Tanzania.

Mergers and acquisitions in Tanzania.

FAIR COMPETITION LAW IN TANZANIA: COMPETITION LAW REQUIREMENTS FOR MERGERS AND ACQUISITIONS AND NOTIFICATION PROCEDURES .

By Edward Kateka (Advocate of the High Court of Tanzania)

Introduction

Competition law in Tanzania is governed by The Fair Competition Act No. 8 (FCA), which came into being in 2003 and established the Fair Competition Commission (FCC), a government body tasked with implementing competition law. Both the FCA and FCC work together to promote and protect effective competition in trade and commerce and to protect consumers from unfair and misleading market practice. A merger is considered illegal if it creates or strengthens a position of supremacy in the market. The control of mergers and acquisitions play an important role in ensuring that markets in different sectors of the economy remain competitive.

The FCC is mandated to control mergers and acquisitions that have the effects of significantly preventing, restraining and distorting competition in relevant markets. This guarantees that markets in different sectors of the economy stay competitive. Once there is an impact in Tanzania of a business/asset as a result of a merger, then notification of the FCC is required, provided it meets the threshold, which shall be discussed in more detail below. The FCC automatically acquires jurisdiction of any slight change above the specific threshold met.

The difference between a merger and an acquisition is the most significant distinction in the FCA. A merger means an acquisition of shares resulting in a change of control of a business, part of a business or an asset of a business in Tanzania. In most occasions, a merger can be regarded as a takeover since, by definition, a merger usually results in a change of control in any part of a business. An acquisition, in relation to shares or assets, consists of either the acquisition of legal (assets) or equitable (shares) interest. This definition is not as broad as merger and does not include acquisition by way of charge only.

The acquirer of a business/asset has the responsibility of notifying the FCC with regards to a merger. It is then the duty of the FCC to examine merger applications and exemptions with the view to establish their likely effects to competition. Exemptions may be granted provided applicant was found to be transparent and honest in their business dealings and if the merger stands to contribute to the economic growth of its relevant sector or even the country as a whole.

This article will look at the different types of mergers that occur in Tanzania along with the procedure and steps required to notify the FCC of any merger and acquisition that may arise. Another area of concern is what gives rise to a merger, as some parts of the FCA remain silent. More specifically, the definition of “change of control” will be looked at

Types of Mergers

There are 3 types of mergers practiced in Tanzania and they are classified as horizontal mergers, vertical mergers and conglomerate mergers;

a) Horizontal mergers occur between companies in the same line of business or selling and offering similar goods or services. (E.g. a law firm merging with another law firm)

b) Vertical mergers happen between firms operating at different stages of production. (E.g. a manufacturer buying out a supplier)

c) Conglomerate mergers occur between two firms in unrelated businesses. (E.g. an accounting firm to a law firm).

As it currently stands in practice, horizontal mergers are not popular with the FCC because they could lead to cartelizing between the companies involved, thus giving them more power control over the market than what they would otherwise have. This defeats the purpose of the FCC and goes against the principles it wants to implement.

With regard to vertical mergers, the FCC’s problem is that this type of merger restricts access to goods and services. For example, if a manufacturing company has merged and gained control of a supplier, this would mean that other competing manufacturing companies that had previously been in business with said supplier may have to find other suppliers. This shortens the number of suppliers available and thus harms competition. There are examples of vertical mergers being approved by the FCC but, by-and-large, the FCC scrutinizes these sorts of mergers very vigilantly.

A Conglomerate merger can be classified into two headings:

i) pure conglomerate merger involving firms with nothing in common; and

ii) mixed conglomerate merger involving firms that are looking for product extensions or market extensions. For example, Coca Cola buying into KFC, so you can only get Coca Cola in KFC.

Control and change of control: Competition v. Company Law approach

The exact definition of “change of control” is not defined in the FCA, thus raising a number of concerns for foreign companies wishing to merge with local companies. Mainly, what is the scope of such a term? To counter these concerns, the approach used by the FCC is to compare the company law definition with the unofficial definition used by the FCC.

The company law approach to change of control would be the right to exercise decisive influence over day to day management or on long term strategic business decisions. The competition law approach to change of control occurs when control is shifting from one party to another party, mainly in relation to a transfer of ownership. Competition Law in Tanzania and the FCC are not concerned with the day to day handling of a company. They primarily concerned with the change of hands of the business, part of a business or an asset of a business between companies. The acquisition of a minority shareholder represents a notifiable merger as it leads to a change in the control of the structure of the target entity; the personalities of the company have changed so the balance of the company changes. Joint Ventures are also subject to notification to and approval of the FCC.

Currently and for the foreseeable future, the FCC does not and will not have jurisdiction over all mergers that occur in Tanzania. According to the FCC, the current threshold of Tanzanian Shillings (TZS) 800,000,000 (approx. US$ 500,000) is very low, resulting in it attracting many small and medium enterprises. The FCC would like these enterprises to mature and the general feeling is with the threshold being at its current level, it hinders their development and growth, especially if they would have to notify of every merger and acquisition. According to their Managing Director, the FCC is looking to raise the current threshold to TZS 5 billion (approx. US$ 3 million) due to them wanting to lessen their already substantial workload and to only handle the ‘big projects’, namely those who would meet a future proposed threshold.

It should be noted that the main and only thing that the FCC is concerned about when it comes to a merger and acquisition is the threshold. It is the upmost requirement and regardless of what change of control may occur, if it does not satisfy the threshold then it is not a notifiable merger. Section 11(2) of the FCA read together with Order 2 (1) of The Fair Competition (Threshold for Notification of a Merger) Order, 2007 provides that the calculation of the threshold shall be based on the combined market value of assets of the merging firms.

Notification Procedures

1. Rule 33(1) of the FCC Procedure Rules, 2013 states that the acquiring firm is obliged to notify the FCC as to the request of a merger.
2. Section 11 (5) states that without limiting the operation of sub-section (1), a person shall not give effect to a notifiable merger unless it has, at least 14 days before doing so, filed with Commission a notification of the proposed merger supplying such information as the Commission may by Order require to be included in such notification.
3. The FCA requires that within 5 working days after filing their application with the FCC, the Commission shall depending on completeness of the info as requested under Form FCC 8 Rule 35(1), issue either a notice of i) complete filing or ii) incomplete filing. All documents need to be attached to the notification and a notice of complete filing has to be issued by the FCC, otherwise the merger will never come up for review.
4. Rule 68 of the FCC Procedure Rules 2013 provides for the basis of computing the applicable fees by the applicant. Payment of applicable fees is part of complete filing.
5. The period to review a merger notification can go up to 90 days but it generally does not take that long. However, they are allowed to extend the number of days should the merger appear to be complicated for a further period not exceeding 30 days.
6. Rule 43 of FCC Rules states that at any time during a merger investigation, the Commission may request additional information from a party to a merger by serving upon the party in question a request for additional information, as set out in the First Schedule to the Rules setting out the specific information that the Commission requires.

Public Notice and Hearing of Third Parties

1. This occurs after the FCC has already reviewed the merger and is the final process before approval.
2. The FCC advertises through newspapers, journals, etc. informing the public of the merger taking place and asking whether they have an interest in the merger and if so, a hearing takes place. This is because the third parties interests could be adversely affected by the merger. There has to be ‘sufficient’ interest. This would be from employees, suppliers, competitors, off-takers, and shareholders, who have a certain stake, direct or indirect, in the merger. It should be noted that it is up to the FCC’s discretion to decide whether to hear the main parties to the merger alone, or main parties together with the relevant parties.
3. It should be noted that the FCC have introduced a ‘whistleblower’ policy, whereby they reward any informant who can provide them with information on any companies that have purposely circumvented the whole FCC notification procedure and merged discreetly, as it is known to occur occasionally. However, the FCC has set a limitation of 6 years of which it would not be able to go after companies that did not follow their notification procedure.

Exemption of Mergers

1. Exemption of Mergers is dealt with under s. 13 of the FCA. The FCC is empowered upon application of a party to a merger, to grant an exemption for a merger, either unconditionally (has to see a serious benefit to the economy and the competitors are so small they will not be affected, competitors will be informed of the possibility of an unconditional merger) or subject to such conditions as the FCC sees fit.
2. The procedure for filing for an exemption for a merger is similar to that for applying for mergers and acquisitions.

Conclusion

In this contemporary age of industrial organisation, mergers and acquisitions are viewed as fundamental for continuous economic development. The law and its intention do not exist to prevent or restrict merger transactions in Tanzania. The FCC is conscious that the combination of resources through a merger or an acquisition, companies are capable of increasing efficiencies through reduced costs, considered re-organization, adoption of new technologies and combined expertise. The FCC is just as aware that mergers and acquisitions are the quickest means for companies to source capital that can transform them to become more efficient and competitive companies. With the current increase of foreign investment in Tanzania and foreign and local businesses merging with one another, the FCC is looking ahead to a more competitive economic environment with which to operate, as witnessed by their proposed new financial threshold. Competition laws are still relatively not fully formed, but that could be seen as just a reflection of the developing economy of the country, and which, in turn, reflect the growing competition.

By Edward Kateka of Clyde&Co LLP.

This series is part of our Legal series to help our users at MergersAfrique that will seek to enlighten the process of acquiring or carry out a merger from the 54 countries that have different judicial processes.