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With the current market trends, mergers and acquisitions are becoming common and inevitable. Companies are aware that mergers and acquisitions are one of the quickest channels to increase their resources, expand their market share or source capital which could in turn revamp the business and at the same time making them more efficient and competitive. This article aims at providing a general overview of the merger and acquisition structure in Tanzania.
Legislative Framework
The governing laws in Tanzania
The main pieces of legislation governing mergers and acquisitions in Tanzania include:
i. The Fair Competition Act No. 8 of 2003 (the Competition Act);
ii. The Competition Rules of 2018 (the Competition Rules); and
iii. The Fair Competition (Threshold for Notification of a Merger) Order, 2006 as amended by the Fair Competition (Threshold for Notification of a Merger) (Amendment) Order, 2017 (the Competition Threshold Order).
It is to be noted that the competition law in Tanzania co-exists with the sector specific regulatory framework.
The Regulatory body
The Fair Competition Commission (the FCC) established under Section 62(1) of the Competition Act is the regulatory body for mergers and acquisitions in Tanzania.
The overview of Mergers and Acquisitions in Tanzania
Definitions of key terms
A “merger” according to the Competition Act, is defined as an acquisition of shares, a business or other assets, whether inside or outside Tanzania, resulting in the change of control of a business, part of a business or an asset of a business in Tanzania, whereas an “acquisition” in relation to shares or assets means acquisition, either alone or jointly with another person, of any legal or equitable interest in such shares or assets but does not include acquisition by way of charge only. Hence based on the definitions, an acquisition is technically a merger.
Change of Control
The definition of merger in the Competition Act states that it’s an acquisition of shares, business or assets resulting in “change of control.” What constitutes “change of control” has always been an ambiguity as the Competition Act does not define the same. However, a Fair Competition Tribunal case, defined change of control for purposes of merger and acquisitions, as:
“the potential ability of the acquiring firm to materially influence the business policy and operations of the Target firm in the post-merger scenario irrespective of size of ownership change."
Moreover, in a recent case, the FCC cited a definition of change of control to mean:
“a situation where one party acquires the possibility of exercising decisive influence over another company.”
Therefore, control is attached to the ability of a person to change the strategic direction of the company. Material influence or decisive influence may arise from the ownership of all or part of the company’s assets, shares or rights.
Notification of a Merger
Prior to implementing a merger, the FCC has to be notified. A merger is notifiable under section 11(2) of the Competition Act if the threshold is met. The current threshold as prescribed by the Competition Threshold Order is Tanzanian Shillings Three Billion Five Hundred Million Only (TZS 3,500,000,000). It is to be noted that the calculation of the threshold is based on the combined market value of assets or turnover of the merging firms. This means that even a non-controlling minority share acquisition will need to be notified to the FCC if the threshold prescribed has been met.
Notification Procedure
The procedures for notification as per the Competition Act and Competition Rules include:
a. filing a notification to the FCC of the intended merger;
b. within 5 days, the FCC will issue notice of complete or incomplete filing;
c. once the notice of complete filing has been issued, the FCC will then have a period of 14 days in which to determine whether the merger will require any further examination and if not the same is deemed approved;
d. where the FCC decides further examination is required, then the proposed transaction will be prohibited for a period of 90 days and such period can be extended for an additional 30 days; and
e. after completing the investigation and consideration of the merger, the FCC shall:
i. approve the merger; or
ii. approve the merger subject to conditions; or
iii. declare the merger prohibited.
Prohibition of a Merger
A merger is prohibited if it creates or strengthens a position of dominance in a market as per Section 11(1) of the Competition Act:
“Position of dominance” in the market is defined in the Competition Act as where a person “acting alone, the person can profitably and materially restrain or reduce competition in that market for a significant period of time; and the person's share of the relevant market exceeds 35 percent.”
Fees
Fees payable for filing application for merger are calculated from combined total annual turnover or assets, whichever is higher as per the last set of audited financial statements of the merging firms on a sliding scale and ranges between Tanzanian Shillings Twenty Five Million (TZS 25,000,000) to Tanzanian Shillings One Hundred Million (TZS 100,000,000).
Penalties
The penalty of committing an offence or being involved in the commission of an offence under the Competition Act may result in the FCC imposing a fine of not less than five percent (5%) but not exceeding ten percent (10%) of the annual turnover which has a source in Mainland Tanzania.
It is to be noted that where a person charged with an offence under the Competition Act is a body corporate, every person who, at the time of the commission of the offence, was a director, manager or officer of the body corporate may be charged jointly in the same proceedings with such body corporate and where the body corporate is convicted of the offence, every such director, manager or officer of the body corporate shall be deemed to be guilty of that offence unless he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of the offence.
Conclusion
The Competition Act has set out clear rules for implementing mergers and acquisitions. Therefore, it is imperative for companies to adhere to procedures for effectuating mergers and acquisitions. Failure to do so could result in hefty penalties being imposed to the parties involved.