Asset acquisitions as qualifying mergers
Under Section 92(1)(a) of the Act, a merger occurs 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. A merger may be achieved in any manner, including through the purchase of the assets of the other undertaking. This is reiterated by Regulation 3 of the Regulations, which provides that an undertaking is considered to be involved in a merger if it, inter alia, establishes direct or indirect control over the whole or part of the business of another undertaking by way of acquisition of assets. In such transactions, the asset purchased is the object of control.
Triggers for merger notifications
As discussed above, a merger becomes notifiable where a relevant merger situation is created or will be created. Paragraph 2.3 of the Merger Review Guidelines, 2020 (“MRGs”) provides that a relevant merger situation is created where the following cumulative criteria are met:
- two or more undertakings must come under common control, or there must be arrangements in progress or in contemplation which, if carried into effect, will lead to the undertakings coming under common control to be distinct; and
- either the value of Nigerian turnover of the undertaking which is being acquired in the preceding year exceeds the prescribed threshold or the combined value of the Nigerian element of the merging undertakings in the preceding year exceeds the prescribed threshold (known as ‘the turnover test’), as stipulated in the Notice of Threshold for Merger Notification 2019 (“Threshold Regulations”) issued by the FCCPC. According to Paragraph 1.1 of the Threshold Regulations, a merger is notifiable if in the financial year preceding the merger:
a) the combined annual turnover of the acquiring undertaking and the targeted (combined figure) in, into or from Nigeria equals or exceeds One Billion Naira (₦1,000,000,000.00) or
b) the annual turnover of the target undertaking, in, into or from Nigeria equals or exceeds Five Hundred Million Naira (₦500,000,000.00)
The FCCPC’s consideration in granting negative clearance to an asset acquisition
As mentioned above, the purchase of assets (or part of an asset) of the target undertaking is one of several ways in which a merger may be achieved. In this scenario, there are clear indications that a change of control of the asset is contemplated or has occurred. In transferring the assets in question to the acquiring undertaking, the FCCPC as a matter of practice will consider such transactions as satisfying the first criterion that creates a relevant merger situation, only “where the [assets] transferred enable a particular business activity to be continued.” For a business activity to be continued, the FCCPC will satisfy itself that “… the acquired assets have sufficient economic significance to merit merger review coverage”. According to the practice of the FCCPC, an acquisition of assets will be considered a ‘merger’ only if those assets ‘constitute the whole or a part of an entity to which turnover threshold can be attributed’. According to the FCCPC, intangible assets, such as intellectual property rights, are unlikely, on their own, to satisfy the first criterion unless it is possible to identify turnover directly related to the transferred intangible assets that will also be transferred to the buyer.
Based on the above, the key focus of the FCCPC’s assessment in determining whether an asset acquisition satisfies the criteria is whether market turnover can be attributed to the asset that is the object of control. In Theodak Nigeria Limited v. Federal Inland Revenue Service Board, the Federal High Court defined ‘turnover’ as “the aggregate income that a business receives from its normal business activities for a given period, usually from the sale of goods and services to consumers.” In accordance with this court decision, it follows that income must be derived in the normal course of business from the asset in order for turnover to be attributable to the asset. Where there is no such turnover or where the turnover attributable does not meet the threshold for notification, the transaction will be eligible for negative clearance by the FCCPC.
Beyond the MRGs there are presently no Nigerian judicial decisions, nor reported decisions of the FCCPC, that provide guidance as to the circumstances in which an asset acquisition does not constitute a merger and is thus not notifiable. However, the FCCPC encourages merger parties to rely on cases and theories from other jurisdictions as persuasive arguments for any view that they may wish to advance for competition law purposes.
For instance, in some asset acquisitions, merger parties have referred to the South African case of Competition Commission / Edgars Consolidated Stores Ltd / Retail Apparel Group (Pty) Ltd (“Edcon case”), where the question before the Competition Tribunal of South Africa (“Tribunal”) was whether the acquisition of an asset, being a debtors’ book in that instance, constituted a ‘merger’. The Tribunal held that the acquisition of the debtors’ book in that case, constituted a ‘merger’ as the acquisition was that of the ‘part of a business’. However, the Tribunal made it clear that the fact that it had determined that the acquisition of the debtors’ book constituted the acquisition of part of a business in that case should not be construed as authority for the proposition that the acquisition of a book debt would always necessarily constitute a notifiable merger.
In this regard, the Tribunal stated that:
.. when the acquisition of an asset constitutes the acquisition of a business or part of a business is a question of fact that must be examined in the context of the whole transaction. Is the acquiring firm by acquiring the asset, acquiring something more than a bare asset that would enhance its competitive position? One example would be where the purchase of an asset enables the acquiring firm to increase its market share or pre-empt a rival from increasing its.
In making this argument, the Tribunal relied on the decision of the European Commission (“EC”) in Blokker v Toys ‘R’ Us for guidance on when an asset acquisition qualifies for notification as a merger. According to the EC in Blokker v Toys ‘R’ Us, “[the] acquisition of control is not limited to cases where a legal entity is taken over but can also happen through the acquisition of assets. In this situation, the assets in question must constitute a business to which a market turnover can be clearly attributed.” This approach, in our view, is consistent with the approach set out in paragraph 2.4 of the MRGs, which provides, inter alia, that “… an acquisition of assets will only be considered a ’merger’ if those assets constitute the whole or a part of an entity to which the turnover threshold can be attributed.”
The EC, therefore, proceeded to analyse the assets being acquired in Blokker v Toys ‘R’ Us, and stated that: “In this operation, Blokker takes over all the assets (leases, fixtures and inventory, personnel, use of brand name) which make up the business of Toys ‘R’ Us in the Netherlands. A turnover can be clearly attributed to this business.” The EC concluded that the asset acquisition constituted a notifiable merger.
Another jurisdiction which is relevant in this context is the United Kingdom (“UK”), where the Competition and Markets Authority (“CMA”) holds the view that assets are “unlikely on their own to constitute [a merger] unless it is possible to identify recently-generated turnover directly related to the transferred intangible asset.” although not expressly stated in the Act, the Regulations or the MRGs, the FCCPC’s position appears consistent with that of the CMA, as paragraph 2.45 of the MRGs provides that for an acquisition of assets to be considered a merger, the assets acquired must constitute the whole or part of an entity to which the turnover can clearly be attributed.
There has also been successful reliance on the UK case of Société Cooperative De Production Seafrance SA (Respondent) v The Competition and Markets Authority and another (Appellants), in an application made on behalf of merger parties for negative clearance for an asset acquisition. In that case, the UK Supreme Court (“UKSC”) reiterated the two-step test used for determining whether the transfer of an asset constitutes an enterprise which in turn can give rise to a merger which is subject to the CMA’s review power. According to the UKSC, the assets in question (i) must give the acquirer more than he might have acquired by going into the market and buying factors of production (the extra), and (ii) the extra must be attributable to the fact that the assets were previously employed in combination in the activities of the target company.
Where there is no ‘economic continuity’, that is to say, the transfer of control over assets in a business that has ceased to exist or ”is no longer characterised by any activities capable of being continued by someone else”; or where the object of control are ‘bare assets’, that is to say, the undertaking “acquires no more than it might have acquired by going into the market and buying equipment, hiring employees, and so forth separately”, a merger situation does not arise. UK case law buttresses the view that such transactions will not trigger the merger review powers of the CMA. In the same vein, it is our considered view that such case law out to be persuasive before the FCCPC and that the FCC ought to apply the same consideration when assessing whether an asset acquisition satisfies the criteria required to create a relevant merger situation.
Conclusion
Based on recent experience, the FCCP’s key consideration when assessing whether an asset acquisition is eligible for negative clearance is whether turnover can be clearly attributed to the asset in question. If the assets purchased do not enable ‘economic continuity’ or are merely bare assets, the FCCPC is likely to consider such transactions as not meeting the criteria necessary to create a merger situation and will readily grant negative clearance for such transactions in accordance with Regulation 9(2)(c) of the Regulations.
It should be noted that assets acquired ‘in the ordinary course of business’ are exempt from the scope of qualifying mergers. This exemption covers the acquisition of new goods, current supplies and used durable goods. Similarly, acquisitions of certain real estate assets, such as undeveloped land, and office or residential property, are also exempt as such transactions are unlikely to raise competition issues.
As competition law practice continues to evolve in Nigeria, we expect to see more jurisprudence and decisional practices of the FCCPC that will provide clearer guidance in respect of asset acquisitions.
