Tag: control

However, for all their positive contributions, mergers also create potential problemsfor competition byincreasing the level of concentration of a given industry. Depending on whether the merger is horizontal, vertical or conglomerate, it could raise a number of competition concerns. A horizontal merger could eliminate a present competitive force from the market. Generally, a market in which there are 2 competitors from a competitive perspective is worse than one in which there are 3 competitors. To the extent that a merger creates that effect because it leads to a reduction in number of competitors, it is suspect. Vertical mergers may result in a predatory foreclosure effect or profit squeeze which ultimately may lead to the elimination of a competitor, and in the process may lead to the extension of market power from one level of the market to another. Conglomerate mergers though generally very benign may hurt competition, where for example, the introduction of a big company into a market in which it did not operate,through another company which it has acquired operating in that market, may adversely affect the competitive conditions in the market. This could be by raising the psychological barriers to entry in the market, subsidization of predation in the new market with profits from other markets in which the conglomerate is dominant, and creation of potential reciprocity situations where in imperfect markets, the merged entity’s buying power can be used to induce others to buy its products or services in other markets, when ordinarily they wouldnot, thus foreclosing the market from competitors.

It is precisely for the above reasons that in recognizing that mergers could be beneficial and at the same time potentially harmful, competition laws provide, as the ISA 2007 has done, for a mandatory pre-notification of all M&A transactions to the competition bodies, the role which the SEC plays in Nigeria in the absence of a competition authority.

Can there be sanctions for non-notified M&A transactions and if so, what?

In relation to this question, it is important to recognise at the outset that the ISA 2007 has under section 13(p) invested the SEC with the foundational power “to review, regulate and approve mergers, acquisitions, takeovers and all forms of business combinations and affected transactions of all companies in Nigeria.” This foundational power is reinforced by the specific provisions in Part XII, ss. 118 – 128 of the ISA, the most fundamental, as mentioned above,being the obligation for a mandatory pre-notification of qualifying M&A transactions under section 118(1) of the ISA. As mentioned earlier, a noticeable feature of the regime under Part XII is what appears to be a lacuna or gap in the law, in the sense that while the law clearly prescribes an obligation to pre-notify mergers for approval, it does notprescribe the penalty or consequence should parties choose not to heed this obligation. This lacuna therefore creates some confusion as to whether non-compliance is punishable or whether what we have is really a legal exhortation rather than an obligation.

The author is of the view, for reasons proffered hereunder, that the absence of a specific penalty clause backing up the merger notification obligation does not support the conclusion that failure to notify is not punishable or attracts no consequence. First, one must recognise that Nigerian merger control regime, unlike the regime in other jurisdictions,does not exist within an autonomous competition law system, but exists as part of our wider securities regulation system in which the SEC is the apex or super-regulator. In the context of effective regulation, the ISA has invested the SEC with a swathe of sanction powers, from the criminal to the civil and administrative, coupled with the power to impose other remedies such as behavioural and reputational sanctions (see e.g. section 305(3(c) ISA 2007). It is to be stated therefore as a first proposition that where a violation occurs in the context of a merger transaction, there is no reason of principle or law why the SEC cannot impose or activate any of the sanction powers and provisions that exist within the ISA which the SEC enforces. Further, although Part XII of the ISA is silent on the consequence of non-notification of M&A transactions, for the reason stated above, to wit, the fact that Nigerian merger control regime at the moment is part of its wider securities regulation system, it appears that the gap in failing to provide for sanction for not notifying qualifying M&A transactions is filled by a provision such as section 303 of the ISA which provides a default sanction power for violation of any provision of the ISA or any rule or regulation made thereunder.Section 303(1) of the ISA provides: “Except as otherwise specifically provided under the provisions of this Act, any person who violates or contributes in the violation of the provisions of this Act or of any rule and regulations made thereunder is liable to a penalty of not less than N100,000 (about $600) and a further sum of N5000 ($30) per day for every day that the violation continues.”

It is our view that parties who have not notified their merger transactions as the ISA stipulates under section 118 of the ISA are potentially liable to the general penalty regime under section 303 of the ISA. Interesting questions thereby raised, are: whether the section 303 default sanction provisions are sufficient and effective to induce compliance with the mandatory obligation to pre-notify as prescribed under section 118? In practice, are merging parties motivated to do a cost-benefit analysis and assess if the gains from non-compliance, such as the fact that transactions can proceed speedily and not suffer a delay from awaiting a decision by the SEC, outweigh the possible pains of non-compliance. Given the paltry sum provided for under section 303 of the ISA, the attraction not to comply is real and parties may conceive that itmakescommercial sense to proceed with the transaction and damn the financial sanctions.

It appears that the default financial sanction provisions under section 303 of the ISA may not have had the potential pernicious consequences created by bad mergers in mind, but as said, applies only because it is just a default provision. One can contrast this with provisions such as Article 14 of Council Regulation 139/2004 of 20th of January 2004 (the European Merger Regulation) that imposes fines on M&A parties of up to 10% of the annual turnover of the enterprises for failure to notify and get pre-approved their M&A transactions to the European Commission, and fines of up to 1 per cent of the annual turnover for supply of incorrect information or generally for failure of merger parties to cooperate with the European Commission in investigating a merger. A similar financial penalty provision exists in almost all merger control regimes in the world, including of recent the supra-national merger control regime of the Common Market of Eastern and Southern Africa (COMESA) which came into force on 14 January 2013. The COMESA supra-national merger control regime provides for a fine up to 10% of the combined annual turnover in the COMESA Common Market of parties who failed to notify their merger transactions.

The problem with the Nigerian system remains the fact that merger control is not really viewed, as it should, from the prism of antitrust or competition protection, but more from the prism of securities regulation. SEC is not an antitrust body but a securities regulator. This then raises the ideological dilemma of antitrust enforcement, as we have it in Nigeria under the ISA, subsumed within securities regulation. Thus, can SEC at the same time be effectively both a securities regulator and a guardian of competition (the role played by a competition authority)? This is also the dilemma of the hermaphrodite. Can the hermaphrodite effectively be both male and female; that is, effectively use its two sexes, or must one sex bow in deference to the other?

Against the above discussions, on the question of whether SEC can impose fines for failure to notify an M&A transaction, in the absence of specific sanctions to back up the obligation of mandatory pre-notification under section 118, the submission is that indeed the SEC can impose fines; and this is as prescribed under section 303 of the ISA. Beyond fines on the legal entities involved in the transaction, there is no reason why the SEC cannot impose administrative sanctions even on officials and advisers of the parties involved in the non-notified M&A transaction. The basis for the later is section 151(6) of the ISA which gives to SEC the power to “impose administrative sanctions on any person or persons contravening any of the provisions of this part of the Act”; and section 118 imposing mandatory pre-notification obligation is in the same part of the Act as section 151 of the ISA.

Will the non-notified transaction

be dismantled?

A different question relates to whether monetary sanctions under section 303 is exhaustive or if in addition to it, the SEC is empowered to impose a dissolution or reversal of the non-notified M&A transaction. Although the answer to this question is not explicitly provided for, it is submitted that the power of the SEC to require parties to reverse or dismantle a non-notified M&A transaction is implied within the provisions of sections 13(p) of the ISA 2007 already cited, section 118 itself which is the obligation prescribing provision, and section 127 of the ISA by which the SEC can revoke a merger approval on a number of reasons, such as where procured by deceit or incorrect information. Noteworthy is subsection 2 of section 127 which provides that the Commission may prohibit the merger over which it has revoked its approving decision, even if a time limit prescribed in the Act for the Commission to take a decision may have elapsed. Noteworthy also is section 128 of the ISA which empowers the Commission to order the break-up of a company whose business practices undermine competition. On section 128 ISA, it may be argued that it amounts to stretching the language of section 128 too much to apply it to M&A transactions, given that the language of section 128 of the ISA seems geared towards an abuse of dominance scenario and not directed at a merger scenario. However, the counter-argument should be that if the Act recognizes that in deserving circumstances that the SEC can impose radical structural remedies in a market by requiring the dissolution of companies whose commercial practices undermine competition, there is no reason why the Commission cannot also inversely require parties to an M&A to dismantle the transaction where such was implemented without securing the prior approval of the SEC as the ISA mandates, particularly where such an M&A would have serious negative consequences on the competitive structure of the market and on consumers.

Granted, as has been argued, that the SEC has the powers to require the reversal or dismantling of a non-notified M&A transaction, a relevant question is whether the SEC should always at every occasion in which an M&A transaction is not notified to it, upon discovery require dissolution of that transaction? It is submitted that the answer to this question is that, “it depends”. Since the SEC already has fining powers which it may have imposed, proceeding to require the parties to unravel the transaction without more may amount to an over-kill. Whether the SEC should require the reversal of the transaction, in our view, should depend on if the particular transaction in question, upon examination, is one which undermines competition and does not enjoy any of the redeeming features under section 121(1)(b) of the ISA. In other words, to decide if the non-notified M&A transaction should be reversed, the Commission should undertake a consideration of the transaction against the factors listed in section 121 of the ISA as if it were one notified to it. If such a review reveals that the transaction is one that would not have been approved had it been notified to the SEC, then the Commission would be right to require a dissolution or reversal of the transaction, in addition to financial penalties imposed. If on the other hand the review reveals that the transaction is one which would have been approved by the Commission had it been notified to it, the Commission should limit its intervention to financial penalties and allow the M&A transaction to stand. The approach suggested here is consistent with best practice as encapsulated under Article 8(4)(a) of the European Merger Regulation, where the remedy of dissolution is not automatically imposed, but only imposed if the non-notified M&A is assessed to be anti-competitive. By the referenced provision, “Where the [European] Commission finds that a concentration…has already been implemented and that concentration has been declared incompatible with the common market…require the undertakings concerned to dissolve the concentration, in particular through the dissolution of the merger or the disposal of all the shares or assets acquired, so as to restore the situation prevailing prior to the implementation of the concentration..”

Miscellaneous matters

Power to impose remedies

On miscellany, it is worth stating that the SEC as part of its merger control powers, can impose various remedies in order to resolve whatever competition concerns that an M&A may have. These remedies could be either behavioural such as price freeze to address consumers concerns, requirement to grant competitors access to infrastructure, Intellectual Property assets, research and Development (R&D) facilities, production facilities, and key technology. The basis for this is section 122(5)(b)(ii) of the ISA by which the SEC can approve a merger “subject to any conditions” and also section 123(3) of the ISA which contemplates that a merger may be approved by the SEC “with or without conditions”. The remedy could also be structural by way of requiring a divestiture by the enterprise of a part of the enterprise to enable new entry or to strengthen some other competitors.

Third Party Intervention in the merger process

Another interesting question is the extent to which third parties may intervene in or influence an M&A transaction in Nigeria and get remedies. Precisely, is there any room for third parties to obtain prerogative writs against a merger? Starting from employees, a legal basis for their intervention is situated under section 123(2) of the ISA which imposes on the M&A parties an obligation to serve a copy of their merger notice to their registered employee unions or their employees generally. Although the provision in question does not specify what the employees are to do with this notification, it is argued that this provision supplies a basis for intervention in a merger process by employees, otherwise the right to be notified becomes a hollow one. Intervention by other third parties other than employees (such as consumer groups and competitors) will find basis under section 124(3) of the ISA which provides that “any person may voluntarily file any document, affidavit, statement or other relevant information in respect of a merger.” The referenced provisions should be taken together with section 303(4) of the ISA which provides that “notwithstanding the provisions of subsections (2) and (3) of this section, the complainant of a contravention may seek by action, consequential or punitive damages or any other remedy that may be available under the law.”

Can the Corporate Affairs Commission come to the rescue?

M&A transaction parties would be reluctant to disregard the obligation to notify where they assess that chances of detection by the SECis high. This does not appear to be the case since parties are able to assume control of the companies that they have acquired by effecting the necessary share transfer and change of directorship filings with the Corporate Affairs Commission (CAC), Nigeria’s companies registry. In practice, the CAC does usually accept filings without any reference to SEC. Therefore, in considering ways of making M&A parties to comply with the obligation to pre-notify, it may be necessary to think outside the box, and perhaps work out an inter-agency arrangement between the SEC and the CAC, whereby to accept filings of any significant change in shareholdings of companies and their directorships, the CAC could insist on the evidence of SEC approval of those transaction. This suggestion obviously may have its own problems, but it is believed that is one option that could be considered and fine-tuned by the SEC in order to induce compliance with the obligation on M&A parties to notify their transactions as the ISA stipulates, given that at present, the SEC’s powers to impose sanctions and remedies, as discussed above, have not been altogether successful in inducing compliance.