Cross-Border Mergers and Competition Regulations
1 November 2013Without Prejudice
International markets have become increasingly closely integrated as a result of globalisation. Stemming from this phenomenon is the emergence of a wave of cross-border mergers and acquisitions and subsequently, the need for an adequate regulatory body.
This article will focus on the manner in which cross-border mergers are dealt with in South African and international competition law, in particular, in developing and emerging economies (DEEs) due to the prevalence of these specific economies in Africa.
Cross-border mergers can be defined either on the basis of the "structure" or the "effect" of the merger. A merger can be considered "cross-border" in structure if it involves firms established in more than one jurisdiction. An "effect" merger is one where, regardless of where the merging firms were established, the merger affects the markets in more than one jurisdiction.
In most countries, where laws have been enacted to ensure free and fair economic competition, mergers (or at least those that involve substantial companies) are scrutinised by a government agency and may not be implemented if the merger is likely to create a monopoly or otherwise lessen competition in the market. The main issue arising as a result of cross-border mergers is the fact that the merger must be reported to, and approved by, the authorities in more than one country and, as a result, the possibility of inconsistent decisions in different jurisdictions arises.
Merger control is a unique branch of competition law, because, unlike cartels and abuses of dominance, mergers have positive and negative effects on economic growth. Thus, in order to maximise the positive business and economic effects that can stem from mergers, it is vital that effective merger control regimes are implemented in DEEs.
The unique characteristics of merger control and COMESA
Of particular interest to African countries is the institution of a Competition Commission by the Common Market for Eastern and Southern Africa (COMESA). COMESA aims to achieve harmonisation among the competition rules of its member states in order to avoid conflicts. This regional regulatory body alleviates some of the issues relating to jurisdiction when assessing cross-border mergers.
DEEs have unique economic, political and social circumstances. Thus, merger controls in these countries must be approached with particular care. COMESA comprises 19 member states with a population of over 389 million; it forms a major market place for both internal and external trading. South Africa and several of Africa's other significant economies, such as Nigeria, Ghana and Botswana, are not members; the member states would be considered DEEs.
Under Article 5 of the COMESA Treaty, member states are obliged to take steps to secure the enactment of the necessary legislation to give effect to the Treaty. Therefore, member states are required to ensure that the obligations arising out of the COMESA Competition Regulations are fulfilled within their domestic markets.
The COMESA Competition Commission (CCC) has jurisdiction in relation to "'notifiable mergers." A notifiable merger is defined as one where two conditions are met:
- one or both of the firms involved operate in two or more COMESA member states; and
- the thresholds of the combined annual turnover or assets of the merging parties provided for in Article 23 (3) of the Regulations, are exceeded (Currently, the threshold is set at zero, so effectively every merger that complies with the first requirement is notifiable).
In addition, the commission may require that mergers which, in its opinion, are likely to prevent competition substantially or negatively affect public policy in the Common Market are also reported.
In terms of the COMESA Regulations, a merger that is not reported or is not approved by the CCC can be very costly to the merging parties. The Regulations provide for a high penalty of up to 10% of aggregate turnover in the COMESA region for not notifying eligible mergers. More importantly, the merger will have no legal effect and will be unenforceable in the region.
Another question that has to be confronted is the relationship between the COMESA competition regulation regime and the local regulations applicable in each member state. Some states require that even if the merger is approved by the CCC, it must still pass muster through the national competition authority, while others do not expressly provide for it.
Other states do not have their own competition laws. Parties to a cross-border merger need to ensure that they are acquainted, and comply, with all applicable laws, to avoid having to unravel the transaction, at great cost and inconvenience, later.
There is significant scope for further development in the field of cross-border merger regulation. Regional regimes, such as that employed by COMESA, are a positive step forward, but the development of internal competition law cultures and laws within countries is vital for the regulations to be implemented efficiently. Globalisation is undeniably attractive for international markets and should not be hampered by inadequate assessment and regulation of cross-border mergers.