South Africa: COMESA Competition Commission Clarifies Approaches – Merger Assessment Guidelines Published

Last Updated: 10 February 2015
Article by Lee Mendelsohn, Lizel Blignaut and Lameez Mayet

Most Read Contributor in South Africa, October 2017

The much anticipated COMESA Merger Assessment Guidelines (the "Guidelines") were published by the COMESA Competition Commission (the "Commission") on 31 October 2014. The Guidelines do not amend the COMESA Competition Regulations (the "Regulations"), but bring some clarity and greater certainty as regards the Commission's interpretation and application of the Regulations. Overarchingly, the Guidelines demonstrate the Commission's commitment to a practical approach to the merger review process and to substantive assessment principles in line with internationally accepted best practice.

COMESA – the Common Market for Eastern and Southern Africa – was established in order to facilitate the region's sustained development through economic integration and is a free trade area comprising 19 member states, including Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe (the "Member States"). An important part of this economic integration is the promotion of competition and a common approach to competition regulation in the region.

The Regulations established a supranational competition regulatory regime, with powers to promote and encourage competition in the common market by establishing, amongst others, a merger review regime to screen mergers for potential anti-competitive and other effects in the common market. As with any new regime, some aspects required clarification and review, for example in this case because the merger thresholds are set at zero.

Properly implementing the Regulations has, since publication, been difficult. In particular, the jurisdictional aspect of the merger notification regime gave rise to some confusion. Read with the Regulations in their entirety, a transaction must meet four conditions to be notifiable to the Commission: first, satisfy the definition of a 'merger', being the "direct or indirect acquisition or establishment of a controlling interest ... in the whole or part of the business ... of (an)other person"; second, fall within the jurisdiction of the Regulations in that it should comprise economic activity within or having an effect within the Common Market and (arguably) also be capable of having an appreciable effect on trade between Member States and be capable of restricting competition; third, have a regional dimension in that "both the acquiring firm and target firm or either the acquiring firm or target firm operate in two or more Member States"; and fourth, meet the monetary thresholds.

The uncertainty regarding the jurisdictional aspect arose from the Commission's public position that an assessment by merging parties as to whether a transaction is capable of having an appreciable effect on trade between Member States and a restrictive effect on competition is not appropriate and that merging parties must approach the Commission to make such determination. To this end, the Commission in March 2014 informally introduced a "comfort letter" process, whereby merging parties may approach the Commission with a "bare" merger filing setting out the salient facts and effects of the merger and may seek from the Commission a comfort letter indicating that it does not require the transaction to be notified and assessed.

The Guidelines formalise this comfort letter process and importantly state that merging parties "may request a comfort letter determining that a merger is not a notifiable merger because it would not have an appreciable effect on trade between Member States or restrict competition in the Common Market".

With the Guidelines the Commission has created a process to relieve parties of an onerous merger regulation burden, but it has also created a curious position for itself. The Commission has publicly stated that there appears to be no jurisdictional requirement that a transaction has an appreciable effect on competition in or trade between Member States and it therefore does not accept that parties are permitted to evaluate the economic effects of their transactions and, if they (the parties) conclude that a transaction will not result in an appreciable effect on competition in or trade between COMESA Member States, to conclude that there is no requirement to notify the Commission. That said, the Commission seems now to state through the Guidelines that if IT (the Commission) concludes that a transaction will not result in an appreciable effect on trade between Member States or competition in the common market, then it will certify that the transaction is not notifiable (that the Commission does not have jurisdiction).

Receiving this comfort letter is fundamentally different from the Commission approving a transaction. Through the comfort letter process the Commission is seemingly disavowing jurisdiction. That seems to us only to be possible if a jurisdictional requirement does exist that for a transaction to be notifiable such transaction must be capable of having an appreciable effect on competition or on trade between COMESA Member States.

In our view, the uncertainty is easily remediable - with no loss of jurisdiction and no concession by the Commission – if the Regulations are amended such that, instead of a comfort letter, the Commission were simply to approve such non-contentious mergers on a fast track and "bare" merger filing basis, and not extract a filing fee from the parties.

It seems to us that such an approval process could satisfy the Commission's requirements without being overly onerous on merging parties.

The Guidelines furthermore introduce an objective test to determine whether the regional dimension of a merger transaction is met (the third condition of a notifiable merger transaction as set out above). With regard to the interpretation of the word "operate", the Guidelines set a safe-harbour threshold that an undertaking "operates" in a Member State only if its annual turnover or value of assets in that Member State exceeds US $5 million. In addition to clarifying the meaning of "operate", the Commission has clarified that a target undertaking must operate in at least one Member State and not more than 2/3 of the annual turnover in the Common Market of each of the merging parties must be achieved or held within one single Member State for the regional dimension requirement to be met.

A final note regards the fact that the Guidelines remain just that – guidelines. The law as previously promulgated stands and the Guidelines are at best an attempt by the Commission to clarify its practical interpretation and application of the Regulations.

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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