31 Jan Merger Control – Getting the Guidance for Merger Transactions
In the current prevailing and uncertain economic paradigm, some companies might be motivated to secure survival or growth by pursuing mergers, joint ventures, sales, or acquisitions. Such opportunities might enhance future growth prospects by taking advantage of synergies and economies of scale. While typically these types of transactions are quite complex, the enactment of the Fair Trading Act (Chap. 81:13 of the laws of Trinidad and Tobago, the FTA) and recently issued draft Merger Guidelines add another layer of complexity.
Prior to the proclamation of the FTA on Monday February 10, 2020, the completion of such transactions (save for industry specific restrictions) was substantially unregulated. The FTA seeks to regulate certain combinations of entities that can affect or lead to anti-competitive behavior and to promote and maintain fair competition in the economy. The legislation addresses the abuse of monopoly power, anti-competitive mergers, and agreements, and also includes enforcement mechanisms. As such, most corporate entities seeking to enter a merger type transaction must first seek permission to merge from The Trinidad and Tobago Fair Trading Commission (the Commission) established under the FTA.
The Commission has recently published Draft Merger Guidelines (the Guidelines) on its website as an aide to companies and other stakeholders on steps required to obtain its permission where appropriate. The Guidelines seek to address the restrictions under Section 14 of the FTA which provides that enterprises shall not enter into a merger unless they obtain permission from the Commission where:
- their assets exceed fifty million dollars; and
- at least one of the enterprises carries on or intends to carry on business in Trinidad and Tobago.
In the Press Release relating to the Guidelines on January 20th 2021, the Commission encouraged the business community to review and comment on the Guidelines and confirmed that it stands ready and committed to provide guidance, cooperate with and assist any enterprise in promoting the observance and compliance with the provisions of the FTA. As discussed in our earlier articles on the FTA, the qualifying thresholds identified in the FTA can lead to certain ambiguities that ought to be clarified in the Guidelines. Two examples are: (1) how and when the qualifying asset test is to be measured and (2) what it means ‘to carry on business’ in Trinidad and Tobago for the purpose of the FTA.
The Guidelines set out the process of applying for permission and set out a list of supporting documents to be submitted by parties proposing to merge, for the Commission to make a determination. To comply with the guidelines, companies will be required to gather information which may not be readily available with potential for delay and increased costs. Item 3 (xvi) of the Guidelines states that the parties may also submit ‘written confirmation that the enterprise carries on or intends to carry on business in Trinidad and Tobago in accordance with Section14(1)(b)(ii) of the FTA’.
One interpretation of ‘to carry on business’ might be that the entity must have a physical place of business in Trinidad and Tobago and sell, through that business, goods or service with a degree of regularity to persons in the country. In the age of digital selling, it is not clear however whether a physical place of business is necessary to fall within the ‘carrying on business’ expression. If it is not necessary, what then will determine that a corporation carries on business in Trinidad and Tobago? This is just one example where clarity would be welcome. To ensure that businesses (both local and international) can compete and thrive, it is essential that businesses understand what is required of them and that legislation, regulations and guidelines be clear and unambiguous. The Guidelines are a good start to achieving Parliament’s intent but there is still some way to go to make the legislation meaningful and effective without unduly hampering business. Stakeholders should take advantage of the opportunities to comment on the draft Guidelines to help bring the clarity.
The Guidelines provide for wide-ranging information to be submitted in relation to the nature of the relevant business conducted, including ‘the general product or geographic market’. The Guidelines also invite the submission by merging parties of a detailed description of the product/service including its end users as well as information on the location of each facility that manufactures any relevant product/ service. Will a corporation be deemed to be ‘carrying on business’ because it sells in products in Trinidad and Tobago or because it manufactures here? If a company manufactures products in Trinidad and Tobago but exports all such products, would such a company be having an impact on competition within the country? Companies would no doubt find some comfort if the expression ‘to carry on business’ could be clearly defined in the Guidelines or amendments to the FTA.
Another query surrounding the FTA involves the seemingly wide definition of ‘merger’ which ought to be clarified. The FTA at section 13 defines “merger” as “the cessation of two or more enterprises from being distinct whether by purchase or lease of shares or assets, amalgamation, combination, joint venture or any other means through which influence over the policy of another enterprise is acquired” (emphasis ours). This definition is meant to capture all instances in which influence over the policy of another enterprise is acquired where two or more enterprises cease to be distinct (whether through the specific types of transactions identified or any other means). As such, if there is no change in influence over the policy of another enterprise acquired in a transaction, such as an internal corporate re-structuring for example, should this constitute “a merger” under the FTA?
If a change in influence over the policy of another enterprise is not or cannot be acquired in a transaction, such a transaction should not constitute “a merger” for the purposes of the FTA, or conversely, a transaction must include or be likely to cause a material change in, or the acquisition of, influence over the policy of an enterprise, for the transaction to constitute a merger under the FTA. If that were not the case, what would have been the need to include the words “through which influence over the policy of another enterprise is acquired” in the definition? Essentially, the phrase explicitly set forth at the end of the definition of “merger” in the FTA (“through which influence over the policy of another enterprise is acquired”) ought to restrict the items mentioned before it so that all the preceding items in the definition are so restricted. This approach / interpretation would appear to be consistent with the purposes behind the FTA and the merger control provisions as the intent appears to be to regulate combinations of entities that can affect or lead to anti-competitive behaviour. However, if no change in ultimate control results from a transaction then the resulting entity’s impact on competition will remain unchanged. In such cases, we are of the view that the merger control provisions of the FTA ought not to be triggered. Nevertheless, if the Guidelines were to give clarity and confirmation as to which transactions cannot constitute a merger as defined by the FTA (because they cannot impact competition and ought to fall outside of the definition), this would surely bring greater certainty and clarity.
Duty to Narrowly Interpret Penal Legislation
It is also noteworthy that the FTA contains penal sanctions. Laws which are penal in nature must be strictly (narrowly rather than broadly) construed. Legal policy principles provide that a person should not be penalised except under clear law, which has also been expressed as one should not be put in peril upon an ambiguity.
Looking at the FTA, and the section on mergers in particular, it is clear that the Parliament intended to capture transactions which could potentially have an impact on competition and therefore required such transactions to be reviewed and approved by the Commission before completion. However, transactions which cannot lead to any influence over the policy of another enterprise being acquired (and therefore cannot impact competition), ought not to fall within the definition of ‘merger’. These include for example: (1) internal re-organisations of companies within a group (e.g. an amalgamation of two subsidiaries that are controlled by the same ultimate entities/persons); (2) the transfer of shares of a subsidiary held by one party in a group to another wholly-owned subsidiary of that party or in that group; and (3) the acquisition of real estate held in a non-operating holding company by the acquisition of such company. The marketplace would no doubt appreciate if the Guidelines could set out the types of transactions which may on their face look like mergers but which do not fall within the definition of a merger under the FTA, as suggested above.
To Merge or not to Merge?
Mergers and acquisitions bring together companies and/or their assets to ideally stimulate economic growth, innovation and technological development. Through them, companies can secure a better position in the marketplace which may allow them to increase their competitiveness. Such transactions can be advantageous to consumers as they may benefit from diverse products and lower prices. Of course, the opposite can also be true where companies can use such transactions to increase their market share and create monopolies which may lead to anti-competitive behaviours that harm consumers. The intent of the FTA is to promote and maintain fair competition in the market; it therefore encourages mergers which do not restrict or distort competition in a market. While the intent is rational, the Guidelines should provide clarity and assurance as to the practical application of the FTA. While mergers or acquisitions may become an essential tool for the corporate development of many businesses as they try to adapt to current economic conditions, the implemented system of merger control in Trinidad and Tobago can have side effects which, unless more clarity is forthcoming in the Guidelines, could impact the ease and cost of doing business to the detriment of consumers. The request for comments on the Guidelines by the Commission is therefore certain to be welcomed by the business community. As the potential fines and other consequences for breaching the FTA are significant, companies considering a merger transaction should seek guidance to determine whether the transaction would be captured under the new legislation, and if so, how to comply.