05 Feb

The Curious Case of Construction & Business Bank

Businesses want to become big. They want their presence to be felt in every corner of the world. Investors explore different avenues to do this by injecting capital, selling equities, reinvesting their profits, opening different branch offices, acquiring other firms or merging with other entities. By the same token, corporations may also use these tactics to either dominate the market or protect their infant industry from other big entities.

All of these factors for expansion may also force Ethiopian business people to engage in changing their style of business. Nowadays, the government is trying to attract foreign investors by creating industrial parks, adding incentive packages and simplifying the service provision and bureaucratic aspects of the investment climate.

On the other hand, the government seems to engage in strengthening the capacity of its enterprises too. The focus on these enterprises may seem to either strengthen their capacity and prepare them for future challenges (or threats from other entities), or save the struggling entity through the umbrella of the successful one.

In this regard, the recent news about the amalgamation of Commercial Bank of Ethiopia (CBE) and Construction & Business Bank (CBB) can become a talking point among lawyers and economists. It can also trigger a lot of interesting debates and analyses.

Amalgamation is not a new phenomenon. It happens frequently worldwide. To give a recent example, Du Pont and Dow Chemicals, the largest US chemical companies, merged with capital of 113 billion dollars.

But it is imperative for businesspeople to understand how a merger affects their competitiveness. Whether a firm is established by statute or by the partners’ agreement, it must observe the legal requirements. There is no difference in the case of mergers and acquisitions (M&A).

Mergers and acquisitions are an important means of transferring resources to where they are most needed. The phrase is often associated with undertakings that desire to buy shares and assets in another firm. Legal scholars define a merger as “a combination of two or more firms in which all but one cease to exist legally; the combined organization continues under the original name of the surviving firm.” Merger is not the same as consolidation, in which two corporations lose their separate identities and unite to form a completely new corporation.

On the other hand, a merger has a different legal consequence from that of an acquisition. A merger may result in the creation of a new legal personality; while, acquisition does not necessarily do so.

Legal personality in this context refers to a situation where business entities get a fictional personality for the purpose of administration, owning properties, paying tax, legal and business interactions with third parties.

The 1960 Commercial Code of Ethiopia does not use the term M&A, but sticks to the term “amalgamation”.  A Memorandum on Amalgamation prepared by Kelvin CHIA, a Singaporean  firm, defines the term amalgamation as “the combination or union of two or more corporate entities, which traditionally take up either of the following forms: merger, as when two or more constituent companies combine to become a single entity, with the surviving company being one of the constituent companies; consolidation, as when two or more constituent companies unite to form an entirely new company which is separate and distinct from any one of the consolidating companies.”

The Commercial Code of Ethiopia says that two or more firms may amalgamate, either by taking over or by the formation of a new firm. A special meeting of shareholders shall approve of the takeover or being taken over. As the law was promulgated some 56 years ago and new laws were issued in this regards during this period, in order to grasp the real and full concept under Ethiopian law, it becomes necessary to look into other laws.

Of relevance is the Trade Competition & Consumer Protection Proclamation Number 813/2013. Before the issuance of this Proclamation, mergers were regulated by the Trade Practice & Consumer Protection Proclamation No. 685/2010. According to Article 9/3  of the latest proclamation, a merger is considered to take place when two or more organisations, previously having independent existence, amalgamate or when such business organisations pool the whole or part of their resources for the purpose of carrying on a certain commercial activity. A merger also takes place by directly or indirectly acquiring shares, securities or assets of a business organisation or taking control of the management of the business of another person or group of persons through purchase or any other means. Hence, under Ethiopian law the term merger now describes and includes the term and concepts of acquisition and consolidation in its definition.

According to this proclamation, whenever a merger takes place, the Trade Competition & Consumer Protection Authority (TCCPA) has to be notified either by the businesspeople who propose to enter into an agreement or arrangement of merger, or the concerned government organ responsible for the registration of the merger. The notification has to follow some procedures. Depending on the type of merger and its effect on market dominance, the Authority will approve or reject the application.

Under normal circumstances, if two independent entities propose to enter into an agreement or arrangement of merger, the Ministry of Trade (MoT), TCCPA, Ethiopian Customs & Revenue Authority (ECRA) and the Document Authentication & Registration Office (DARO) will be involved. But would the case be the same with that of public enterprises? Is a merger for public enterprises that are established by law the same as private firms?

Both CBE and CBB are established by Council of Ministers Regulation Number 202/2002 and 203/2002, respectively. In the M&A world, there is something called a statutory merger. In his book, Mergers and Acquisitions Basics: All You Need to Know, Donald DePamphilis defines it as follows: “a statutory merger is one in which the acquiring company assumes assets and liabilities of the target in accordance with the statues of the State in which the combined companies will be incorporated.”

Based on the Ethiopian Public Enterprise Proclamation Number 25/1992, if two or more enterprises intend to amalgamate, they may do so by the decision of the Council of Ministers. The acquired entity, in this regard, will be treated as being dissolved. And the organ responsible for proposing such arrangements to the Council of Ministers is the Ethiopian Financial Public Enterprise Agency.

But should the decision of the Council of Ministers be approved by the TCCPA?

The merger of CBE and CBB might create some pressure on other private banks in Ethiopia and hence Proclamation Number 813/2013 requires this.

Is the merger in connection with public financial institutions an exception to the principle laid down under Proclamation Number 813/2013 and hence the Council of Ministers may not need the approval from the Authority? Does the highest organ of the executive branch need the consent of TCCPA? Much seems to be unclear.

On the other hand, after observing the merger between the banks, a person might normally be tempted to ask the reason behind it.

Is it because CBB failed to meet its intended purpose? Is it to strengthen CBE from future potential competitors as the country intends acceding to the World Trade Organization?

Other concerns may also be raised. For instance, how will CBE settle issues related with employment benefits if these two institutions have different benefits for the same kind of job their employees are doing?

In answering these questions, we start by stating that the government had previously issued a special government bond. Largely, it seems that the acquisition of CBB by CBE was made to strengthen the capacity of the latter.

Under Ethiopian law, public enterprises are different from public bodies. Unlike public bodies, public enterprises are not financed by a government budget every fiscal year. Instead, are will only allocated initial capital and are expected to generate income. If they want additional income, they are given the mandate to issue commercial instruments, such as bonds.

However, apart from this, a special type of bond was issued recently by the government to raise the capital of CBE. According to Proclamation Number 531/2007, Special Government Bond Proclamation, the Ministry of Finance & Economic Development, (MoFED), now the Ministry of Finance & Economic Cooperation (MoFEC), is empowered to issue this bond to raise the capital of CBE.

The total amount of the bond issued by the Ministry was 2.5 billion Br. The loan is expected to be repaid within 10 years time commencing from the issuance of the bond. The loan is interest free and tax free on its transaction. From this point of view, one can therefore argue that CBE is strengthening itself by a government guaranteed bond and acquiring other like entities. Nonetheless, while stating our assumption that the government is strengthening its public enterprise, we are not sure whether the move was also intended to save CBB from privatization.

On the other hand, the issue of employment benefits may create contention if employees of the two enterprises working on the same tasks were entitled to different salaries and benefits. The current Labor Proclamation No. 377/2003 demands employers to keep their employees even if there is amalgamation, division or transfer of ownership of the undertaking.

These things will not have any effect on modifying contracts of employment. In addition, Ethiopia’s employment law gives the minimum threshold protection to employees that can be expanded by collective agreement or a contract of employment.

If there is a salary or benefit package difference among employees that are working in the same position, employees of the acquiring bank who have lower salaries might see a raise in their entitlements sooner or later. This may lead the management of CBE to engage in resolving the issue by revising their collective agreement or individual contractual agreements of their employees.