Safeguarding Competitive Markets Vs Promoting Efficiencies

Achieved Through Mergers: The Balancing Act

LOICE BRIGHT ERAMBO*

**

The Author is a Post-Graduate student at Kenya School of Law. She graduated at the University of Nairobi in 2013

with Second Class (Upper Division) Honors. The author is an experienced legal researcher.

TABLE OF CONTENTS

1.0. Introduction .............................................................................................................................. 3

1.1. Regulatory framework ............................................................................................................. 3

1.2. Merger analysis in Kenya ........................................................................................................ 4

Conclusion ...................................................................................................................................... 9

BIBLIOGRAPHY ......................................................................................................................... 10

1.0. Introduction

A merger is an acquisition of shares, business or other assets, whether inside or outside Kenya,

resulting in the change of control of a business, part of a business or an asset of a business in

Kenya in any manner and includes a takeover2. There are three types of mergers. If the merging

firms operate at the same level in the relevant market, it is classified as a horizontal merger3. If they

operate in successive markets, it is classified as a vertical merger; and if they operate in unrelated

markets, it is a conglomerate merger4. Horizontal mergers are of greater concern in merger analysis.

This paper explores the globally controversial subject relating to the difficulty facing competition

authorities in balancing the need to safeguard competition in markets against the need to increase

efficiency from larger scale production achieved through mergers between competitors. This

paper is specially prejudiced to merger analysis by competition authorities in Kenya. The first

segment analyzes the legal framework in Kenya; the second explicates the thematic problem

discussed herein; and the third evaluates merger analysis and enforcement in Kenya.

1.1. Regulatory framework

The main statute governing the regulation of mergers in Kenya is the recently enacted

Competition Act5 which repealed the Restrictive Trade Practices, Monopolies and Price Control

Act.

The object of the Competition Act, hereinafter referred to as “the Act”, is to enhance the welfare

of the people of Kenya by promoting and protecting effective competition in markets and

preventing unfair and misleading market conduct throughout Kenya, in order to, among others,

increase efficiency in the production of goods and services6. From the foregoing, it is clear that

consumer welfare is the paramount aspiration of competition law in Kenya. Safeguarding

competitive markets is the principal method utilized to achieve consumer welfare.

2 The Competition Act; Section 2.

3 Robert G. Harris and Thomas M. Jorde, Market Definition in the Merger Guidelines: Implications for Antitrust

Enforcement, 71 Cal. L. Rev. 464 (1983). 4 Ibid.

5 Act No.12 of 2010; Laws of Kenya

6 The Competition Act; Section 3 (a).

In Kenya, a proposed merger cannot be implemented unless it is approved by the Competition

Authority of Kenya7. Section 7 of the Act establishes the Competition Authority, hereinafter

referred to as “the Authority”, as an autonomous regulatory body charged with the mandate to

promote and enforce compliance with the Act8. A merger implemented without the Authority’s

approval has no legal effect, and no obligation imposed on the participating parties by any

agreement in respect of the merger is enforceable in legal proceedings9. Section 41 (1) defines a

merger as occurring 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. Note that

a transaction constitutes a notifiable merger when it falls within the merger definition set out in

section 41 rather section 2 of the Act10

. Kenya therefore adopts a mandatory merger notification

regime. However, the Authority may, by notice in the Gazette, declare any proposed merger to

be excluded from any requirements set out under Part IV of the Act11

.

The Authority may either give approval for the implementation of the merger; or decline to give

approval; or give approval for the implementation thereof with conditions12

. A party to the

merger may, within 30 days after notice the Authority’s decision, apply to the Competition

Tribunal for review of the Authority’s decision13

.

1.2. Merger analysis in Kenya Section 46 (2) of the Act provides that in analyzing proposed mergers, the Authority may base its

determination on any criteria which it considers relevant to the circumstances involved in the

proposed merger. The section proceeds to prescribe a lengthy list of factors that may be

considered including the extent to which the proposed merger would be likely to prevent or

lessen competition14

; and the extent to which the proposed merger would be likely to result in

7 The Competition Act; Section 42 (2).

8 Functions of the Competition Authority are laid out in section 9 of the Competition Act.

9 The Competition Act; Section 42 (2). See also the case of the proposed acquisition of Synovate by Ipsos which was

unauthorized. 10

Karanja-Ng’ang’a J & Rosemary Maina in Bowman Gillman Africa Group; (2014) Competition Law in Africa. 11

The Competition Act; Section 42 (1). 12

The Competition Act: Section 46 (1). 13

The Competition Act: Section 48 (1). 14

The Competition Act; Section 46 (2) (a).

any undertaking, including an undertaking not involved as a party in the proposed merger,

acquiring a dominant position in a market or strengthening a dominant position in a market15

.

It is widely accepted that in analyzing mergers, two tests are generally followed namely;

a. The Substantial Lessening of Competition (SLC) test; and

b. The Public interest test (PIT).

Under the SLC test, the proposed merger transaction is analyzed for possible anticompetitive

effects16

. The Authority will assess whether the proposed merger is “likely to prevent or lessen

competition17

” In South Africa, the Competition Commission is required to test whether the

proposed merger is “likely to substantially prevent or lessen competition18

” and thus espouses a

higher and more reasonable burden of proof in assessing the anti-competitive effects of a

proposed merger, thereby creating room for efficiency considerations. The Kenyan Act ought to

adopt this wording. Nevertheless, the Authority in practice, applies the South African standard. It

analyzes whether the proposed merger is “likely to substantially prevent or lessen competition

(SLC test19

).

In applying this test, the Authority must define the relevant market in order to be able to establish

the market power of the parties in the proposed merger. The Authority will also ascertain the

firms operating in the said market and their sizes to determine the concentration of power in the

relevant market and consider if the merger will result in a barrier to entry of new firms in the

relevant market. The Authority will assess the market structure to determine whether the

proposed merger will materially increases the likelihood that other firms in the market will

successfully coordinate their behavior20

. Lastly, the Authority will compare the competitive

conditions that would result from the notified merger with the conditions that would have

prevailed without the merger21

.

15

The Competition Act; Section 46 (2) (b). 16

Organization for Economic Co-operation and Development; Competition Policy and Efficiency Claims in

Horizontal Agreements, OECD/GD (96) 65, Paris 1996. 17

The Competition Act; Section 46 (2) (a). 18

South Africa Competition Act (1998); Section 12. 19

The Competition Authority; Public Interests Test in Merger Determinations; Clause 9. 20

ICN Merger Working Group: (2006); ICN Merger Guidelines Workbook. 21

Korah V, (2004); Guidelines on the assessment of horizontal mergers under the Council Regulation on the control

of concentrations between undertakings.

Once the Authority finds that the proposed merger is not likely to lessen competition in the

market, it must perform the Public interest test (PIT) required under section 46 (2) (d-g) of the

Act. The PIT considers the extent to which a merger would affect employment; the ability of

Small & Medium Enterprises to gain access or to be competitive in any market; the ability of

national industries to compete in international markets and a particular industrial sector, and

salvaging of dormant and failing firm22

.

If a proposed merger qualifies under both the SLC and PIT tests, it will be approved by the

Authority. If it qualifies under the SLC test but fails under the PIT test, it may be disapproved or

alternatively, it may be approved with conditions aimed at repressing the potential negative effects.

Difficulties arise once the proposed merger is adjudged to be likely to lessen competition. Section

46 (2) (c) allows the Authority to consider any benefits likely to be derived from large-scale

production of goods. This constitutes an efficiency defence which only arises once the proposed

merger is deemed to be anti-competitive. Historically, efficiency arguments were not favored by

anti-trust laws as being of legitimate consideration in merger analysis. In the American case of

U.S. v. Philadelphia National Bank23

, the Court expressed hostility towards efficiency

arguments by stating that “a merger the effect of which, “may be substantially to lessen

competition” is not saved because, on some ultimate reckoning of social or economic debits and

credits, it may be deemed beneficial”. It was only until 1969 that the economic absurdity of a

merger policy that failed take efficiencies into consideration was realized through the work of Oliver

Williamson24. It is now globally accepted that merger analysis policy must incorporate efficiencies as

a consideration before approval or disapproval of proposed mergers. However, implementing

efficiencies into merger analysis has been the subject of global debate with various jurisdiction

adopting differing practices. There is no harmonized practice of implementing efficiency arguments

into merger analysis globally.

The efficiency defence elicits complex considerations. Firstly, who bears the burden of proving

the efficiency? The burden of establishing the existence and magnitude of the efficiencies usually

22

The Competition Authority; Public Interests Test In Merger Determinations; Clause 11. 23

374 U.S. 321 (1963) 24

Oliver E. Williamson, (1969) Economies as an Antitrust Defense: The Welfare Tradeoffs, 58 AM. ECON. REV.

18.

falls upon the parties to the merger25

. This is because competition authorities suffer an

informational disadvantage as it is the parties themselves that possess detailed facts proving

efficiency claims.

Secondly, every merger brings about some form of efficiency gain even if it is trivial26

. The

question becomes, what type of gains are acceptable to sustain the efficiency defence? In the

Proctor and Gamble case, American judge Harlan J stated that “economies employed in defence of a

merger must be shown in what economists label ‘real’ terms”.

The inference is that Competition authorities are only allowed to consider efficiencies that result in

real cost savings. There are various categories of efficiencies. There is general agreement that

production efficiencies that permit firms to produce more output or better quality output from the

same amount of input are cognizable under the defence27. Dynamic efficiencies, such as

improvements in product quality are less cognizable under the defence because they are inherently

more difficult to measure28. Finally, pecuniary efficiencies, such as tax savings are not considered

real savings in resources, and are thus less favored29.

Thirdly, what is the standard of proof of the efficiencies? The extent to which the proposed merger

would be likely to result in a benefit to the public should outweigh any detriment to competition

in the relevant market30

. This means that the efficiencies must not be vague but must be real and

capable of being measured qualitatively. Further, the Authority must examine the likelihood that

the efficiency will be realized. The efficiency claims will not be considered if they are vague and

speculative or otherwise cannot be verified by reasonable means31

. The problem is that efficiency

gains are not always susceptible to measurement by the same units and on the same scale32

. In

such situations, the Authority is invited to exercise discretion in quantifying the efficiency.

Fourthly, must the gain be passed on to the consumer? The wording of section 46 (2) (c) of the

Act infers that the benefit realized must be passed on to the public. The term “public” is vague. It

25

Organization for Economic Co-operation and Development; Competition Policy and Efficiency Claims in

Horizontal Agreements, OECD/GD (96) 65, Paris 1996. 26

Trident Steel (Proprietary) Limited and Dorbyl Limited; Case No.: 89/LM/Oct00 27

Organization for Economic Co-operation and Development; Competition Policy and Efficiency Claims in

Horizontal Agreements, OECD/GD (96) 65, Paris 1996. 28

Ibid. 29

Ibid. 30

The Competition Act; section 46 (2) (b). 31

US Merger Guidelines. 32

Trident Steel (Proprietary) Limited and Dorbyl Limited; Case No.: 89/LM/Oct00.

is not clear whether it refers to consumers or society in general as to include the benefits gained

by the producers themselves. The object of Competition law in Kenya is among others, to protect

consumers33

. Further, section 9 of the Act prescribes various functions of the Authority aimed at

consumer protection. The Act does not espouse any similar bias towards producers. The

inference is that the benefit must be passed to consumers. However, there are inherent difficulties

in proving that the benefit will actually pass to the consumer. The South African Tribunal

suggested that where efficiencies constitute real efficiencies and there is evidence to verify them

of a quantitative or qualitative nature, it is less necessary to demonstrate evidence that the

efficiencies will benefit consumers34

. On the other hand, where efficiencies demonstrate less

compelling economies, evidence of a pass through to consumers should be demonstrated and

although no threshold for this is suggested, they need to be more than trivial, but neither is it

necessary that they are wholly passed on35

.

Lastly, must the efficiencies be merger-specific? If the efficiencies could come about through

some other legal arrangement or organizational form that is not a merger, or if one of the firms

could achieve a claimed efficiency on its own, the efficiency defence fails36

. In a South African

case, Walmart Stores Inc and Massmart Holding Ltd37

, the Tribunal stated that the job of

competition authorities in merger control is not to make the world a better place, but only to

prevent it becoming worse as a result of a specific transaction. Once the production efficiency

claim is verified under the tests set out hereinabove, the proposed merger must undergo the PIT

test as earlier set out hereinabove. If it fails the PIT test, the proposed merger may be wholly

disapproved or be approved with conditions.

If it qualifies under the PIT test, the proposed merger will be approved with or without

conditions as the Authority deems fit. Usually the Authority will impose remedies aimed at

suppressing the potential anti-competitive effects arising from the merger.

33

The Competition Act, Section 3 (d). 34

Trident Steel (Proprietary) Limited and Dorbyl Limited; Case No.: 89/LM/Oct00 35

Ibid. 36

Ibid. 37

Case no: 73/LM/Nov10

Conclusion

The Competition Authority of Kenya faces an uphill task in balancing the need to increase

efficiency in production against the risk of impairing competition in the relevant market due to

mergers of competitors. Competition law in Kenya contemplates the efficiencies that may be

achieved by mergers between competitors but remains weary of the potential effects thereof to

competition in markets. However, the law does not clearly elaborate how merger analysis should

be undertaken and how the Competition Authority ought to find balance between the differing

aspirations i.e promoting consumer welfare versus safeguarding competitive markets. This has

prevented predictability in the merger enforcement process. Kenya ought to adopt merger

guidelines that clearly elaborate the steps undertaken in merger analysis.

.

BIBLIOGRAPHY

Primary Sources

The Competition Act, Act No.12 of 2010; Laws of Kenya

The South Africa Competition Act, (1998)

Secondary Sources

Bowman Gillman Africa Group; (2014), Competition Law in Africa.

ICN Merger Working Group: (2006); ICN Merger Guidelines Workbook.

Korah V, (2004); Guidelines on the assessment of horizontal mergers under the Council

Regulation on the control of concentrations between undertakings

Oliver E. Williamson, (1969) Economies as an Antitrust Defense: The Welfare Tradeoffs, 58

AM. ECON. REV. 18

Organization for Economic Co-operation and Development; Competition Policy and Efficiency

Claims in Horizontal Agreements, OECD/GD (96) 65, Paris 1996

Robert G. Harris and Thomas M. Jorde, Market Definition in the Merger Guidelines:

Implications for Antitrust Enforcement, 71 Cal. L. Rev. 464 (1983)

The Competition Authority; Public Interests Test in Merger Determinations.

Trident Steel (Proprietary) Limited and Dorbyl Limited