TANZANIA’s economy is witnessing unparalleled economic growth, propelled mainly by a sharp rise in foreign direct investments (FDIs) entering the country. Investors and international businesses have continued to seek out Tanzania as the top spot for FDI destination; driving FDI inflows in 2013 to US$12.7 billion, significantly higher than Kenya’s US$514 million of inflows in the same year, according to the United Nations Conference on Trade and Development (UNCTAD). This influx of foreign capital has fed into the economy, generating a growth rate of 7 percent for 2013/2014 – and this rate has been forecast by industry experts to rise by 4 percent in 2014/2015.
One of the key factors enabling Tanzania to sustain its growth levels is the occurrence of Mergers and Acquisitions (M&A) activity. Numerous multinational companies from Europe, America, Asia and the Middle East have set up offices in Tanzania, taking advantage of the country’s tax and investment incentive regime for potential investors. The tourism, construction, banking, telecoms, mining, energy, oil and gas, transportation, and agriculture sectors have been the main poles of attraction for FDI.
The applicable Tanzanian laws and regulations governing mergers and acquisitions include the Companies Act 2002 and the Fair Competition Act 2003, which is supplemented by the Fair Competition Rules 2010; as well as, sectoral legislation, such as, the Energy and Water Utilities Regulatory Authority Act 2001 and the Tanzania Communications Regulatory Authority 2003.
As mergers and acquisitions normally cause taxable events, the Income Tax Act 2004 is also important. In addition, the Employment and Labour Relations Act 2004 governs the entitlement of employees in the event a merger or acquisition leads to redundancies or other labour-related changes. For companies whose shares are traded publicly on the Dar es Salaam Stock Exchange (DSE), the Capital Markets and Securities (Substantial Acquisitions, Takeovers and Mergers) Regulations 2006 govern tender offers, proxy statements and rules of disclosure, among other matters.
Business combinations may be structured in a variety of ways for legal, taxation and other reasons, which include sale and purchases of shares and assets, tender offerings, or mergers, though other methods can also be used. For instance, in the case of public companies combinations may involve a two-step process that starts with a tender offering (either for shares, bonds or a combination of both) followed by a real merger.
Developments in Tanzania’s corporate and takeover law have essentially entailed mergers, and shares and asset purchases. With mergers, Tanzanian law allows a merger between competing companies (a) producing and selling similar goods or offering similar services; (b) operating at different stages of production; (c) in unrelated businesses; and (d) whose assets and operations belong to or are registered in two different countries. Unless the articles of association stipulate otherwise, a merger decision must be approved by a majority vote of shareholders of each company.
In the case of share and asset purchases, again, unless the articles of association state differently, the acquisition of a company, regardless of whether it’s structured as a share or an asset purchase, normally requires the sanction of a majority of the directors of the acquiring company. Conversely, the sale of a company, if it represents all or considerably all of the assets of the vendor, generally requires approvals by a majority of the directors and shareholders, with the right to vote, of the selling company.
Foreign participation in Tanzania’s merger and acquisition transactions is possible (but with some restrictions), thanks to the advent of globalisation of markets and the creation of free-trade blocs, such as, COMESA, EAC, and SADC, which have led to increased cross-border merger and acquisition activities. Political instability in neighbouring Burundi and Democratic Republic of Cong (DRC) as well as Kenya’s dire state of insecurity have also been a substantial driver for inbound investments into Tanzania, as investors look to spread their country risk.
Owing to national security and national interest concerns, the restrictions to foreign participation in certain sectors include (a) grant of a telecom license to an entity in which a Tanzanian shareholder posses 35 percent of the shares; (b) grant of a shipping agency license to a citizen of Tanzania or a company incorporated in Tanzania in which more than 50 percent of the share capital is held by a Tanzanian; (c) in respect of insurance companies, at least one-third of the controlling interest and members of the board of directors must be citizens of Tanzania; and (d) some types of mining licenses, to be precise, primary mining licenses, can only be issued to Tanzanian citizens.
Like in every investment, the financing options for merger and acquisition deals play a very critical role in whether or not making the investment is viable. In Tanzania, financing is usually provided by local and international banks. It can also be generated from domestic and international securities issues. Nevertheless, because of the global financial crisis, banks have become much more cautious with their lending policies as they require parties in a merger or acquisition deal to comply with all statutory requirements, applicable laws and regulations. Some of the major ones are discussed below.
The Companies Act 2002 enables parties to effect registration of share transfers and contains disclosure requirements for offering documents issued by public companies. Acquisitions and mergers involving publicly listed companies must comply with the Capital Markets and Securities (Substantial Acquisitions, Takeovers and Mergers) Regulations 2006. These Regulations, which came into force in December 2006, mainly apply to acquisitions of an interest of between 20 and 75 percent in public or listed companies and to mergers meeting such thresholds.
As well, the acquisition of an interest of more than 90 percent sets in motion the compulsory takeover and delisting provisions of the Regulations. The implication of this is that the acquirer must either give a mandatory public takeover offer to all shareholders of the target or disinvest via an offer for sale or by a new issue of capital to the public so as to fall below the threshold.
Besides the above legislation, the Government of Tanzania has enacted sectoral laws and regulations aimed at balancing the interests of consumers and investors in monopolistic sectors. As such, parties in a proposed merger or acquisition must obtain the consent of the pertinent regulatory body if the proposed transaction involves a change in the ownership of the license. By way of example, the consent of the Tanzania Communications Regulatory Authority is required in a transfer of a telecom license.
Further, in a merger or acquisition setting, redundancies or other labour-related changes are more likely to occur and trigger the provisions contained in the Employment and Labour Relations Act 2004 governing the entitlement of employees. Under this Act, trade unions and employees must be notified even though they cannot stop a merger or an acquisition from taking place.
Taxation is, undoubtedly, another key component of any merger or acquisition deal structuring; and thus, the Income Tax Act 2004 has an impact depending on the structure of the transaction. If the underlying ownership of the acquiring entity changes more than 50 percent compared with its ownership during the three years before the acquisition, the event is treated as a taxable acquisition. However, the precise tax treatment will depend upon the type of consideration and whether there’s a built-in gain.
Within the competition regime established by the Fair Competition Act 2003, mergers or acquisitions that result in a change of control of a business, part of a business or an asset in Tanzania, and involve a turnover or assets in excess of Tshs800 million threshold have come under increasing scrutiny by the Fair Competition Commission (FCC), one of the implementing bodies for mergers and acquisitions in Tanzania.
The FCC may prohibit outright, or propose changes to, a merger that creates or strengthens a position of dominance in a market. The “position of dominance” concept is defined to mean a merged entity that would, acting alone, profitably and materially restrain or reduce competition in a given market for a significant period of time and possesses a share of the relevant market exceeding 35 percent.
In the absence of legal and economic experts, explaining to the FCC whether there are any obstacles to market entry which could lead to the merging companies being able to act independently to a significant degree from their customers and/or competitors, is a complicated task. Also, assessing the market share of merging companies is not without difficulties. This is why it is critical to retain advisors who are well-acquainted with legal and economic concepts and also understand and appreciate the FCC’s priorities and policies.
It is worth noting that Tanzania’s competition law does not prohibit, as a matter of course, all positions of dominance but only those whose effects may harm competition. Moreover, positions of dominance with restrictive effects on competition may be exempted by the FCC, either conditionally or subject to conditions, if the restrictive effects of the dominance will contribute to greater efficiency in production or distribution, promote technical and economic progress, and protect the environment and the merger.
If the exemption is applied for and granted, the merger cannot be subsequently challenged except where the FCC is satisfied that the exemption was, for instance, granted on the basis of false, misleading or incomplete information. If no exemption is sought, and after closure of the merger, the FCC considers the same to be an abuse of a dominant position, the FCC may require that conditions be imposed on the parties to ensure competitiveness in the market, or require a partial or complete divestiture of the merger or both. Pecuniary penalties may also be imposed on the directors of the merging companies.
Lastly, the outlook for mergers and acquisitions market in Tanzania remains positive. This positive sentiment, which is supported by the country’s growing economy that continues to attract significant FDI and international investors seeking to take advantage of the strategic geographical position, free market economy, fiscal and investment incentives, and political stability, will cause a strong increase of mergers and acquisitions. Certainly, the current legislation affecting mergers and acquisitions will continue to change and develop as transactions involve more foreign parties and become increasingly complicated.