The recent decision by the Competition Tribunal highlights the critical importance of adhering to Kenya’s regulatory framework for mergers. This decision stemmed from the irregular consummation of a merger between Sika International AG and LSF11 Skyscraper Holding Company. Sika International AG (“Global Acquirer”), a company based in Switzerland, acquired direct control of LSF11 Skyscraper Holding Company (“Global Target”), a Luxembourg-based entity. Both companies have subsidiaries in Kenya, namely Sika Kenya Limited and Master Builders Solutions Kenya Limited.  The Competition Authority of Kenya (CAK) imposed a fine of Kshs. 17,492,795.23 for the premature merger without prior approval, contrary to the Competition Act of 2010.

The Legal Framework

Definition and Control of Mergers
According to Section 41 of the Competition Act, 2010, a merger occurs when one or more entities acquire direct or indirect control over the whole or part of another business. This control can be achieved through various means such as purchasing shares, leasing assets, or acquiring interests. Notably, mergers include the acquisition of a controlling interest in a foreign company that has a subsidiary in Kenya.

Regulatory Approval
Section 42 mandates that no merger should be implemented without the approval of CAK. The Competition (General) Rules, 2019, along with the Merger Threshold Guidelines, provide the framework for this approval. The law requires notification to the CAK if the combined turnover or asset value of the merging entities exceeds KShs. 500 million but is below KShs. 1 billion. For transactions above KShs. 1 billion, merger filing fees are applicable as per the graduated scale in the Regulations.

When a merger is proposed, all involved parties must notify the CAK in writing. The Authority then has 60 days to review the notification and request additional information if necessary. This period can be extended if the merger involves complex issues.

The CAK evaluates proposed mergers based on several criteria, including:

• The impact on competition and market dominance
• Public interest considerations
• Effects on specific sectors or regions
• Employment implications
• The ability of small businesses to compete
• National and international market competitiveness

The Authority can approve, conditionally approve, or prohibit a merger. Conditional approvals come with specific requirements that must be met by the merging entities. In some cases, the CAK may convene a hearing conference to gather more information and views on the proposed merger. This conference provides a platform for stakeholders to present their opinions and for the Authority to make a more informed decision.

Revocation of Approval
The CAK retains the right to revoke its approval if it discovers that the decision was based on false or misleading information or if the conditions of the approval are not met. This revocation can also lead to financial penalties of up to 10% of the preceding year’s annual gross turnover and legal consequences for the entities involved. Providing materially incorrect or misleading information, or failing to comply with conditions attached to the approval, can result in fines of up to KES 10 million and imprisonment for up to five years.

Appeals Process
Entities dissatisfied with the CAK’s decision can appeal to the Competition Tribunal within 30 days. The Tribunal reviews the decision and can uphold, amend, or overturn it. Further appeals can be made to the High Court, whose decision is final.

Compliance with Other Laws
Approval by the CAK does not exempt merging entities from complying with other applicable laws. They must ensure adherence to all relevant legal and regulatory requirements beyond the Competition Act.

Non-Compliance and Penalties
Failure to obtain the necessary approval renders the merger legally ineffective. In addition to the administrative invalidity, non-compliance can lead to severe penalties, including fines of up to 10 million shillings and imprisonment for up to 5 years. The CAK may also impose a financial penalty up to 10% of the preceding year’s gross annual turnover of the involved entities. These penalties underscore the high cost of non-compliance, as illustrated in the Sika & LSF case, where the parties were fined Kshs. 17,492,795.23.

Implementation of a Merger
A merger is considered implemented not only through the formal integration of entities but also through various operational changes. These include integration of infrastructure, information systems, and employees, or efforts by the acquiring company to control competitive aspects of the target’s business. An actual integration of any of these elements, or even strategic information exchange, can signify the implementation of a merger.

In the case of Sika International AG and LSF11 Skyscraper Holding Company, the merger was part of a global transaction. Although the combined turnover of the entities exceeded Kshs. 1 billion, the target’s turnover/assets were below Kshs. 500 million. Consequently, the merger was excluded from full analysis by CAK as it was unlikely to negatively impact market competition. Despite this, the parties implemented the merger following the global deal’s closure in May 2023 without notifying CAK. In October 2023, they self-reported and agreed to pay the administrative penalty. Following the penalty payment, they filed a merger application, which CAK subsequently approved.

Key Takeaways

1. Global Transactions and Local Compliance: Foreign entities with Kenyan subsidiaries must carefully analyze proposed mergers to ensure compliance with local laws.
2. Cost of Non-Compliance: Non-compliance can be expensive. The penalty of Kshs. 17,492,795.23 in this case far exceeded the merger filing fees that would have been payable had the merger been notified in advance.
3. Strategic Considerations: The decision emphasizes the need for strategic foresight and legal compliance in merger activities to avoid hefty fines and operational disruptions.

The Sika & LSF case illustrates the high cost of non-compliance. The imposed fine of Kshs. 17,492,795.23 highlights the financial burden entities may face when neglecting regulatory requirements. This case underscores the importance of understanding and adhering to the Competition Act and related regulations to avoid substantial penalties and ensure seamless merger transactions.