Five firms fined Sh21 billion over Swala takeover

Dar es Salaam. Five energy companies have been ordered to pay $8,980,328.2 (about Sh20.6 billion) in administrative fines for concluding an acquisition deal involving Swala Oil and Gas (Tanzania) without duly notifying the Fair Competition Commission (FCC).

The merger – which is in contravention of Section 11 (2) and (5) of the Fair Competition Act (FCA), 2003 – saw the FCC initiate a complaint, and the decision was passed on August 5, 2022, and posted on the commission’s website on October 12, 2022.

Swala PanAfrican Energy Mining was the first respondent, Orca Exploration Group Inc was the second, while PAE Pan African Energy Corporation, Swala Oil and Gas Tanzania and PanAfrican Energy Tanzania Limited were the third, fourth and fifth respondents, respectively.

Fines imposed on the firms are: Swala PanAfrican Energy Mining ($177,712.20), Orca Exploration Group Inc ($2,888,300), PAE Pan African Energy Corporation ($2,888,300), Swala Oil and Gas Tanzania ($137,716) and PanAfrican Energy Tanzania Limited ($2,888,300).

The matter dates back to January 24, 2018 when the FCC received a letter from Swala Oil and Gas Tanzania Plc, informing the commission that Swala PanAfrican Energy Mining Limited (Swala UK) and Orca Exploration Group Inc, both of which are registered in the UK, had entered into an investment agreement.

Under the agreement, Swala Tanzania would acquire 7.9 percent shares of Orca Exploration Group Inc held in PAE PanAfrican Energy Corporation (PAEM) by Swala UK, which is a wholly owned subsidiary of Swala Tanzania.

PAEM, which owns 100 percent shares in PanAfrican Energy Tanzania – a company that owns and operates Songo Songo gas fields in Tanzania – is registered in Mauritius and owned by Orca.

During a February 22, 2018 meeting between the FCC and Swala Tanzania officials, Swala Tanzania wrote a letter, and reiterated that the acquisition of 7.93 percent of Orca in PAEM by Swala Tanzania was not a controlling interest or an interest leading to a change of control.

It is against this background that the FCC initiated an investigation to establish whether the acquisition of the 7.93 percent shares of Orca held in PAEM by Swala UK amounted to a merger under the ambit of the FCA and thus the acquisition of the same amounted to infringement of the provisions of the FCA, 2003.

In line with Section 69 (1) and Rule 10(1) (c) of the Competition Rules, 2018, the FCC initiated the complaint on May 20, 2022, to ascertain whether the acquisition was concluded in contravention with Section 11 (2) and (5) of the FCA.

During the course of investigating the matter, the five-member FCC says in its findings that it established that under the content of Agreement, Orca had agreed to sell the Investment Shares to Swala UK and the latter agreed to purchase the same from the former in three tranches.

Members of the commission who signed the decision and order are chairman Aggrey Mlimuka and commissioners Fadhili Manongi, Godwin Osoro, Jenard Bahati and William Erio.

The first tranche involved acquisition of 7,933 shares at a price of $25,782,250 while the second tranche involved acquisition of 12,067 shares at a price of $39,217,750 whereas the third would involve the acquisition of 20,000 shares at a total of $65 million.

In its arguments constituting the case, the FCC advanced that at the time of the agreement, the total assets of Orca Exploration Inc stood at $249.549 million which was equivalent to Sh559.299 billion.

It argued that though the transaction involved parties outside Tanzania, the fact that Orca Exploration Group was the ultimate owner of PanAfrican Energy Tanzania Limited means that the former does exist in Tanzania through its subsidiary.

The FCC also found out that the acquisition of 7.93 percent of the issued and outstanding shares of Orca Exploration Group Inc in PAE PanAfrican Energy Corporation by Swala (PAEM) Limited amounted to a change of control of business by PanAfrican Energy Tanzania Limited in Tanzania.

“This meant that the acquisition was an outright merger as defined under Section 2 - read together with Section 7 (c) of the FCA - and thus the FCC ought to have been notified,” the findings read in part.

Again, the FCC says while the FCA requires the threshold for notification of the merger to be an amount of Sh3.5 billion, at the time the share transaction in the PAEM was effected, the market value of assets of Orca Exploration Inc alone amounted to Sh559.299 billion which far exceeds the threshold amount.

“Thus, by failing to notify the FCC, the respondents had contravened the provisions of the FCA…The Complainant understands that by acquiring 7.93 percent of shares in the third Respondent, the fourth Respondent acquired controlling interest on the business strategies and direction of the fifth Respondent,” the FCC says.

This is so because the fourth Respondent has sole control over the business conduct of its subsidiary (the first Respondent) and therefore, the fifth Respondent has acquired indirect control over the business strategy of the fourth Respondent.

“Therefore, the Complainant (FCC) is of the considered position that the share transaction in the third Respondent resulted into a change of control of the third Respondent, a company duly incorporated in Tanzania and hence the share transaction satisfies the requirement of Section 2 of the FCA and constitutes a merger,” the FCC says.

But in adducing its position, Swala Tanzania argued that the company [Swala] did not have a board representation or any agreement under which it may affect board representation at that level of ownership and that it [Swala] did not provide any additional services or advantages to PAEM that would allow it [Swala] to manage or direct the company.

It argued, among others, that Swala had additional ownership rights beyond those of its equity interest, among others hence asking the FCC to define whether the company had a locus standi (a right to appear in a court or before anybody on a given question).

Consequently, Swala Tanzania wrote a reminder letter to the FCC on March 31, 2022, reminding it that sometime in 2018, it had approached the FCC for an opinion as to whether the 2017 transaction was a notifiable merger or not.

It submitted that the transaction was completed on December 29, 2017 and that Swala paid a consideration which included cash, preferred shares at the assumption of proportionate shares of the debt that PAET had with the International Financing Corporation.

As a beneficial owner in the Songo Songo field, Swala has the right to a share of net free cash flow distributed dividends and is responsible for a share of the field’s financial obligations.