The legal framework for mergers and acquisitions in Tanzania consists of the Fair Competition Act 2003, the Companies Act 2002, the Capital Markets and Securities (substantial acquisitions, takeovers and mergers) Regulations 2006, sector legislation (such as the Energy and Water Utilities Authority Act 2001 and the Tanzania Communications Authority Act 2003) and other general pieces of legislation (such as the Income Tax Act 2004 and the Employment and Labour Relations Act 2004).
The Fair Competition Act
M&A is regulated by the Fair Competition Act 2003 (the Competition Act) through its implementing bodies: the Fair Competition Commission (the Commission) and the Fair Competition Tribunal. The Competition Act defines a merger as an acquisition of shares, a business or other asset, whether inside or outside Tanzania, resulting in the change of control of a business, part of a business or an asset of a business in Tanzania.
A proposed merger must be notified to the Commission by providing the memorandum and articles of association of the merging companies, copies of their annual financial statements, strategic business plans, outline of their product market, a list of all their operating offices, market share of their businesses in Tanzania, income-statement projections of the resulting merger and a copy of the merger plan at least 14 days before the implementation of the proposed merger or acquisition if it results in a change of control of a business, part of a business or an asset in Tanzania and it involves turnover or assets above threshold amounts specified by the Commission under the Competition Act (currently this figure is eight million Tanzanian shillings).
After notification the Commission has 14 days to request more information and determine whether the proposed merger or acquisition should be examined, after which the transaction is deemed cleared. If the Commission wishes to further examine the transaction, the acquisition will be prohibited for 90 days, extendable once for a period of 30 days – for a maximum possible period of 120 days. During this period the Commission will investigate if the merger or acquisition creates or strengthens a position of dominance in the market. The Competition Act defines a position of dominance where a person acting alone can profitably and materially restrain or reduce competition in that market for a period of time. The person's share of the relevant market exceeds 35%.
The experience of the first acquisitions notified to the Commission shows that the examination period is often used in full. The Commission also calls for further information to examine a transaction. Thus a proposed merger or acquisition may be delayed for several months. Combined with the fact that there is no fast-track process, the methodical pace of Commission investigations may act as a disincentive for firms seeking to engage in merger activity (especially where the firms are not sure if the merger is notable) from notifying the Commission about it.
Failure to notify is an offence punishable by a fine of between 5% and 10% of the annual turnover of the corporate body that fails to notify the Commission. In addition every director, manager or officer of the corporate body at the time the offence was committed may be jointly charged in the same proceedings with such corporate body and be deemed to be jointly guilty of that offence unless he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of the offence.
If the Commission determines that the merger or acquisition creates or strengthens a position of dominance in the market it may, by issuing a compliance order, either prohibit the merger or acquisition outright or suggest changes so that the proposed transaction does not contravene the Competition Act.
The Commission will grant an exemption to the merger prohibition if:
- the merger is likely to benefit the public, for example, contribute to efficiency in production and allocation of resources, protect the environment, benefit the public, outweigh the detriments caused by the merger and promote technical or economic progress; and
- in the case of a merger resulting in the change of control of a business, the business faces financial failure and the merger offers the least anti-competitive use of the business assets.
So far there have been no instances where a merger notification has been rejected or modified by the Commission.
Extraterritorial impact
Since the definition of merger under the Competition Act extends to an acquisition of shares, business or other assets whether inside or outside Tanzania, it may require foreign companies to notify and obtain the consent of the Commission if a proposed foreign merger results in the change of control of a business, part of a business or an asset of a business in Tanzania. Thus a very important consideration in relation to the extraterritorial reach of the Competition Act is what constitutes change of control. Under the Competition Act a corporate body is viewed as controlling another if it:
- owns or controls a majority of the shares carrying the right to vote at a general meeting of the other body corporate;
- has the power to control the composition of a majority of purposes the board of directors or other governing organ of the other of corporate body; or
- has the power to make decisions in respect of the conduct of the affairs of the other corporate body.
Therefore a change of control would occur if a proposed merger leads to a change in any of the above.
The change of control requirement under the Competition Act is similar to the European position where a merger between companies resulting in a change of control under European Community law is notable in Brussels (along with the relevant turnover thresholds of the European Community Merger Regulation).
The Companies Act
The Companies Act 2002 (the Companies Act) establishes procedures for registration of share transfers and contains disclosure requirements for offer documents issued by public companies in relation to issues of shares.
The Companies Act also regulates arrangements and reconstructions. If an arrangement is proposed between a company and its creditors or shareholders, the court may, upon application (or upon the company's liquidation), order a meeting of the creditors or shareholders. The Companies Act sets out information obligations in relation to the arrangement. If a majority of the creditors or members voting at the meeting agrees to an arrangement, it will, if sanctioned by the court, be binding on all members and creditors (or the liquidator) and on the company.
The arrangement can include a reorganisation of the company's share capital by consolidating shares of different classes, dividing shares into different classes or both. If an application is made to the court to sanction an arrangement and it is shown that the arrangement is for the reconstruction of a company, the court may sanction the arrangement or make provision for certain matters, including the transfer of assets or liabilities, the allotment or appropriation of shares and the dissolution without winding up the company.
Furthermore the Companies Act provides for the possibility of the court making an administration order directing that during the period for which the order is in force, the affairs, business and property of a company shall be managed by a court appointed person (the administrator). The court can do this in instances where it is satisfied that a company is or is likely to become unable to pay its debt and the court believes that making an administration order would ensure the survival of the whole or any part of the company as a going concern or would lead to a more advantageous realisation of the company's assets than would be effected in a winding up. The court may also make an administration order to sanction an arrangement. Either the company or its directors, a creditor or creditors or all of these parties, can apply to the court for an administration order. The administrator must inform the Registrar of Companies and all of the company's creditors their proposals for achieving the objectives set out in the administration order, the creditors may suggest modifications to said proposals but the administrator must approve any suggested modifications. During the duration of the administrative order the administrator has power to run the company, dispose of its assets and sell or acquire shares.
In addition the Companies Act allows companies that are taken over or transfer a part of their undertakings to another entity to make provisions for their employees even if these provisions are not in the best interest of the company being taken over or transferring part of its undertakings.
Substantial acquisitions
As of February 11 2009 the Tanzanian bourse has 10 locally listed companies and four cross-listed companies worth $3.7 billion. Acquisitions and mergers involving publicly-listed companies are governed by the Capital Markets and Securities (substantial acquisitions, takeovers and mergers) Regulations 2006 (the Regulations) which came into force in December 2006.
The Regulations apply to acquisitions and mergers of an interest of between 20% and 75% in public and listed companies. A specialised committee (currently the Prospectus Evaluation Committee) is responsible for reviewing applications pending the creation of a specialised M&A committee.
The regulations contain:
- lengthy and detailed provisions that aim to ensure a transparent and efficient offer system in relation to acquisitions and mergers meeting the threshold figures;
- restrictions on dealings before, during and after the offer; and
- shareholding disclosure requirements.
The acquisition of an interest of more than 90% triggers the mandatory takeover and delisting sections of the Regulations. This means that the acquirer's must either make a mandatory public takeover offer to all shareholders of the target or disinvest through an offer for sale or by a fresh issue of capital to the public to fall below the threshold.
Sector legislation
In order to balance the interests of consumers and investors in industry sectors characterised by natural monopolies or other strategic industries, the government of Tanzania enacted legislation such as the as the Energy and Water Utilities Authority Act 2001, the Surface and Marine Transport Authority Act 2001, the Tanzania Communications and Regulatory Authority Act 2003 and the Tanzania Civil Aviation Authority Act 2003.
Most of these acts require the parties in a proposed merger or acquisition to obtain the consent of the relevant regulatory body in their industry if the proposed transaction entails a change in the ownership of a licence or the transfer of a licence. For instance the transfer of a telecommunications licence granted under the new converged licensing scheme requires the consent of the Tanzania Communications Regulatory Authority.
Although most industry sectors are open to foreign participation, in a few sectors there are limits to foreign participation imposed by legislation. For instance a telecommunications licence can only be granted to an entity in which a local shareholder possesses 35% of the shares or one-third of the directors are Tanzanian. A shipping agency licence can only be granted to a citizen of Tanzania or a corporate body incorporated in Tanzania in which more than 50% of the share capital is held directly or indirectly by a citizen of Tanzania. An insurance company must be incorporated in Tanzania and at least one-third of the controlling interest must be held by citizens of Tanzania and at least one-third of the members of the board of directors must be citizens of Tanzania. Certain types of mining licences (namely primary mining licenses) can only be issued to Tanzanian citizens under the Mining Act 1998.
These restrictions place a limit on the extent foreign companies and firms can acquire or merge with companies in these sectors.
The Income Tax Act, 2004 has an impact on mergers and acquisitions depending on the structure of the transaction. If the underlying ownership of the acquiring entity changes more than 50% compared with its ownership during three years prior to the acquisition, the event is treated as a taxable acquisition. However, the exact form of tax treatment will depend upon the form of consideration, the relationship of the tax base in the vendor's assets to the tax base of its shareholders and whether there is a built-in gain and whether the vendor will liquidate all its shares.
In addition the Employment and Labour Relations Act 2004 governs the entitlement of employees in the event mergers lead to redundancies or other labour-related changes.
Although the wave of privatisations that occurred from 1993 to the end of 2004 saw the height of M&A activity in Tanzania there are still healthy prospects in the private sector.
However there are concerns that that the Commission, which currently has fewer than 10 staff members in the department and whose task it is to investigate proposed mergers, may not have the capacity to fully investigate mergers.
In addition to the lack of capacity there is still uncertainty in relation to the extraterritorial reach of the Competition Act. The Director General of the Commission by making statements that foreign mergers technically fell under the jurisdiction of the Commission has not assuaged these fears.
Despite this fact some of the uncertainty surrounding M&A activity has been allayed by the setting of the merger notification threshold at eight million Tanzanian shillings. Nevertheless, to properly navigate through the uncertainties of competition law in Tanzania it is desirable to hire a reputable law firm to advise on the proposed merger or acquisition.
| Author biographies |
Nimrod E Mkono
Mkono & Co
Nimrod E Mkono is the founder and managing partner of Mkono & Co Advocates, Tanzania's leading and largest law firm. He has headed since the practice since 1977 and today Mkono is recognised as one of the country's leading corporate, finance and energy lawyers. He also has extensive experience in all aspects of commercial practice and litigation. Mkono has represented and advised major Tanzanian and international companies as well as the Government of the United Republic of Tanzania in numerous transactions. He has also been instrumental in drafting different Tanzanian laws and regulations. Mkono's regulatory and transactional work and experience go hand-in-hand with his long, outstanding career in law.
Mkono is an elected member of parliament for the Musoma Rural Constituency and a trustee of the Mwalimu J K Nyerere Foundation.
He holds an law degree from the University of East-Africa, College of Dar es Salaam, a masters degree in business law, is a fellow of the Institute of Chartered Secretaries & Administrators (since 1986) and is an associate of the Institute of Chartered Secretaries & Administrators (since 1976).
Patrick Ache
Mkono & Co
Patrick Ache is an associate who joined Mkono & Co in 2006. He is a law graduate of the University of Kent and obtained his masters of laws degree in international economic law at the University of Warwick.
He specialises in various aspects of corporate and commercial law including competition law, telecommunications law, mining law, banking law, insurance law and investment law. His experience in these areas includes drafting legal opinions, obtaining regulatory approval and drafting commercial contracts. From the firm's offices in Dar es Salaam and Bujumbura, Ache advises a diverse range of both local and multinational clients including mobile fixed and wireless telephony companies, international banks, mining companies, insurance companies and international non-governmental organisations. Ache is the author of several articles in specialist publications. He speaks English, French, Mandarin Chinese and Kiswahili. |