Mergers and Acquisitions under ECOWAS Competition Law


By Prince Ifeanyi Nwankwo*

Introduction

As markets mature and become concentrated, entities merge and acquire others to achieve economies of scale. Such combinations are likely to create powerful companies which have the capacity to control the market and reduce competition. In his Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith captures what may become of such markets in the absence of competition regulation: “The monopolists, by keeping the market constantly understocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate.”[1] Competition law therefore regulates business combinations in order to prevent the emergence of entities that may distort open, competitive markets and undermine consumer interests. A vigorous competition policy would stimulate economic growth,[2] reduce poverty in West Africa and foster the current drive for continental economic integration by African States.

With the aim of regulating competition in West Africa, the Economic Community of West African States (“ECOWAS”) launched the ECOWAS Regional Competition Authority (“ERCA”) in May 2019.[3] This was overdue given that ECOWAS had established a framework for regional competition regulation over a decade ago. Indeed, in 2007, ECOWAS articulated its competition policy in its Regional Competition Policy Framework. This was followed in 2008 by the adoption of the ECOWAS Competition Rules[4] (“Competition Rules”) and the enactment of a law establishing ERCA to implement the Competition Rules[5] (“ERCA Act”).

This commentary explores the current legal framework for mergers and business combinations under ECOWAS competition law and discusses, in particular, the scope of mergers covered by the Competition Rules, considerations for merger notification/approval and potential jurisdictional challenges. The commentary makes recommendations that would aid a robust implementation of the ECOWAS merger regime.

Scope of Mergers Regulated by ECOWAS Law

ECOWAS competition law seeks to regulate mergers and business combinations which affect trade and investments within the ECOWAS Common Market and which may not be conveniently regulated other than within the framework of regional cooperation.[6] Accordingly, the Competition Rules prohibit “every merger, takeover, joint venture, or other acquisition or business combination including interconnected directorships whether of a horizontal, vertical, or conglomerate nature between or among enterprises…where the resultant market share in the ECOWAS Common Market, or any significant part thereof, attributable to any good, service, line of commerce, or activity affecting commerce shall result in abuse of dominant market position resulting in a substantial reduction of competition”.[7] Such mergers and business combinations are automatically void and without any effect within the ECOWAS.[8]

The core competition law concern for mergers and acquisitions is the creation or enhancement of market power.[9] A merger creates or enhances market power if it may stimulate companies to increase prices, shrink innovation, decrease output, allocate markets or otherwise adversely affect consumers as a result of diminished competitive incentives or restrictions.[10] Indeed, Art. 7 of the Competition Rules targets transactions which engender “abuse of dominant market position” that diminishes competition.[11] Competition regulators will assess how competition in the marketplace will change as a result of the transaction. Can the combined entity slow down innovation? How would competitors respond? Would consumers be adversely affected?[12]

Under Art. 1(6) of the Competition Rules, a transaction reduces competition if it hinders or prevents competition in the ECOWAS Common Market, or in a national market when such reduction of competition has a demonstrable effect on the Common Market.[13] This suggests that an effect in at least two Member States is required to implicate the ECOWAS Common Market. However, it is unclear if the merging entities should operate in two or more States before ERCA’s jurisdiction can be triggered. Although Art. 1(6) does not explicitly require that the merging parties operate in at least two Member States, it is unlikely that a merger of parties operating exclusively within one Member State will have a substantial anticompetitive effect in another State in which neither party operates.  However, if one of the parties operates in two or more Member States, the merger may have implications for competition within the ECOWAS Common Market and therefore notifiable to ERCA. This is consistent with the tenor of most regional competition laws. For example, under the Competition Regulations of the Common Market for Eastern and Southern Africa (COMESA), a merger is notifiable if “both the acquiring undertaking and the target undertaking or either the acquiring undertaking or target undertaking operate in two or more COMESA member states”.[14] We expect that ERCA’s jurisdiction (as may be clarified in subsequent legislation) will be structured along these lines.

By Art. 7(2) of the Competition Rules, mergers which lead to an abuse of dominant market position that substantially reduces competition are automatically void. Notwithstanding this wording, it seems that the intention of the drafters is that such mergers become void only after a finding by ERCA that competition will be considerably reduced by the transaction. This is because, other than an assessment by ERCA, there is no mechanism for ascertaining if the transaction would diminish competition within the meaning of the Art. 7. Art. 7(2) should be interpreted in this sense, otherwise there may be confusion as to whether a merger is prohibited for being anti-competitive under Art. 7.

Determining Merger Thresholds

Neither the Competition Rules nor the ERCA Act stipulate the thresholds that would be met before a merger will be caught by ECOWAS law. Arguably, until thresholds are established, all mergers which may affect competition within the ECOWAS Common Market are notifiable to ERCA. However, it is expected that ERCA will, through regulations, establish thresholds that would be met before its jurisdiction can be triggered. In doing so, ERCA may consider one or more of the following approaches:

i) Turnover

This is the traditional standard and focuses on the turnover of the parties – i.e. the amount of business that the parties do within a period, usually measured by the value of goods and services sold. Parties with a turnover that meets the monetary threshold must notify and seek approval from ERCA, while those that fall below the threshold need not do so. The turnover test, however, does not provide an adequate standard for merger notification, as it may not capture mergers involving high-value, tech companies with low turnovers.[15]

ii) Size-of-the-Transaction Test

The size-of-the-transaction test focuses on the monetary value of the transaction, e.g. the amount paid by the acquiring entity for the transaction, the value of voting securities, non-corporate interests, or assets of the acquired entity that will be held by the acquiring party as a result of the transaction.[16] Some competition authorities are adjusting merger thresholds to capture transactions involving digital companies which have low turnovers but hold commercially valuable data not captured by the turnover test.[17] Germany introduced a value-based merger control threshold in 2017, making mergers with purchase prices in excess of €400 million subject to review.[18]

iii) Market Share

A third standard is the market share test, where thresholds are determined by reference to the market share held by the parties, either individually or jointly, in the region. This test is useful to catch transactions involving competitors with low turnovers, but which hold a sizable market share that may have implications for competition within the ECOWAS Common Market if the transaction proceeds.

The above tests are not mutually exclusive and the recent practice among competition authorities is to combine two or more of the tests. We consider that a combination of the three tests provides a sufficiently wide net for merger notifications under the ECOWAS competition regime. To avoid jurisdictional conflicts with national competition authorities, ERCA should clearly delineate applicable merger thresholds for transactions that will be within its competence.

Merger Notification and Approval

There is no provision in either the Competition Rules or the ERCA Act that expressly requires parties to apply for merger approvals. However, Art. 4(2) ERCA Act provides that ERCA is to consider “…applications for authorizations, mergers, acquisitions or business combinations…” In addition, Art. 7(3) of the Competition Rules empowers ERCA to authorize or exempt mergers, acquisitions and concentrations that are in the public interest.[19] A combined reading of these provisions shows that parties to a transaction caught by ECOWAS law should notify and seek authorization/exemption from ERCA before proceeding with the transaction. ERCA may authorize the transaction if it considers that the transaction advances public interest. The language of Art. 7 (3) of the ERCA Act suggests that authorizations/exemptions are only needed for prohibited combinations, i.e. transactions that substantially reduce competition. Accordingly, if the merger does not substantially reduce competition within the meaning of Art. 7, an authorization is not required and the transaction may proceed without more.

Neither legislation defines what constitutes “public interest” for the purpose of merger authorizations. Art. 4(2) of the ERCA Act however provides some indices that should guide ERCA’s consideration:

  1. market position, economic and financial power of the parties;
  2. structure of all the markets concerned;
  3. the actual or potential competition from entities located within or outside the ECOWAS;
  4. the effects of the transaction on suppliers and buyers;
  5. the legal and other obstacles to entry and the supply and demand trends of the goods and services considered; and
  6. any potential for technical and economic progress created by the proposed transaction which benefit consumers.

Art. 4(1) of the ERCA Act empowers ERCA to order the termination of a contract or prohibit the implementation of a contract. We envisage that this power may be triggered where the parties to the merger fail to notify and seek approval from ERCA, or upon a decision by ERCA that the transaction is not in the public interest. An alternative option open to ERCA upon a finding that the merger raises competition concerns, is to condition approval on the rectification of the competition issues. In this case, ERCA may require a one-off rectification rather than behavioral commitments which would entail monitoring by ERCA.[20] It will not be unusual for ERCA, acting under Art. 4(1) of the ERCA Act, to retrospectively review a completed transaction if authorization was not initially sought, and to stipulate conditions that must be met before authorization is granted. In addition, failure to notify and obtain authorization/exemption from ERCA before a prohibited transaction is consummated may attract sanctions, which may take the form of punitive fines.[21]

A person who incurs losses on account of a prohibited transaction may apply to ERCA for compensation.[22] The conditions for awarding compensation are to be prescribed in subsidiary regulations.[23] Such regulations may address some of the challenges that could bedevil the compensation process, including how to draw a link between a prohibited transaction and the harm suffered, the issue of accessing evidence to support a victim’s claim and how to determine eligible victims for compensation.[24] In addition, the regulations may make provisions for collective redress procedures (such as representative claims and class representations), affording victims of prohibited transactions the opportunity to combine their claims, thereby reducing costs and delays. A party that is dissatisfied with ERCA’s decision in relation to the merger may lodge an appeal with the ECOWAS Community Court of Justice.[25]

Jurisdictional Issues

It is unclear, from the Competition Rules and the ERCA Act, whether ERCA would have exclusive jurisdiction over mergers within its competence or if the competition regulators of Member States would also exercise jurisdiction in respect of mergers affecting entities within their domain. While there is a need for ERCA and national competition authorities to cooperate in respect of mergers within the Community, ERCA should be the lead regulator for cross-border cases, to avoid jurisdictional conflicts or subject the parties to multiple regulatory regimes. In addition to national competition regulators, there is the Department of Regional Markets, Trade, Competition and Cooperation of the West African Economic and Monetary Union (WAEMU), which  exercises concurrent regulatory jurisdiction over eight ECOWAS Member States in competition matters.[26] Cooperation among ERCA, WAEMU and national competition authorities is vital and a mechanism needs to be put in place to facilitate cooperation and remove jurisdictional uncertainties in the merger process. A situation where merging parties have to notify and seek multiple approvals from national authorities, ERCA and WAEMU would affect transaction timelines, increase transaction costs, forum shopping and the likelihood of conflicting decisions by the  different regulators.[27]

Conclusion

One challenge with competition law is its enforcement. A robust implementation of the ECOWAS competition law will inevitably promote and facilitate conditions necessary for economic growth and integration in West Africa. We expect that one of the initial steps towards implementation of the ECOWAS competition policy will be for ERCA to address potential jurisdictional conflicts, especially between ERCA and WAEMU, and provide guidelines that clarify the scope of mergers within its competence and the procedure for merger notification and approval.

 

* Prince Ifeanyi Nwankwo provides legal and technical support to the ECOWAS Regional Competition Authority. He is a Harvard Orrick Fellow and researches on the intersection of law, China and competitive markets in Africa. He studied at Harvard Law School and the University of Nigeria.

 

[1] Adam Smith, Inquiry Into the Nature and Causes of the Wealth of Nations (1776), Book 1, Chapter 1, 26, accessible at http://geolib.com/smith.adam/won1-07.html.

[2] World Bank. 2017. A Step Ahead: Competition Policy for Shared Prosperity and Inclusive Growth, p. 3, Washington, DC: World Bank. doi:10.1596/978-1-4648-0945-3. License: Creative Commons Attribution CC BY 3.0 IGO.

[3] https://www.ecowas.int/ecowas-launches-regional-competition-authority/.

[4] The Competition Rules were adopted in 2008 by the ECOWAS Authority of Heads of State and Government. See Supplementary Act A/SA.1/12/08 Adopting the Community Competition Rules and the Modalities of their Application within ECOWAS.

[5] Supplementary Act A/SA.2/12/08 on the Establishment, Functions and Operation of the Regional Competition Authority for ECOWAS.

[6] Art. 4(1), Competition Rules.

[7] Art. 7(1), Id.

[8] Art. 7(2), Id.

[9] Daniel E. Hemli et al., Beating the Competition: Antitrust Issues in Mergers and Acquisitions, Recycling Today, p. 2, accessed on 5 August 2019 at https://bracewell.com/sites/default/files/assets/RT-871-0516_ePrintFinal.pdf.

[10] Id.

[11] Art. 7(3), Competition Rules.

[12] Adam Putz, M&A 101: What Antitrust Law Means for Mergers and Acquisitions, Pitchbook (June 13, 2018), accessible at https://pitchbook.com/news/articles/ma-101-what-antitrust-law-means-for-mergers-and-acquisitions. Last accessed on 9 August 2019.

[13] Art. 1(6), Id.

[14] Art. 23(3)(a), COMESA Competition Regulations.

[15] The South African Competition Commission, Competition in the Digital Economy, Presentation at the United Nations Conference on Trade and Development Intergovernmental Group of Experts on Competition Law and Policy Eighteenth Session, 11 July 2019, p. 4, available at https://unctad.org/meetings/en/Contribution/ciclp18th_cont_South_Africa.pdf. Accessed on 5 August 2019.

[16] The In-House Lawyer, What are the jurisdictional thresholds (turnover, assets, market share and/or local presence)?, accessed on 5 August 2019 at http://www.inhouselawyer.co.uk/wgd_question/merger-control-thresholds-turnover-assets-market-share/.

[17] Victoria Moorcroft & Ariane Le Strat, The rise of Big Data – Intersection between Competition Law and Customer Data, accessed on 9 August 2019 at https://www.twobirds.com/en/news/articles/2018/uk/the-rise-of-big-data-intersection-between-competition-law-and-customer-data.

[18] Id.

[19] See also Art. 11(2), Competition Rules.

[20] Id.

[21] See Art. 7(1), ERCA Act, Art 3(d), Id.

[22] Art. 10(1), Competition Rules, Art. 10, ERCA Act.

[23] Art. 10(2), Competition Rules.

[24]  Ahmore Burger-Smidt, How to Compensate the Victims of Collusion: Anti-Competitive Practices, Go Legal (Mar. 8, 2016), https://www.golegal.co.za/how-to-compensate-the-victims-of-collusion/. Last accessed on 3 August 2019.

[25] Art. 7(1)(3), ERCA Act.

[26] The eight WAEMU Member States are Benin, Burkina Faso, Guinea Bissau,, Ivory Coast, Mali, Niger, Senegal and Togo.

[27] Joyce Karanja-Ng’ang’a, “EAC Competition Law”, p. 437 in Emmanuel Ugirashebuja et al (eds.), East African Community Law: Institutional, Substantive and Comparative EU Aspects, Brill (2017), available at https://www.jstor.org/stable/10.1163/j.ctt1w76vj2.31. Last accessed on 6 August 2019.

 

Photo Credit: ECOWAS Website, https://www.ecowas.int/trade-and-competition-experts-commence-meeting-on-the-implementation-of-the-ecowas-competition-policy/

Leave a Reply

Your email address will not be published. Required fields are marked *