Monday, April 23, 2012

As would be expected, a huge chunk of the Act seeks to regulate mergers. Going forward, approval of mergers and take-overs shall be the responsibility of the Authority only, not the Minister of Finance as was the case under the RTPA.

A merger is deemed to have occurred 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. Mergers may be achieved by a purchase or lease of shares, acquisition of an interest, or purchase of assets (where an asset is any real or personal property, whether tangible or intangible, intellectual property, goodwill, chose in action, right, licence, cause of action or claim and any other asset having a commercial value)of an entity, exchange of shares between or among undertakings which results in a substantial change in ownership structure through whatever strategy or means adopted by the concerned undertakings or even through amalgamations and vertical integration. The acquisition of a controlling interest in a section of the business of an undertaking capable of itself being operated independently shall also be deemed to be a merger whether or not the business in question is carried on by a company.

The Act is now clear on multi-jurisdictional transactions that involve entities that are not within Kenya. To this effect, any acquisition of an undertaking under receivership by another undertaking either situated inside or outside Kenya or an acquisition by whatever means of the controlling interest in a foreign undertaking that has a controlling interest in a subsidiary in Kenya, will constitute a merger. Where conglomerate undertakings are concerned, acquiring the controlling interest of another undertaking or a section of the undertaking that is capable of being operated independently also falls under the definition of a merger.

Do we then have thresholds through which the above forms of mergers are qualified? NO. There is currently a lacuna in implementation of the Act despite already being in effect. There is no jurisdictional or substantive measure explaining which transactions would fall under the realm of mergers based on factors like market share, turnover or asset base. One would therefore be correct in assuming that all mergers, small, intermediate or large fall under mergers as defined in the Act. It is expected, however, that regulations will be published to address this issue.

Mandatory approval for a merger is required if a transaction falls within the scope of the Act. An application should be made at any time prior to the consummation of the merger or takeover – this is understood to mean before completion or closing of the deal takes place. It is possible that the filing and the grant of the merger or takeover approval be included as a condition precedent to completion or closing of the transaction. The Authority is bound, subject to certain exceptions, to make a determination on a merger application within sixty days of receipt of the notification after by the Authority.

No merger carried out in the absence of an authorising order by the Authority, has any legal effect, and no obligation imposed on the participating parties by any agreement in respect of the merger are enforceable in legal proceedings. In fact, failure to observe this requirement could lead to imprisonment for a term not exceeding five years or to a fine not exceeding ten million shillings, or both. In addition to these penalties, the Authority may impose a financial penalty in an amount not exceeding ten percent of the preceding year’s gross annual turnover in Kenya of the undertaking or undertakings in question. It is not clear which entity would be penalised though.

The Authority takes into account several factors when considering an application to merge. These range from the extent to which the proposed merger would be likely to prevent or lessen competition, the likelihood of any undertaking (including one not involved as a party to the proposed merger) acquiring a dominant position in a market or strengthening a dominant position in a market, the extent to which the proposed merger would benefit the public which outweighs any detriment which would be likely to result from any undertaking (including one not involved as a party in the proposed merger), acquiring a dominant position in a market or strengthening a dominant position in a market. Also the Authority must check the        effect of a merger on a particular industrial sector or region, employment, the ability of small undertakings to gain access to or to be competitive in any market and the ability of national industries to compete in international markets.

The Minister of Finance, in consultation with the Authority, is empowered to make rules generally for the better carrying into effect of the provisions of the Act. Any applications and investigations that were before the now defunct Monopolies and Prices Commission have been taken over by the Authority.

To conclude, stakeholders will be keen to see how this piece of legislation is implemented and how the market will react to it. Also of interest will be how the Authority utilises its newly ‘acquired’ teeth as it seeks to enforce compliance with the Act.

Kenneth Njuguna is a lawyer at Coulson Harney Advocates