Tanzania: Merger control in Tanzania

Are you involved in the purchase or sale of a business in Tanzania? You and your business could be at risk of very significant penalties if you fail to comply with the Tanzanian merger rules.

The framework for competition policy enforcement was created by the Fair Competition Act 2003 (the Act), which entered into force in 2004. Section 11 of the Act prescribes that where there is an acquisition of shares or a business or other assets within the jurisdiction of Tanzania and the value of the acquisition is above a value prescribed by an order laid down by the Fair Competition Commission (FCC) then the merger is mandatorily referable to the FCC.

The FCC recently published an order, the Fair Competition,Threshold for Notification of a Merger Order 2006, confirming the threshold at which anticipated acquisitions of businesses must be notified to it for clearance under the Act. The publication of the order is a crucial piece in the jigsaw, not only in a merger control regime, but also of a functioning competition policy in Tanzania as a whole.

The value of the acquisition is to be assessed by reference to the asset value of the market value of the assets of the "merging firms or entities". A notification becomes mandatory in the event that their asset value is above TSsh 800,000,000 (around US$550,000).

Substantive test – when should a merger be cleared?

The FCC has been keen to stress that its policy is not to prohibit mergers as a matter of course but to ensure that they do not impinge upon competition in the markets which they affect. Tanzania is committed to a full transition to a market economy, and the FCC is aware of the importance of merger and acquisitions activity as part of that process.

The acquisition of local firms within Tanzania is an important part of attracting foreign direct investment into the country as well as facilitating market entry. Many foreign companies that wish to start up in Tanzania will find that the easiest way to do so is to purchase a firm which is already established, with a ready list of customers, employees and suppliers, as well as perhaps benefiting from local licences and domestically registered intellectual property rights.

On the other side of the equation, where companies wish to exit the market, it is only right that they are able to do so, provided that this does not impact adversely on competition. That point too seems to have been taken on board by the FCC.

When is a merger permissible under the Act? Section 11(1) states that a merger is only prohibited where it "creates or strengthens a position of dominance in a market".

The "position of dominance" concept is fleshed out at Section 5. This is a two part assessment involving an inquiry into whether the merged entity would:

Dominance is an economic concept and must be treated as such. The notifying parties will need to explain to the FCC whether there are any barriers to market entry which could lead to the merging parties being able to act independently to a significant degree from their customers and/or competitors. This can, in the absence of specialist legal and economic knowledge, be a tricky exercise. Similarly, assessing the parties' market shares is often fraught with difficulty, requiring as it does the identification of the relevant market or markets, as well as trying to work out how much of those markets "belongs" to the merging parties.

The adoption of this dominance test is helpful, insofar as it is consistent with the approach taken by other competition authorities around the world. However, one should not expect that the jurisprudence from those jurisdictions can be imported lock, stock and barrel into Tanzanian Law. Although case law from other countries may be a useful point of reference, it should only be applied whilst bearing in mind that the Tanzanian economy has its own priorities, not least of which is the need to develop and strengthen a developing market economy. It is therefore essential to have advisers who are not only up to speed with the economic and legal concepts attendant in notification, but who also understand the priorities and policies of the FCC.

Merger notification procedure

As a first step, an eligible transaction must be notified to the FCC in such form as the FCC may require by an order. Currently, notification is made by letter but the FCC is taking steps to introduce a standard form applicable for all notifications.

Once the submission has been made, the FCC has 14 days in which to decide whether or not the proposed transaction could raise competition issues and require an examination of the merger in more detail.

If no communication is made to the parties within 14 days, the parties may proceed. If within that 14 day period the FCC notifies the parties that it will be examining the proposed merger, it has a further 90 days within which to do so and decide whether or not to clear it, apply an exemption or to block it. That period may be extended by a further 30 days by the FCC at its discretion and indefinitely if it considers that its consideration of the merger has been delayed by the failure of any of the merging parties to provide information to the FCC when required to do so.

The Tanzanian system is a relatively straightforward regime, and this bodes well for the notifying parties. The 14-day time-scale is a relatively short period in which the parties will find out where they stand and whether a more in-depth assessment will be necessary. Some may of course fear that faced with such a brief period for its preliminary examination, the FCC will seek to protect its position by insisting that the merger proceed to a Phase II examination in all but the most obviously innocuous cases, though this has not been the position taken by the FCC thus far.

It is submitted that it is also helpful to notifying parties that the "Phase I" and (if required) "Phase II" examination will be carried out by the same body.

On the other hand, some may argue that the 14-day turnaround requirement for the FCC to decide whether or not to take the notification to Phase II is inadequate to allow third parties to make their concerns known over a proposed merger. To date, it has not been the FCC's practice to publish notifications it receives in the same way that certain other competition authorities do (for example, the EC Commission), but rather it consults internally in order to make the decision. Even if it did move to a public consultation process, a fortnight is probably not long enough for organizations' to learn of the deal and respond to the FCC with their thoughts.

At the end of a Phase II investigation, the FCC will either:

(i) clear the proposed merger on an unconditional basis;
(ii) clear the proposed merger with conditions; or
(iii) block the transaction.

Where conditions are to be attached to clearance, this will be dealt with under section 58 of the Act. That provides that where a person is likely to commit an offence under the Act (in the context of mergers, the offence would be to consummate a merger that created or strengthened a dominant position), the FCC may draw up a compliance agreement with the notifying parties or make a compliance order which will be aimed at addressing the FCC's concerns over the merger.

In practice, a compliance agreement or order is likely to include behavioural and/or structural undertakings from the merging parties. A behavioural remedy could include, for example, prohibiting a newly merged entity from imposing prices that are above a certain level. A structural remedy usually involves a requirement that the merged entity sell off part of its business to prevent it from becoming too powerful economically.

From the point of view of the merging entities, behavioural or structural remedies can have a far-reaching impact on their business going forward. It is worth bearing in mind in relation to structural remedies that where an FCC order is made to sell off all or part of a business or its assets, this will be published in the Tanzanian Public Register. The publication of the requirement for a sale to take place (and perhaps by a required date) could adversely affect the sale price of the business or assets in question. It is therefore important to have a team which is able to cope with the economic concerns that the FCC may have regarding the proposed merger and to negotiate clearance terms which do not wreck the merged business or the parties' plans.

Any decision of the FCC can be subject to an appeal to the Fair Competition tribunal.

Penalties for non-compliance

Parties must be aware of the numerous and significant risks of failing to comply with the merger regime.

Where a person commits an offence under the Act or is involved in such an offence, that person may be subject to a fine exceeding not less than 5% of his annual turnover and not more than 10% of its annual turnover.

This poses a serious threat to companies thinking, for example, of not notifying or of pushing ahead with a deal which the FCC has not cleared.

Even by the standards of longer-established competition authorities, the financial penalties of the Tanzanian regime are severe. By way of comparison, for failure to notify a relevant merger to the European Commission, parties can be fined periodic penalty payments not exceeding 5% of "average daily turnover" for each day that the infringement persists. Interestingly then, the maximum financial penalty in the EU is less than the starting point for the Tanzanian jurisdiction.

As stated above, Section 58 allows the FCC to make "compliance orders" of its own initiative where it is satisfied that this is required to avoid an infringement of the Act. This could include an order not to proceed with a pending merger which has not been notified to the FCC.

Section 68(5) of the Act also provides that where the Commission is satisfied that a person has acquired shares or other assets in breach of the Act, it may within three years make an order that:

(a) the acquirer dispose of some or all of the shares or assets within such time as the Commission specifies in the order; or
(b) declare the acquisition to be void, require the acquirer to transfer some or all of the shares or assets back to the vendor and require the vendor to refund some or all of the amounts received by the vendor in respect of the acquisition, as the FCC specifies in the order.

The time limits of Section 68(5) are quite generous to the FCC and allow for the possibility of an unscrambling order up to three years after the deal has been done. At that time, assets may have been integrated into different parts of the purchaser's business and complying with the order may prove significantly more difficult.

Section 68 is also interesting because it poses a threat to the seller as well as the purchaser of a business. In jurisdictions such as the UK and EU, it is the purchaser who bears the responsibility of ensuring observance of the merger control rules and the associated risk of non-compliance. In Tanzania, however, the sale of a business in breach of the merger rules could be construed as an "involvement" in an infringement by the seller. This in itself could expose the seller to a financial penalty. Furthermore, any vendor will surely want to avoid an order under Section 68(5) to repay all or part of the purchase price.

In addition, it is not only bodies corporate who are at risk for non-compliance. Section 68(3) prescribes that where a body corporate is guilty of an offence under the Act, every director, manager or officer of the body corporate may also be charged jointly in the same proceedings. Section 68(1) indicates that such persons could be fined between 5% and 10% of their annual income. Furthermore, given that orders of the FCC are enforceable as orders of the High Court (Section 59(7)), there may be an argument that failure to comply with such an order could give rise to contempt proceedings against the individuals concerned.

Finally, companies must also be aware that completing a merger illegally could result in a lawsuit for damages from parties alleging loss or damage as a result. A compensatory order can also be made by the FCC. In Tanzania, it is possible for an additional penalty to be imposed on offenders, equal to double the amount of the loss or damage suffered by a victim of the illegal conduct.

Conclusions

The threshold order having now been published, there will be no excuse for failing to observe the provisions of the merger control regime in Tanzania. Furthermore, given the risk of the imposition of harsh penalties for failing to comply, there is a real incentive for parties to a merger or acquisition to ensure that the law is observed.

Whilst the Act is relatively clear in terms of the procedure to be followed by notifying parties and in terms of when a deal becomes notifiable, there is still a fair degree of fine-tuning to be undertaken in order to bring about legal certainty within the regime. For example, the Act makes numerous references to "turnover" whilst not specifying how this is to be calculated. In the absence of such guidelines, there is a risk of confusion and divergent practice in different cases. As with other merger jurisdictions, further clarification is likely to be given in the form of guidelines and further orders made by the FCC under the Act.

The Act has been praised by the World Bank as having been well-drafted and presenting a good basis for a workable competition policy regime. However, as with any Competition Law regime, there will be difficult concepts to deal with, such as dominance, market assessment and barriers of market entry. For parties involved in the notification of a deal in Tanzania, the need could not be clearer for advice from a local law firm with an excellent working relationship with the FCC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.