M&A activity in Tanzania took off in the mid-1990s, with privatization programmes sponsored by the World Bank and the Tanzanian government. But M&A activity in Tanzania is now moving towards private sector transactions. Corporate trade buyers and private equity partners are the new players. The new M&A market also involves a greater number of small to medium-sized businesses undergoing restructurings or strategic reorganizations.
The legal framework governing mergers and acquisitions in Tanzania mainly consists of:
- the provisions on general agreements in the Law of Contract Act, Cap 433;
- the provisions on merger control in the Fair Competition Act; and
- the provisions contained in the Companies Act 2002.
Share deals have to be structured taking into account tax provisions under the Income Tax Act 2004. Several other laws and regulations might apply to, and impact on, specific M&A transactions (such as sector legislation and laws on employment).
Merger control provisions
Under the Competition Act, a proposed acquisition of shares, a business or of other assets, whether inside or outside Tanzania, must be notified 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 Fair Competition Commission under the Act.
Acquisitions creating or strengthening a position of dominance in a market are prohibited.
After receiving notification, the Commission has 14 days to request more information and to determine whether the acquisition should be examined, failing which the transaction is deemed cleared. If the Commission wishes to further examine the transaction, the acquisition will be prohibited for 90 days, or longer if the Commission so determines.
Based on the first acquisitions notified to the Commission, the examination period is often used in full. The Commission also often turns to a request for further information to examine a transaction. The Competition Act does not provide for any possibility to speed up the process.
Although the Competition Act was enacted in 2003, the Commission was only constituted in December 2005. This lack of supportive infrastructure and funding created uncertainty regarding the application of the Act in the market. Even now, the inauguration of the Commission has not completely ended this uncertainty, because the thresholds for acquisitions to be notified have not yet been decreed. So the practice has evolved of notifying the Commission regarding every change of control that strengthens the position of one of the firms or involves a firm that already has a position of dominance in a market. This delay is a headache for small and medium-sized businesses undergoing restructurings.
Another area of concern is the issue of the Competition Act's application to foreign mergers and acquisitions. The Act does not expressly limit the powers of the Competition Commission to direct changes of control. The explicit extraterritorial reach of the Competition Act, the lack of thresholds and the powers of the Competition Commission present challenges for foreign mergers.
The Commission will grant an exemption to the merger prohibitions if:
- the merger is likely to benefit the public, for example, contribute to efficiency in production and allocation of resources, promote technical or economic progress, and protect the environment, and the benefits to the public outweigh the detriments caused by the merger; 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.
The Companies Act 2002 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 reorganization of the company's share capital by consolidating shares of different classes or by dividing shares into different classes, or by both methods. 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 and/or liabilities, the allotment or appropriation of shares and the dissolution without winding up of a transferor company.
Public M&A transactions
Public takeover bids and changes of control of public companies are not governed by specific legislation. However, draft Capital Markets and Securities (Substantial Acquisitions, Takeovers and Mergers) Regulations are expected to come into force later this year.
The Regulations will mainly apply to acquisitions of an interest of 20% or more in public and listed companies and to mergers involving such a company (public transactions). A Mergers and Acquisition Committee will be created within the Capital Markets and Securities Authority and will be responsible for reviewing applications.
The draft Regulations seem to be in line with international best practices. They contain:
- lengthy and detailed provisions that aim to ensure a transparent and efficient offer system for public transactions;
- restrictions on dealings before, during and after the offer; and
- shareholding disclosure requirements.
The acquisition of an interest of more than 90% triggers the acquirer's duty to either make a mandatory public takeover offer to all shareholders of the target, or to disinvest to fall below the threshhold.
Nimrod E Mkono and Steven De Backer