Highlights:

• In January 2013, a supranational organization of 19 African States known as “COMESA” implemented a new and potentially burdensome merger notification regime affecting parties with assets or sales in eastern or southern Africa.
• Pre-merger notification is required for any merger where either the acquiror or the target operates in at least two COMESA member States. Arguably, notification may be required only if the merger will have an appreciable effect on trade between member States and restricts competition in COMESA.  The definition of “operates” in this context is unclear, as are the exemptions.
• Under the Regulations, the test for CCC approval is whether the merger:
  a)  has lessened substantially or is likely to lessen substantially the degree of competition in COMESA or any part thereof; or
  b)  has resulted, or is likely to result in, or strengthen a position of dominance which is or will be contrary to the public interest.
• A COMESA filing must be made within 30 days of the parties’ “decision to merge”.  The review period is 120 days, although the CCC may seek extensions from the Board of Commissioners of COMESA.  The Regulations and merger notification form (currently available only in draft) do not expressly prohibit closing a merger pending completion of the CCC’s review; it is unclear what is intended by this omission.

Main Article:

In January 2013, a supranational organization of 19 African States known as “COMESA” implemented a new and potentially burdensome merger notification regime that should be considered in the context of any mergers involving parties with assets or sales in eastern or southern Africa.  Some important questions remain unanswered at this time, but it appears likely that the regime will add uncertainty and require additional advance planning for transactions involving companies active in the region.  This perspective provides a brief overview of its potential application.

COMESA

COMESA stands for the Common Market for Eastern and Southern Africa, and 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.

Merger Notification Thresholds

Pursuant to the COMESA Competition Regulations (“Regulations”) establishing the COMESA Competition Commission (“CCC”), a pre-merger notification is required for any merger where either the acquiror or the target operates in at least two COMESA member States.  The CCC recently set the financial threshold for notification at $0 in assets or revenues, and the definition of “operates” in this context is unclear.  For example, it remains to be seen whether the CCC will take the position that a company that merely owns land or mineral rights in two or more member States, but otherwise has no other assets or operations in COMESA, would satisfy the notification threshold.

The Regulations apply only to mergers that have an appreciable effect on trade between member States and which restrict competition in COMESA.  This requirement may exempt transactions from notification where only the acquiror has operations in the region, although the scope of the exemption is unclear.

The Regulations define a “merger” as the acquisition or establishment of a controlling interest in the whole or part of the business of another person.  However, the definition of a “controlling interest” is unclear and includes any interest that enables the holder to directly or indirectly exercise “any control whatsoever” over the activities or assets of an undertaking.  It remains to be seen whether the CCC will broadly interpret this provision and whether the acquisition or establishment of a minority interest, board representation or even contractual rights could amount to a “controlling interest”.

Interaction with Filing Obligations in COMESA Member States

Where a COMESA notification is required, the CCC intends for the COMESA regime to operate to the exclusion of individual notification regimes in COMESA member States.  (Currently, eight of 19 COMESA member States have their own notification regimes.)  However, recent media reports indicate that in some circumstances both COMESA and the Kenyan competition authority have asserted jurisdiction (and notification obligations) over the same transaction.  Until there is more clarity in this regard, merging parties may be wise to approach both the CCC and applicable State-level regulators in transactions subject to notification in the region.

Substantive Test for Approval

Under the Regulations, the test for CCC approval is whether the merger:
a)  has lessened substantially or is likely to lessen substantially the degree of competition in COMESA or any part thereof; or
b)  has resulted, or is likely to result in, or strengthen a position of dominance which is or will be contrary to the public interest.

This test is generally consistent with tests for approval in other jurisdictions.

Timing of Review

If a COMESA filing is required, it must be made within 30 days of the parties’ “decision to merge”.  (We understand that the CCC is of the view that “days” in the Regulations means business days and not calendar days.)  While unclear, it appears that the CCC may be taking an expansive view of when the “decision to merge” has been made and may have in mind that the filing requirement could be triggered by a board decision even before a merger agreement is entered into.

The review period is 120 days, although the CCC may seek extensions from the Board of Commissioners of COMESA.  At present, the CCC does not appear to have provided for an accelerated timetable for mergers that raise no substantive issues.

The Regulations do not expressly prohibit closing a merger pending completion of the CCC’s review.  While the merger notification form (currently available only in draft) notes that mergers implemented in contravention of the Regulations will be of no legal effect, the draft form no longer includes a statement (found in the prior draft) that parties cannot close their transaction until CCC approval has been received.  Accordingly, the change in the draft form may signal a position of the CCC that the parties may complete a merger before the CCC has completed its review (absent an injunction or other enforcement action).

Notification Form

A notification form must be submitted by each party to a transaction (except in the case of an unsolicited bid, where only the acquiror must submit a notification).  Unless significant changes are made or exceptions permitted, the form will necessitate the provision of extensive information regarding, among other things, sales, customers and competitors.

Notification Fees and Penalties

If a filing is required, the notification must be accompanied by a filing fee equal to the lesser of:  (a) US$500,000; or (b) the lower of 0.5% of the parties’ combined turnover or 0.5% of the parties’ combined assets in the COMESA region.  (Although the CCC has stated that the lower of these two figures is intended to apply, the Regulations themselves are somewhat unclear.)

If the parties to a transaction fail to file within the required timeframe, they may be subject to a penalty of up to 10% of their combined annual turnover in COMESA.  In addition, as noted above, a merger implemented in contravention of the Regulations will be of no legal effect in COMESA.

Summary

Compliance with the COMESA merger notification regime may need to be added to the competition approval checklist for a merger involving a party with operations in two or more COMESA member States.  This approval, if required, could result in significant costs and potential delay.  A significant amount of uncertainty about the application of the COMESA merger notification regime remains and further clarification from the CCC is needed.