Kenya: Overview

The Kenyan competition regime was overhauled in 2010 with the enactment of the Competition Act of 2010 (the Act), which came into operation in 2011. The Act’s primary purpose is to promote and safeguard competition in the national economy, to protect consumers from unfair and misleading market conduct and to establish and provide for the powers and functions of the Competition Authority of Kenya (CAK) and the Competition Tribunal. Kenya is also subject to the COMESA Competition Regulations (the COMESA Regulations), which were operationalised in 2013 and the East African Community Competition Act 2006 (the EAC Act), which is not yet operational but is likely to be operationalised before the end of 2016.

This article will look at the trends of the past year and the strategic policy of the CAK for the coming years, and what businesses and practitioners can expect.

Between 2013 and 2015, the CAK developed several guidelines relating to merger analysis, specifically:

• horizontal, conglomerate and vertical guidelines;
• public interest guidelines;
• merger threshold guidelines; and
• market definition guidelines.

The CAK also introduced merger filing fees in August 2014 and updated the merger notification form. Based on the CAK’s Annual Report 2014–2015, it is clear that there was an increase in the number of mergers reviewed: 148 merger notifications (18 of which were brought forward from the previous year) compared to the 88 reviewed during the 2013–2014 period. Of the mergers reviewed, 49 per cent had an international dimension.¹ This highlights the increasing awareness of the applicability of the Act and the CAK’s mandate to review mergers with an international dimension that result in a change of control in a business in Kenya.

In relation to restrictive trade practices (RTP), the CAK handled 19 RTP cases and two exemption applications. The higher percentage of RTP cases were in the alcoholic beverages, telecommunications and air transport sectors.

The CAK has become increasingly active and is striving to ensure compliance and enforcement of the Act. This is clear from the CAK’s strategy, which, in its own words, ‘provides a clear road map to enable the [CAK] to meet [its] Vision which is ‘a Kenyan economy with globally efficient markets and enhanced consumer welfare for shared prosperity’.’² Highlighted in the policy are the following five key areas of focus for the CAK:

• enforcement of competition and protection of consumers;
• promotion of research, advocacy and awareness;
• mobilisation and optimal utilisation of resources;
• infrastructure and human capital development; and
• visibility and corporate image.

Mergers

Under the Act, all transactions taking place in or outside Kenya that result in a change of control in an undertaking in Kenya require the approval of the CAK. A ‘change of control’ is not defined under the Act, however section 41(2) provides different ways in which a merger may be achieved, including the purchase of shares, the acquisition of a controlling interest or the acquisition by whatever means of the controlling interest in a foreign undertaking that has a controlling interest in a subsidiary in Kenya; and section 41(3) of the Act defines when a person controls an undertaking. Some of the forms of control listed under section 41(3) include beneficial ownership of more than half of the issued share capital of the undertaking, the ability to cast the majority of the votes at a general meeting, the ability to appoint a majority of the directors and the ability to materially influence the policy of the undertaking.

Merger Threshold Guidelines

The CAK issued Merger Threshold Guidelines (the Threshold Guidelines) that were applicable from 1 August 2013. The Threshold Guidelines provide clarity to parties on the circumstances under which a merger may be considered for exclusion. While the Threshold Guidelines are not binding and do not afford parties an automatic exclusion from the provisions of the Act, they at least provide parties with an indication of whether a full merger notification is required.

The thresholds under the Threshold Guidelines provide, in summary, as follows:

(i)   generally, mergers where the combined turnover of the parties is above 1 billion Kenya shillings will be notifiable and the parties must wait for the decision of the CAK before implementing the transaction;

(ii)  where the parties’ combined turnover falls between 100 million and 1 billion Kenya shillings, the parties may apply to the CAK for an exclusion, and if not informed within 14 days that the merger has been excluded, the parties must await the determination of the CAK; and

(iii) where the combined turnover of the parties is below 100 million Kenya shillings, the parties may apply to the CAK for an exclusion.

Exclusions under (ii) and (iii) are normally granted in less than two weeks. Where the parties to the transaction only own assets but do not generate sales, the CAK will base the thresholds on the value of the parties’ assets.

What constitutes ‘relevant turnover’ when calculating the parties’ combined turnover has been the subject of several interpretations. The Threshold Guidelines define ‘turnover’ to include ‘the value of the annual sales turnover for the merging parties within Kenya, based on the audited accounts of the holding company, the subsidiaries and other related companies for the preceding year’.

The definition of holding company and subsidiary are relatively well known. Under Kenyan company law, a company is defined as a subsidiary of another if that other:

• is a member of the company and controls the composition of its board of directors; or
• holds more than half in nominal value of the company’s equity share capital.

The difficulty in interpreting what relevant turnover constitutes is in defining what ‘other related companies’ refers to in the definition of turnover under the Threshold Guidelines.

The CAK has made different decisions on relevant turnover, and in light of the fact that there are limited guidelines in Kenya on this issue at present, practitioners have sought guidance from international best practices. One of the key practices that has been highlighted to the CAK is the need to base turnover figures on audited accounts prepared in accordance with International Financial Reporting Standards.

Considering that the definition of turnover refers to the audited accounts, it would follow that any turnover figures should be based on audited accounts. Following this line of thought, only those companies captured in a group’s consolidated accounts pursuant to IFRS would form part of the relevant turnover. It is interesting to note that in some instances the CAK has considered including the turnover of companies in which a merging party has an interest, although not a controlling interest, on a pro rata basis. For example, if a merging party has a 10 per cent interest in another company, 10 per cent of that company’s turnover would be attributed to the turnover of the merging party. In addition, our recent experience has been that the seller’s group turnover in Kenya is required for purposes of determining what threshold the merger falls under. This seems an unusual approach considering the seller is exiting the market and therefore the group turnover ought not to be relevant for purposes of analysing the merger.

Introduction of filing fees

The CAK has recognised that funding is a challenge and identified filing fees as a source of revenue. The fees are calculated on the basis of the joint turnover of the merging parties and we have set out below the applicable fee in Kenya shillings.

Merger Assessment Guidelines

In the latter half of 2015, the CAK put in place the Consolidated Guidelines on the Substantive Assessment of Mergers (the Merger Assessment Guidelines) to provide guidance to parties in determining when a merger occurs and how mergers are assessed.³

Under the Act, a merger is defined as ‘an acquisition of shares, business or other assets, whether inside or outside Kenya, resulting in the change of control of a business, part of a business or an asset of a business in Kenya in any manner.’

Section 41(1) of the Act goes on to state that ‘a merger occurs when one or more undertakings directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another undertaking.’

The Merger Assessment Guidelines expand on what constitutes direct and indirect control. Acquisition of direct control can be evidenced by ‘the exercise of full or decisive influence over the affairs of the target undertaking’.⁴ In addition, ‘the acquisition of less than 50 per cent of the shares of an undertaking with attached voting rights and unanimous decision-making raises a presumption that direct control has been acquired.’⁵ The Merger Assessment Guidelines also indicate what sort of evidence may be considered in determining whether decisive influence can be exercised – for example, veto rights and the appointment of directors.

In the Merger Assessment Guidelines, both material influence and decisive influence are referred to in terms of what the CAK will consider in their determination as to whether an undertaking has acquired indirect control. This has led to uncertainty as the two levels of control are different.

The Merger Assessment Guidelines only provide a few examples of what would constitute ‘material influence,’ such as an acquisition of a minor shareholding, but the remainder of shares is widely dispersed such that the acquirer can exercise material influence over key strategic decisions of the target. As the Merger Assessment Guidelines are relatively new, we hope to see the CAK providing further guidance and interpretation of what constitutes ‘material influence’.

Trends in merger approvals and post-merger compliance

Imposition of conditions in merger approvals

We note that the CAK has recently been issuing approvals for mergers with conditions, such as conditions relating to employees and the achievement of business plans. This means merging parties may be faced with conditions relating to non-retrenchment of employees for a certain period after the transaction is completed. The CAK takes into consideration the information disclosed by the merging parties in the merger notification form relating to the strategic plan after the completion of the transaction. Usually, on a full merger notification, parties are required to provide information on what will happen to employees post-completion. It is important that parties provide relatively detailed information on the post-completion status of employees to avoid having conditions imposed that would be out of line with their strategic plan.

Post-merger compliance audits

The CAK is also carrying out post-merger compliance audits to ensure that mergers are implemented in accordance with the information provided to the CAK in the merger notification and in conformity with conditions imposed by the CAK. In 2014–2015, the CAK conducted audits on five matters in the agriculture, automobile, banking, mining and telecommunications sectors.

Restrictive trade practices (RTPs)

The CAK is increasing its manpower and in doing so has become active in enforcement and compliance regarding RTPs. Many sectors are being investigated. The CAK has stated that its priority is sectors ‘with great impact on national economic and social agenda; conduct involving coordination of activities among actual competitors; likelihood of making a finding; and whether a formal complaint was filed’. Some of the main sectors that were affected by the investigations include airport transport, telecommunications, alcoholic beverages and insurance.⁶

During the year 2014–2015, out of 19 RTP cases handled by the CAK, four were finalised. The CAK has the ability to impose penalties on offending parties and has done so on occasion. For example, a penalty was imposed on the Association of Kenya Reinsurers (AKR) for fixing prices (discussed below).

One of the RTP investigations handled by the CAK is reported in the Annual Report and is summarised below.

Association of Kenya Reinsurers

The CAK initiated investigations following complaints lodged by the National Intelligence Service (NIS) against AKR in relation to a circulation on the minimum applicable rate of premium in tendering for provision of the renewal of NIS Group Life Scheme. Preliminary investigations established that AKR was in violation of the RTP provisions under the Act relating to fixing prices and collusion. AKR and the CAK eventually entered into a settlement agreement pursuant to section 38 of the Act. The CAK imposed a penalty of 721,715 Kenya shillings and the requirement that members of AKR give an undertaking that they would desist from any anticompetitive conduct.⁷ The penalty was based on the affected turnover which was the total reinsurance premium for the NIS group life cover for the preceding year and mitigating factors as presented by the parties.

Dawn raid by the CAK

The CAK conducted its first dawn raid in March 2016 in exercise of its powers of entry and search under section 32 of the Act. The CAK conducted the raid on two fertiliser firms – MEA Limited and Yara East Africa – on allegations of engaging in price collusion. The raid was aimed at obtaining information that will assist the CAK in its investigation of the firms for anticompetitive practices.

The raid is illustrative of CAK’s seriousness in enforcing provisions of the Act, especially on restrictive trade practices. Therefore, companies ought to ensure their operations are in compliance with the provisions of the Act.

RTPs under the Act

Section 21 of the Act states that ‘agreements between undertakings, decisions by associations of undertakings, decisions by undertakings or concerted practices by undertakings which have as their object or effect the prevention, distortion or lessening of competition in trade in any goods or services in Kenya, or a part of Kenya, are prohibited.’

The agreements, decisions and concerted practices contemplated include parties in a horizontal relationship and parties in a vertical relationship.

Section 21(3) of the Act sets out that a prohibited RTP is one that, without distinguishing between horizontal and vertical relationships:

• directly or indirectly fixes purchase or selling prices or any other trading conditions;
• divides markets by allocating customers, suppliers, areas or specific types of goods or services;
• involves collusive tendering;
• iinvolves a practice of minimum resale price maintenance;
• limits or controls production, market outlets or access, technical development or investment;
• applies dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
• makes the conclusion of contracts subject to acceptance by other parties of supplementary conditions that by their nature or according to commercial usage have no connection with the subject of the contracts; or
• amounts to the use of an intellectual property right in a manner that goes beyond the limits of fair, reasonable and non-discriminatory use.

Interpretation of RTP provisions

From a straightforward reading of the wording in section 21, one would think that for an RTP to be prohibited it must prevent, distort or lessen competition by object or effect. However, recent cases suggest that even technical breaches of the Act may constitute an offence. For example, a historic contract entered into prior to the Act that contains a provision relating to suggested resale prices, although historic and not intended to have the object or effect of preventing, distorting or lessening competition, may constitute a contravention of the Act. In addition, it would appear that all the RTPs listed above would apply to both horizontal and vertical relationships.

However, the CAK has issued Consolidated Guidelines on the Substantive Assessment of Restrictive Trade Practices under the Act (the RTP Guidelines).7 The RTP Guidelines suggest that the CAK is only interested in agreements that are ‘significant enough to prevent, distort or lessen competition on the market in Kenya’.⁸ The RTP Guidelines are relatively new and it is yet to be seen how the CAK will apply them.

The RTP Guidelines also seem to suggest that under section 21(3) of the Act, which sets out all the prohibited practices, such practices are divided into two categories: practices that are applicable to horizontal relationships and those that are applicable to vertical relationships. This provides more clarity on the application of the RTP provisions in the Act, as prior to the RTP Guidelines any prohibited practice undertaken would constitute an offence.

The Act specifically states that a practice is prohibited if it has the ‘object or effect’ of preventing, distorting or lessening competition. The RTP Guidelines make it clear that the CAK will undertake an assessment of either object or effect and both do not need to be satisfied for there to be an infringement of the Act.

It is interesting to note that the RTP Guidelines state that it is the CAK that bears the burden of adducing proof that an agreement has its object or effect of restricting, distorting or lessening competition. We are not aware of cases where the CAK has provided its reasoning and evidence that an agreement has the effect of lessening competition and it will be a step forward for business practitioners if the CAK is required to substantiate its claim.

Horizontal agreements

Horizontal agreements are agreements between competitors or undertakings that are on the same level of production or are at the same level in the distribution chain. Horizontal agreements to fix prices, divide up markets through customer allocation or geographic regions are prohibited by the Act.

The RTP Guidelines classify the following as ‘hard-core restrictions’:

• price fixing;
• collusive tendering; and
• market division.

The RTP Guidelines make it clear that collusive agreements are only subject to the object assessment, which means that, regardless of whether the agreement has an effect on competition, the existence of an agreement constitutes an offence.

Vertical agreements

Vertical agreements are agreements between undertakings that operate at different levels in production or in a distribution chain, such as between a manufacturer and a supplier.

The types of vertical restrictions the RTP Guidelines envision relate to:

• resale price maintenance;
• tied selling and bundling; and
• discount and rebate agreements.

Under certain vertical restrictions, the CAK will consider the effects assessment or rule of reason analysis in determining whether there has been an infringement. This is because certain conduct could have pro-competitive effects and the CAK recognises that certain vertical arrangements may promote or preserve quality in the market.

Leniency programme

Pursuant to amendments made to the Act in 2014, the law introduced a leniency programme where an undertaking can voluntarily disclose the existence of an agreement or practice that is prohibited under the Act. If an undertaking does come forward, it may not be subject to the full fine that may be imposed under the Act.

The rules and regulations in respect of the leniency programme are yet to be finalised. However, the amendment to the Act shows the CAK’s enhanced role in promoting compliance with the Act.

Notes

1. Competition Authority of Kenya, ‘CAK Annual Report 2014–2015’
2. Competition Authority of Kenya, ‘Strategic Plan 2013/14–2016/17’ www.cak.go.ke/index.php/resource-centre/publications.html, accessed 20 May 2016
3. Competition Authority of Kenya, ‘Merger Guidelines’ www.cak.go.ke/index.php?view=list&slug=merger-guidelines&option=com_docman&Itemid=502, accessed 20 May 2016
4. Ibid
5. Ibid
6. Annual Report 2014–2015.
7. Competition Authority of Kenya, ‘Restrictive Trade Practices’ www.cak.go.ke/index.php?option=com_docman&view=filteredlist&Itemid=505, accessed 20 May 2016
8. Ibid