There has recently been a great deal of hype regarding the opportunity that Africa presents to foreign investors seeking high returns no longer available in more developed markets.
Part of the attraction is often based on the assumption that the regulatory environments of African countries are unsophisticated or non-existent meaning that deals are easier to implement from a regulatory perspective. Whilst it is true that there was a time when doing business in Africa was relatively easy from a regulatory perspective, this situation is rapidly changing, particularly in the area of competition law and, more specifically, merger control.
Over the past few years there has been a proliferation of national and regional competition law and merger control regimes across the African continent. The majority of African countries now have some kind of competition law and merger control regime in place, the most recent additions being Botswana (2010), Namibia (2008) and Swaziland (2007).
The skills, capacity and resources of competition authorities across Africa vary considerably, as does the competence of local lawyers. Competition law is one of those speciality fields of law which requires knowledge and appreciation of other disciplines, most notably economics. This has important implications for a merger, both in terms of timing and cost. In less developed countries where appropriate and adequate market data is often not available, it may be difficult and time consuming to successfully prosecute a complicated merger which requires detailed market analysis in order to properly deal with the competitive effects of the merger.
Importantly, merger control in many African countries is not just about considering the competition effects of a merger. As Walmart discovered in South Africa, a number of African merger control regimes take into account certain public interest considerations (specifically, social, economic and political considerations) including, in some instances the impact of the merger on employment and exports.
Part of the problems experienced with merger control regimes in Africa is the delay between the primary legislation coming into force and the establishment of the relevant institutions and the promulgation of important subsidiary legislation. Namibia is a case in point. The Namibian Competition Act was passed in 2003, but only became operative in 2008. Merger thresholds have yet to be promulgated, which means that a transaction of any size which constitutes a merger under the Namibian Competition Act requires to be notified to the Namibian competition authorities and may not be implemented without the approval of the Namibian competition authorities. The absurd position therefore arises that the merger between two businesses of any size requires to be notified to the Namibian competition authorities.
Some of the difficulties outlined above suggest that a regional approach to merger control may be a worthwhile ideal, an ideal that is being pursued by the Common Market for Eastern and Southern Africa (“Comesa”). Comesa comprises 19 member states including the Indian Ocean Islands, the DRC, Egypt, Ethiopia, Kenya, Libya, Malawi, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. Comesa has established competition legislation (including a merger control regime) applicable to Comesa member states.
The Comesa merger control regime requires the prior notification to, and approval by, the Comesa Commission of mergers that have an effect in two or more member states and meet the turnover or asset thresholds that have yet to be prescribed. Although the Comesa merger control regime is not yet fully operational, when it does become operational, investors will have to deal with both domestic and regional competition authorities as the regional merger control does not dispense with domestic merger control regimes, resulting in two tiers of merger control.
Too often merger control implications in Africa go unappreciated or are simply ignored. Foreign investors do this at some risk as the consequences can be severe and include not only administrative penalties (typically calculated as a percentage of annual turnover) but also in some cases criminal penalties. In Kenya, for example, failure to notify a merger may result in imprisonment for five years or a fine of ten million Kenyan Shillings or both.
Foreign investors are therefore well advised to consider the impact of increased merger control in Africa as this is likely to have significant cost and timing implications for doing business in Africa.
Andrew Cadman is a director and head of the competition law department of Read Hope Phillips Attorneys in Johannesburg, South Africa. Bridgett Majola is an associate with Read Hope Phillips Attorneys.
Africa: Funding on the frontier , FT
South Africa resists march of Walmart, Guardian
African M&A activity hits $3.98bn in Q1 2012, This is Africa
Broad horizons – why due diligence is key in African M&A transactions, legalweek