COMESA: Competition Commission
The COMESA Competition Commission (the Commission) commenced operations in January 2013 to administer and enforce the COMESA Competition Regulations (the Regulations). The objective of the Regulations is to promote and encourage competition by preventing restrictive business practices that deter the efficient operation of markets, thereby enhancing the welfare of consumers in the Common Market 1 and to protect consumers against offensive conduct by market actors. The Regulations apply to restrictive business practices, mergers and acquisitions and consumer violations that have an effect on trade between Member States and that restrict competition in the Common Market. The focus of this article is on mergers and acquisitions occasioned by private equity funds (PE funds).
What are PE funds?
In general terms, a PE fund has been defined as a general partnership formed by PE firms that are utilised to invest in private companies. The PE fund may either have general investment criteria (meaning it invests in different industries) or specific industry criteria. PE funds may invest directly in equity securities of the target investment, in the form of mezzanine debt or in both equity and debt. For purposes of merger control, the form in which the PE firm presents itself in another undertaking is immaterial. The focus is whether the transaction leads to a material change in control on a lasting basis for a merger to be construed.
As Greenfield investments are dwindling in size and frequency, PE funds have become a popular form of investment and source of funds for start-up companies, those wishing to accelerate their growth and indeed saving or sustaining companies in financial distress. PE funds are also popular in that they do not involve themselves in the day-to-day operations of the company in which they invest. They are more concerned with the policy and commercial direction of companies in which they invest.
Regulation of merger transactions involving PE funds within the overarching merger control framework
The Commission has in the recent past seen an increase in the number of merger notifications involving private equity funds. PE funds are important in that they would enhance the competitiveness of firms in the Common Market to compete effectively at global level through the provision of the necessary resources, which are often limited. From a regulator’s viewpoint, mergers involving PE funds should be reviewed within an overarching competition law framework to ensure that the envisaged benefits are not eroded by anti-competitive effects that may emanate from them. Most transactions involving PE funds do not raise significant competition concerns. The question that often arises is whether transactions involving PE funds should be treated as mergers and if so, whether there are special rules that apply to them under the COMESA Merger Control Regime. It is therefore imperative that we review the COMESA Merger Control Legal Framework.
The regulation of mergers in COMESA is guided by two principle documents, namely the COMESA Competition Regulations and Rules (the Regulations) and the COMESA Merger Assessment Guidelines (the Guidelines).
The Regulations are binding on the Commission, the Member States and the merger parties. The Guidelines are not binding but they guide both the Commission and the parties in the assessment of mergers. However, the Commission cannot casually depart from the Guidelines unless there are serious reasons to do so and such action is not in breach of the Regulations.
To address the question of whether transactions involving PE firms should be captured by the Regulations, it is important to look at the definition of the term ‘merger’ in the Regulations. Article 23 of the Regulations provides that a merger means the direct or indirect acquisition or establishment of a controlling interest by one or more persons in the whole or part of the business of a competitor, supplier, customer or other person whether that controlling interest is achieved as a result of:
- the purchase or lease of the shares or assets of a competitor, supplier, customer or other person;
- the amalgamation or combination with a competitor, supplier, customer or other person; or
- any means other than as specified in sub-paragraph (i) or (ii).
The definition of the term merger in article 23(1) is very wide and capable of encompassing many transactions that may not be construed as mergers under international best practice. It is therefore important to carefully examine article 23(1) and establish if it is possible to make the definition of the term merger specific and encompass only those transactions that are likely to lead to a change in market structure post transaction. Article 23(1) informs us that for a merger to be construed, there must be an acquisition of a controlling interest by one or more persons in the whole or parts of the business of one or more other persons. Therefore, it is also imperative that we understand how this acquisition of a controlling interest is occasioned. Guidance is provided in article 23(2) which provides that:
For the purpose of this article, controlling interest in relation to:
- any undertaking, means any interest which enables the holder thereof to exercise, directly or indirectly, any control whatsoever over the activities or assets of the undertaking; and
- any asset, means any interest which enable the holder thereof to exercise directly or indirectly, any control whatsoever over the asset.
However article 23(2) is unclear when it states that a controlling interest is established when this controlling interest enables the holder thereof to exercise direct or indirect control over the activities or assets of another undertaking or the assets under consideration. Therefore, the term control has to be defined to resolve the uncertainty. The Regulations do not provide the definition of the term ‘control’. This definition is found under section 2.5 of the Guidelines. The Commission regards ‘control’ as being constituted by rights, contracts or any other means which, either separately or in combination and having regard to the considerations of fact or law involved, confer the possibility of exercising decisive influence on the undertaking or asset concerned. Whether or not a person has the possibility of exercising decisive influence on an undertaking or asset concerned should be assessed on a case by case basis. Regard should be had to the overall relationship between the person and undertaking or asset concerned in light of the commercial context, in particular in relation to the competitive conduct of the relevant business, including its strategic direction and its ability to define and achieve its commercial objectives. The Guidelines under Section 2.6 go on to provide that notwithstanding the generality of Section 2.5, when determining whether a person has the possibility of exercising decisive influence over an undertaking, the Commission will take into account, among other factors, whether the person directly or indirectly:
- has the ability to determine a majority of the votes that may be cast at a general meeting of the undertaking;
- is able to appoint or to veto the appointment of a majority of the directors of the undertaking;
- has the ability to determine the appointment of senior management, strategic commercial policy, the budget or the business plan of the undertaking; or
- has a controlling interest in an intermediary undertaking that in turn has a controlling interest in the undertaking.
It is therefore clear from the above definition that the Regulations capture various forms of transactions including PE funds as long as they involve the acquisition of a controlling interest. Most PE transactions require the PE firm to appoint directors on the boards of the firms in which they invest funds, to convert debt to equity interest in an event that the firm borrowing the funds defaults to pay by the agreed date. The PE firms may also be given power to veto certain strategic commercial policy decisions. Such rights may give the PE firms control in terms of conferring on them the possibility of exercising decisive influence in the acquired undertaking and therefore a merger would be construed. Transactions that involve PE funds and meet the definition of a merger under the Regulations are therefore subject to notification just like any other merger. It is important to establish control in such transactions. This is because some of these transactions may not result in material change in market structure to justify competition authority review. These PE transactions that only confer right for a propriatory protection of their instruments and for a short duration should not be considered as mergers otherwise this may limit their effectiveness as a source of funds for company growth.
Notification of PE transactions
In order to be notifiable, parties to PE transactions must operate in two or more Member States pursuant to article 23(3) and meet the merger notification thresholds pursuant to Rule 4 of the Rules on the Determination of Merger Notification Thresholds and Method of Calculation. Once the above criteria are satisfied, it follows therefore that the regional dimension requirement is established, a pre-requisite for merger notification. The notification of PE transactions is subject to the same notification fees of 0.1 per cent of the merging parties turnover or assets in the Common Market – whichever is higher – with a cap set at US$200,000.
Is there any special treatment of PE transactions under the Regulations?
As already noted, the Regulations do not treat PE funds differently to other forms of acquisition of Control. However, the Guidelines have recognised that certain transactions are not likely to give rise to competition concerns. Such mergers are reviewed under an expedited process under the Phase 1 assessment process provided under the Guidelines. The maximum number of days within which to consider a merger under Phase 1 is 45 calendar days. It should be noted that mergers that are prima facie likely to raise competition concerns are reviewed under the Phase 2 assessment process, which takes a maximum of 120 days.
Whether or not a merger should be considered under Phase 1 is affirmed by the Commission. The merging parties, however, are not precluded from giving justifiable reasons why they think their transactions should be treated under Phase 1 assessment. The Commission shall then undertake its own assessments and confirm if this is the case. From experience, PE funds do not raise significant competition concerns and may benefit from the Phase 1 assessment.
In conclusion, the Commission has observed that the prevalence of PE transactions has significantly increased and shall, therefore, commence a study to fully comprehend their impact on the competitive landscape in the Common Market. The Commission has observed that most of these PE funds have acquired control in a number of companies and in due course, it is more likely than not that some of those companies may be competitors that may be linked by cross-directorship thereby making the market very transparent for possible coordination. Currently this concern may sound remote albeit it is a real one.
1 Common Market in this article refers to the Common Market for Eastern and Southern Africa.