This article has been written by Shaunak_Choudhury pursuing the Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
Introduction
Early 2020 the news hit the internet that Zomato, the multinational restaurant aggregator and food delivery company, has bought out UberEats, the food delivery company formerly owned by Uber India Systems Private Limited (UISPL), in an all-stock buy out. The same was also published on Zomato’s website. Most of the details of the transaction between Zomato, UISPL, and Uber Technologies Inc. (parent company of UISPL headquartered in San Francisco, USA) were unknown and only broad evaluations of the value of the transaction were reported. It was reported that the employees of Uber-Eats shall not be absorbed by Zomato after the transaction.
Details of combination
The transaction was an asset purchase agreement dated January 21, 2020, between the parties, with Zomato not actually purchasing the whole of Uber-Eats but the parts that made the core of its business. This was made apparent after the Red Herring Prospectus for the Zomato IPO was published. The composition of the purchase did not just include particular assets of Uber Eats but also a non-compete agreement and a brand licensing agreement. The total purchase consideration was chalked down to a major ₹13,759.52 million. The bifurcation, although not very detailed, was between the three items; non-compete valued at ₹1,354.44 million, brand license of ₹1,234.37 million, and ₹11,170.71 million for the UberEats assets. In Zomato’s accounts, UberEats assets have been mentioned as “goodwill” since the individual assets were not recognized independently of each other. The only categorization that the prospectus gives is that the assets Zomato bought were the Uber Eats India Contracts and Data along with transition services.
The consideration paid for the transaction was in fact not purely through Zomato shares. 76,376 cumulative compulsorily convertible preference shares were allotted to UISPL, they were issued at a total fair value of ₹687.39 million and share premium worth ₹13,071.98 million. ₹150,000 was given as cash consideration. The shares were then transferred to Uber B.V. and on April 6, 2021, the CCCPS were converted to 617,199,100 equity shares, which is 9.19% of the total share of equity in Zomato.
Reason for asset purchase
The purpose with which this transaction was carried forward was, as per Zomato, was to expand the food delivery service in India by integrating the assets of Uber Eats with the existing tech platform and salesforces. Meaning the integration being primarily of the market space that Uber Eats had created along with the data from its operations to acquire more customers on its own platform. UISPL also cannot engage in the food delivery business for 3 years due to the non-compete signed in this transaction.
As it has been previously analyzed by many, this move was to clean the marketplace to establish two clear competitors, Zomato and Swiggy. And with its IPO, Zomato is more committed to the goal of reigning supreme over Swiggy, than ever. For Uber, it is a cost-cutting strategy as Uber Eats was not performing as per what the company would have liked. It did not have the market share like Zomato and Swiggy in the food delivery service sector, and it was producing losses that the company did not wish to sustain.
Notice from Competition Commission
Along with details about the combination, the consideration paid, and the exact nature of shares devolved to Uber B.V., what also came to light with the prospectus was the notice sent to Zomato from the Competition Commission of India with regard to the Uber Eats purchase. In any way, in May 2020 it had been reported that the CCI was looking into the combination. The show-cause notice was sent under Regulation 48 of the CCI (General) Regulations, 2009 which is pertaining to the procedure for imposing penalties on any entity as per Chapter VI of the Competition Act, 2002. The penalty that the CCI wishes to impose upon Zomato is under Section 43A of the Act which talks about failing to give notice as per Section 6(2) of the Act, to the CCI for entering into a combination. The management of Zomato is of the firm opinion that the combination was non-notifiable and has accordingly sent a response to the CCI asking for an oral hearing as per Section 43A. The question is whether Zomato was correct in its assessment of the laws or the CCI can impose a penalty on it. This article shall not deal with the question of whether the combination causes appreciable adverse effects as that is a question of law that would require its own exhaustive analysis.
The laws involved in the matter
Notice as per Competition Act
Section 6(2), specifies that any person wishing to enter into a “combination” shall have to give notice to the CCI about the proposal. The section is clear about the fact that the notice must be given before the combination has been executed and not after since it uses the word “proposes’ ‘. The reason it must be given before the combination has been entered into is that it will give an opportunity to the CCI to determine whether the combination is in fact in accordance with the Act or not. This assessment shall be crucial in determining the fate of the combination. This has been held in SCM Soilfert Ltd v. CCI, where a penalty of ₹2 Crores was imposed on SCM Solifert India Limited and Deepak Fertilizers and Petrochemicals Limited because they had failed to notify the CCI about the acquisition of shares in Mangalore Chemicals and Fertilizers and the Supreme Court held that an ex post facto notice would be violative of Section 6(2) since it would be a fait accompli.
Combination regulations
The procedure and format of the notice to be sent to the CCI has been given in Regulation 5 of the CCI (Procedure in regard to the Transaction of Business relating to Combinations) Regulations, 2011. As per the Regulation, Form I in Schedule II must be filled and submitted along with the requite fees. Form II on the other hand is an optional formality that the entities may provide if they are involved in similar or identical services or processes pertaining to similar or identical or substitutable goods, and after such combination, the share of the parties in the relevant market shall be more than 15%. Form II may also be submitted if their businesses are at different levels in the processes behind a similar, identical, or substitutable good or service and after the combination, they share more than 25% of the market. If Form II has not been given by the entities and the CCI feels that the combination may have an appreciable adverse effect on the relevant market, then it may call upon them to submit the form. If required, the CCI may ask for more information from the parties if the Forms are insufficient. The fee for Form I stands at ₹15 Lakhs and for Form II it is ₹50 Lakhs, which is why perhaps many parties to combinations would not want to send Form II right away without the CCI asking for it.
The Combination Regulation in Regulation 8 gives the power to the CCI to inquire into the combination if the parties fail to notify about it. The CCI shall also direct the parties to file Forms I and II within 30 days of the receipt of the communication. Such inquiry shall take place as per Section 20(1) of the Act and shall be guided by the CCI (General) Regulations.
Explicit exceptions are made in the Combination Regulations in Regulation 4 which mentions that types of combinations in Schedule I need not be notified. The exception in Schedule I that would be most relevant would be point 3 where acquisitions of assets in the normal course of business or made as an investment do not lead to control over the enterprise.
We can also look at the definition of a combination to determine whether any of these regulations would apply to Zomato. As per Section 5 of the Act, where the acquirer and the acquired have more than ₹1000 Crores worth of assets or turnover more than ₹3000 Crores, such a transaction would be considered a combination. 
Law and Zomato
Whether a combination or not
To consider whether the combination was notifiable or not, we must decide whether the arrangement was a “combination” under Section 5 of the Act in the first place. Zomato by itself crosses the mark that Section 5(1)(i)(A) sets by a large margin. Since its assets are valued at ₹69883.21 Million (₹6988.321 Crores) it comfortably crosses the ₹1000 Crore mark. Thus, the regulations pertaining to combinations shall apply to the deal.
Compulsorily notifiable or no
As mentioned before, there are certain exceptions to the rule of notifying the CCI about a combination. Regulation 4 of the Combination Rules mention Schedule I which lays down several exceptions although the only one meant for asset acquisitions is about purchases made by the company in the regular course of business or as an investment, which this deal will clearly not qualify for. As per the Red Herring Prospectus, the deal has been stated as a method of expanding its customer base and increasing its market share (as per page 109). It is meant for integrating the assets of Uber Eats with Zomato’s existing platform and technology for generating outputs for the Food Delivery Business and has been described as an inorganic way of growing the business (as per page 272).
Ordinary course of business or what qualifies as an investment for the party has not been defined in the Competition Act, 2002, but the same in the context of the Insolvency and Bankruptcy Code, 2016 in Anuj Jain v. Axis Bank has been determined as the common flow of transactions of the business. If the activity is indistinguishable from the rest of the transactions of the business, it would be considered as being a part of the ordinary course of the business. The combination shall certainly be considered extraordinary since Zomato’s ordinary business is relating to aggregating restaurants and food delivery. It will not count as a simple investment since the assets are being integrated into the business. Thus, the exception would not apply to the Zomato and Uber Eats deal.
Concluding remarks
The management at Zomato should have not taken a chance with the CCI with such a prominent and widely known deal. It was only a matter of time that they would have sent a show-cause notice under Regulation 48 of the CCI (General) Regulations and initiate an inquiry as per Regulation 8 of the Combination Regulations. This is exactly what has come to be.
It is unknown whether the CCI will find that the combination shall have an adverse appreciable effect on the market, but the whole matter has just been complicated even more due to the Zomato IPO. If the combination is found to be void as per Section 6(1) of the Act, then reversing the whole deal would be quite a task. But with respect to the analysis of this article, there is a very high chance that the CCI finds that Zomato has violated the Act and may put a penalty under Section 43A.
Whatever the conclusion of this case may be, one thing to commend is the swiftness with which the CCI has acted. The deal went down on January 21, 2020, and the notice was sent to Zomato on February 6, 2020, with news of an inquiry in May. Hopefully, the matter concludes with the CCI’s decision and not in decade-long litigation, although that is being rather optimistic.
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