Fine Imposed For Irregular Consummation Of A Merger

The Competition Authority imposed a fine of Kshs. 17,492,795.23 for the irregular consummation of a merger between Sika International AG and LSF11 Skyscraper Holding Company. The two entities had proceeded to consummate a merger without procuring the approval of the Competition Authority of Kenya contrary to the Competition Act.  

Background 

Sika International AG (“Global Acquirer”), a company incorporated in Switzerland, acquired direct control of LSF11 Skyscraper Holding Company (“Global Target”), incorporated in Luxembourg. Both the acquirer and the target had subsidiary companies incorporated in Kenya, which respectively are, Sika Kenya Limited and Master Builders Solutions Kenya Limited. 

The Law 

The Competition Act, under section 42 provides that no party may implement a merger unless the same is approved by the Competition Authority of Kenya. This approval is provided pursuant to the Competition (General) Rules, 2019 as well as the Merger Threshold Guidelines. Section 41 lists what is defined as a merger and includes acquisition by whatever means the controlling interest in a foreign undertaking that has got a controlling interest in a subsidiary in Kenya. 

The law provides that where (the higher of) the combined turnover or value of assets of the acquirer and the target exceeds KShs. 500 million but falls below KShs. 1 billion, the parties are required to notify the Competition Authority of the transaction. If the combined turnover or asset value is above KShs. 1 billion, the parties will be required to pay merger filing fees as per the graduated scale provided in the Regulations. 

A merger which is not approved in accordance with the law has no legal effect. Additionally, any person who contravenes the provisions of this section of the law shall on conviction be liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding 10 million shillings. Furthermore, the Authority may impose a financial penalty in an amount not exceeding 10% of the preceding year’s gross annual turnover in Kenya of the undertaking or undertakings in question. The penalties are calculated and imposed in line with the Consolidated Administrative Remedies and Settlement Guidelines. 

Implementation of a merger 

In addition to the traditional merging where all processes of two undertakings are integrated, a merger can be said to be implemented in the following instances: 

• there has been an actual integration of any aspect of the merging parties, including, but not limited to, the integration of infrastructure, information systems, employees, corporate identity or marketing efforts; 
• there has been placement of employees from the target undertaking to the acquiring undertaking; 
• there has been an effort by the acquiring undertaking to influence or control any competitive aspect of the target undertaking’s business, such as setting prices, limiting discounts or restricting sales to certain customers or of certain products; 
• there has been an exchange of strategic information between the merging parties for purposes other than valuation or on a need-to-know basis during due diligence or in ways compromising the strategic independence of each of the parties to the merger; or 
• Where more than 20% of the consideration in a transaction is paid. 

The SIKA & LSF Case 

In this case Sika and LSF11’s combined turnover was above Kshs. 1 billion, but the target’s turnover/ assets was below Kshs. 500M. The Authority observed that because the target’s turnover/assets was below Ksh. 500 million, the transaction met the threshold for exclusion from full analysis by the Authority since the merger was unlikely to impact competition in the market negatively. In October 2023, the parties self-reported that the merger in Kenya was implemented following the close of the global deal in May 2023. The merging parties agreed to pay the administrative penalty under the Competition Act and thereafter regularise the transaction. After paying the penalty, the parties filed a merger application with CAK, and the transaction was excluded from full analysis, and subsequently approved. 

What to Note 

• The transaction was a global transaction between entities which controlled businesses in Kenya. Sika International AG (the global acquirer), which is listed in the Swiss Exchange owns the Kenyan subsidiary and Skyscraper HoldCo which was incorporated in Luxembourg owns and controls MBS Kenya. Foreign players with who own a subsidiary in Kenya should carefully analyse any proposed mergers to ensure compliance with the law. 

• Non-compliance is expensive. Although the combined turnover of the entities was above KShs. 1 billion, the Authority exempted the merger from a full analysis as the turnover of the target was below KShs. 500 million. Had the merger been notified prior to its implementation, the parties would not have paid the merger filing fees instead of paying the penalty which was calculated at Kshs. 17,492,795.23. 

Conclusion 

All parties intending to merge or engage in any transaction which results in a change in control are encouraged to comply with the Competition Act. At CM Advocates we are available to guide you through the process of mergers and acquisition. From the due diligence exercise, to drafting the transaction documents, procuring the relevant approvals from the Competition Authority and completing the transaction. Additionally, we can assist you in navigating through the settlement procedures with the Competition Authority where regularisation is required. If you need any clarification or need assistance on this or any other related matter, please do not hesitate to contact the contributor below or the team at commercial@cmadvocates.com. 

Contact Persons & Contributors 

Victorine Rotich (Senior Associate) -Email: vrotich@cmadvocates.com