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A NEW CHAPTER FOR MERGER CONTROL IN KENYA

By Joyce Karanja,Richard James Bryce,Cynthia Waweru Wednesday, June 17, 2020
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On 4 May 2020 Kenya’s Competition Tribunal (Tribunal) handed down its first judgment, since its establishment in 2017,  in relation to the review application brought by Telkom Kenya Ltd (Telkom) and Airtel Networks Kenya Ltd (Airtel) (together the Appellants) in respect of the Competition Authority of Kenya’s (Authority) conditional approval of the Appellants proposed merger (Review Application).

In terms of the Review Application and the eight conditions imposed by the Authority, the Appellants sought to have five conditions reviewed and set aside entirely, with a further two conditions reviewed and varied. Noting that one condition was uncontested, the Tribunal ultimately varied six and affirmed one out of the eight conditions.

The Tribunal’s decision is significant, as it touches on several key considerations for competition law in Kenya, including:

  • the Tribunal’s jurisdiction and powers in applications for merger review;
  • the Authority’s jurisdiction in assessing mergers;
  • the approach to be taken by the Authority when formulating conditions, including, those of a public interest nature;
  • the ‘failing firm’ doctrine; and
  • consideration of who bears the cost of an application for review.

The approach of the Tribunal to each of these considerations is briefly discussed below.

The Tribunal’s jurisdiction and powers

The Review Application was brought in terms of section 48 of the Competition Act, No. 12 of 2010 (Act), which enables a party to a merger to apply to the Tribunal for review of a determination made by the Authority in relation to a proposed merger.

According to the Tribunal, its powers and jurisdiction in terms of the Act are ‘appellate in nature’ and the ‘remedies’ that it can grant are not defined. The Tribunal further indicated that it was doubtful that Parliament intended to grant the Tribunal ‘Judicial Review’ powers, which are ‘supervisory powers’ that are ordinarily exercised by the High Court.

As such, the Tribunal indicated that the term ‘review’ as used in section 48 of the Act should not be construed to mean ‘Judicial Review’. The Tribunal also noted that statutory mechanisms (such as the mechanism in the Act that allows for appeals to the Tribunal) should always be exhausted before a ‘Judicial Review’ application is made.

The Authority’s jurisdiction

The Appellants argued that the conditions that were the subject of the Review Application were ‘superfluous’ as the competition concerns they were intended to address could already be addressed through separate – and existing – mechanisms that were already at the disposal of the Communications Authority of Kenya (CA) in terms of the Kenya Information and Communication Act and its accompanying regulations.

In this context, the Tribunal had to consider the jurisdiction of the Authority vis-à-vis the jurisdiction of the CA in the regulation of competition matters in the telecommunications sector in Kenya.

The Tribunal noted that the mandate of regulating the telecommunications sector in Kenya is a statutory function of the CA, but that the management and control of radio frequencies/ electromagnetic spectrum is also a function that falls within the ambit of the Authority to the extent that such management and control relates to competition, consumer welfare and protection.

As such, the Tribunal recognised that the Authority and the CA have concurrent jurisdiction insofar as the regulation of competition matters in the telecommunications sector in Kenya is concerned. Further, the Tribunal noted that the two agencies had sought to cooperate with each other in this regard as evidenced by the memorandum of understanding that was entered into between the Authority and the CA on 6 May 2015 (MOU). 

Importantly, however, the Tribunal highlighted the importance of not usurping the powers and duties given to sector-specific regulators, like the CA, by statute and in this regard noted that the ‘MOU and the ensuing cooperation does not however in any way mean that the two agencies are abdicating their statutory mandates as stipulated in their establishing statutes’.

As such, the Tribunal found that the CA is ‘the primary regulator in the telecommunications sector… [and the Authority] has the broad role of regulating the market to ensure fair competition in all sectors of the economy… [and] is a market wide superintendent in competition matters… [and the CA] in telecommunication matters is better equipped with the market and technical knowledge within the telecommunications sector’.

The approach to be taken by the Authority when formulating conditions

The Appellants objected to the imposition of seven out of the eight conditions on various grounds, including that:

  • the conditions would render the proposed merger untenable in an environment with a dominant market leader;
  • certain conditions were not justifiable;
  • certain conditions adversely impacted the Appellants’ right to property and inhibited the Appellants’ ability to compete post-merger; and
  • the manner in which the conditions were imposed infringed the Appellants’ right to fair administrative action.

As a starting point, the Tribunal noted that the role of the Authority is ‘to give effect to the said intention [of merging parties] provided the same does not negatively affect competition’, and that where the imposition of conditions as part of a merger approval is contemplated by the Authority, the burden of proof will shift to the Authority to ‘demonstrate’ that (i) the merger negatively affects competition, and thus (ii) informs the Authority’s decision to impose the conditions.

As such, the Tribunal noted that conditions were to be determined on a case by case basis, including conditions relating to the public interest.

In the context of assessing the impact of a proposed merger on the public interest, in particular, employment, the Tribunal recognised that there was a need to put in place certain ‘safeguards’, through the use of conditions, ‘to ameliorate the negative effects of a proposed merger’.

The Tribunal noted that employment conditions should always be considered from a market and sector specific context, with the ability of employees to be reabsorbed into a smarket being critical for any regulator to consider in a merger review.

In the course of assessing the conditions taken on review, the Tribunal noted that it was required to establish whether each of the conditions imposed by the Authority were aimed at advancing the objects of the Act (as provided for in section 3 of the Act), namely:

  • enhancing the welfare of the people of Kenya;
  • promoting and protecting effective competition in markets; and specifically, the telecommunications industry; and
  • preventing unfair and misleading conduct throughout Kenya.

Notably, neither the Act nor the Competition Rules, 2019 (Rules) prescribe a ‘procedure’ for ‘engagement’ between the Authority and merging parties on possible condition(s) that the Authority may impose as a part of a merger approval.

In this regard, as a preliminary point, the Appellants had submitted that the decision reached by the Authority in conditionally approving the merger was void ab initio for failure to accord the Appellants a right to be heard and present their case against the proposed conditions, which the Appellants characterised as being ‘adverse administrative decisions’.

The Tribunal considered the test for fair administrative action as set out by the High Court in Geothermal Development Company Limited v Attorney General and 3 others [2013] eKLR, which, in the view of the Tribunal, created a two-tier approach to assessing what amounts to reasonable notice and fair administrative action, namely:

  • fair administrative action requires notice and information to a person in instances where an adverse administrative decision is to be taken; and
  • an adequate opportunity to present his response.

With respect to what constitutes adequate notice and information, the Tribunal indicated that this was to be determined by taking into account the circumstances of each case.

That said, in considering whether the Appellants did have ‘an adequate opportunity to present a response’ to the pending administrative action (i.e., the proposed conditions, as they were at the time), the Tribunal also took note of the merger approval statutory time limits in determining whether the Appellants were provided with sufficient time to comment on the conditions.

Following an analysis of the communication and engagement between the Appellants and the Authority, the Tribunal held that the Appellants had been accorded sufficient time and opportunity to present their responses on the conditions.

The Tribunal also noted that conditions needed to be clearly articulated. In this regard, the Tribunal stated that:

‘Clarity is a key facet when making a law, regulation or a condition that limit[s] the exercise of a certain right of prohibiting a party from doing something. In a constitutional democracy such as ours, there is a great need to foster clarity in limiting certain rights and freedoms. The same should be easily discernible and definite in their application.’

In this context, while the Tribunal recognised that the Review Application did not include the consideration of legislation by a legislative organ, but rather a decision by an administrative body; it noted that the underlying philosophy is similar (i.e., the need for clarity) where there are limitations to rights or certain acts, as the case may be.

Consequently, the Tribunal reviewed and varied some of the conditions to provide further clarity on their application including prescribing a time limit for implementation.

The ‘failing firm’ doctrine

One of the conditions imposed by the Authority was that the merged entity, including any part of it, was restricted from entering into any form of sale agreement within the next five years following the Authority’s conditional approval of the merger, unless there was an ‘indication of a failing firm’ and in such an instance the Authority required the CA to conduct a forensic audit at the cost of the merged entity.

Paragraphs 202 to 204 of the Authority’s non-binding consolidated guidelines on the substantive assessment of mergers under the Act (Guidelines) include reference to ‘failing undertakings’ and the criteria for what the Authority will consider to be a failing undertaking for purposes of its merger assessment.

Notably however, neither the Act, nor the Rules, refer to the well-established failing firm doctrine. The decision of the Tribunal notes that the failing firm doctrine applies as a defence to an otherwise anti-competitive merger (similar to the approach taken in the EU and the USA).

In this regard, with specific reference to the Authority’s Guidelines, one wonders if the Tribunal intended to limit the application of the ‘failing firm doctrine’ to apply as a ‘strict defense’ only, or, considering that the Tribunal refers to the South African Competition Tribunal case of ISCOR Limited and Saldanha Steel (Pty) Ltd (67/LM/Dec01) [2002] ZACT 17 (4 April 2002), whether, similar to the approach taken in South Africa, the fact that a party to a merger is a ‘failing firm’ ought to be one of several considerations that the Authority is required to take into account  when assessing  a merger (and is not limited to a ‘defense’ to an otherwise anti-competitive merger).   

Costs

The Tribunal reasoned that because the Appellants were partially successful in the Review Application, then each party should bear its own costs. The Tribunal’s rationale implies that in future review applications, the costs will be borne by the unsuccessful party.

With its gavel now warmed and given the Tribunal’s decision in the Review Application, the Authority has been put on notice that the Tribunal will not hesitate to overturn or vary its decision.  Accordingly, it will be interesting to see how the Tribunal develops and the extent to which its activity will impact on the Authority’s decisions going forward.