• Key Changes Made to COMESA's Merger Control Rules
  • February 18, 2015
  • Law Firm: Dentons Canada LLP - Toronto Office
  • Merger Control Guidelines Published by the COMESA Competition Commission

    On 31 October the COMESA Competition Commission (CCC) published its first set of formal guidelines as to its merger notification requirements (the Merger Guidelines).

    The CCC has been operational since January 2013 and is charged with enforcing the supranational competition regime of the Common Market for Eastern and Southern Africa (COMESA), a collection of 19 Member States, many of which do not have competition laws of their own (see below).

    During this time, the CCC has begun enforcing a merger control regime which requires qualifying transactions to be notified for merger clearance within 30 days of the parties' decision to merge. The parties to a notifiable transaction are therefore entitled to close prior to receiving clearance, although in so doing they run the risk that the CCC subsequently finds the transaction to be anti-competitive and imposes remedies.

    The existing regime has been criticised for being inflexible and overly burdensome. The notification requirement currently applies wherever at least one party to a transaction operates in two or more COMESA Member States. This, combined with the fact that the asset and turnover based thresholds were set at zero, has meant that many transactions with little or no nexus to the COMESA region are caught. The Merger Guidelines, which were drafted as part of a project sponsored by the World Bank to improve the COMESA competition regime, go some way to addressing this issue.

    The new thresholds

    The Merger Guidelines acknowledge that the CCC should only take jurisdiction over mergers with a "regional dimension" with a view to regulating only those transactions that are actually capable of having an appreciable impact on trade between COMESA Member States.

    The new rules keep the requirement that at least one party "operates" in two or more Member States, but now state that, in order to "operate" in a Member State, an undertaking must have achieved annual turnover in that Member State for the most recent financial year of greater than US$5 million. In addition, the regional dimension test will not be met if:

    a.    a target company does not operate in at least one Member State; and

    b.    the merger is not capable of having an appreciable effect on trade between Member States or does not restrict competition. This will be the case if more than 2/3 of the annual turnover of each of the merging parties in COMESA is achieved or held within one and the same Member State.

    Comfort letters and pre-notification consultation

    Prior to issuing the Merger Guidelines, an informal practice had been developed by the CCC by which it made itself available to discuss with merging parties whether or not their transaction had an appreciable impact on COMESA competition and, in appropriate circumstances, issued "comfort letters" exempting a transaction from the need for a full notification.

    The Merger Guidelines now formalise this policy and set out a more formal process by which any party to a transaction can submit a reasoned request for a comfort letter including any information or supporting documentation deemed necessary. Such requests are kept confidential by the CCC, which will respond within 21 days after receipt of the request.

    The Merger Guidelines specifically state that, in the absence of any countervailing factors, the CCC will not regard a transaction as having any appreciable effect on COMESA competition if the parties satisfy the 2/3 rule set out above. The Merger Guidelines do not expressly state whether or not the CCC would be prepared to issue a comfort letter in any other circumstances. However, it does not rule this possibility out either and therefore there may be scope for parties to seek a comfort letter irrespective of the application of the 2/3 rule.

    As well as the comfort letter procedure, the Merger Guidelines also explain that the CCC is willing to engage in pre-notification discussions with merging parties in order to deal with specific issues that may speed up the notification process and/or enable the parties to decide whether they need to notify in the first place. Given that the CCC merger regime remains in its formative stages and there is limited precedent for parties to rely on, this is clearly a useful development.

    Other points covered by the Merger Guidelines

    Other than the changes referenced above, the Merger Guidelines broadly confirm the CCC's existing practice, although they explain that practice in further detail. In particular the Merger Guidelines confirm that the type of transaction covered by the rules is any acquisition of direct or indirect "control" over another undertaking. The definition of control for these purposes mirrors that used by the European Commission under the EU Merger Regulation.

    This will therefore include the acquisition of a minority interest in another undertaking if this gives the holder the ability to veto decisions which are important to determining that undertaking's commercial behaviour. Examples given in the Merger Guidelines include a veto over the appointment of senior management, strategic commercial policy, the budget or the business plan. So-called full function joint ventures (those set up by their parents to operate autonomously on the market for a sustainable period) are also caught.

    The substantive test applied by the CCC for purposes of assessing a merger remains whether or not a notifiable transaction gives rise to a "substantial prevention or lessening of competition". The Merger Guidelines give a useful steer on how the CCC would expect to apply this test in practice, based on a comparison of the competitive situation in the light of the merger as against that which would exist without it (known as the "counterfactual").

    Further changes imminent

    One key issue which has not been dealt with by the Merger Guidelines is that of the filing fee payable on notification. At present, the level of the fee is extraordinarily high by international standards - set at the higher of 0.5 per cent of the parties' combined annual turnover and the value of their assets in the COMESA region with a fee cap of US$500,000.

    When it announced a review of the merger rules, the CCC made clear that it would also be looking at the way filing fees are calculated. No such changes have been made in the Merger Guidelines. However, this appears to be more a matter of process than substance. Any such amendments would need the separate approval of the COMESA Council of Ministers and it is understood that such approval is unlikely to take place until February 2015 at the earliest. It is also possible that the Council will at the same time be asked to consider further changes to the financial thresholds for notification.

    Otherwise, the CCC is dedicating more resources to enforcing its rules. It has already stated that it fully intends to penalise parties that do not comply with the merger notification requirements, if only to set an example for others to follow. Any notifiable merger that is carried out in contravention of the merger control rules will have no legal effect in the Common Market and parties may also be liable for a fine of up to 10% of their annual turnover in the Common Market. Those undertaking transactions with any COMESA dimension will need, therefore, to pay close attention to the CCC's regime as it develops further.