This article was written by Amish Shah (consultant, ATZ Law Chambers).
The past 10 years have seen a significant increase in investment in Africa. From around USD 15 billion in 2007, Foreign Direct Investment (FDI) is projected to rise to around USD 150 billion by 2015. Tanzania is now the top destination for FDI in the East Africa region, according to the United Nations Conference on Trade and Development (UNCTAD). Recent data from UNCTAD World Investment Report 2014 shows that Tanzania had USD 12.72 billion in FDI stock.
Furthermore, the Government of Tanzania generally has a favourable attitude toward FDI and has had considerable success in attracting FDI. Tanzania currently attracts approximately USD 1.8 billion of FDI inflows annually.
This large amount of FDI, coupled with an average GDP growth ranging between 6.5% to 7.8% annually from 2002 to 2014, has made mergers and acquisitions transactions a necessary next step in Tanzania becoming a global economy.
However, although the general attitude is that Tanzania is making strides towards becoming a favourable destination for inward flows of FDI, there has been a recent change in stance by Tanzania’s Fair Competition Commission (FCC) as to how it treats mergers and acquisitions, and we look at the historical and current position below and see what effect it may have on inward investments and mergers and acquisitions.
Merger notifications under the Fair Competition Act
Tanzania is not a party to COMESA so only the domestic merger control regime applies under the Fair Competition Act 2003 (the FCA) where a merger is defined as an acquisition of shares, a business or other assets, whether inside or outside Tanzania, resulting in the change of control of a business, part of a business or an asset of a business in Tanzania.
Consistent with merger control regimes in a number of other countries, the FCA provides that a merger is notifiable under the FCA if it involves assets above threshold amounts which the FCC shall specify from time to time by Order, in the Gazette, calculated in the manner prescribed in the Order.
The Fair Competition (Threshold for the Notification of a Merger) Order, 2006 sets out the threshold amount providing that a merger has to be notified to the FCC if the combined assets of the entities involved in the transaction is above the prescribed threshold amount of TZS 800,000,000 (approximately USD 380,000.00 as of today).
As such, for a merger to be notified, it has to meet the prescribed thresholds being a combined value of asset above TZS 800,000,000 of the merging parties and also result in a change of control. However, “change of control” has not been defined under the FCA nor has it been interpreted or guidance provided by the FCC.
Defining a “change of control”
What is a change of control in the absence of a definition under the FCC Act? In our view guidance can be drawn from the definition of “common control” in section 4 (2) of the FCA, which specifically excludes the section on mergers and merger notification, which provides that a body corporate shall control another body corporate if the first mentioned body corporate:
(a) owns or controls a majority of the shares carrying the right to vote at a general meeting of the other body corporate;
(b) has the power to control the composition of a majority of the board of directors or other governing organ of the other body corporate; or
(c) has power to make decisions in respect of the conduct of the affairs of the other body corporate.
The above is broadly consistent with English law and other international concepts of control. However on interpretation it applies to any interest in the control of a Tanzanian company, directly or indirectly up the corporate chain and is therefore applicable when interests in offshore holding vehicles are transferred.
Also instructive are the directions contained on the Merger Notification Form (FCC.8) which provide that “subsidiary”, in relation to a body corporate (first body) means a first body that is controlled by another body (other body) because:
(a) the other body -
(i) controls the composition of the first body’s board; or
(ii) is in a position to cast, or control the casting of, more than one half of the maximum number of votes that might be cast at a general meeting of the first body corporate; or
(iii) holds more than one half of the issued share capital of the first body (excluding any part of the issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or
(b) the first body is a subsidiary of a subsidiary of the other body.
Accordingly, it can be implied from section 4 (2) and the directions on the Merger Notification Form (FCC.8) that a merger will result in the change of control if it results in the change of the following:
(a) control of the majority of the shares carrying the right to vote at a general meeting;
(b) power to control the composition of a majority of the board of directors or the other governing organ; or
(c) power to make decisions generally in respect of the conduct of the affairs.
Although, section 4(1) of the FCA states that the definition of common control does not apply to mergers, our view is that in the absence of any general definition of a change of control in the FCA, the definition provided by the legislator at section 4(2) should be persuasive as to the definition of a change of control as such term appears throughout the FCA.
Given this analysis we have always been of the opinion that only mergers that (a) result in a change of control; and (b) involve combined assets above TZS 800,000,000 are notifiable under the FCA. Accordingly, if a merger does not result in a change of control, that merger is not notifiable to the FCC even when it involves an entity with assets above the threshold of TZS 800,000,000.
However in recent inquiries we have made to the FCC we were informed that any merger is notifiable to the Commission as long as it involves assets above the threshold of TZS 800,000,000 only. This is not in our view a correct interpretation of the law as, consistent with merger control regimes in other jurisdictions, there must also be a change of control.
A new look at “change of control”
As stated above the FCA has not defined what amounts to “change of control” and as such the FCC seems to have the discretion to decide what amounts to a “change of control” by looking at other jurisdictions and jurisprudence which often does not fit well with a particular transaction and its merits. The FCC may import a definition it deems to fit to a certain transaction and conclude that a merger ought to be notified. For example, the FCC has in some instances referred to definitions used in other jurisdictions such as the European Union, the United Kingdom and South Africa.
The FCC has recently adopted a broad definition of what amounts to a change of control albeit this definition has not been codified; or the FCA amended by Parliament to include a definition; or guidance provided by the FCC on how it interprets change of control. It has however been stressing on a case by case basis that a change of control can be:
(a) a ‘de facto’ change of control (through the acquisition of a majority of the voting shares or through acquiring the right to a majority of the votes on the board of directors); or
(b) a ‘de jure’ control where, as a result of the merger: it can still exercise decisive influence (which is the standard in the European Union); or where it can exercise material influence (which is the standard in the United Kingdom).
The new position, in our view, is perhaps not in line with international best practices and has the likelihood of discouraging investment into Tanzania as it effectively catches all investments/transactions (including transfers of indirect interests) which are upwards of USD 380,000.00. Furthermore, this means that it catches small to medium sized businesses that have assets on their balance sheet of over USD 380,000.00 and means that for any merger or sale they would have to notify the FCC and incur additional costs which they often may not be able to sustain.
The fact that Tanzania does not have a clear definition of what amounts to a change of control and the freedom of the FCC to define change of control depending on the circumstances, results in lack of clarity as to what standard the FCC might use and has led to numerous challenges not only for investors but for legal advisors as they cannot definitively advise whether a transaction is notifiable as there is no clarity to what is a change of control. Furthermore, the position taken by the FCC is that where the merger threshold is met then a merger becomes notifiable even in the absence of change of control.
In addition, we acknowledge that the term “power to make decisions generally in respect of the conduct of the affairs” in Section 4(2) is wide and open to interpretation. However, we consider that the FCA should make it clear that the minimum threshold for this to apply is the power to veto strategic decisions of the company (for example, the budget, the business and appointment of senior personnel). This would be consistent with EU Merger control.
The cost of uncertainty
With such lack of clarity on what is and what is not, a notifiable merger, investors as well as legal advisors are left in a dilemma when trying to establish if they should notify a transaction or not. The uncertainty coupled with the low notification thresholds, high penalties and high notification fees, makes one conjecture how long investors will tolerate such an environment.
The shift in the approach of the FCC has led to it going back and investigating previous mergers that took place and were not notified. As a result, the country has witnessed a number of proceedings brought against several entities that have been deemed to have infringed the provisions of the FCA, for failure to notify the FCC.
The FCC has been issuing penalties where it has investigated and finds a party guilty of failing to notify a transaction as required under the provisions of the FCA. Pursuant to the FCA, at any time within 6 years of the offence, the FCC may impose a penalty of between 5-10% of the acquirer’s annual turnover for a merger that was not notified. There is also a danger of the FCC issuing an order, at any time within 3 years after the transaction has been consummated, declaring the transaction void and requiring total or partial restoration of the status quo ante.
In another move, the FCC has recently taken the position that an acquisition of less than 5% of the voting shares and the right to appoint 1 director in a public listed company is a notifiable transaction. This move leads to the question whether the acquisition of a certain amount of shares through the stock exchange would require the FCC’s approval where the shares are publicly and freely traded. This would not be the case under EU law. If yes, how will the FCC monitor this and what impact will this have on the developing stock exchange? Furthermore, how will a single director in a large board of over 10 directors be able to exercise either decisive or material influence for there to be a change of control?
The foregoing questions depict the dilemma facing investors and legal advisers when trying to establish if the FCC’s approval is required in transactions.
There is urgent need for clarity in the law regarding what a change of control is, as it effects transactions where there is no change of control. With the current uncertainty we err on the side of caution and advise our clients to notify the FCC even if there is no change of control as long as the merger threshold has been met or alternatively to consult with the FCC to ascertain if a merger is notifiable.
Unfortunately this has in some cases proven counterproductive as the FCC always comes back and states that a merger notification filing must be made and filing fees paid and thereafter it will advise whether approval is required for the merger or not. This means that transaction completion timelines are extended by a minimum of 3 to 4 months and includes further costs of between USD 12,000.00 to USD 48,000.00 as merger notification filing fees which are non-refundable must also be paid.
We continue to consult on these matters and are working towards achieving certainty in Tanzanian merger control laws so that future FDI is not put at risk.