Beyond the Term Sheet: How Indirect Mergers and Debt Conversion Trigger Mandatory FCC and EACCA Filings

An international conglomerate enters into a merger, acquisition or disposition of part or whole of its assets or business internationally (Restructuring), which indirectly affects or leads to re-structuring of the Tanzania subsidiary, whether the Tanzania subsidiary is a major or minor part of the conglomerate’s operations. In another instance, a company experiencing financial distress, conversion of shareholder or bank debt to equity seems like the best solution to improve the company’s financial position by eliminating debt.

The Restructuring and the conversion of debt to equity, even if done at a global level may trigger antitrust notifications at the Fair Competition Commission (FCC) and EACCA, among other sector-specific approvals.

1. The Fair Competition Act (FCA), the Fair Competition (Threshold for Notification of a Merger) (Amendment) Order, 2017 (FCA-AO) and the Competition Rules, 2018 (FCC Rules).

1.1. A merger is "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".

1.2. Acquisition is an "acquisition, either alone or jointly with another person, of any legal or equitable interest in such shares or assets but does not include acquisition by way of charge only".

1.3. Asset includes any real or personal property, whether tangible or intangible, intellectual property, goodwill, chose in action, right, licence, cause of action or claim and any other asset having a commercial value.

1.4. Change of control is not defined in the FCA or any of the supporting regulations but the FCC has historically taken a wide view as to what constitutes a change of control. The FCC has stated, "change of control for the purposes of merger control and regulation is the potential ability of the acquiring firm to materially influence the business policy and operations of the Target firm in the post-merger scenario irrespective of size of ownership change."

1.5. The FCA-AO provides the current threshold triggering notification is TZS 3.5 billion (approximately USD 1.34 million) which is calculated on the basis of the combined market value of the assets or turnover of the merging firms (local or international assets).

1.6. The term “merging firms” has not been defined in the FCA but the FCC Rules contain a definition of a “Party to a Merger” which has been defined to include the ‘acquiring firm’ and ‘the target firm’. The FCC Rules go further to define a target firm to include ‘the actual target’ and ‘entities which directly or indirectly control’ the target firm. As such, for the purposes of calculation of the notification threshold, the FCC could go up the chain and consider the value of the global assets of the shareholders of the relevant entities in the transaction.

2. The East African Community Competition Act, 2006 (EACCA Act), the East African Community Competition (Thresholds For Notification of Mergers and Acquisitions to the East African Competition Authority) Notice (EACCA Threshold), and the East African Community Competition (Mergers and Acquisitions) Regulations (EACCA Regulations)

2.1. Merger means the acquisition of shares, business or other assets whether inside or outside the Community resulting in the change of control of a business, part of a business or an asset of a business in the Community in any manner and includes a take-over.

2.2. Acquisition means any acquisition by an undertaking of direct or indirect control of the whole or part of one or more other undertakings, irrespective of whether the acquisition is effected by merger, consolidation, takeover, purchase of securities or assets, contract or by any other means.

2.3. Change of control is not defined but Control is defined as the right by an undertaking to exercise restraint or direction over another undertaking and includes— (a) beneficial ownership of more than one half of the issued share capital, business or assets of the other undertaking; (b) the ability to appoint or veto the appointment of more than half of the members of board of directors or similar body in the other undertaking; or (c) the potential or actual ability of the undertaking to materially influence the business policy and operations of the other undertaking irrespective of the size of ownership change.

2.4. The EACCA Threshold states that, a cross border merger or acquisition is notifiable to the EACCA if (a) the combined turnover or assets in the Community of the merging undertakings, whichever is higher, equals to or exceeds USD 35 million; and (b) at least two undertakings to the merger or acquisition have a combined turnover or assets of USD 20 million in the Community, unless each of the parties to a merger achieves at least two-thirds of its aggregate turnover or assets in the Community within one and the same Partner State.

Based on the above, a Restructuring transaction which is occurring at the conglomerate’s parent level outside Tanzania and outside of the East African Community Partner States may trigger a merger notification both at the FCC and the EACCA, if the thresholds are met.

3. Income Tax Act

Section 56 of the Income Tax Act triggers deemed realization of assets or liabilities in Tanzania which may require payment of taxes in Tanzania notwithstanding that the Restructuring is occurring outside of Tanzania. Section 56 of the Tanzania Income Tax Act states that, if the underlying ownership of an entity changes by more than 50% compared with any time in the previous three years, the Tanzanian entity is deemed to have realized all its assets and liabilities at market value immediately before the change. The Restructuring occurring outside of Tanzania must be reported to Tanzania Revenue Authority before and after the change. Restructurings relating to allotment of shares to new members of the local entity and transfer of shares occurring between resident persons are exempted from section 56 applicability. This means that, the Tanzania entity is deemed to have realized its assets or liabilities and may be obligated to pay taxes even when it has not disposed of any equity and/or asset, the transaction occurring internationally may have nothing to do with the assets/operations in Tanzania and the Tanzania company is at risk of losing the ability to use certain tax benefits that arose before the ownership change, including the right to deduct losses occurring before the change.

In addition to the foregoing, the Restructuring occurring outside of Tanzania may trigger sector specific approvals from the regulatory bodies. Failure to notify the Restructuring to the FCC, EACCA and/or the regulatory bodies in Tanzania triggers hefty penalties, which negatively affect the Tanzania entity’s business, and in some instances, it can lead to suspension or cancellation of the operation licence. Whilst Tanzania operations may be small, it is advisable to seek advisory on local law compliance and how the Restructuring will impact the Tanzania entity, or carve out the Tanzania entity from the overall international deal.

Disclaimer

The views expressed in this paper are those of the author only and should not be considered as an official interpretation, defamatory, or interference of any legislation, laws, or policies of any country including Tanzania. The contents of this paper should not under any circumstances be reproduced or used without the express written consent of the Author. It should not be considered as legal advice to any of its recipient(s) and should not be relied upon without obtaining further legal advice. We accept no liability for any loss occasioned or suffered due to the contents of this paper. The information contained herein is general and is not intended to address the circumstances of any particular deal. Although effort has been made to research and share the correct information, we do not provide any guarantee to such information.