The Common Market of Eastern and Southern Africa (“COMESA”) is a supra-national organisation with 19 Member States, which are Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe.
The COMESA Competition Commission (the “CCC”) commenced operations on 14 January 2013 and implements a supra-national merger control regime under the COMESA Competition Rules and COMESA Competition Regulations 2004 (the “Regulations”). In response to calls for greater clarity and legal certainty, COMESA published the Draft Merger Assessment Guidelines in April 2013 (the “Draft Guidelines”). While the Draft Guidelines provided some clarification on certain ambiguities in the Regulations, a number of issues remained unresolved.
The lack of certainty in the wake of the Draft Guidelines has partly been addressed by the publication of revised CCC Guidelines on the merger control rules (the “Revised Guidelines”) on 31 October 2014. The key changes brought about by the Revised Guidelines are set out below.
Under the Draft Guidelines it was unclear whether the CCC had exclusive jurisdiction in circumstances where the jurisdictional thresholds set out below are met or whether domestic merger control regimes can be concurrently engaged. The CCC has stated that it believes it has exclusive jurisdiction if the thresholds are met. However, the CCC’s view was not shared by all domestic competition authorities and the Kenyan Competition Authority had stated that domestic merger control rules continue to apply even if a filing must be made to the CCC.
The Revised Guidelines appear to address this issue by providing that the CCC’s jurisdiction will not be engaged in circumstances where both merging parties generate more than two-thirds of their COMESA turnover in one and the same COMESA Member State. Further, the Revised Guidelines establish a formal referral procedure where a Member State can request referral of a transaction for examination under its domestic merger control rules.
The above rules reflects the position under the European Commission rules and is a welcome development as it removes uncertainty as to jurisdiction and the need to make parallel filings in different Member States.
Unlike most merger control regimes, the Regulations set out no turnover or market share thresholds, which meant that all mergers must be notified if both the acquiring firm and the target firm or either the acquiring firm or the target firm operated in two or more Member States. In effect, where any one of the merging parties operated in two COMESA Member States a merger notification was necessary.
The Draft Guidelines explained that the turnover threshold was set to zero because different Member States are at different levels of economic development and a realistic threshold can only be set after the merger control rules have been tested. However, the zero threshold raised significant concerns that the merger regime would hinder transactions which have a minimal effect in the COMESA region.
The Revised Guidelines clarify which mergers require notification to the CCC. In particular, the Revised Guidelines state that a transaction need only be filed with the CCC where:
(a) At least one party to the transaction has gross assets or turnover of at least US$5 million in two or more COMESA member states; and
(b) The target company generated gross assets or turnover of at least US$5 million in one COMESA member state in the proceeding financial year; UNLESS
(c) Each of the merging parties generated two thirds of their annual turnover within the same COMESA member state.
The Revised Guidelines also confirm that the CCC bases its definition of control on the E.U. merger control rules. This means that one undertaking will be regarded as exercising ‘control’ over another, for merger control purposes, where it has “decisive influence” over that undertaking (i.e. negative, positive, sole and joint control would all be covered). The Revised Guidelines also indicate that acquisition of less than 15% of voting rights as a passive financial investor will not be caught by the merger control rules.
Local Effects Test
As set out above, a transaction has to be notified under the Regulations if at least one of the parties to the transaction operates in two or more Member States. However, the COMESA merger control rules apply only to transactions “which have an appreciable effect on trade between Member States and which restrict competition in the common market.” Therefore, in theory, transactions with minimal local effects should not require notification. The Draft Guidelines did not clarify how the local effects test would be applied and as a result it was not advisable to rely on this exception without further clarification. The merger notification thresholds introduced by the Revised Guidelines (see above) have added a degree of certainty.
Further, under the Revised Guidelines, where the proposed transaction would have no appreciable effect on trade on the COMESA Common Market, a comfort letter can be issued that would provide an exemption for the merging parties from having to file full notifications. The comfort letter would also enable to merging parties to avoid the high filing fee.
The Guidelines stipulate that requests for a comfort letter should be received by the CCC within 30 days of the decision to merge. Any information and supporting documents necessary to evaluate the request should be included in the application. Within 21 days of its receipt, the CCC will either issue the comfort letter, make a request for more information or documents or state that a full merger notification is required.
The COMESA merger filing fee is the lower of:
(a) 0.5% of the merging parties’ combined turnover or assets in the COMESA region (whichever is higher); or
This means that whenever the parties have a combined turnover or assets of greater than $100 million in the COMESA region the filing fees will reach the maximum of $500,000. The filing fee has not been affected by the Revised Guidelines and this level of filing fees continues to be amongst the highest in the world (in comparison, the filing fee in the UK ranges from $60,000 – $250,000) and may be a significant barrier to merger activity given the size of the companies operating in the region.
Penalties for failure to file
Failure to file the transaction within the 30 day deadline may lead to fines of up to 10% of the parties combined turnover in the COMESA region. In addition, the transaction will be unenforceable in the COMESA region unless it is filed.
The Revised Guidelines indicate that for parties which have failed to file prior to 31 October 2014 the CCC will not impose any penalties if the merger is notified to it by 29 January 2015.
Time limits for decisions
The Revised Guidelines have clarified that a ‘Phase 1’ clearance decision will be made within 45 calendar days from the filing of a complete notification. If the merger is referred to a ‘Phase 2’ investigation the CCC will issue a decision within 120 calendar days.
All nascent merger control regimes can be expected to encounter a difficult initial phase of implementation and the COMESA regime is no exception. However, significant progress has been made by issuing the Revised Regulations which provide welcome clarity and removes ambiguity in the filing process. The next step for the CCC will be to ensure that it has adequate resources to apply the sophisticated economic and legal analysis required to examine the increasing number of merger filings which can be expected in the region.