The term 'control' does not have a definition under the Fair Competition Act Number 8 of 2003 of the laws of Tanzania, as revised from time to time (the “Competition Act”). The word control is only used in the Competition Act to make reference to Section 8, 9 & 10 which applies specifically to restrictive trade practices, and not to mergers transactions, which is the crux of this write-up.
A lack of a specific definition and/or a yardstick on what constitutes control has resulted in a myriad of interpretations from stakeholders and the regulator (that is, the Fair Competition Commission (“FCC”)). Given these broad interpretations, anti-trust/competition law practitioners in Tanzania have previously faced (and continue to face) the simple question as to what amounts or constitutes ‘control’ in a merger transaction for it to be notifiable and/or approved outrightly by the FCC. This question though simple, has not had a rational nor adequate legal response, often resulting in opposing philosophies between anti-trust/competition law practitioners and the FCC.
Control is a pertinent word in merger transactions in Tanzania because of how a ‘merger’ is defined under the Competition Act. The Competition Act defines a “merger'' as an acquisition of shares, a business, or other assets, 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.
What constitutes change of control in the definition above is what anti-trust/competition law practitioners in Tanzania have previously struggled to unearth until it was dealt with, though loosely, in the landmark case of Toyota Tsusho Corporation (Alliance Autos) versus the Fair Competition Commission, Appeal No. 6 of 2013 at the Fair Commission Tribunal (the “Case”). This intricate issue has never been presented before a judicial body for interpretation nor have there been any attempts before to amend the Competition Act despite this obvious conundrum.
The summary facts of the Case were that the Appellant (“Toyota Tsusho Corporation”), a distributor of new Toyota branded motor vehicles informed the Respondent (FCC) of its intention to acquire CFAO (Alliance Autos Limited). CFAO is a public traded company listed on the Paris Euronext Stock Exchange whose core business is the distribution of automotive and pharmaceuticals. The merger application was in respect of Toyota Tsusho Corporation’s intention to purchase 100% shares held by CFAO in Alliance Autos Limited following the acquisition of CFAO by the Toyota Tsusho Corporation. The acquisition was predicted to lead to a horizontal overlap in the Tanzanian market for distribution of brand-new motor vehicles and spare parts in so far as Toyota Tsusho Corporation and CFAO were concerned.
Following the merger application, the FCC commenced an investigation with a view of establishing the effects of the transaction to the consumers in the relevant market that is, Tanzania. The investigation established that Toyota Tsusho Corporation’s market share prior to the acquisition was 40% (based on a distribution agreement it had with Toyota Tanzania Limited), and the target firm, that is, Alliance Autos Limited’s market share was 0.055%. Thus, when combined the market share of the merger parties would be 40.055% which exceeds the 35% market share approval threshold provided under the Competition Act (outright approval requires market share to be below 35%). This revelation and other factors that were considered in the appeal, led the FCC to reject the merger application outrightly.
Aggrieved by the aforesaid decision, Toyota Tsusho Corporation appealed and filed five (5) grounds of appeal, one touching on the issue of control, and explicitly addressing whether Toyota Tsusho Corporation was in control of Toyota Tanzania Limited on the basis of a distribution agreement between them for the distribution of new Toyota branded motor vehicles in Tanzania.
On the issue of control, in summary, Toyota Tsusho Corporation argued that control cannot be identified by a mere contract (distribution agreement) in absence of analyzing other means of control, such as, by means of acquisition of shares or assets. They made reference to the European Union Notice (Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No. 139/2004 on Control of Concentration between Undertakings (2008) c95/01) (“Notice on Control of Concentration between Undertakings”), which defines control for purposes of mergers and acquisitions assessment. The argued based on the said notice that, in order to confer control on a contractual basis, the contract must lead to a similar control of the management and the resources of the undertaking as in the case of acquisition of shares or assets. In addition, Toyota Tsusho Corporation referred to the definition of control in the Black’s Law Dictionary to strengthen their point further that, control over an entity (or a controlled company) in the usual business practice is defined as one entity owning most of another’s entity voting stock or a majority of the stock is held by another person .
On the other hand, the FCC submitted that control of one entity over the other is a matter of fact and such control can either be direct or indirect. In that the level of influence one has over the other, fundamentally establishes the extent by which that person can exercise his control over the other. In the circumstance, they argued that the European Notice on control was for purposes of determining whether there is a fillable/notifiable merger, which is different from the question in this appeal which seeks to determine the kind of economic relationship between a party to a merger and non-party. As a result, notwithstanding that control is not defined under the Competition Act, it doesn’t necessarily mean it (control) has to be attached to the ownership of a company, but it is just the ability to influence the market and business policy of the company (material influence).
In their decision, the appellate forum, the Fair Competition Tribunal (“FCT”) sided with the FCC and stated that control of one entity over the other is a matter of fact and such control can either be direct or indirect. The level of influence one has over the other establishes the extent to which he has exercised his control over such other person. In their ratio decidendi, the FCT stated that control does not necessarily need to be attached to the ownership of the company, but it can be the ability to exercise decisive influence of an undertaking. This particular position is what currently constitutes control in Tanzania today for merger transactions.
The above very wide and general position is quite distinct from other jurisdictions around the world which have in place specific criteria for determining what constitutes control.
One example which we craze leave to refer to in this write-up is found in Kenya, which is a commonwealth jurisdiction like Tanzania. What constitutes control in mergers matters is well articulated in Section 41 (3) of the Competition Act No. 10 of 2010, Revised Edition 2016 of the laws of Kenya (“Kenyan Competition Act”).
The section reads as follows: -
A person controls an undertaking if that person —
beneficially owns more than one half of the issued share capital or business or assets of the undertaking;
is entitled to vote a majority of the votes that may be cast at a general meeting of the undertaking, or has the ability to control the voting of a majority of those votes, either directly or through a controlled entity of that undertaking;
is able to appoint, or to veto the appointment of, a majority of the directors of the undertaking;
is a holding company, and the undertaking is a subsidiary of that company as contemplated in the Companies Act (Cap. 486);
in the case of the undertaking being a trust, has the ability to control the majority of the votes of the trustees or to appoint the majority of the trustees or to appoint or change the majority of the beneficiaries of the trust;
in the case of the undertaking being a nominee undertaking, owns the majority of the members’ interest or controls directly or has the right to control the majority of members’ votes in the nominee undertaking; or
has the ability to materially influence the policy of the undertaking in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control referred to in paragraphs (a) to (f).
The above section aids in defining the parameter by which control can be applied with certainty and predictability, especially where the control scenario is similar to what constitutes control as adopted in the Case, that is, control is the ability to exercise decisive influence of an undertaking. It is worth noting that in the Kenyan Competition Act, such criteria is qualified in a manner which makes it comparable to other control tests specified therein, such as control by beneficially owning more than one half of the issued share capital or business or assets of the undertaking (see also the Notice on Control of Concentration between Undertakings which has similar application).
In our opinion, the general position of what constitutes control as propounded in the Case, has had an adverse effect on many merger transactions which otherwise would not have been fillable/notifiable or would have been approved without condition(s), if what constituted control had been given specific criteria like in the Kenyan Competition Act. The drawback, among others, being that merger parties end up paying significant filings fees (ranging from TZS25,000,000 to TZS100,000,000 – at approximately 1USD = TShs2,300), and in the course of processing merger applications, waste precious time (normally processing a merger application takes a minimum of 19 working days and a maximum of 140 working days or longer depending on the complexity of a merger application) in a transaction which perhaps would not have been fillable/notifiable in the first place or would have been approved during the first stage of the FCC’s analysis, that is within 14 working days.
In light of the above, and given the nature of business methodologies and strategies applied in mergers transactions, it can be observed that what constitutes control as reflected in the Case hasn’t helped or given a quantifiable or definite yard-stick to assist mergers parties. As a result, we call for amendment of the Competition Act so that the term control is well defined and given a more quantifiable yardstick, to avoid, (1) fishnet application or coverage which presently capture transactions which may not qualify, and (2), the vagueness arising in the course of advising parties/clients in merger transactions.
Note: This is not a legal opinion and the contents hereof are not meant to be relied upon by any recipient unless our written consent is sought and explicitly obtained in writing.
