https://cms.law/en/LUX/Publication/CMS-Competition-issues-in-M-A-transactions

https://cms.law/en/LUX/Publication/CMS-Competition-issues-in-M-A-transactions

In this article, Shamika Vaidya discusses the application of competition laws in mergers and acquisitions transactions.

Introduction

Competition in the market benefits the consumer through price control. Having said that, there are few instances where companies indulged in malpractices by forming cartels to control the prices or quality. These practices are prohibited in most of the global markets. Article 102 of the ‘Treaty on the Functioning of the European Union’ states that the abuse of power by the undertaking of dominant position is prohibited. There are more than 130 systems of competition in the world and at least 110 of them include the Merger Control Regulations. The global reach of competition is evident by the creation of a virtual organization, International Competition Network. This clearly reflects the belief that the evolution of competition law is beneficial to consumer welfare.

What is competition?

As discussed by the Commission in the FAQ’s, in common parlance, competition in the market means sellers striving independently for buyers’ patronage to maximize profit (or other business objectives). Unfair competition practices are indulgence in practices like (1) Barrier creation to entry (2) Allocation of markets (3) Discriminatory Pricing (4) Collusive Price Fixing (5) Predatory Pricing (6) Deliberate reduction in output to increase the price.

Competition Laws, Policies and Adjudicating Authority

In India, The Competition Law consists of The Competition Act along with the following regulations –

  1. CCI (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011(Combination Regulations)  (See link here).
  2. CCI (General) Regulations, 2009
  3. CCI (Manner of Recovery of Monetary Penalty) Regulations, 2011
  4. CCI (Lesser Penalty) Regulations
  5. CCI (Meeting for the transaction for business) Regulations

Competition policies are instrumental in improving the competitiveness of enterprises, bridging the gap between industrial and trade policies and promoting convergence which helps to boost the competition like relaxed FDI policies or liberalized trade policies.

The Adjudicating Authority for the Competition Laws is the Competition Commission of India (CCI). Vide a notification the Central Government had set up Competition Appellate Tribunal in 2009, later the National Company Law Appellate Tribunal (NCLAT) was declared to be the appellate body. The appeals from NCLAT are further taken to the Supreme Court of India.

Collaboration of CCI with other countries

CCI has collaborations with competition authorities of different countries 1) Competition Bureau, Canada 2) Federal Antimonopoly Services, Russia etc for cooperation in the field of competition. This extensively helps the commission to get hold of the companies although incorporated or functioning outside India but affecting or influencing the Indian market. (See the list here).  

M&A Transactions

  • M&A transactions involve restructuring of the companies, internally and externally. In fact, one of the prime factors that drives a company to merge or acquire is the benefit of the synergies.
  •  The resultant merged combinations could be in a dominant position in the market or could have an adverse effect on the competition in the market. An investigation into the conduct of dominant firms is cumbersome, complex and lengthy and the authorities may lack resources to police every alleged infringement. M&As are regulated ex-ante. Even before the companies merge and form a new entity, they are prevented from being in the dominant position.
  • Competition authorities can regulate changes in the market structure by exercising the power to approve the combinations. If a transactions creates a dominanat entreprise it is creating a bad outcome and can be challenged.
  • Mergers or acquisitions of entities will be recognized as a combination, if transactions surpass the thresholds put forward by Section 5 of the Act.
  • On 4th March, 2016, CCI  revised the thresholds for notification to the Competition Commission of India. The acquirers are exempted from notifying to the CCI in case the assets of the target company are not more than Rs. 350 crore and the turnover is not more than Rs. 1000 crore in India, the exemption is for the period of five years.
  • The Acquirer with assets of more than 2000 crore and turnover of more than 6000 crore have to file a notice. Acquirer outside India with Indian leg USD 1 billion with at least 1000 crore in India and turnover of 3000 crore.

OECD

  • The Organization for Economic Co-operation and Development, (OCDE) is an inter-governmental economic organization.
  • The OECD council has adopted non-binding recommendations on competition law and policy, these are often catalysts for major changes in the policies of competition laws of the countries.
  • Listed below are few recommendations;
  1. Recommendations on International Co-operation on Competitive Investigations and Proceedings, 2014
  2. Recommendation on Competition Assessment, 2009.
  3. Recommendation concerning Merger Review, 2005.

Exemptions

Banking Companies under Section 45 of the Banking Regulations, 1949 are exempted from the provision of Section 5&6 by a notification from the Ministry of Corporate Affairs in August 2017 for a period of ten years.(See notification here)

Ministry of Corporate Affairs also vide a notification exempted Central Public Sector Enterprises (CPSE) operating in the Gas and Oil sector under the Petroleum Act, 1934 from the provision of Section 5&6  for a period of 5 years (See notification here)

The Ministry vide a notification also exempted Groups that exercise Voting Rights less than 50% in other enterprises from the provisions of Section 5&6 of the Act for a period of five years.(See notification here)

Suo-Moto Cognizance

  1. Section 18 gives the commission power to suo moto initiate an inquiry if it is of the view that any combination has an adverse effect on the competition. The commission can also get into arrangements with agencies of foreign countries with prior approval of Central Government.
  2. The CCI took suo-moto cognizance of the public announcements made by acquirers the acquisition of Alstom India Limited by GE Energy Europe B.V, GE and GE Industrial France SAS. A fine of 5crore was imposed by the CCI.

Filing the notice

Reg. 9 states that if the combination is an acquisition is with or without the consent of the target company then the notice is to be filed by the acquirer. In the case of an amalgamation or merger, the same is filed by both the parties jointly.

Inquiry

When the companies fail to send the notice to the authority as per the requirement of (S.)  then according to the Regulation 8 of the Combination Regulations an inquiry is initiated by the commission to check the adverse effect of the combination if any. The commission can with regards to Reg.8(2) ask the parties of the proposed combination file notice in the requisite form.

Investigation

Section 29 explains the procedure of investigating by the Commission, notices are sent to the concerned parties for them to state the reasons as to why the combinations have no AAEC. Similarly, the commission can invite the affected parties and ask them to file written objections.

Show cause notice

The commission can issue a show cause notice if it is of the view that the combination, whose parties have applied for the approval has an adverse effect on the competition.

Report

The commission may call for a report from the Director-General and invite the affected people with written objections.

Instances of Gun Jumping

Gun Jumping is not a statutory concept and has been evolved with competition laws and its judicial interpretation. When parties to the proposed merger fail to notify the transaction to the competition authorities and implement parts or all of the merger steps during the mandatory waiting period it is know as gun-jumping.

Thomas Cook Vs. Sterling Holidays  ( CRNo. C-2014/02/153)

CCI imposed a penalty of 1 crore on three entities namely;

(1) Thomas Cook (India) Limited (TCIL) (2) Sterling Holidays Resort (India) Limited(SHRIL)  (3) Thomas Cook Insurance Services (Private ) Limited (TCISIL)

Scheme of Amalgamation and Arrangement

TCISIL was a subsidiary of TCIL the following was the scheme that was proposed between the parties –

The resort and time business of SHRIL was initially proposed to be demerged from the company and later transfer to TCISIL in lieu, the shareholders of SHRIL were to receive equity shares from TCIL as per the decided ratio. The residual business of SHRIL was to be amalgamated into TCIL in lieu of equity shares of TCIL to the shareholders of SHRIL.

The issue

In accordance with the proposed scheme, the parties entered into the Subscription Agreement and Share Purchase Agreement. Later, an Open offer had to be made in accordance with the SEBI guidelines. According to the Competition Commission, the market purchases were consummated before issuing a notice to it. Therefore, the parties had failed to adhere to Section 6(2) of the Act where they failed to issue a notice and make disclosures before getting into a combination to the commission

Show Cause Notice

A show cause notice was issued to the parties in accordance to Regulation 48 of CCI (General) Regulations, 2009 along with 41A of the Competition Act to show cause in writing as to why a penalty should not be imposed, within fifteen days from the date of the receipt. In the Show cause notice, the commission demanded a clarification as to (1) Why SHRIL had to purchase TCIL and its subsidiary when SHRIL business was going to emerge and amalgamate with TCIL.

The parties in their replied presented a logic as below-

1) That the market purchases were not the part of the transaction and there is no mentioning of the same in any of the agreement, an approval is not necessary from the commission from the same.

2)The approval of the Market Purchases happened through separate Board Resolutions

However, not convinced by the reply the commission was of the view that the two transactions were interconnected and not independent and replied as below –

1) That the time of market purchases was almost simultaneous as that of entering into SPA and SA and it was difficult not to believe that the whole transactions are part of a composite transaction by the act of the parties.

Order

Section 43A mentions the penalty that could extend to 1 percent of the turnover or the assets of the combination. In this case, the commission was of the view that although the disclosures were made pursuant there was no effort to conceal any information, therefore, it wasn’t a severe breach and imposed a fine of 1 crore on the parties.(See complete order)

Tesco Overseas Investment Limited (TOIL) and Trent Hypermarket Limited (THL)

  • A Joint Venture Agreement and Share Purchase Agreement were executed between Tesco Overseas Investment Limited (TOIL) (acquirer) and Trent Hypermarket Limited (THL) for acquisition of fifty percent of the issued and paid-up equity share capital of (THL).
  • The acquirer through its notice to the CCI under Section 6(2) sought their approval on 21st March 2014.
  • As per, Section 5(3) of the Competition Act, 2002 and Regulation 5 of the Combination Regulations, the acquirer was required to give notice to the commission within thirty days of sending the notice to authorities DIPP and FIPB and there was delay of 73 days.
  • As per, Regulation 14 of the Combination Regulations, the acquirer was required to justify the delay.
  • Although the commission gave a green light to the combination, under Section 43A of the Competition Act, the company was liable to pay the penalty value that is 1 percent of the total value of transaction; the penalty was reduced to 30 million INR considering that the company has voluntary sent notice to the commissions.
  • Therefore, although the Commission approves the proposed combinations it can impose a penalty on non-compliances, making proceedings under Section 43A, independent to the evaluation.(View the full judgment here).

Extraterritorial Jurisdiction

  1. Section 32 of the Act empowers the CCI with extraterritorial jurisdiction, that is the power to inquiry in cases where the combination has taken place out of India, any of the party to the agreement is outside India, anti-competitive agreement is entered outside India, party to combination is outside India or any enterprise abusing the dominant position is outside India

1) Any party outside India looking forward to merging or acquire an Indian Company.

2)  International businesses having the objectives of eliminating local competition by forming cartels and other unfair practices

Temasek Holdings an investment arm of Singapore Government and its two subsidiaries in India have imposed a penalty of Rs. 50 lakh by the CCI for delayed submission during its proposed acquisition of shares from the DBS group. (View complete Judgement here)

Conclusion

CCI had penalized dozens of companies for not filing the notice within 30 days and later issued a notification relaxing the norm.(See notification here)

Sources

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