How to use a spoon to cut a steak: The Egyptian Competition Authority’s guide to how to use anti-cartel legislative provisions to control and review mergers
EXCLUSIVE- Does the ECA have the legal ground to halt the Uber and Careem merger (or any M&A)? That was the question we were asking ourselves when the Egyptian Competition Authority (ECA) sent a sharp, unprecedented warning to ride-hailing companies Uber and Careem that they could be fined up to EGP 500 mn each if they go through with the merger they announced (pdf). If you were wondering the same thing, dear reader, you are in luck. Founding and Managing Partner at Zulficar & Partner Firas El Samad (bio) outlines the legal repercussions of the ECA’s decision. The following is by far the best piece out there right now on the legal nuisances and implications of the case on future M&As and the ECA’s ability to regulate them.
How to use a spoon to cut a steak: The Egyptian Competition Authority’s guide to how to use anti-cartel legislative provisions to control and review mergers
The decision: On one fine morning, on October 23rd, 2018, the world woke up to the Egyptian Competition Authority (ECA) issuing a first of its kind decision that requires ride-hailing giants Uber and Careem obtain the pre-approval of the ECA before completing their “contemplated” merger, which was brought to the attention of the ECA through media outlets. The decision looks at Uber and Careem as competing entities, and their contemplated merger a form of collusion that is penalized under Article 6 (a) and (d) of the Egyptian Competition Law No.3 for the year 2005 (the Antitrust Act) that governs the prevention of cartels. The decision itself was taken under Article 20, which entitles the ECA to intervene if they conclude from appearances and ostensible proof that a certain act, contemplated or committed, constitutes or would likely constitute a breach of the law with potential imminent and irreversible damages to consumers and/or to competition itself.
Egypt does not currently have a law that allows or empowers the ECA to review, approve or disapprove mergers whether prior to or following their completion. Since the adoption of the Antitrust Act more than a decade and a half ago, the ECA has been fighting and lobbying for a proper pre-merger control regime in vein. The law itself was originally and primarily conceived and passed as a tool to fight monopolistic practices, such as a merchant or a group of merchants who restrict supply in order to raise their prices. To date, there is still no confirmed and serious indication that a comprehensive pre-merger control regime is on the government’s legislative agenda.
What the ECA has managed to obtain since 2005 through the current law (as a compromise of sorts) is the power to gather some “post completion” information about transactions of a certain size and this in order to keep themselves up-to-date and to study relevant markets when needed. So as things currently stand, Article 19 of the law requires mergers and acquisitions of a certain size be notified to the ECA within 30 days from the date on which the merger (or the acquisition) comes to effect. The threshold for notification is the cumulative turnover of EGP 100 mn . Failure to make the notification will result in a fine that ranges between EGP 20,000 and EGP 500,000. It is therefore obvious that there is nothing in the act that would require the clearance or the pre-approval of the merger by the ECA.
So when faced with the question of whether the law should prevent companies from merging or assess in advance the presumed harmful effect of a merger and take preventive measures, the presumed answer by legislators has been so far: no. Let them merge and the ECA will oversee what the resulting entity would do. Why should we overwhelm and swamp the regulator with the task of having to study and review countless transactions and add another layer of bureaucracy to an already saturated environment, especially in an era of a supposedly post-socialist private sector-driven economy?
Frustrated by the lack of proper legislative tools, the ECA has finally decided to react and to take matters into its own hands. Choosing to ignore the fact that the Antitrust Act does not provide for the desired interventionist approach in regulating mergers, the ECA has taken it on itself to assume greater regulatory and authoritative powers by transforming the existing post-merger notification regime into a de facto pre-merger authorization requirement that is not legislatively supported by the law.
We will not debate whether or not the ECA is addressing a legitimate antitrust legal concern, we are merely highlighting that the ECA’s approach, as expressed in the decision, is bound to create serious legal and conceptual issues. Like Uber and Careem, some people may feel intimidated by the ECA’s change of heart and policy and may pragmatically cave in and file for clearance from the ECA prior to their merger, but the legal and conceptual issues are there and will not go away.
I counted four fundamental issues: the presumption of guilt vs the presumption of innocence; the strict letter of the penal text and intention behind the current law; the paradox of applying anti cartel regulation legislation on a one post-merger created entity; the lack of clear guidelines for merger pre-approval.
Issue#1 – The presumption of guilt vs the presumption of innocence: The first issue is that the law does not punish or prevent mergers under any circumstances, and, as a matter of fact, it does not even punish agreements between competitors per se. Putting on the criminal investigator’s hat, the ECA has the duty and the obligation, well before referring “alleged colluders” to prosecution, to prove that an agreement between them, implicit or explicit, exists and that it has caused “harm” by resulting in abusive price manipulation, artificial market allocation, bid rigging and/or unlawful barriers to output. The presumption of guilt of the two parties contemplating a merger runs against all criminal law and constitutional law principles on several levels. The decision effectively shifts the burden of proof to place it upon the parties to a merger irrespective of the established legal principles and the universal presumption of innocence, all without grounds and justification in the penal text itself. Using the ECA’s logic, the ECA may prosecute any group of natural persons who decide at any point in time to start a business and to become shareholders in a company because those natural persons can be presumed to be competitors by default and their joint venture a presumably harmful collusion between competitors. In fact, neither the Antitrust Act nor the Companies Act require the founders or the shareholders of a company under any circumstances to seek the approval of the ECA as a requisite for incorporating their new venture.
Issue #2 – The strict letter of the penal text and the intention behind the current law: The second issue is that the law requires parties to a merger to merely make the notification within a certain time frame from closing the transaction without waiting to obtain clearance or pre-approval from the ECA (as per Article 19). The act, which imposes criminal sanctions and is therefore a criminal law in essence, cannot, as a matter of fundamental legal principle, be interpreted or constructed extensively beyond the strict wording and text. If Article 19 tells people to notify their transactions within 30 days from closing and punishes them for failing to do so, how can the ECA come and prosecute someone who did make the notification within the set and prescribed deadlines?
The strict interpretation and construction of the penal text requires that no person who follows the letter of law and files the notification within 30 days from closing, be penalized for not filing for ECA approval prior to closing. By the same token, an entity who did not collude with its competitors to raise prices, limit supply, rig bids or divide market along non-competitive lines must not be penalized under these strict and specific provisions of Article 6 for simply merging with another entity without notifying and obtaining the prior approval of the ECA. In order for the ECA to be able to prosecute merging entities under said Article 6, a new sub-article (e) should have been added that clearly states that mergers must be approved by the ECA or else the parties to the mergers would be considered as colluding competitors and penalized accordingly. Since that hasn’t happened, and Article 6(e) does not exist, the ECA may not use the currently worded Article 6 to prosecute the competing entities who were merely contemplating a merger.
The intention of legislators: Furthermore, the true intention behind Article 6 (para2) (which governs ECA approval or exemption), as clearly expressed in its wording, is to allow competitors to obtain “comfort” (clearance) from the ECA regarding their ongoing mutual arrangements which they consider beneficial to the consumer and to their industry as a whole, while they continue to compete amongst each other as usual. There is in fact nothing presumed, assumed, implied or explicit in said Article that requires competitors to obtain the ECA pre-approval if they aim to merge and become one consolidated economic interest. The ECA’s role is merely to draw the line between what competitors can legitimately do and not do in coordination together while remaining in full competition with each other. Nothing in said Article 6 (para 2) requires a party to a merger to notify the ECA in advance and therefore said Article must not be expanded and used to impose an obligation that the legislature did not require or contemplate.
Issue#3 – The paradox of applying anti cartel regulation legislation on a post-merger created entity: The third issue is the attempted application of Article 6 — essentially worded and designed to target a group of colluding competitors — on a single entity resulting from a merger. In criminal law terms, it’s like accusing someone of conspiring with himself to commit a crime. In other words, an accessory to him or her self.
We therefore need a specific merger control regulations: We understand that the logic of the ECA, however questionable it may appear to the neutral penal law expert observer, which is that the ECA wishes to prosecute the parties to a merger prior to completing the merger on the grounds that this merger is merely a form of cartel disguised as a merger. Had this logic been sound from a general competition law perspective, there would be no need for any specific merger control legislations requiring pre-approval, which are the actual “universal” norm. In fact, Article 7 of the European Commission (“EC”) merger control regulation (EC 139/2004) admits explicitly that “Articles 81 (and 82) [of the EU Treaty], […] are not sufficient to control all operations which may prove to be incompatible with the system of undistorted competition envisaged in the Treaty”. Had the cartel prohibiting regulation been adequate and sufficient to prevent abusive “concentrations”, the EC would have never had to issue a specific merger control regulation (EC 139/2004).
Issue #4 – The lack of clear guidelines for merger pre-approval: Finally, the fourth issue here is that, assuming for the sake of argument that it applies to mergers, the exemption mechanism laid down in Article 6 (2), which allows competitors to obtain for comfort the pre-approval of the ECA ahead of concluding any mutual arrangements, does not specify neither the validity period for said exemption (if granted) nor what would become of said exemption once the applicants are no longer competing entities following a merger. Article 6 (2) does not provide for any ECA follow up guidelines. It does not specify at what point in time the agreement between competitors no longer fulfills the requirements under which the clearance that has been granted. Articles 15, 16 and 17 of the executive regulations of the Act regulate the cases when an exemption from the law is granted to a private sector company managing a public utility sector, while the exemption under Article 6 (2) of the act is not included in this procedural regime nor stated anywhere else for all that matters. Several questions may be raised as a consequence: are the exemptions granted to competing entities perpetual or are they subject to periodical review? What are the documents required? How does one apply? What are the deadlines? What about delays for review? None of those questions can be answered confidently and conclusively even by the most hawkish defender of the ECA’s stance.
The current circumstances forces the following question: is it better for the parties to any potential merger to proceed and then notify the ECA in accordance with current notification regime or is it better to seek the clearance of the ECA ahead of any concrete steps towards merger?
The natural approach is to make the notification when it is due, post-closing and without need for clearance and approval. This approach under the current circumstances, in view of the legislative shortfalls and the ECA’s questionable interventionist approach, comes with a significant risk. In fact, going through the merger without seeking the ECA approval would entail a high risk of prosecution especially if the merging entity is expected to yield a significant market power over its competitors once eventually created. The high risk of prosecution does not mean that the case is lost before a neutral judicial forum, it merely means that the parties to the merger will be likely taken to court by the ECA. There is absolutely no precedent to predict the outcome of the case by then, and we don’t know whether the Prosecutor General and ultimately the Economic Court would agree with the ECA in their approach and interpretation of the Antitrust Act.
As for seeking approval from the ECA: The other approach, which was apparently followed by Uber and Careem, is to prepare a comprehensive file and seek the approval of the ECA ahead of the merger. If the ECA agrees, on the basis of the ECA presumptions and after its much publicized societal consultations, that the agreement to merge is not a harmful collusion, then they may not prosecute the parties to the merger merely because of their agreement to merge. But the matter is unfortunately not that simple. In its decision on the Uber and Careem merger, the ECA said that they would issue their conclusions within 60 days from the date all “requested” documentation is duly delivered. It means that if a document is “not deemed to have been provided”, the 60-day period would not start running. The process of requiring and providing required documentation to the “satisfaction” of the ECA may take be extended by additional ECA requests and clarification thus extending the process and delaying the merger for a very long time, as all is under their sole discretion.
Assuming the clearance is granted, would it be perpetual and irreversible? What would happen if the ECA concludes that the assumptions on the basis of which the exemption has been granted turned out to be wrong and the parties did not fulfill their obligations towards obtaining said exemption? Can the ECA undo the merger? Can they prosecute the parties to the merger and fine them on the basis of Article 6?
What is sure is that the ECA cannot and does not have the tools to undo the merger. It cannot prosecute the merging entity for colluding with its own self on the basis of Article 6. The ECA would assume however that it may still go after the original shareholders of the merging entity if the assumptions and assurances based on which the exemption was granted turned out to be false or misleading or if the merging entity did not honor its obligations towards obtaining said exemption. But what about if the merging entity went public for example and the original shareholders who agreed to merge their interests are no longer there to be held accountable for the actions of the merging entity?
Protection from future prosecution? In all cases, the real dilemma facing the parties to a merger if they decide to follow the second approach and file for an exemption, is that there would be actually nothing that guarantees that the ECA will not come back in one year or two years and request the review of the merger on the basis of their initial approval. The parties to a merger would have to have admitted, as per the requirement of Article 6, that the merger itself is presumably harmful to competition but that this harm is overshadowed by the benefit it brings to consumers and/or the concerned industry. The ECA would be therefore given the power to review the merger post completion through the indeed unintended will of the applicants and the ECA may be able to revoke its approval in the future without maybe having to prove that the merging entity has committed anything wrong from a pure antitrust perspective. Conscious probably of the underlying weakness of their de jure legal argument, the ECA, in the press release published on its website, seemed actually quite keen on pointing out that Uber and Careem chose “contractually” to submit to the merger review authority of the ECA by suspending the effect of the merger until said review is completed. Ultimately, the ECA is sure to be happy with the precedent created by Uber and Careem’s coming forward initiative and may feel empowered and emboldened to deal in the same way with similar cases in the future.
Among possible future scenarios is that the ECA may actually use the admitted presumption of harm to competition against the parties to a merger if they simply establish that the promised and desirable effect of the merger did not materialize. They may say, for example, that the merger was approved on the assumption that the prices would not increase, and that, if prices have increased against the applicants promises, the ECA would like to revoke their clearance accordingly. By then, since the merger cannot be undone (the agreement to merge is already finalized and concluded), the parties to the merger may be subjected to harsh scrutiny and prosecuted, and this despite the fact that the increase in prices is not per se a punishable act under the law and that the parties to the merger are no longer competitors as a matter of new reality, or may be no longer stakeholders in the prosecuted entity.
A de facto “law”: It’s worth noting that if it became a norm that the parties to a merger would have to file for an exemption to consummate their contemplated merger, then the ECA’s decision will have brought about a de facto amendment of the Act in absence of the necessary de jure reform by the legislature that is the only entity entrusted with the authority to make amendments to the law.
Indeed the concerns of the ECA are legitimate. Indeed they are right to worry about concentrations and the inherent abuse of market power of the mega undertakings. But until Egypt passes a law that empowers the ECA to review and approve mergers in accordance with common international practice, the zealously interventionist approach and bending of regulations to use them for unintended purposes would do nothing but backfire and create, unnecessarily, an environment of uncertainty, unpredictability, confusion and hostility towards investors, local and foreign.