Anand Pathak sheds light on the regulatory pitfalls that remain for parties looking to enter into combinations
Merger control was introduced for the first time in India by sections 5 and 6 of the Competition Act, 2002. Thereafter, regulations, government notifications and guidance notes were issued to implement the act. Some significant changes were recently made by the government for streamlining the merger review process to enhance ease of doing business. For example, while notifiable transactions (known as “combinations”) continue to remain subject to the suspension provisions of the act and cannot be implemented unless approved by the Competition Commission of India (CCI) or the expiry of the 210-day review period following notification, the 30-day deadline for notifying a proposed transaction has been eliminated. All forms of transactions now benefit from the de minimis exemption, which was earlier available only to transactions structured as acquisitions. While determining the availability of the de minimis exemption, only the value of assets of/and turnover attributable to the target’s division or business being transferred will be taken into account and not the entire assets or turnover of the seller. The CCI has also been generally faithful to the self-imposed time limit of 30 working days (excluding the “clock-stops”) to clear notified transactions that do not raise competitive concerns.
While the CCI has made great strides in rationalizing merger enforcement, a few concerns for unwary transacting parties still remain, which are discussed below.
All so-called ‘foreign-to-foreign’ transactions satisfying the notification thresholds of the act (based on the assets and turnover of the combining parties), and not benefitting from any exemption, must be notified to the CCI even in the absence of local nexus and competitive effects on markets in India. In the Titan International Inc/Titan Europe PLC combination, notwithstanding that the transaction was a ‘foreign-to-foreign’ acquisition and the parties were based outside India, the CCI imposed a penalty of ₹10 million (US$154,000) for notifying the combination after consummation.
More recently, in the Baxter/Baxalta combination, the CCI imposed a penalty of ₹10 million on the parties for closing the global (non-Indian) limb of the transaction before receiving clearance in India. The CCI held that the global transaction triggered notification and that the global transaction could not be given effect despite the fact that the transfer of the Indian entities was the subject matter of a separate local implementation agreement.
‘Investment only’ exemption
Transactions involving the acquisition of less than a 25% shareholding, “solely as an investment” or in the “ordinary course of business,” are categorized by the implementing regulations as an “ordinarily exempt transaction” if such transactions do not result in the acquisition of control. The CCI had adopted a restrictive interpretation of this exemption and stated that an acquisition of a passive, non-controlling minority shareholding either in a competitor or in a company active in one or more vertically related markets will not be treated as an acquisition “solely as an investment” or in the “ordinary course of business”.
In January 2016, the CCI clarified that the acquisition of less than 10% shares or voting rights would be treated “solely as an investment” if the acquirer (1) has the ability to exercise only ordinary shareholder rights commensurate with its shareholding; (2) does not have representation on the board of directors of the target nor has a right or intention to nominate a director in the future; and (3) does not intend to participate in the affairs or management of the target. There is, however, still no clarity on the application of this exemption to investments in competitors or in entities having vertical relations with the acquirer.
There is unfortunately no statutory definition of a joint venture (JV) provided under the act. The absence of specific provisions in the act for calculating turnover and asset values for JVs (as compared to the EC Merger Regulation) for purposes of determining the satisfaction of the section 5 notification thresholds (a result of inadvertence by the drafters of the legislation) creates an enforcement gap, potential inconsistency in the treatment and assessment of JVs and uncertainty for transaction parties. To obtain legal certainty, transaction parties find themselves compelled to seek the CCI’s guidance in pre-notification meetings, which, more often than not, result in a CCI suggestion to notify the transaction to obtain legal certainty! Once this suggestion is made, the JV partners (in practical terms) face the unenviable choice of either making the notification or suffering the risk of enforcement action.
The CCI requires parties to provide details in the notification of any arrangements between the parties that are ancillary to the notified combination and expects the notifying parties to explain the purpose underlying the proposed ancillary contractual arrangements. The CCI’s approval of the combination also covers the ancillary restraints if the CCI regards such restraints to be “directly related and necessary to the implementation of the combination”. While the CCI has issued a notice to provide guidance on the assessment of non-competition obligations accompanying an acquisition or merger, there is no published guidance for other forms of ancillary restraints, such as IP licences and supply and distributorship arrangements.
Contractual restraints accompanying a notifiable transaction that are found not to be ancillary will be assessed by the CCI under section 3 (anti-competitive agreements) of the act. While in the case of exclusive, long-term IP licenses, section 3(5) of the act, which provides an exception to the section 3 prohibition, should have provided a natural safe harbour, the CCI’s overly restrictive interpretation of this exception has limited its value.
Given the CCI’s significant experience of over six years in merger control, the time has come for it to address these concerns and provide published guidance to improve legal certainty.
Anand Pathak is the managing partner of P&A Law Offices.