Egypt: New merger control regime updates competition law framework

In summary

This article outlines the main features of the new Egyptian merger control regime. This includes explanation of the scope of its application in terms of the nature of transactions and their value. It also addresses the Egyptian Competition Authority’s (ECA) procedures for reviewing mergers and similar transactions according to this regime. Moreover, it discusses the subject matter of this control, and ECA’s authority in this respect, and tries to envisage the potential position of the ECA, relying on brief case studies of merger cases that it reviewed during the old regime.

Discussion points

• Scope of application of the new Egyptian merger control regime
• Procedures to be followed in application of this regime, including the Egyptian Competition Authority’s powers in this respect
• Practices that might be prohibited by the Egyptian Competition Authority under this new regime

Referenced in this article

• The Egyptian Competition Law No. 3 of 2005
• Law No. 175 of 2022 amending the Egyptian Competition Law
• The European Union Merger Regulation

Introduction

As indicated in last year’s article, the Egyptian Competition Law was enacted by Law No. 3 of 2005 (ECL). Since the publication of our last article, Egypt has been working to modernise its competition law framework, particularly through the introduction of a merger control regime. The amendments to the ECL were finally passed by Law No. 175 of 2022 (the Amendments). The Amendments aim to promote competition within the market and prevent the creation of any anticompetitive practices through mergers and acquisitions.

Unlike the ECL’s old regime, under which the parties had to notify the Egyptian Competition Authority (ECA) of mergers and similar transactions post-closing, the Amendments introduced a pre-clearance regime for transactions meeting certain conditions, whereby parties to these transactions must notify the ECA and obtain clearance before completing such transactions. The Amendments entered into force the day following their publication in the Official Gazette (30 December 2022). Nevertheless, the executive regulations of the Amendments, the notification form template and relevant guidelines are not yet available but are expected to be issued soon.

In this regard, this article will examine the key features of the new merger control regime in Egypt, including:

• its scope of application;
• its procedural aspects;
• the prohibited practices under it;
• the applicable sanctions in the event of non-compliance; and
• the current applicable regime in light of non-issuance of the executive regulations to date.

Scope of application

Scope of application ratione materiae

The new merger control regime applies to transactions constituting economic concentrations and meeting certain financial thresholds.^[1] Accordingly, any transaction fulfilling these two requirements must be notified to the ECA.^[2]

An economic concentration is defined in the Amendments as any change of control or material influence over one or several entities.^[3] Such a change could be the result of:

• a merger transaction, whether through the consolidation or amalgamation of two or more undertakings, whether this leads to forming a new legal person or through a merger with an already existing person;
• an acquisition transaction, whether directly or indirectly, and individually or collectively, by means of a contract or purchase of shares, securities, assets or other means;
• establishment of a full-functioning joint venture, or acquisition by two or more persons of an existing joint venture, which would conduct a business in an independent and permanent manner.

The Amendments provided definitions of what control and material influence are. On one hand, the ECL defines control as the ability to practice an effective influence, directly or indirectly, over the economic decisions of one or several other undertakings, whether based on the majority of voting rights or the ability to veto certain economic decisions or any other means.^[4] Accordingly, a change of control can be easily detected whenever there is a significant change in the voting rights of an undertaking, or whenever someone is granted the actual management or decision-making powers of one or more undertakings, or whenever a transaction provides for certain voting rights for one of the parties. Control also exists through any agreement, situation or ownership of shares or stakes whatever their percentage might be, as long as it leads to actual control of management or decision-making.

On the other hand, the definition of material influence is much wider. It means the ability to affect one or more undertakings’ policies, whether in a direct or an indirect way, including its strategic decisions and business objectives.^[5] The ECL referred in this respect to the executive regulations, which have not yet been issued.

Therefore, there would be a change of control and material influence whenever the transaction in question influences economic and strategic decisions, or the business objectives of the target entity (ie, the merging undertakings, the acquired undertaking, etc). Thus, a change of control or material influence does not necessarily require acquisition of a majority of the voting rights. An acquisition involving a minority shareholding may still be notifiable if it leads to a change of control or material influence.

Conversely, transactions not resulting in a change of control or material influence, such as those between subsidiaries affiliated to the same parent company, shall not be characterised as economic concentrations, and consequently are not subject to the new merger control regime.

Accordingly, the Amendments expressly provided for two cases^[6] that would not be considered as economic concentrations:

• transactions concluded between subsidiaries affiliated to the same parent company, which are made for restructuring purposes and do not result in any direct or indirect change of control or material influence; and
• transactions by which a securities company temporarily acquires securities belonging to another undertaking for the purpose of reselling them within one year, provided that the acquiring undertaking does not exercise any voting rights or take any actions that might influence strategic decisions or business objectives of the target undertaking.

Additionally, transactions involving companies that conduct activities subject to the regulatory supervision of the Financial Regulatory Authority (FRA) are carved out from the general scope of application of the merger control regime and are treated differently under the Amendments.^[7] For any economic concentration transactions, these companies must notify the FRA to seek its prior approval, and the FRA must procure the opinion of the ECA before issuing its approval.^[8] To issue its non-binding opinion, the ECA’s review of the transaction is subject to a special regime provided in article 19 bis 6 of the ECL.

According to this regime, the ECA will constitute committees to study those transactions. The committee in question might:

• declare absence of competence to examine the transaction (for not being an economic concentration according to the above definition);
• close the request if the parties decide not to proceed with the transaction;
• issue a recommendation to the FRA to approve the transaction; or
• issue a recommendation to the FRA to reject the transaction.

Transactions in the banking sector are exempt from the ECL and fall under the jurisdiction of the Central Bank of Egypt.

In conclusion, a pre-closing clearance will be required for all merger and acquisition transactions, or in the event of the establishment of a full-function joint venture, or in any of the above cases, whenever it results in a change of control or material influence over the target undertakings. Nevertheless, these transactions would not be notifiable unless they meet one of the financial thresholds indicated in the Amendments.^[9]

Financial thresholds

Under the old regime of the ECL, a post-merger notification was required if the combined annual turnover of the involved undertakings and their related parties (ie, their direct and indirect parent companies, subsidiaries and sister companies) in Egypt, according to their latest financial statements, exceeded 100 million Egyptian pounds.^[10] Now, the Amendments require much higher thresholds for triggering pre-merger notification.

According to article 19 bis of the ECL, added by virtue of the Amendments, an economic concentration will be notifiable whenever:

• the combined turnover or assets of the concerned undertakings in Egypt, in their past fiscal year, exceeds 900 million Egyptian pounds, provided that each of at least two relevant undertakings has an annual turnover exceeding 200 million Egyptian pounds during the past fiscal year;^[11] or
• the global combined turnover or assets of the concerned undertakings, in their past fiscal year, exceeds 7.5 billion Egyptian pounds, provided that at least one party to the transaction has an annual turnover in Egypt exceeding 200 million Egyptian pounds during the past fiscal year.^[12]

As stated above, the financial thresholds required by the Amendments do not only take into account a local nexus to trigger the ECA’s jurisdiction over the transaction in question. Rather, the financial thresholds for notification are based on either the turnover or the assets of the concerned undertakings in Egypt or worldwide.

Nevertheless, the Amendments did not determine the mechanism by which the combined turnover or assets of the concerned undertakings would be calculated. Thus, this is left to the forthcoming executive regulations of the Amendments to determine the method and criteria for calculating these amounts.

In all cases, the ECA would still have the right to intervene in transactions falling below the required financial thresholds, within one year of their closing, whenever there are indications that the transactions have resulted or would result in a restriction to the freedom of competition.^[13] In these cases, the ECA would not be able to unwind these concentrations but would have the power to impose behavioural remedies on these concentrations, which are exclusively listed in paragraph 2 of article 19 bis of the ECL.

Those remedies include:

• abstention from any acts that might lead to limiting the distribution of certain products;
• making available basic utilities or services of competing persons;
• abstention from discriminating in contracts or agreements concluded with customers or suppliers of similar contractual statuses; and
• abstention from product tying.

Procedural aspects

Notification procedure

Under the Amendments, parties to an economic concentration that meets the conditions set by the Amendments and reaches the above thresholds are required to notify the ECA about the transaction and provide it with the relevant information. The list of documents and information required and the persons required to submit these documents and information are not yet announced, but are expected to be specified by the executive regulation and the ECA through its new notification form and guidelines.

As is the case in the European Union Merger Regulation (EU MR),^[14] there is no deadline for the notification. However, the notification must be filed before the transaction is implemented, meaning that the transaction cannot be completed before obtaining the ECA’s approval.^[15] Therefore, filing has a suspensory effect.

With regard to the persons or undertakings responsible for this notification, the Amendments do not indicate by whom the notification should be filed. Future regulations implementing the Amendments are expected to provide guidance together with the ECA’s guidelines. Meanwhile, it is expected to take a similar approach to that already set out in the EU MR, which provides that the notification must be filed jointly by the merging parties or those acquiring joint control in case of a merger or an acquisition of joint control, whereas in other transactions it must be made by the person or undertaking acquiring all or part of one or more undertakings.^[16]

Examination process

Regarding the time frame for examining the submitted notification of the potential transaction, it essentially depends on whether the notification would be cleared after the initial investigation (Phase I) or needs to go through a detailed investigation (Phase II).^[17]

Therefore, it is necessary to explain these two investigational phases established by the Amendments.

The initial investigation (Phase I)

Once all the required information is completely submitted as prescribed by the ECA’s notification form template and related guidelines, the ECA has 30 working days (starting from the first working day after the formal filing of the notification) to analyse the deal.^[18] In doing so, the ECA will establish several examination committees, each composed of three members, and each committee will be responsible for studying one of the notified transactions and decide whether it raises any concerns related to competition.^[19] The committee may consult relevant experts to assist it in its mission, provided that the consulted experts do not have a vote in the committee’s decision.^[20] If the examination committee has competition concerns, the concerned undertakings may propose certain remedies or commitments, which could lead to the extension of this first phase by 10 working days.^[21] At the end of this time frame (30 to 40 working days),^[22] the examination committee may:

• decide that it has no jurisdiction over the filed notification;
• decide to close the filed notification if the undertakings in question decide to cancel the potential transaction;
• unconditionally clear the transaction if it raises no competition doubts;
• clear the transaction subject to the remedies and commitments offered by the related undertakings; or
• open a detailed investigation (Phase II) if the transaction still raises anticompetitive doubts.

The examination committee is bound by the time frame specified in the Amendments. Accordingly, if the examination committee has not issued its decision within the deadlines determined in the ECL, the notification will be deemed to be accepted by the ECA.^[23]

Detailed investigation (Phase II)

This phase is an in-depth analysis of the transaction’s effect on competition, which requires a longer time. Thus, it lasts for 60 working days, starting from the date on which the examination committee decides to refer the notification to the detailed investigation (Phase II).^[24] It is to be conducted by the ECA’s Board of Directors. However, it is not yet clear what the extent of such a phase is. It will be expected to include more extensive information gathering, extensive economic data, more detailed questionnaires to the market players and site visits (similar to the tools typically used by the EU Commission in detailed investigations) owing to the competition concerns that could arise out of this transaction.^[25] The ECA’s Board of Directors may extend this period by an additional 15 working days to assess the transaction in the event the related undertakings offered certain remedies or commitments.^[26] At the end of this phase, the ECA’s Board of Directors will decide to:

• close the file if the undertakings decide to cancel the potential transaction; or
• unconditionally clear the transaction if it raises no competition issues; or
• clear the transaction subject to certain remedies and commitments offered by the related undertakings; or
• prohibit the implementation of the transaction owing to its negative impact on competition within the relevant market.^[27]

In this last case, the related undertakings have the right to appeal the decision within 30 days of its notification to them.^[28]

In all cases, the notification is deemed to be accepted by the ECA if the ECA’s Board of Directors does not take any decision within the deadlines determined in the ECL.^[29]

Practices prohibited

Under the new merger control regime, the ECA will generally prohibit the implementation of any transaction that ‘would limit, restrict or impair competition’ in the market.^[30] The wording of this provision is broad and general, allowing wide discretionary power to ECA. The executive regulations are expected to determine the elements to be taken into account when assessing the effects of the transaction in question on the market.

Nevertheless, there are already certain instances in which it could be expected that the ECA would block the notified transaction. For example, it is expected that transactions creating a dominant position on a particular market as defined under article 4 of the ECL, or that could be characterised as vertical or horizontal agreements under articles 6 and 7 of the ECL, may not be cleared by ECA. This includes mergers and acquisitions that result in a significant market share or market power.

In this context, it is worth recalling an earlier case (in December 2020) in which the ECA asked the Egyptian Ministry of Health to stop a potential transaction whereby one of Egypt’s largest private hospital groups aquired another hospital group.^[31] From the ECA’s perspective, this transaction would create a monopoly in the Egyptian healthcare market, leading to higher prices for medical services, allegedly lowering their quality and potentially weakening future investment opportunities.^[32] Moreover, the ECA opinded that such a transaction would have a negative impact on the doctors in the market, by potentially entering into exclusive agreements with the group and thus giving it control of their salaries, as they would have no other alternatives.^[33]

Similarly, the ECA preliminarily objected to a full acquisition in the ride-hailing market. The ECA preliminarily opined that the potential effects of this transaction, if completed, would harm consumers within the market owing to: the high prices that would be imposed by the acquirer (which would allegedly have a monopolistic position); the risk of having lower quality of cars; reduced consumer choice; and reduced incentives to innovate in the market. In addition, the ECA reached the further conclusion that the likelihood of entry into the ride-hailing market would be greatly decreased if this acquisition took place. This was demonstrated by the low profits generated in this market, the significant investments required and the highly valuable data already available to the parties to the transaction.

Nevertheless, in December 2020, the ECA approved the completion of this transaction, after the acquirer submitted a series of commitments to be complied with.^[34] The ECA approved the transaction because the imposed obligations and controls would ‘ensure the competitive environment in the local market, preserve the rights of users, including passengers, drivers, and owners of small and medium-sized companies, and enhance the opportunities for expansion of current and potential investments’.^[35]

In another example, the ECA sanctioned players in the on-demand delivery market following a transaction between them for their violations of the ECL. The ECA opined that the alleged violation was for ‘colluding to restrict competition on the on-demand delivery market in Egypt preventing Egyptians from enjoying a whole range of services provided by the acquired party’. While the acquirer acquired a minority shareholding in the acquired shares, the shareholders’ agreement allegedly gave the acquirer the right to access commercially sensitive information of its direct competitor in the Egyptian market (the acquired party) and the power to influence its strategic business decisions, which allegedly led to its exit from the Egyptian market. The ECA considered this transaction to have caused severe competition concerns by leading to ‘the exit of an efficient and innovative market player that was rapidly growing in the Egyptian market and offering innovative solution to Egyptian consumers’.^[36] Accordingly, following its investigation, the ECA’s Board of Directors decided that this agreement would be declared null and void, and the parties would take all necessary measures to cease and desist anticompetitive practices and restore the initial situation prior to the agreements. In sum, the ECA ordered the acquired party to resume its operations in the Egyptian market.

In the above cases, and in the absence of a pre-merger control regime at that time, the ECA relied on article 6 of the ECL, in conjunction with article 20, to intervene and stop the transactions in question. Even under the old regime, the ECA has, since 2018, conducted a quasi pre-merger review of transactions between competitors through relying on article 6(2) of the ECL. This article provides for a possible exemption from the application of article 6 of the ECL regarding cartels, upon prior approval of the ECA, if the benefits for consumers outweigh anticompetitive effects. The ECA considered some mergers and acquisitions as potential cartels, and thus required them to obtain prior approval under article 6(2) to allow these transactions. Otherwise, the ECA would consider them cartels concluded in violation of article 6 of the ECL.

Hence, by examining the ECA’s reactions to certain practices over the past years (including the three cases mentioned above), it seems that transactions, including certain practices, might be prohibited under the new merger control regime applied in Egypt. These practices include, but are not limited to, the following.

• Insertion of non-compete clauses between competitors: these are contractual provisions that prohibit one party from competing with another party for a certain period or in a specific geographic area. From the ECA’s point of view, these clauses may restrict competition and limit consumers’ choices, leading to higher prices and reduced innovation. The ECA has already sanctioned undertakings that included non-compete clauses in their dealings. The ECA previously found that non-compete clauses in contracts between competitors entailed the violation of article 6 of the ECL.^[37]
• Insertion of exclusivity clauses in horizontal agreements: these are contractual provisions requiring a buyer to purchase all or most of its products or services exclusively from the seller. These clauses may also be considered anticompetitive from the ECA’s perspective, as they might harm competition in the market by limiting consumers’ available choices. For example, for the ride-hailing market referred to above, one of the commitments imposed by the ECA was to ensure the absence of exclusivity provisions and provisions with a similar effect. This commitment addressed the ECA’s concerns regarding the exclusivity provisions between the acquirer and several stakeholders (eg, drivers and auto care shops).

Despite the above, the ECA may, upon obtaining approval from the Council of Ministers, clear the transaction in question whenever its prohibition would cause the exclusion of certain players from the market, its positive effects have preponderance over its negative effects on the relevant market or for reasons related to national security.^[38] Nevertheless, this exception will still be subject to certain conditions to be imposed by the forthcoming executive regulations.

Non-compliance with the Amendments

Under article 22 bis 4 of the ECL, failure to notify the ECA, to obtain its clearance or to abide by its decision to block the transaction in question (or failure to fulfil any of the obligations mentioned in the Amendments) will subject the parties to a penalty of a fine not less than 1 per cent and not exceeding 10 per cent of the total annual turnover, the asset value or the transaction value of the concerned parties, whichever is higher. If the percentage cannot be calculated, the penalty will be a fine of not less than 30 million Egyptian pounds and not exceeding 500 million Egyptian pounds.^[39]

Old regime

Under the old regime, the ECA had no legal basis to rely on when reviewing potential transactions and assessing their potential impact on competition in a certain market except when its view was taken by another competent sectorial regulator. However, since 2018, the ECA has consistently used articles 6 and 20 of the ECL to intervene in these transactions as mentioned above. Prior to the Amendments, the ECA was only able to: impose behavioral remedies on the parties involved; order the removal of anticompetitive practices; or cancel the agreements in question. Now, with the entry into force of the Amendments, the ECA has much stronger and more concrete authority in reviewing and evaluating any potential transaction that may have any effect on the Egyptian market. Moreover, it is able to clear, conditionally approve or to reject the transaction before it is even implemented.

It is too early to evaluate whether the application of this new pre-merger regime will be strict or flexible. This conclusion can only be drawn when the ECA starts to implement these new provisions. This is not expected to happen before the publication of the executive regulations relating to these Amendments and the new notification form with the list of required documents and relevant guidelines. These regulations should cover missing information, such as:

• the concept of concerned parties;
• the mechanism for calculating financial thresholds;
• the elements to be taken into account by the ECA during the investigation phases;
• whether there is an accelerated procedure for certain transactions;
• the list of commitments and possible remedies that could be proposed by the parties when their transaction raises competition concerns; and
• the related administrative fees.

Notes