is restricted to activities which have an appreciable effect on trade between COMESA member states and which restrict competition in the region. Potentially this 'effects' rule could be relied upon in some cases to argue against a merger filing requirement. Whilst this is as yet untested, in its recent announcement the CCC appears to seek to cast the net very widely regarding the scope of application of its competition rules.

A one-stop-shop regional merger regime

Although not stated explicitly, the working assumption is that transactions of a regional dimension (where one of the parties, for example the acquirer or the target, operates in two or more COMESA member states) must be notified exclusively to the CCC.    

A number of observations can be made:

  • A question which remains open to interpretation is how the expression 'operate in two or more Member States' will be interpreted and whether a physical presence in two or more COMESA member states will be required or whether activity short of physical presence will suffice. 
  • For the moment, out of the 19 member states party to COMESA, eight member states have a merger control regime with an operational competition authority accepting filings, namely Burundi, Egypt, Kenya, Malawi, Mauritius,  Swaziland, Zambia and Zimbabwe. 
  • Local filings will still be required for transactions without a regional dimension if the relevant thresholds are met. This means that transactions falling under the requirements of a COMESA member state law but where the parties do not operate in two or more COMESA member states will need to be notified in that member state.
  • Filings made to the CCC can potentially be referred back to a local competition authority at its request if the merger is likely to disproportionately reduce competition to a material extent in all or part of that member state. The decision whether or not to refer the case is ultimately taken by the CCC within 21 days of receipt of the request. The CCC may choose to deal with the case itself or to refer the whole or part of the case to the competition authority having requested the referral. As experience of the referral process under the European Union Merger Regulation has shown, the right of member states to request a referral of a case can add significant delays and uncertainty to a merger review process. It is hoped that additional guidance will be adopted promptly to provide further clarity on the referral procedure, including deadlines applicable to COMESA member states for making such a request.
  • The CCC has the discretionary power to investigate a non-notifiable merger if it is likely to substantially prevent or lessen competition or if it is likely to be contrary to public interest. This means that transactions without a regional dimension could still be subject to review by the CCC at any point in time. In cases where the parties operate in only one COMESA member state, the CCC must however consult with the relevant member state before requiring a filing. Such an open-ended discretionary power to review a merger is unfortunate as it introduces uncertainty in a deal context. It is also unclear, in the event that a transaction had already been filed with a COMESA national competition authority, whether the latter would step aside and let the CCC carry forward the review.

An extensive reach: application to foreign companies 

The reach of COMESA's merger control regime is potentially very extensive, catching transactions, for example where the target has no operations in the COMESA region, but the acquirer operates in two or more COMESA member states. Likewise, a foreign business not operating in the COMESA region but wishing to acquire or merge with a business operating in two or more COMESA member states will also potentially  have to notify its transaction to the CCC.

Mandatory filing within 30 days of decision to merge

The filing must be made within 30 days of the parties' decision to merge. Each party to the transaction must individually submit a notification to the CCC. COMESA's Merger Form, which is not yet publicly available on the CCC's website, will require extensive information to be supplied to the CCC. Notably, merging parties may have to provide information on all products or services sold by the parties to the transaction, including turnover information, customer and producer information, for each product and service. 

Businesses expecting to enter into an agreement to merge should therefore exercise caution and consider the applicability of COMESA's new merger control provisions. 

Heavy sanctions for failing to notify and gun-jumping

According to the CCC, failure to notify or implement prior to clearance under COMESA's competition rules has significant consequences. First, the transaction will have no legal effect in the COMESA region and will not be legally enforceable. In addition, a penalty of up to 10 per cent of aggregate turnover in the COMESA region for the preceding financial year can be imposed on the notifying parties. Although there is some uncertainty, the CCC has said that the same penalty may also apply for implementing prior to clearance.

Very high merger filing fee

Parties required to notify must pay a filing fee of, whichever is higher: (i) US$500000 or (ii) the lower of 0.5 per cent of the parties' combined turnover or combined assets in the COMESA region. Given the absence of thresholds, a larger number of transactions are now expected to be caught by COMESA's merger filing obligation. The very high filing fee adds a significant transaction cost for merger filings.

Lengthy review period of 120 working days, extendible

The CCC has said that it will complete its merger review within 120 working days from the date of filing. However, the 120-day period only starts to run from the day following receipt of a complete notification. In addition, the CCC may seek an extension of this deadline from the Board of Commissioners.

The CCC has not yet announced any commitment to fast-track review periods, notably for transactions raising no competition concerns.

Substantive test for review: competition concerns and public interest grounds

As is prevalent in a number of national merger control regimes in Africa, the substantive test for review of mergers is based on both competition and public interest considerations. The CCC must first consider whether the merger is likely to 'substantially prevent or lessen competition', having regard to a number of considerations such as the level of import competition, ease of entry, history of collusion and level of concentration. In problematic cases, the CCC must then proceed: (i) to a balancing test to determine whether the merger will produce benefits greater than its anti-competitive effects; and (ii) to assess whether the merger can be justified on public interest grounds. In considering whether a merger is contrary to public interest, the CCC will take into account, for example, the desirability of maintaining and promoting effective competition and of promoting the interests of consumers, purchasers and other users in the COMESA region.

The ability of a competition authority to review a transaction based on public interest grounds adds uncertainty to a merger review process and may potentially result in businesses having to concede commitments to address regional or local public interest considerations which are unrelated to competition concerns. However, and contrary to certain other similar regimes in the world, public interest considerations under COMESA's Regulations can only be taken into account if the CCC concludes that the transaction is likely to substantially prevent or lessen competition. In the absence of such competition concerns, the CCC does not have the power under the Regulations to prohibit a merger solely on public interest grounds or to impose commitments to address these concerns. Ultimately the assessment of a notified transaction will rest on relevant factors referred to in the applicable rules.

Right of appeal to Board of Commissioners by any aggrieved party

The Regulations provide that merger decisions can be appealed to the Board of Commissioners by any aggrieved party. However the Regulations do not define who is an aggrieved party. In addition to the merging parties, an aggrieved party could possibly include suppliers, competitors, distributors, and consumers.

The Regulations are also silent as to the procedure applicable to appeals. It is hoped that rules will be adopted swiftly to clarify the deadline for aggrieved parties to lodge an appeal and for the Board of Commissioners to decide on an appeal. Whilst the CCC appears to consider its merger approval decision as final thereby allowing parties to complete a notified transaction, any appeal to the Board of Commissioners could lead to prolonged uncertainty as to the final outcome.    

Review of anti-competitive practices

The CCC has also started to enforce COMESA's competition rules on anti-competitive practices and conduct. Key points to note are set out below.

Power of CCC to investigate and grant exemptions

The CCC can launch investigations into business conduct affecting competition in the COMESA region, either pursuant to a complaint or on its own initiative. The Regulations prohibit anti-competitive arrangements and abuse of a dominant position. Businesses may also request the CCC to exempt restrictive arrangements on the basis that public benefits outweigh the anti-competitive effects of the arrangements. The CCC is inviting parties who currently may have such arrangements in place to seek an exemption from the CCC. 

The CCC is granted wide investigatory powers, including to enter premises, to examine business records and to take copies of documents. The CCC may also send requests for information and conduct general inquiries into sectors of the economy. 

Fines of up to 10 per cent of annual turnover in the COMESA region

Businesses that engage in anti-competitive practices may be fined up to 10 per cent of annual turnover in the COMESA region in the preceding business year. No guidance is available yet as to the criteria which the Board of Commissioners will apply in setting a fine, other than duration and gravity. The fines are not of a criminal nature.

Interaction with national competition laws

The majority of the COMESA member states have adopted their own local competition laws which seek to address and prohibit different forms of anti-competitive practices. These national laws may differ in several respects from COMESA's Regulations, including as regards which conduct or practices are viewed as anti-competitive. It is unclear whether national competition authorities will continue to enforce their national competition rules in parallel to COMESA's rules in cases concurrently being reviewed by the CCC. Further clarification would be welcome from both the CCC and COMESA's national competition authorities.   

Conclusion

The entry into force of COMESA's supra-national merger control regime will have a significant impact on global transactions as well as on transactions in the African region. The CCC must now be added to the checklist of competition regulators from whom mandatory approval may be required. Given the significance of the COMESA region in terms of size and expected growth and the lack of any financial threshold, businesses will need to carefully consider the potential implications of this new regime and, where appropriate, factor it into their regulatory timetable, particularly in view of the CCC's 120-day review period. With business practices in the region coming under scrutiny from the CCC, companies with activities in the COMESA region will also need to review relevant business arrangements and ensure conformity with COMESA's rules on anti-competitive practices and conduct.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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