Competition Authority of Kenya emphasises the role of public interest in M&A reviews
By Joshua Eveleigh
On 05 January 2024, the Competition Authority of Kenya (“CAK”) approved Nava Apparels L.L.C-FZ acquisition of the assets of Mombasa Apparel (EPZ) and Ashton Apparel (EPZ) on the condition that Nava retains all of EPZ’s 7019 employees on terms that are no less favourable than their current terms of employment.
Notably, post-transaction the merged entity would have an insignificant market share of only 3.83% in the market for the manufacture of clothing apparel for export. Accordingly, the merged entity would still face significant competitive restraint from various other market players post-transaction and, against this, the CAK found that the transaction would not result in any substantial lessening or prevention of competition in the relevant market.
Similar to South Africa’s merger control regime, the CAK is mandated to conduct a public interest assessment, in addition to the conventional competition assessment, during its merger review process. As part of its public interest assessment, the CAK has particular regard to the enhancement and sustainment of employment; the ability of SMEs to enter into and compete into a particular market; and the ability of national industries to compete in international markets. Where the CAK has a credible basis to conclude that a notified transaction will result in a public interest concern, it may prevent that particular transaction.
What is interesting in this instance, however, is that the merger decisions do not appear to include any particular period within which the retrenchment moratorium must be adhered to. Without guidance, the acquirer may find itself in the invidious position of not being able to retrench any of the 7019 employees for an extended period of time.
The CAK’s recent decision emphasises the agencies’ commitment to preventing merger specific retrenchments. Parties intending to conclude mergers in Kenya must proactively consider the effect of the proposed transaction on the public interest, as is the case in other African jurisdictions such as South Africa and be able to meaningfully engage with the CAK to proffer public interest commitments.
Fidel Mwaki, Kenyan lead partner of Primerio International, says: “An interesting decision by the CAK that highlights the need for businesses to seek legal and regulatory guidance on public interest factors that may affect their workforce retrenchment timelines when looking to conclude mergers.”
A perspective from private practice — the real cost of doing business in South Africa: Merger Control Disincentivizing Investment into the South African Economy
By Gina Lodolo, Joshua Eveleigh, and Nicola Taljaard
A Look Back:
South Africa has been trying to find the delicate balance between the promotion of public interest initiatives, attracting foreign investment and promoting the competitiveness of South Africa’s markets. In recent years, however, the South African Competition Commission (“Commission”) appears to have taken a more rigid approach towards requiring the promotion of public interest initiatives as an outcome of merger control investigations.
At the outset, it is important to note that the Competition Act 89 of 1998 (“Act”) allows the Commission to impose conditions on mergers and acquisitions that are deemed to result in a substantial lessening of competition or detrimental to the public interest.
In 2019, the Act also underwent a significant amendment regarding the public interest provisions. In accordance with the transformative values under the Act’s preamble, the amendment aimed to ensure that competition authorities have regard to public interest factors when assessing mergers and acquisitions and, in particular, section 12A(3)(e) makes provision for the promotion of a greater spread of ownership with a view to increasing the levels of ownership by historically disadvantaged persons and employees.
While the Commission was not so emphatic on the promotion of HDP and/or employee ownership immediately after the 2019 amendments, the Commission has been taking an increasingly robust approach to the imposition of these public interest criteria. Most notably, this can be seen from the widely publicised Burger King decision where a merger that raised no competition concerns was prohibited for the first time, based solely on public interest concerns (namely a decreased HDP shareholding from 68% to 0%). While the decision was ultimately settled before being heard on request for consideration before the Tribunal, it certainly indicated the trajectory of the Commission’s approach. Since the Burger King decision, the Commission has increasingly taken a hard-line regarding transactions that are benign both from a competition and public interest perspective.
While the amendments to the Act symbolize a benevolent effort toward the transformative objectives that the competition authorities are mandated to develop, a great deal of uncertainty stemmed as a result. In practice, the Commission’s interpretation of section 12A(3)(e) of the amended Act has been to place a positive obligation on the merging parties, post transaction, to increase the merging parties’ HDP and/or employee shareholding, often times utilising a benchmark of 5%. This is irrespective of whether a transaction is benign from both a competition and public interest perspective.
Merging parties, legal representatives and regulatory authorities have also substantially debated the interpretation and effect of the amended public interest provisions. The primary argument that contrasts the Commission’s interpretation of the amended public interest provisions, however, provides that section 12A(3)(e) is only one factor for consideration in determining whether a transaction that would otherwise have an adverse effect on competition or other public interest grounds, should be allowed. Premised on this interpretation, the Commission would not be authorised to refuse a transaction if it cannot show an adverse effect on competition based on a holistic assessment of the public interest grounds delineated in section 12A(3).
The Commission’s application of the public interest provision has increasingly lacked clarity and predictability, thereby creating uncertainty in the merger review process, and making it challenging for businesses to plan and execute transactions with confidence. This is particularly so when transactions are subject to long-stop dates where protracted engagements and negotiations with the Commission risk the termination of the entire agreement. To circumvent the incurrence of frictional costs and risks of breaching any long-stop dates, private practitioners are experiencing an increased amount of global mergers carving-out (or at least considering to) the South African legs of those transactions.
Firms are often concerned about the potential dilution of existing shareholders’ equity, regardless of the size of the firm. Foreign investors may be concerned about the impact of the allocation of new shares to employees on their current ownership stakes, potentially reducing their control and influence over the merged entity.
Further uncertainty surrounded how the application of what appears to be a 5% public interest divestiture approach will apply in all circumstances. For example, it is unclear whether this would apply to all merging parties even if the two merging entities are wholly owned BBBEE entities. Furthermore, how should firms divest a 5% stake in the merged entity where the underlying transaction involves land and no employees? These are some examples of the difficult questions the Commission has yet to consider if it is to continue with the outright application of its interpretation of the Act.
In addition, by insisting on ownership-related commitments from merging parties, the Commission’s policy undermines the efficacy of the BEE framework, as parties are likely to take the view that any efforts to improve their BEE profiles outside of the ambit of the transaction may, on the Commission’s approach and assessment, carry very little weight. Accordingly, firms may start to favour an approach of decreasing their BEE efforts prior to transactions in preparation of having conditions imposed on them. Firms may also start to undervalue the target to account for additional public interest spend or carve out the South African part of the transaction to circumvent this cumbersome condition.
Over an extended period, the outcome becomes evident for South Africa – increased uncertainty and an impractical application of the Act will result in decreased in investment; potential prohibition of competitively benign mergers and increased transaction costs.
While the Commission’s approach is prima facie laudable, the unintended consequences may result in a counterintuitive outcome and cause greater long-term prejudice to the public interest and growth of the South African economy. This is particularly true in light of the much-needed foreign direct investment South Africa requires following the effects of Covid-19, greylisting and economic instability.
Introduction of Public Interest Guidelines
On 28 September 2023, the Commission released their ‘Draft Amended Public Interest Guidelines relating to Merger Control’ for public comment accessible here (“Public Interest Guidelines”).
On the same day, at the Commission’s 17th Annual Conference, the Minister of Trade, Industry and Competition (“DTIC”), Minister Ebrahim Patel, lauded the amendments to the Act and stated that the increasing imposition of public interest conditions on mergers has resulted:
in a contribution of R67 billion towards the local economy;
the saving of at least 236 000 jobs over a period of five years;
the creation of at least 22 000 jobs;
and 143 000 workers now being shareholders in companies.
While there have certainly been commendable strides towards the achievement of promoting the transformation of the local economy, the above statistics do not paint a full picture. While many firms will continue to consent to the public interest commitments suggested by the Commission, for fear of an outright merger prohibition, a number of firms would rather carve-out the South African leg of multi-jurisdictional deals. This, in itself, would stifle economic growth and adversely effect the public interest in the long-term (as consumers do not stand to enjoy the benefits of pro-competitive mergers).
The Public Interest Guidelines are intended to formalise the Commission’s policy approach discussed above when evaluating public interest factors.
We outline the pertinent aspects of the Public Interest Guidelines below:
Commission’s approach to public interest factors in merger control
Section 12A of the Competition Act provides that both the competition and public interest assessments carry equal weight in merger considerations.
Regardless of whether a merger is found to result in a substantial prevention or lessening of competition (“SPLC”), the Public Interest Guidelines provide that the Commission must still determine whether the merger is “justifiable on Public Interest grounds”. In this regard, the Commission will determine the effect of the merger on each of the public interest elements arising from the merger to determine the net effect of the merger on the public interest.
General approach to assessing public interest provisions
The Commission considers that a merger assessment requires a quantitative and qualitative determination into the merger’s likely effect on:
a particular industrial sector or region;
employment;
the ability of small and medium businesses, or firms controlled or owned by historically disadvantaged persons, to effectively enter into, participate in or expand within the market;
the ability of national industries to compete in international markets; and
the promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers in firms in the market.
Where the Commission concludes that the merger will have a positive effect on one of the above factors, there will be no further assessment into that factor. Where, however, the Commission finds that one of the above factors is substantially negatively impacted by the merger, the Commission will consider remedies to address these adverse impacts.
Importantly, the Public Interest Guidelines provide that where a negative impact on a public interest factor cannot be remedied, the Commission may consider “equally weighty countervailing Public Interest factors that outweigh the negative impact identified” on a case-by-case basis.
Where a merger is found to positively impact a majority of the above public interest factors, these may be outweighed countervailed by a substantial negative effects from a single public interest factor.
Approach to induvial public interest factors
The Public Interest Guidelines provide guidance on how the Commission will assess each of the public interest factors. For purposes of this summary, we focus primarily on “the promotion of a greater spread of ownership…by [HDPs] and workers…” factor which has caused the greatest degree of uncertainty, transaction costs and protracted negotiations with the Commission. This factor stands out from the rest of the public interest factors as the Public Interest Guidelines make it clear that the Commission considers section 12A(3)(e) of the Competition Act to confer a “positive obligation on merging parties to promote or increase a greater spread of ownership, in particular by HDPs and/or Workers in the economy.” In this regard, the Commission regards every merger having an effect in South Africa as having to promote HDP and/or worker ownership and therefore assumes no neutral effect.
In light of the above, where a merger does not promote HDP and/or worker ownership, it will be regarded as having an adverse impact on that particular public interest factor and, if considered substantial enough, may render the merger unjustifiable on public interest grounds.
The Public Interest Guidelines go further so as to state that where a merger promotes HDP ownership, this would not preclude the Commission’s obligation to consider an increase of ownership by workers.
Where the Commission considers there to be a substantial negative effect on the promotion of HDP and/or workers, the following remedies may be imposed:
concluding alternative ownership agreements with HDPs/Workers in either the acquiring, target or merged firm; and
divestitures to HDP shareholders which would create a greater spread of ownership in another part of the business. Importantly, the Commission will generally require that these HDPs and/or workers are actively involved in the operations (ideally control should be conferred) of the divested business and are not merely passive or financial investors.
Where the Commission proposes that an ESOP be implemented, the following guidance is provided:
where a merger results in a dilution of HDP and/or workers, the ESOP should remedy the full extent of the dilution;
where the merger does not result in a dilution, the ESOP should “hold no less than 5% of the value/shares of the merged entity but may be required to hold a higher shareholding based on the facts of the case”.
Where the Commission proposed that an HDP transaction be concluded, it provided the following guidance of the principles that ought to apply:
the HDP transaction should be no less than 25% +1 share and “should ideally confer control on the HDPs”;
the merging parties will have discretion to choose the HDPs; and
the merging parties must inform the SACC of the proposed HDP transaction prior to its implementation to assess compliance with imposed conditions.
Importantly, while the Public Interest Guidelines are not binding on the Commission, the Competition Tribunal or the Competition Appeal Court, they provide clarity on how the Commission intends on assessing mergers notified to it.
Despite an increase in certainty, the Public Interest Guidelines remain a cause for concern amongst the local and international private sectors as they have merely confirmed the policy approach that the Commission has increasingly been adopting in practice. In this regard, even where a foreign-to-foreign merger is notified to the Commission, it ought to consider how it can actively promote HDP and/or worker ownership and may become susceptible to ESOPs and/or HDP transactions in achievement of the Competition Act’s transformational objectives.
The Public Interest Guidelines are open for public comment until 28 October 2023 and are likely to be subject to extensive submissions.
To all our Africanantitrustfollowers, please take note of the upcoming American Bar Association webinar on 2 July 2019 (11amET/4pmUK/5pm CET) titled:
“Beyond Pure Competition Law – Is Africa Leading the Way Forward in Antitrust Enforcement?”
In what promises to be a highly topical (telecon) panel discussion, Eleanor Fox, Andreas Stargard, John Oxenham, Amira Abdel Ghaffar and Anthony Idigbe will:
provide critical commentary of the most recent developments in antitrust policy across the African continent;
highlight the most significant legislative amendments and enforcement activities in Africa; and
analyze some of the key enforcement decisions.
South Africa, Nigeria, Egypt, COMESA and Kenya are among the key jurisdictions under the microscope.
Practitioners, agency representatives, academics and anyone who is an antitrust enthusiast will find this webinar to be of great interest. Not to mention companies actually active or looking to enter the African market place.
For details on how to participate, please follow this Link
South African President Cyril Ramaphosa is expected to sign the Competition Amendment Bill into law today, February 13, 2019, continuing a busy seven-day streak for major legislative antitrust developments on the continent (see here). The new law will be amending the venerable Competition Act, one of the preëminent antitrust statutes of the continent. The amendment has been pushed for by Minister for Economic Development, Ebrahim Patel. The official Presidential commentary on today’s signing notes the novel fights against “concentration and economic exclusion as core challenges” to the country’s growth, as well as the perceived dangers of economic exclusion from major markets of small and black-owned businesses.
As a trio of competition attorneys write in a recent article in the Journal of European Competition Law & Practice, the Amendment Bill alters key provisions of the South African Competition Act focusing specifically on the redistribution of wealth and transformation of ownership in lieu of pursuing traditional antitrust goals.
The Bill provides for greater ministerial intervention at the initial stage of a merger (based on national security), during the merger investigation (based on public-interest grounds) and broadens the right of appeals to parties outside the merger control review.
The Bill lowers the standard that the South African Competition Commission must meet to prosecute cases and foreshadows a risk of increased third-party interventionism more generally.
The departure from a traditional substantial lessening of competition (SLC) test to an adverse effects-based test, which takes public interests considerations into account, is likely to result in the injection of greater subjectivity into the decision-making process and parties’ increased difficulty in self-assessment of conduct particularly in relation to dominant firms.
AAT has published further articles on the topic here, here, and here.
South Africa has amended its antitrust laws, first introduced to the country in 1998 via its Competition Act. Parliament ratified the amendments (which still have to be rubber-stamped by the National Council of Provinces, a mere formality) yesterday over the serious objections of the opposition parties. The new law will give significant interventionist powers to the Minister for Economic Development, Ebrahim Patel, as well as introduce lower (or even reversed) burdens of proof for the Competition Commission (SACC) to make its case, after a long-running string of court losses and appellate defeats has seen the SACC’s track record weakened, observers say.
As reported on AAT Monday, a panel of Africa-focussed competition specialists had just recently convened in Johannesburg, warning the South African business community about the high probability of the Bill’s passage, as well as addressing the adverse effects the Bill will have on doing business in South Africa as a medium to large size market player (measured in market share, not merely revenue) or simply as a foreign-owned corporate.
Minister Patel
Interviewed yesterday in Cape Town, where the Amendment Act was ratified by South Africa’s Parliament, Primerio competition practitioner Andreas Stargard commented: “As we foreshadowed at our conference less than a week ago, the likelihood of the Bill passing was high. Political, populist pressure was simply too strong for this amendment — which had been introduced as a so-called ‘prioritised bill’ that could be fast-tracked — not to pass. We view the likely effects of it as a serious departure from commonly accepted best practices in the international world of antitrust law, as we outlined to our clients at the Johannesburg conference. I will be curious to hear what Commissioner Bonakele’s comments on these critiques will be at Friday’s conference at New York University“, referring to an event sponsored by NYU and Concurrences, at which the SACC Commissioner is expected to deliver a panel speech later this week.
Commenting on the purported social transformational goals, South African competition partner John Oxenham adds: “There is a relentless push from government (not only Mr. Patel) to use the Competition Act as a tool to speed up its broader social and transformation goals. The underlying reasons for this Amendment are rather straightforwardly conceded by the current, and arguably presently fluctuating, administration: the Bill was ostensibly designed not to enhance competitiveness in the traditional antitrust sense, but rather to address so-called market concentration and perceived unequal ownership patterns in the SA economy.”
On 29 June 2018, the South African Competition Tribunal (Tribunal) penalised the RTO Group R75 000 for failing to comply with the Tribunal’s conditional merger approval in respect of two companies now within the RTI stable, Warehouseit and Courierit. The Tribunal approved the large merger in August 2015.
In terms of the Tribunal’s merger approval, a moratorium on merger specific retrenchments for a two year period was imposed – now a frequently imposed public interest related condition by the competition agencies in South Africa.
RTI, however, was penalised not for retrenching any employees during this window but for failure to adhere to the monitoring obligations as set out in the Tribunal’s conditional approval certificate.
In this regard, the merging parties were obliged to notify their employees (and Courierit’s subcontractors) of the conditions to the merger approval within five days of the merger approval date. The merging parties were also obliged to provide the Competition Commission with an affidavit confirming that the obligations in terms of the conditions had been complied with.
By way of a consent order, RTI admitted that it failed to comply with its monitoring obligations and agreed to pay an administrative penalty for breaching the Tribunal’s conditional merger approval.
Although there have been a limited number of cases in respect of which an administrative penalty has been imposed for a breach of the merger conditions, this case demonstrates the importance of fully complying with the terms set out by way of a conditional merger approval.
Furthermore, although notifying the employees of the relevant conditions may not have been a particularly onus obligation, merging parties should take particular cognisance of monitoring and reporting obligations when negotiating conditions with the Competition Commission. Merging parties understandably place greater emphasis on the substantive aspects of the conditions and may underestimate the reporting obligations related thereto – particularly if conditions are being negotiated at the eleventh hour (which is not uncommon).
While there are mechanism’s available to merging parties to remedy any patently unworkable aspects contained in merger approval conditions, it is advisable to ensure that the conditions are practical and capable of being adhered to in full prior to being finalised – assuming the merging parties have that luxury.
[Michael-James Currie is a South African based competition lawyer and practices across Sub-Saharan Africa]
Events focus on media & business community’s understanding of competition rules and practical workload of CCC
Media
For two days this week, COMESA will hold its 5th annual “Regional Sensitization Workshop for Business Reporters“, focussed on provisions and application of the COMESA competition regulations and trade developments within the 19-country common market.
Over 30 journalists from close to a dozen countries are expected to participate in the event, held in Narobi, Kenya, from Monday – Tuesday.
AfricanAntitrust.com will cover all pertinent news emerging from the conference. We will update this post as the conference progresses.
Speakers include a crème de la crème of East African government antitrust enforcement, including the CCC’s own Willard Mwemba (head of M&A), the CCC’s Director Dr. George Lipimile, and the Director and CEO of the Competition Authority of Kenya, Francis Wang’ombe Kariuki. Topics will include news on the rather well-developed area of of mergerenforcement, regional integration & competition policy, as well as the concept of antitrust enforcement by the CCC as to restrictive business practices, an area that has been thus far less developed by the Commission in terms of visibility and actual enforcement, especially when compared to M&A. We previously quoted Director Lipimile’s statement at a 2014 conference that, since the CCC’s commencement of operations “in January, 2013, the most active provisions of the Regulations have been the merger control provisions.”
“We have been impressed with the Commission’s progress to-date, but remain surprised that no cartel cases have emerged from the CCC’s activities. We believe that the CCC has sufficient capacity and experience now, in its sixth year of existence, to pursue both collusion and unilateral-conduct competition cases.
Personally, I remain cautiously optimistic that the CCC will, going forward, take up the full spectrum of antitrust enforcement activities — beyond pure merger review — including monopolisation/abuse of dominance cases, as well as the inevitable cartel investigations and prosecutions that must follow.”
The media conference will conclude tomorrow evening, June 26th.
Business Community
The second event, also held in Nairobi, will shift its focus both in terms of attendees and messaging: It is the CCC’s first-ever competition-law sensitization workshop for the Business Community, to take place on Wednesday. It is, arguably, even more topical than the former, given that the target audience of this workshop are the corporate actors at whom the competition legislation is aimed — invited are not only practicing attorneys, but also Managing Directors, CEOs, company secretaries, and board members of corporations. It is this audience that, in essence, conducts the type of Mergers & Acquisitions and (in some instances) restrictive, anti-competitive business conduct that falls under the jurisdiction of Messrs. Lipimile, Mwemba, and Kariuki as well as their other domestic African counterparts in the region.
The inter-regional trade component will also be emphasized; as the CCC’s materials note, “we are at a historical moment in time where the Tripartite and Continental Free Trade Area agreements are underway. The objective of these agreements is to realize a single market. Competition law plays a vital role in the realization of this objective, therefore its imperative that journalists have an understanding of how competition law contributes to the Agenda.”
Boniface Kamiti, the CAK representative replacing Mr. Kariuki at the event, noted that Africa in general and including the COMESA region “has a weak competition culture amongst businesses — which is why cartels are continuing in Africa, and the level of M&A is not at the level one would expect.” This is why media “reporting on competition advocacy is very important, to articulate the benefits of competition policy and how enforcement activities further its goals, so the COMESA countries may be able to compete with other countries, including even the EU members, at a high level.”
He also highlighted — although without further explanation — the “interplay between the COMESA competition laws and those of the member countries; most people are not aware of that!” This comment is of particular interest in light of the prior jurisdictional tension that had existed between national agencies and the CCC in the past regarding where and when to file M&A deals. These “teething issues are now fully resolved”, according to Dr. Lipimile, and there are neither de iure nor any de facto merger notification requirements in individual COMESA member states other than the “one-stop shop” CCC filing (which has, according to Mr. Mwemba, reduced parties’ M&A transaction costs by 66%).
On the issue of restrictive trade practices (RTP), the CAK reminded participants that trade associations often serve to facilitate RTP such as price-fixing cartels, which are subject to (historically not yet imposed, nor likely to be) criminal sanctions in Kenya. It also observed that (1) manufacturers’ resale price maintenance (RPM) would almost always be prosecuted under the Kenyan Competition Act, and that (2) since a 2016 legislative amendment, monopsony conduct (abuse of buyer power) is also subject to the Act’s prohibitions.
Concluding, the CAK’s Barnabas Andiva spoke of its “fruitful” collaboration with the CCC on ongoing RTP matters, noting the existing inter-agency Cooperation Agreement. Added Mr. Mwemba, “we have approximately 19 pending RTP cases.”
CCC leadership perspective: Nudging Uganda and Nigeria towards competition enforcement
George Lipimile, CEO, COMESA Competition Commission
Dr. Lipimile took up Mr. Kamiti’s “weak African competition culture” point, noting the peculiar regional issue that “between poverty and development lies competition” to enhance consumer welfare.
He took the audience through a brief history of antitrust laws globally, and encouraged journalists to explain the practical benefits of “creating competitive markets” for the population of the COMESA region at large.
He called on Uganda and Nigeria to — finally — enact a competition law. (AAT has independently reported on Uganda and also the EAC’s emphasis on its member nations having operational antitrust regimes. We observe that Uganda does have a draft Competition Bill pending for review; a fellow Ugandan journalist at the conference mentioned that there has been some, undefined, progress made on advancing it in the Ugandan legislature.) Dangote — the vast Nigerian cement conglomerate (see our prior article here) — and Lafarge played exemplary roles in Lipimile’s discourse, in which he commented that “they do not need protecting, they are large”, instead “we need more players” to compete.
Importantly, Dr. Lipimile emphasized that protectionism is anti-competitive, that “competition law must not discriminate,” and that its goal of ensuring competitive market behaviour must not be confused with the objectives of other laws that are more specifically geared to developing certain societal groups or bestow benefits on disadvantaged populations, as these are not the objectives of competition legislation.
The CCC also called on the press to play a more active role in the actual investigation of anti-competitive behaviour, by reporting on bid rigging, unreported M&A activity, suspected cartels (e.g., based on unexplained, joint price hikes in an industry), and the like. These types of media reports may indeed prompt CCC investigations, Lipimile said. Current “market partitioning” investigations mentioned by him include Coca Cola, SABMiller, and Unilever.
He concluded with the — intriguing, yet extremely challenging, in our view — idea of expanding and replicating the COMESA competition model on a full-fledged African scale, possibly involving the African Union as a vehicle.
2018 CCC workshop participants
COMESA Trade perspective
The organisation’s Director of Trade & Commerce, Francis Mangeni, presented the ‘competition-counterpart’ perspective on trade, using the timely example of Kenyan sugar imports, the cartel-like structure supporting them, and the resulting artificially high prices, noting the politically-influenced protectionist importation limitations imposed in Kenya.
Dr. Mangeni opined that the CCC “can and should scale up its operations vigorously” to address all competition-related impediments to free trade in the area.
CCC Mergers
Director of M&A, Mr. Mwemba, updated the conference on the agency’s merger-review developments. He pointed to the agency’s best-of-breed electronic merger filing mechanism (reducing party costs), and the importance of the CCC’s staying abreast of all new antitrust economics tools as well as commercial technologies in order to be able to evaluate new markets and their competitiveness (e.g., online payments).
As Mr. Mwemba rightly pointed out, most transactions “do not raise competition concerns” and those that do can be and often are resolved via constructive discussions and, in some cases, undertakings by the affected companies. In addition, the CCC follows international best practices such as engaging in pre-merger notification talks with the parties, as well as follow-ups with stakeholders in the affected jurisdictions.
Key Statistics
Year-to-date (2018), the 24 notified mergers account for approximately $18 billion in COMESA turnover alone. Leading M&A sectors are banking, finance, energy, construction, and agriculture.
In terms of geographic origination, Kenya, Zambia, and Mauritius are the leading source nations of deal-making parties, with Zimbabwe and Uganda closely following and rounding out the Top-5 country list.
The total number of deals reviewed by the CCC since 2013 amounts to 175 with a total transaction value of US $92 billion, accounting for approximately $73.7 billion in COMESA market revenues alone. (The filing fees derived by the Commission have totaled $27.9 million, of which half is shared with the affected member states.)
All notified deals have received approval thus far. Over 90% of transactions were approved unconditionally. In 15 merger cases, the CCC decided to impose conditions on the approval.
If one looks at the 2011Preferential Procurement Policy Framework Act (PPPFA) Regulations, the Regulations provide two ratios to be used in determining a tender award. The two point systems are the 90/10 and the 80/20 ratios. The 90/10 ratio indicates that 90 out of 100 points are to be awarded based on the price of the bidder and 10 out of 100 points are to be awarded based on “special goals”[1]. Since the commencement of the 2011 PPPFA Regulations, special goals have primarily been allotted to BEE status levels.
Turning to the 2017 PPPFA Regulations, in which the above-mentioned ratios have been maintained, regulation 4 provides for pre-qualification criteria for preferential procurement. Interestingly, according to regulation 4(1)(a) of the 2017 Regulations, an organ of state may stipulate a minimum B-BBEE status level for tenderers. Furthermore, regulation 4(2) deems any tender in contravention of pre-qualification criteria unacceptable. In essence, the pool of bidders can be reduced significantly by requiring all bidders to possess as a B-BBEE Contribution level 1 despite primary legislation only allowing B-BBEE to be taken into account at a maximum threshold of 80/20. Therefore, it is hard to understand why the allocation of points to special goals is capped at 20 points whereas there is no maximum level allocated to the minimum pre-qualification criteria. Arguably, pre-qualification criteria in this regard are open to abuse in oligopolistic markets with few suppliers.
If one views this legal framework holistically, it may seem that the points allocation in the PPPFA is capable of being somewhat circumvented. In other words, the importance attached to a tenderer’s B-BBEE status level may be increased immensely if a level 1 or 2 B-BBEE status level is stipulated as a minimum pre-qualification criterion. On the other side of the coin, the significance of price may be undermined, rendering a competitive tendering process ineffective in securing value-for-money. This suggests the 2017 Regulations are misaligned in that the purpose of the 80/20 split is unclear when read with regulation 4.
In an effort to restrain pre-qualification criteria restricting a large pool of bidders, a bidder may ask whether a dominant public entity, for example, a monopolistic entity such as Eskom, would contravene section 8(c) of the Competition Act if the pre-qualification B-BBEE status level is set too high. Does it qualify as an exclusionary act which is likely to affect competition in the particular market? This falls part of a larger looming question, at what point does pre-qualification criteria by dominant parastatals become anticompetitive in terms of the Competition Act and how will Competition Law interact with procurement? Section 217 of the Constitution of South Africa does not provide a clear answer but it does suggest that competition may have an important role to play going forward.
[1] section 2(1)(e) of the Preferential Procurement Policy Framework Act Regulations 2011
South Africa signs cooperation agreements with Russia and Kenya
Leading government officials presented their respective countries’ accomplishments in the antitrust arena at the 10th annual Competition Law, Economics & Policy Conference in Cape Town yesterday.
The attendees ranged from the SA Minister of Economic Development, Ebrahim Patel, and the Commissioner of the Competition Commission, Tembinkosi Bonakele, to their Russian and Kenyan counterparts. Kenya Competition Authority director general Francis Kariuki emphasised the officials’ desire to remove barriers to trade. He was quoted as saying he looked forward to exchanging information on cross-border cartels, which affect both the South African and Kenyan economies: “We have regional economic communities and regional trade. There are some infractions in South Africa which are affecting Kenya and vice versa. We want to join hands to do market enquiries and do research. This will inform our governments when they come up with policies.”
On the inside-BRICS front, the SA Commission signed an MoU with Russia, adding to Russia’s “rich and diverse bilateral agreements portfolio.” The MoU is described as focussing particularly on pharmaceutical and automotive sectors, in which pending or future sectoral inquiries would see information-sharing between the Federal Antimonopoly Service (FAS) of Russia and the SACC, according to the FAS deputy chief Andrey Tsarikovskiy.
Mister Patel’s keynote address showed the glass half-full and half-empty, focussing in part on the need to “scale” the South African agency activity up to the level of the “success story” of domestic competition enforcement and its large caseload (quoting 133 new cartel cases initiated in the past year).
Never one to omit politicisation, Mr. Patel noted the perceived parallels he saw between South African history of concentrating economic power in the hands of a minority, raising indirectly the issue of public-interest concessions made in antitrust investigations, including M&A matters. Mr. Patel clearly sees the SACC’s role as including a reduction in economic inequality among the populace, rather than being a neutral competition enforcer guided solely by internationally recognised legal antitrust & economic principles. Both he and Commissioner Bonakele drew parallels between their anti-cartel enforcement and a purported reduction in the SA poverty rate of a whopping four tenths of a percent.
South African Competition Commission Concludes Investigation into the AB In-Bev/SABMiller deal and Recommends that the Merger be Approved Subject to Conditions
On 31 May 2016, the South African Competition Commission (SACC) recommended that that the Anheuser-Busch Inbev/ SABMiller merger be approved subject to various conditions relating to both competition and public interest concerns.
From a procedural aspect, the SACC’s recommendations are made to the South African Competition Tribunal, the adjudicative body ultimately responsible for approving a merger.
The SACC’s recommendations are not binding on the merging parties or the Tribunal. To the extent that the merging parties, or third parties, are concerned about the merger or the SACC’s recommendations, they may elect to participate in the hearing before the Tribunal.
In cases where neither the merging parties nor any third parties contest the SACC’s recommendations, the Tribunal usually rubber stamps the SACC’s recommendations.
We note that in terms of the SACC’s proposed recommendations, that the merging parties have made numerous undertakings to address the SACC’s concerns.
The following concerns and recommendations were proposed by the SACC:
A divestiture of SABMiller’s shareholding in the Distell Limited Group (a competitor of SAB in the cider market) within three years of the closing date of the transaction;
That no employees of the merged entity will be involved on the bottling operations of both Coca-Cola and PepsiCo and that no commercially sensitive information would be exchanged between employees in relation to these two soft drink entities;
AB Inbev will continue supplying third parties with ‘tin metal crowns’ in South Africa as AB Inbev will own the only ‘tin metal supplier’ in South Africa post merger for a period of 5 years;
AB Inbev should make at least 10% of its fridge space available, in small retail outlets or taverns, to competitors’ products to protect small beer producers;
The development of a R1 billion fund which will be used, inter alia, to develop barley, hops and maize output in South Africa;
No merger related retrenchments are to take place in South Africa, in perpetuity;
AB Inbev will continue to supply certain products to small beer producers;
AB Inbev will continue to ensure that it follows the same ratio of local production and will, itself, remain committed to sourcing products locally;
Undertakings to ensure that the merging parties will, within two years after closing the merger, propose to the Commission and Government its plan on how to maintain black participation in the company and preserve equity;
AB Inbev will continue to comply with the existing terms and conditions of the current agreements which exist between SABMiller and ‘owner-drivers’.
The merging parties have agreed to the majority of the conditions imposed on the merger. We note, however, that the SACC’s media statement does not make it clear that the merging parties have agreed to the divestiture recommendation. The merging parties have also not agreed to the proposed condition relating to a commitment to continue to supply small beer producers with hops and malt.
Accordingly, even in the absence of any third party intervention, this merger may still be contested before the Tribunal.
While the SACC’s official recommendations have not yet been published, it appears to us that a number of the concerns raised by the SACC relate to pre-existing concerns which are not merger specific. Furthermore, important aspect of the proposed recommendations, even those which have been agreed to between the parties, will be in perpetuity.
Furthermore, although what may appear to be a relatively innocuous proposed conditions which the merging parties shave agreed to, is that AB Inbev will respect the current existing contractual arrangements as between SABMiller and ‘owner drivers’. Approving a merger subject to such a condition poses an interesting conundrum. What happens in the event that there is contractual dispute between Ab-Inbev and owner drivers in the future? Will the Tribunal have jurisdiction to hear such disputes and could the merged entity be subject to penalties for breaching a condition of the merger, despite a contractual dispute which may have little if anything to do with the merger itself?
We have previously, here on Africanantitrust raised our concerns regarding the merger specificity of the R1 billion development fund. To access our previous article on this topic, please click here.
In our view, the Competition Tribunal should satisfy itself that the proposed conditions, even if agreed to between the merging parties, should address merger specific concerns and nothing more. A decision by the Tribunal is precedent setting and has an impact on the transparency and certainty of the merger control process in South Africa. When mergers are approved subject to conditions which go beyond merger specificity, uncertainty is created.
Media
Speakers include a crème de la crème of East African government antitrust enforcement, including the CCC’s own Willard Mwemba (head of M&A), the CCC’s Director Dr. George Lipimile, and the Director and CEO of the Competition Authority of Kenya, Francis Wang’ombe Kariuki. Topics will include news on the rather well-developed area of of mergerenforcement, regional integration & competition policy, as well as the concept of antitrust enforcement by the CCC as to restrictive business practices, an area that has been thus far 
The second event, also held in Nairobi, will shift its focus both in terms of attendees and messaging: It is the CCC’s first-ever competition-law sensitization workshop for the Business Community, to take place on Wednesday. It is, arguably, even more topical than the former, given that the target audience of this workshop are the corporate actors at whom the competition legislation is aimed — invited are not only practicing attorneys, but also Managing Directors, CEOs, company secretaries, and board members of corporations. It is this audience that, in essence, conducts the type of Mergers & Acquisitions and (in some instances) restrictive, anti-competitive business conduct that falls under the jurisdiction of Messrs. Lipimile, Mwemba, and Kariuki as well as their other domestic African counterparts in the region.
As Mr. Mwemba rightly pointed out, most transactions “do not raise competition concerns” and those that do can be and often are resolved via constructive discussions and, in some cases, undertakings by the affected companies. In addition, the CCC follows international best practices such as engaging in pre-merger notification talks with the parties, as well as follow-ups with stakeholders in the affected jurisdictions.
Turning to the 2017 PPPFA Regulations, in which the above-mentioned ratios have been maintained, regulation 4 provides for pre-qualification criteria for preferential procurement. Interestingly, according to regulation 4(1)(a) of the 2017 Regulations, an organ of state may stipulate a minimum B-BBEE status level for tenderers. Furthermore, regulation 4(2) deems any tender in contravention of pre-qualification criteria unacceptable. In essence, the pool of bidders can be reduced significantly by requiring all bidders to possess as a B-BBEE Contribution level 1 despite primary legislation only allowing B-BBEE to be taken into account at a maximum threshold of 80/20. Therefore, it is hard to understand why the allocation of points to special goals is capped at 20 points whereas there is no maximum level allocated to the minimum pre-qualification criteria. Arguably, pre-qualification criteria in this regard are open to abuse in oligopolistic markets with few suppliers.
“We have regional economic communities and regional trade. There are some infractions in South Africa which are affecting Kenya and vice versa. We want to join hands to do market enquiries and do research. This will inform our governments when they come up with policies.”
African Antitrust & Competition Law 