New merger notification rules could become a costly burden for companies operating in nineteen countries in eastern and southern Africa, warns John Bodrug, a partner at Davies, Ward, Phillips & Vineberg LLP.
The new regulations implemented in January by a supranational organization called COMESA, which stands for the Common Market for Eastern and Southern Africa, will add uncertainty to M&A in the region and require companies to plan in advance, argues Bodrug, a Toronto-based partner in the law firm’s Competition & Foreign Investment Review practice.
COMESA—a pan-African group created by a treaty in November 1993— is made up of Burundi, Comoros, the Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe.
The group recently set up a Competition Commission that may require companies involved in a proposed merger or acquisition to notify it if either of the parties has operations in at least two of COMESA’s member states. The CCC is tasked with deciding whether a proposed merger or acquisition will prevent or lessen competition within its member states.
But the new requirements pose a number of challenges and the rules are unclear, Bodrug argues. For a start, eight of the nineteen member countries in COMESA have their own merger notification regimes, which could create conflicts over jurisdiction, he says. “In some cases, it appears that competition authorities in both COMESA and a member state are asserting jurisdiction over the same merger,” he continues.
In addition, under COMESA’s competition rules, the financial threshold at which companies with assets or revenues in two or more of the African member states must notify the group of an impending transaction, has been set at zero.
“In most jurisdictions you have a fairly significant dollar threshold for assets or revenues in the jurisdiction before the parties have to file a notification, but with a zero dollar threshold it’s potentially quite challenging to confirm whether a notification obligation exists,” he says. For example, a merger filing to Canada’s Competition Bureau is not required if the acquired entity has less than $80 million in assets or revenues in Canada.
Bodrug also says that it remains to be seen whether the COMESA Competition Commission “will take the position that a mining company that merely owns land or mineral rights in two or more member states, but otherwise has no operating mines in COMESA, would satisfy the notification threshold because it operates in such states.”
Filing fees have been set at the lesser of a) US$500,000 or b) the lower of 0.5% of the parties’ combined turnover or 0.5% of the parties’ combined assets in the COMESA region.
And companies who don’t meet the CCC filing requirements in time can be slapped with a penalty of up to 10% of their combined annual turnover in COMESA, he adds. Companies must file notification of a “decision to merge” within thirty days, he says, but it is unclear when the clock starts ticking on a proposed transaction. Can it be triggered, for example, by a board decision, “even before a merger agreement is executed,” he wonders.
Bodrug notes that he didn’t learn of the new notification regime until it came into effect in January and says companies “don’t want to be discovering this at the eleventh hour.”
“What is important for Canadian mining executives to know is that there is a lot of uncertainty regarding the new regulations”, he says. “You have to factor in the COMESA regime early in your merger planning process in order to avoid surprises.”
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