February 19, 2020
The technical ability to clearly determine whether a proposed Offshore mergers and acquisition transaction will have a Domestic Effect under Nigerian Competition law is now a key transaction imperative for deal makers and counsel in Nigeria. This is because, there now exists legal basis for regulating Foreign to Foreign Mergers (“Offshore Mergers”) in Nigeria. Although, not all Offshore Mergers are caught by the Domestic Effect provisions of the Competition Act applicable in Nigeria (“Competition Act”), parties to Offshore Mergers which come within the Domestic Effect definition, will need to, comply with a notification requirement to Nigeria’s Competition regulator, the FCCPC, and also obtain merger clearance. The big “transactional” risk with a notification requirement now, is that the FCCPC has yet to (and understandably so) establish its objective authority in this area of regulation. Accordingly, it may not be easy for counsel to predict or defend the outcome of a substantive merger review. New regulations by the FCCPC prescribing a simplified procedure and a 15-day turn around period for regulatory decisions on Offshore Merger notifications are a step in right direction and very commendable.
“Merger” as used in this Opinion is statutorily defined. Pursuant to Section 92(1) of the Competition Act, a Merger occurs when one or more undertakings directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another undertaking. A Merger may be achieved in any manner, including through (a) the purchase or lease of the shares, an interest or assets of the other undertaking in question (b) the amalgamation or other combination with the other undertaking in question, or (c) a joint venture.
What is the Legal Basis of the Domestic Effect Doctrine under the Competition Act?
The Domestic Effect doctrine in Nigeria is preserved under Sections 2 and 3 of the Competition Act. Section 2 [1] provides that the Competition Act applies to “all undertakings and all commercial activities within, or having effect within Nigeria”. Section 3(d) provides that the Competition Act applies to conduct outside Nigeria by any person in relation to the acquisition of shares or other assets outside Nigeria resulting in the change of control of a business, part of a business or any asset of a business, in Nigeria.
In Which Circumstances Would an Offshore Merger be said to Have Domestic Effect under Nigerian Competition Law?
Based on the provisions of the Guidelines on Simplified Process for Foreign-to-Foreign Mergers with Nigerian Component (Domestic Effect Guidelines), a proposed Offshore Merger will be deemed to have Domestic Effect and therefore subject to merger notification and clearance:
- where a proposed Offshore Merger has combined turnover of N1billion and above; and
- where the Target Undertaking ( as defined under the Competition Act) in a proposed Offshore Merger has a turnover of between N500 million and N1billion ( collectively referred to as the “TurnOver Tests”)
Ordinarily, the conclusion to be made from an application of the TurnOver Tests is that (a) Offshore Mergers that have a combined turnover of less than N1billion; and (b) Offshore Mergers where the Target Undertaking has a turnover of less than N500 million, are deemed not to have or be of Domestic Effect and will not require merger notification and clearance.
In thinking about the transaction regulatory risk that may arise from non-compliance with the Competition Act, this general position has to be qualified by Section 3(d) of the Competition Act which provides that the Competition Act applies to conduct outside Nigeria by any person in relation to the acquisition of shares or other assets outside Nigeria resulting in the change of control (Emphasis Ours) of a business, part of a business or any asset of a business, in Nigeria.
Within the context of the Domestic Effect doctrine, the legal effect of Section 3(d) would be that Offshore Mergers which result in a change of control of “a business, part of a business or any asset of a business, in Nigeria” may be deemed to have Domestic Effect and require merger notification and clearance.
This suggests that proposed Offshore Mergers which do not qualify for notification and merger clearance using the TurnOver Tests stipulated in the Domestic Effect Guidelines may be caught by the change of control provisioning in Section 3(d) of the Competition Act.
The practical way to think about is that, in relation to Offshore Mergers, there exists, under Nigerian law, substantive legal basis upon which the FCCPC can impose additional Domestic Effect tests ( that is, additional to the Turnover Test) on the premise of which defensible regulatory action action may result. Accordingly, the scope of notifiable Offshore Merger transactions may be wider. To the extent that such legal basis exists, the practical scope and regulatory expectations arising from a deconstruction of Section 3(d) becomes a matter for analysis and additional guidance from the FCCPC.
The definition of “control” under the Competition Act, provides some guidance on how the FCCPC or a competition tribunal may interpret “change of control”.
Pursuant to Section 92, an undertaking has “control” over the business of another undertaking if it – “(a) beneficially owns more than one half of the issued share capital or assets of the undertaking; (b) is entitled to cast 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; (c) is able to appoint or to veto the appointment of a majority of the directors of the undertaking; (d) is a holding company, and the undertaking is a subsidiary of that company as contemplated under the Companies and Allied Matters Act. (e) in the case of an undertaking that is a trust, has the ability to control the majority of the votes of the trustees, to appoint the majority of the trustees or to appoint or change the majority of the beneficiaries of the trust; (f) 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).
Conclusion
There are still a number open points around the applicability and scope of the Domestic Effect doctrine within the context of Offshore Merger transactions. We expect that the FCCPC will issue interpretive guidance on the scope and applicability of the Domestic Effect doctrine and on the calculation of “turnover”. We expect that the FCCPC will sooner establish objective authority in this area of regulatory practice. At the minimum, an objective authority standard, will require the FCCPC to demonstrate and provide the comfort that its decisions/evaluations on Merger notifications follow global best practices and are immune from any personal and political considerations. On the whole, it would be prudent for merging parties and counsel to consider informal discussions and inquiries with the FCCPC at the early stage of the notification process.
Please reach out to your Balogun Harold contact or via support@balogunharold.com for additional inquiries.
