This article has been written by Apurv Umredkar, pursuing a Certificate Course in Competition Law, Practice And Enforcement from LawSikho.
Table of Contents
Introduction
The term control carries an indelible significance in today’s corporate and commercial law aspects around the globe. It forms the crux of Antitrust Regimes and provides an essence to the methods and procedures stipulated under it. Various jurisdictions strive hard to connote the real and practical meaning of ‘Control’ so as to eliminate the perplexing interpretations made by competent authorities. From the Indian regulatory perspective, control is understood differently by different regulators each with their own set of understanding, protocols & pattern. Some of the notable statutes in the Indian Corporate Law theme like Companies Act 2013, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, Insurance Laws, FDI Policy and Competition Act 2002 have prominently laid down the meaning and definition of Control.
Segregating the other legislations, this article non exhaustively deals with the concept of Control pertaining to Competition Law, the legal intricacies & ambiguities surrounding it, merger regulation laws and different approaches taken by the Competition Commission of India (CCI) given the circumstances and conditions.
Also, an attempt has been made to clarify the difference between Decisive Influence and Material Influence with respect to Control under the Competition Laws. The author ultimately seeks to establish a crystal clear concept of Control by comprehending the above mentioned two types of influences and analyzing the underlying issues which threaten the Indian Merger Control Regimes.
What is ‘Control’?
‘Control’ has been a controversial topic surrounding Corporate and Commercial Laws in several jurisdictions. It is always on the loggerhead with Competition Regimes being one of the preliminary tests in assessing the Appreciable Adverse Effect on Competition (AAEC) if any. According to the Black’s Law Dictionary – Control means to exercise restraining or directing influence over. In competition space, it is defined as the ability to exert direct or indirect influence on the routine procedure, operations and working pattern of an enterprise.
The Competition Act, 2002 lays down the meaning of Control under explanation to Section 5 as – “controlling the management or affairs of the company by one or more enterprises either jointly or singly.” The scope of meaning was further extended by CCI in cases like Telenor Case & UltraTech Cement Case. As cases of overlapping jurisdictions of CCI with respective sectoral regulators (like SEBI, TRAI) grew, so did the uncertainty on the correct aspect of defining control. The point of view of each of the regulators differed with one another prominently.
For instance, SEBI defines the control in a very lenient and broadminded approach since the amount of penalties prescribed under SEBI Act are staggering and SAT imposes them only in cases of grave misconduct. CCI on the other hand tries to impose regulations in a manner that will cause maximum transactions to go under its purview. Although, the penalties levied by CCI are not less but comparatively lesser than in cases of SEBI.
Competition Experts are often being noticed using various testimonies, legal schemes, legislative history and purposive interpretation along with regulations of other international jurisdictions to obtain the proper meaning of Control. The Indian Competition Arena witnessed various combination cases since the inception of Combination Regulations in 2011 where CCI defined what amounts to control on a case to case basis. Sometimes, the broad approach was taken, other times the narrower approach was taken for delineation of relevant markets.
The term ‘control’ in legal parlance can also be found in various areas of corporate laws like Merger Acquisition & Amalgamation, Corporate Governance, Security Regimes and Competition Laws among others. To find out the proper level of control, one must delve into the underlying concept therein, the relevant cases dealt with by the Competent Authority, and precedents set by the judicial authorities.
CCI has also explicitly laid down the concept of DeJure control & DeFacto control in cases like Meru Travel Case and UltraTech Case. The former refers to the situation when an enterprise holds less than a majority of voting rights, but in practical sense controls over more than half of the votes cast at meetings. The latter is a situation in which an entity holds more than 50% of the voting rights but in actual sense doesn’t have the power to cast a majority vote.
Intricacies surrounding control
The controlling aspect has been by far the most cumbersome activity to determine by any of the regulatory authorities dealing with company merger-related matters. The absence of any particular scale/unit or defined set of protocols has adduced the need to ensure the accountability of the unrivalled power of CCI being the one and only authority to deal with competition cases across India.
To a greater extent, the determination of control significantly depends upon the interpretation of regimes by the relevant authority, facts and materials of the case, any significant modification causing any AAEC & overall impact on the market among others. For CCI this becomes an ambivalent task.
The major problem dealt with by it here’s to properly measure the level of control. In cases where acquisition leads to acquiring of shares, securities, or stocks, the correct and measurable information is provided i.e price per share, total lot of shares, type of shares, how many shares issued etc. In control, there isn’t any specific scale to weigh or map down the exact amount since the transaction here involves transfer of an intangible asset or property. And this absence leads to conundrum which further enhances the mistakes and misinterpretations.
After several misinterpretations and incorrect implementation of laws, a need was felt to make a proper strategic system of assessment for becoming cost and time effective. The confusion and chaos when determining the correct aspect and threshold of control by Antitrust Regulators were also harming the ease of doing business and promotion of competition regimes in India.
Also the unnecessary imposition of fines and penalties made it almost impossible for even small enterprises to operate freely and fairly. To address such legal intricacies, Competition Law Review Committee was formed in October 2018 in the wake of changing business landscape which announced Draft Competition (Amendment) Bill 2020, primarily aimed to serve and provide necessary guidelines to the CCI in promoting and upholding competition values across India. One of the key features of the amendment was the introduction of the concept of Material Influence in Merger Regulation cases.
The bill was kept open for some time for public review so that positive suggestions and fruitful modifications may be made before the final drafting of the act. Several International Foreign Jurisdictions (nations) have tried to derive the exact meaning of Control by way of their legislation, guidelines and regulations.
For instance European Commission defines control as the possibility of exercising decisive influence on an undertaking under Article 3(2) of the Council Regulation (EC) No 139/2004. For greater assistance the European Commission also published a handbook to help competition lawyers and enthusiasts to get accustomed to the underlying concept of Control which is considered to be a prime key to assess merger, acquisition or amalgamation from the Competition point of view since it provides the nexus between Competition Laws and Merger & Acquisition laws.
The book provides a step by step guide for all probable situations and its consequences to grasp the basics of Merger Control Regulations. In India, due to the regulatory complexity and legal intricacies setting up a proper definition of control has not been possible. The presence of various specialized sectoral tribunals have made it impossible to set a uniform definition. This problematic situation surrounding control is not a new thing. Streamlining the concept of control from every regulator’s perspective one can easily anticipate that this will bring the highly undesirable results of interpretation since every organization viewpoint for control differs with the difference in ultimate objective and analyzation of cases.
Although the global financial organizations like Organization for Economic Cooperation and Development (OCED) and United Nations Conference on Trade and Development (UNCTD) prescribe to formulate the global rules and regulations in determining several aspects related so as to form international parity & consistency, there has always been some sort of confusion since each and every jurisdiction has its own way and procedure of dealing with Competition cases.
On the ground level, practical implementation of these international protocols in real life scenarios become a bit of a hefty task when the laws governing the same aspect are different in 2 different nations.
Prominently, the U.S, U.K and Australian Regimes are one of the most active Competition Enforcers which hugely impact the cases in other developing jurisdiction’s Antitrust Commissions. Apart from the assessment of the thresholds, the need for analyzing control in the competition front pertains to the fact that also helps down the authorities in tracing the overlaps between the parties in the relevant market which will serve as a guiding point for CCI to impose penalty or pronounce its decision.
Without the proper determination of control, the competent Antitrust Authority cannot enforce the decision or come to a conclusion about whether the given transaction will pass the Merger Control Test or not. For commencement of proper assessment it is necessary to correctly identify the parameter of control in the given circumstances.
Merger regulation: Indian competition perspective
The insertion of Competition Regimes in Mergers/Amalgamations/Acquisitions is to prevent two entities who are strongest players of market & are competitors of each other to create a monopoly by joining hands or undertaking certain anti-competitive agreements thereby leading to unfair and prejudiced economic conditions of the market.
Whenever two entities join hands or collaborate, the need arises to analyze and examine the transaction so as to eliminate or deplete any of the illegal or unwanted consequences as a result of the successful consummation of the transaction. Generally, the consumers and small competitors are found on the verge of losing the side of such collaborations. Big power-hungry conglomerates either one way or another try to achieve their target. And because of their sheer size and dominance, they are easily able to evade the law.
For rooting out this illicit conduct, the key element of the Merger Analysis is the evaluation of the Corporate Entity whether it will cause any Appreciable Adverse Effect on Competition. When a company acquires, merges, collaborates or takes over its rival entity, the possible risk of market manipulation arises by the alleged involvement of parties to the transaction in illegal conducts like price manipulation, bid-rigging, tacit collusion & cartelization among others.
This exactly was the trend before the introduction of Merger Regulation Regimes where competitors were successfully able to synchronize their price and output decisions so as to create a monopolized market which would ultimately increase their profits & cause consumers to suffer.
Therefore, in order to stabilize the market economy, CCI in Merger Regulation cases scrutinizes the anti-competitive effect on the relevant market by the post-merger entity. The Report of Raghvan Committee suggested the introduction of Combination Regulations titled (Competition Commission of India (Procedure in regard to transaction of business relating to combination) Regulations 2011) (CCI General Regulations 2011) which laid down the concept of pre-notifying the CCI regarding the proposed transaction. Regulation 9(4) stipulates the inter-connected or interlinked transactions as composite transactions, thereby causing them to come under the liability of filing a notice to CCI.
Section 5 (Operative Provision) & Section 6 (Substantive Provision) of the Competition Act deal with the provisions stipulating that in case the figures pertaining to the transaction breaches the thresholds given (either in relation to assets or turnover) along with an absence of any economic benefit to the overall relevant market, then parties are obliged to file a notice to CCI providing all the details of the transaction. If the thresholds are breached, the parties are required to file a notice to CCI performing Parties Test for exemption.
If exemption not available under the Parties test then parties approach for Group Test and finally if group exemption is not available then parties avail one of the 10 exemptions under Schedule I of Regulation 4 of the CCI Combination Regulations 2011. The time limitations for each of the procedural requirements is stipulated from Section 29 to Section 31 of the Act.
The Competition Law Team & the General Corporate Law team along with several lawyers work in parallel and assist each other by providing an exchange of relevant important information to successfully consume the transaction. The thresholds are categorized & further sub-categorized on the basis of assets or turnover of entities in India as well as abroad. The non-compliance of these provisions attracts liability and penalty under Section 43A of the Act.
Sometimes even if the thresholds are not met, the CCI interprets such transactions as notifiable as clearly seen in cases like Zuari Case (C-2014/06/181), Jet Eithad Case (C-2013/05/122) & Thomas Cook case (C-2014/02/153). In all these cases, CCI held the transactions as “Strategic Investments” citing the concord between new acquirers and current promoters. Meaning that investors have an aim of controlling, running or taking over the business of the target entity.
CCI in MSM Pvt Ltd case (C-2012/06/63) held that not only positive rights but negative rights also come under the ambit of control since they possess the power to heavily impact the company’s decision by the Board of Directors. The veto rights over the strategic corporate decisions lead to the situation of joint control over the enterprise.
Generally, the need for notifying arises when:
(a) Board of Directors has approved the proposed transaction.
(b) Execution of any agreement or document entered into between the parties.
(c) Any binding document to acquire control, shares, assets or voting rights.
(d) A public announcement to acquire shares, control or voting rights under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.
The CCI considers various measures like Elzinga-Hogarty Test, Herfindahl-Hirschman Test along with the following criteria to assess the aftereffects of the combination whether it causing any AAEC:
- Actual and Potential Level of Competition on the market.
- Extent of entry/exit to and from the market.
- Level of Combination
- Degree of Countervailing power in the market (Buyers’s power).
- Market share of the parties.
- Nature and extent of vertical/horizontal overlap between the parties.
- Nature and extent of innovation.
Control by decisive influence vs material influence
Although complex but over the time Antitrust Authorities have come up with significant changes and precedents which forms the basics of Merger Regulation Regime in India.
Taking the broader approach, CCI considers modifications in Contractual Veto Rights, Minority Shareholdings with Affirmative Rights and other such instances as coming under the meaning of Control. In one of its earlier orders (C-2012/03/47) concerning ambit of control, CCI held that subscribing the convertible securities (like Zero-Coupon Optionally Convertible Debentures) along with right to convert it into equity shares of the entity amounts to control in competition parlance since Acquirer is entitled to exercise Decisive Influence over the company.
The determination of control is analyzed by the amount or threshold of influence one company (Acquirer) has over another (Target Enterprise). The level of influence can be assessed by calculating various factors like Every jurisdiction has its own procedure of determining the control. The CCI in the Indian perspective, there exists two types of control – Decisive Influence and Material Influence.
The former is an already established principle used by CCI to assess the level and amount of control between parties to the transaction. It is the most common test conducted by authorities to determine the level of control. It takes a broad approach & thoroughly examines the ability of an enterprise to exert decisive influence over the management or working affairs of the target entity through veto rights or majority shareholding. Since the beginning, this approach has been relied upon by CCI in the majority of cases.
A calculation and analysis of the transaction determine the party’s ability to appoint or nominate the majority of the members of the Board. Also known as the term ‘Legal Control’, decisive influence gets triggered when there is a significant shift in the concentration of power from one party to another.
The latter is a newly generated criteria introduced with the enactment of Competition Amendment Bill 2020 which saw some astute recommendations in the Competition Arena in India. The bill introduced laid down the concept of Material Influence as a potential category of deciding the level of control one entity has over another. At first, it was defined in Case & Meru Travel Case. Material Influence criteria set a lower bar (narrower approach) for assessing a company’s capability to influence management & affairs of another company through shareholding, board representation, financial arrangements and exclusive rights.
This will insert the concept of a minimum threshold point for various transactions in which there’s a significant shift in control to the other party. It will lead to consistent and undivided decisions thereby scrutinizing more and more transactions as possible. Also, this will authorize tremendous power to the CCI with almost no challenger to shake its root. For the Merger Regulation Regime, the majority of the jurisdictions analyze the quantum of control by using the Decisive Influence method. For example, the EU Merger Regulation Regime uses the Decisive Influence threshold to deal with cases. India was also among the league of nations using that method to determine control.
It was until 2013 when CCI for the first time used Material Influence as a threshold in Merger cases. Apart from this a contrasting difference between both these types of influences is that Decisive Influence is more of an Enterprise-centric since it gives maximum possible liberty to parties or entities of the relevant transaction, also making it a bit tedious for the CCI to impose penalties and punishments. Due to the larger tolerance for threshold, this influence leads to the maximum number of cases that escape the scrutiny of CCI. On the contrary, Material Influence hardly leaves any scope of liberty in computing the level of control one entity has over another.
By this method, CCI’s tasks in Merger Regulation cases have become relatively easier since almost every Merger transaction has to pass through the investigation of CCI. The tolerance of the threshold is very minuscule here. And that is the reason why this influence acts as a friend for Antitrust regulators and a foe for parties to the transaction.
Notable cases
Since the inception of CCI, it has dealt with Merger Control cases in a fluctuating and ambivalent manner. The CCI has a tendency of pronouncing Merger Control judgments using the Decisive Influence criteria for assessment. Till 2016, the commission used the Decisive Influence Test to come to a certain conclusion in a case. Although the concept of Material Influence has become a trend lately, it is still developing on a case by case basis.
Decisive influence cases
Sony/MSM Acquisition case
The Acquirers – SPE Holdings and SPE Investments (a wholly-owned subsidiary of Sony Corporation) proposed to acquire 32.39% of equity shares of MSM Corporation through Grandway and Atlas. The Acquirer already owned 62% of equity shares of the target company and was seeking to acquire another 32.39% of the shareholding. Also the former was entitled to nominate 3 directors of the Target Entity. Grandway and Atlas were empowered to nominate 2 directors on the Board.
The Shareholders Agreement earlier entered into between the parties stipulated that certain key decisions of MSM could be approved only when 75% of shareholders or directors agree to it. The 32.39% shareholding by Grandway and Atlas can be remarkably considered as fit for influencing or affecting the decision of the Board of Directors
This kind of Decisive Influence on MSM by Acquirers made it a matter of serious competition concerns. Keeping in a tab all the considerations, the CCI opined that the resultant merger in the proposed transaction saw a complete transfer of control to Acquirers from joint to sole thereby increasing the extent of control for this particular case. The CCI extended the scope of control.
Century Tokyo/Tata Capital case
The Acquirers – Century Tokyo and Tata Capital, sought to acquire the leasing division of one of the Acquirers in the form of Joint control as stipulated in the Business Partnership Agreement, entered into between the parties.
The resultant leasing division will post-merger status empower Tata Capital to nominate three out of four members of the Supervisory Committee and the remaining one will be selected by Century Tokyo. CCI held that the proposed combination comes under the purview of section 5(a) of the Act since it establishes the concept of Joint control over the assets of the company. The Acquirer is exercising the Decisive Influence over the Target Company.
Material influence cases
UltraTech Case
The first case where CCI clearly defined the meaning & scope of Material Influence. was in the UltraTech Case, where an Implementation Agreement was entered into between the Acquirer – UltraTech & Seller – Jaiprakash Associates Limited. The proposed Transaction laid down the transfer of business, assets and operations of two cement plants in Madhya Pradesh. The Acquirer also issued a bank guarantee to Axis Bank in favour of Seller in lieu of which INR 500 Crores loan was passed to Seller. As the conduct clearly was carried out before the approval of CCI, a notice was sent to the parties under Section 43A of the Act. Due to the incomplete response by the Acquirer, a notice was sent under Section 44 of the Act.
The CCI raised several issues related to the decisive influence by the KMB (Kumar Mangalam Birla) Family (Owner of Aditya Birla Group) on the subsidiaries of ABG – Century, Kesoram, Grasim, Hindalco & ABCIL. Although the shareholding of KMB Family in all the above mentioned companies is less than 50%, there still exists a possibility that significant control is being conferred upon by them. The order defined ‘Material Influence’ in para 12.10 as lowest level of control, implies the presence of factors which give an enterprise an ability to influence affairs and management of the other enterprise including factors such as shareholding, special rights, status and expertise of an enterprise or person, Board representation, structural/financial arrangements etc. Also the concept of De Facto Control & De Jure Control was established.
The CCI held this case of DeFacto Control in which an enterprise holds less than majority of a share but exercises majority control over the affairs and management of the company. Also the proposed transaction was held to be a “Strategic Investment”. Accordingly, the CCI levied a fine of INR 50,00,000 on Acquirer. Hence, in this case CCI narrowly interpreted the scope of Control.
Agrium Potash Case
A Plan of Agreement was entered into between the parties which laid down the amalgamation of both the parties – Agrium and Potash. Both parties will hold a share of 52% and 48% in a newly formed parent entity incorporated in Canada. The CCI Prima-Facie formed an opinion that the proposed transaction is likely to cause an Appreciable Adverse Effect on Competition.
The relevant product was considered as Potash since the parties business overlap in that commodity. The relevant product market was considered as India since the parties are global suppliers. CCI observed that the parties are operating in India with the same entity – Canpotex and as a result, the proposed transaction will lead to an extension of Material Influence of Potash to Joint Material Influence of Potash and Agrium combined and rejected the party’s claim that the resultant transaction will not cause any AAEC.
Observing that the parties along with the subsidiaries Canpotex, APC, ICL & SQM account for about 45-50% of the market share, the potash market is concentrated, the further concentration will surely impact the competition regimes in India. It was further noted that the proposed transaction will intensify the organizational & working links between the parties.
As a result, a divestiture of 3 subsidiaries – APC, ICL, SQM was recommended along with some modifications for the combination to be passed by CCI. Here although the control by the parties was not a serious issue, even then CCI held the control as conferring Material Influence on the company. The proposed transaction was coming under the radar of Strategic Investment.
In Re : Meru Travel Solutions Pvt Ltd.
In this case, the CCI received a notice by Informant Meru Travel Solutions Pvt Ltd (Meru) complaining against ANI Technologies (ANI), Uber India Systems Pvt Ltd (Uber India), Uber B.V (Uber BV), Uber Technologies Incorporation (Uber Tech) collectively referred to as Parties for alleged misconduct of Anti-competitive agreements & Abuse of Dominant Position under Section 3 & 4 of the Act.
A total of four separate complaints were made by the same informant. Each set of complaints prominently focused on majorly three aspects-
(a) Ola and Uber are individually alleged to be in the relevant market.
(b) Both collectively hold a dominant position in the market.
(c) Presence of common shareholders – Softbank, Tiger LLC & Sequoia Capital in both the companies increases the possibility of coming under the same group under Section 5 of the Act. Aspersions have been cast regarding the relevant market for radio taxi services in 4 cities – Mumbai, Kolkata, Chennai and Hyderabad.
The CCI observed that the Softbank although being a minority shareholder is an Active Investor in both Ola and Uber. It was also noted that Softbank has a tendency of being biased towards those startups which have the stronghold to dominate the industry. Hence it has the ability to Materially Influence the Ola and Uber.
Conclusion
Even after the plethora of cases apropos Merger Regulation/ Combination perspective dealt with by CCI, the Competition Experts are never 100% certain about whether the Proposed Transaction will cause any crucial or notable shift in the Control of the merged entity in case of merger/amalgamation & newly formed entity in case of an acquisition.
As observed in many precedents, even the transaction whose figures are crossing thresholds might not harm any of the Competition Regimes & on the other hand, some clean looking transactions might have an Appreciable Adverse Effect on Competition due to the illicit or prohibited conduct of the parties which otherwise is not easily detectable by the authorities.
As the Competition Law itself is naive in nature, let alone the Merger Regulation Regimes in it. With its developing and evolving character, we are yet to perceive the full-fledged Merger Regulation Regimes and Combination Rules which will be able to adeptly deal with such complex transactions. Till then, it’s more of a Trial & Error Method, one can approach in Merger cases.
Specifically, the CCI, being the only adjudicatory authority with regard to Antitrust issues, it casts upon itself a primary responsibility to deal in a fair & justiciable manner keeping the notion of principles of natural justice so as to avoid any Miscarriage of Justice.
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