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When assets transfer constitutes a merger

Broadly put, the goal of competition law and competition regulation is to promote fair competition in a market, with the aim of facilitating economic growth and protecting the interests of the ultimate consumers in a market.

Competition regulators are mandated with the responsibility of promoting fair competition in their specific markets. For instance, in Kenya, the Competition Authority of Kenya (CAK) is responsible for regulating competition in Kenya, while the COMESA Competition Commission (CCC) is responsible for regulating competition within the Common Market (i.e. the COMESA Region) - including in Kenya, if competition regulation has a regional dimension.

In fulfilling that mandate, competition regulators, among other roles, review and approve the implementation of mergers in a market, to ensure that proposed mergers are not likely to restrict competition in the particular market or go against public interests (such as resulting in mass layoffs, which would ultimately have a detrimental impact on the economy). Competition regulators also review the impact of mergers on future competition in a market. Some mergers can be predatory, killing innovation at nascent stages. For example, a large fintech company could choose to acquire a start-up fintech company that is likely to compete with it in the future, hence killing competition at its nascent stage.

Mergers can take several forms, they can be an acquisition of shares, a business, or other assets. The cardinal rule for identifying whether such an acquisition constitutes a merger is whether there is a direct or indirect change of control of the business or an asset of a business. For example, if one acquires more than 50% of the shares of a company, they have directly acquired control of the company, since you can carry a majority vote at shareholder meetings of the company. An undertaking can also acquire indirect control in a target undertaking, such as the right to appoint a majority of the board members, or the right to veto certain strategic decisions of the company.

Determining whether an acquisition would result in a direct change of control is ordinarily a straightforward exercise. However, identifying whether a transaction constitutes an indirect change of control is not as obvious, and careful consideration and analysis of various parameters is required. Similarly, identifying whether an acquisition of the assets of a business constitutes an acquisition of a business or an enterprise is also not as simple as one plus one.

To determine whether an acquisition of assets of a business constitutes a change of control, and hence a merger, one needs to identify whether the assets constitute a business, a part of a business, or not. Transfer of bare assets that do not constitute a business or a part of a business does not constitute a merger.

For example, if a telecommunications company, whose core assets for its business are towers and telecommunication equipment, agrees to sell all its towers and telecommunication equipment to a competitor, the same may not necessarily be a merger for purposes of competition law. The implication or effect of the sale of the assets is essential in determining whether it is a merger. If the company sells the assets installs upgraded equipment and continues to carry on its business, the transaction would simply be a transfer of bare assets and not the underlying business. However, if the company upon selling ceases to undertake the business premised on the assets, and the competitor takes over the business, the transaction would constitute a transfer of a business, and hence a merger.

This question has been previously considered in various transactions. A classic example is the SeaFrance case. In this case, Sea France SA, which owned four ferries, ceased to operate a ferry service between two destinations and went under liquidation. After about a year, all its assets (including three ferries, trade name, brand, logos, computer software, IT hardware, customer records and office furniture) were acquired by a parent company of a group with operations between the UK and France. The group resumed operations of the ferry business, with the same ships, operated by a majority of the former employees of SeaFrance. The Supreme Court in the UK determined that the acquisition of the assets of the liquidated SeaFrance, and the continuation of business using the same assets, and route constituted an acquisition of an enterprise (or a business), and hence a merger.

Once a transaction has been determined to constitute a merger, the same should be notified to the applicable competition regulators if it meets the required merger notification thresholds (usually financial) for approval before the parties implement the merger. Mergers that are required to be notified to either the CAK or the CCC, and which were not so notified are void and have no legal effect, and neither are the legal obligations imposed by such mergers binding.

The article was featured in the Business Daily and can be accessed here.