This article is written by Madhur Patel who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Development of the Indian economy towards free-market practices has also led to the growth of various competitive practices like mergers, acquisition and takeovers which have become quite common and corporate reconstruction of various companies in the form of Mergers and Acquisition directly affects the competitive aspects within a market and that is why amongst the gamut of laws that are relevant in a Mergers and Acquisitions (M&A) practice, competition law is one of the most significant.
The following article makes an attempt to understand this exact connection between the competition law from the perspective of practicing Mergers & Acquisitions lawyers. Firstly, the article would discuss the important aspects of the current competition law along with a brief history of the same for contextual understanding and then in the second part of the article the merger control regime that currently exists shall be discussed extensively followed up by the conclusive remarks of the article.
Competition law and its historical context
Unlike the other developing nations and even before the economic liberalisation, India already had a competition related legislation in place, called the Monopoly and Restrictive Trade Practices Act, 1969 (MRTP Act) and the main objective of the same was to prevent monopolies coming into existence and prohibit unfair trade practices. However, the MRTP act’s outlook wasn’t specific in nature as it catered to both the consumers as well as the stakeholders in the market and this approach became impractical and that is why a need for a legislation that specifically dealt with the issues of the various stakeholders in the market was needed i.e. a bifurcation was done and the Competition Act, 2002 came into existence.
Another major gap within the MRTP Act was the lack of a robust merger control regime as at that point of time the government was of the view that the incumbent Companies Act,1956 was enough to regulate the same. The current Competition Act was established on the basic principles based on the various international established competition agreements and the regulatory body, which was established via the Act, The Competition Commission of India works on these three fundamentals:
- Explicit prohibition of activities leading to cartelisation that leads to subjugation of healthy competition.
- Explicitly outlawing the abuse of dominant position to gain unfair competitive advantage within the market.
- Regulating various mergers and acquisition, “combinations” which could lead to unfair trade practices and hinder healthy competition within the market.
The CCI unlike in the first two instances where the CCI prohibits those activities in the third scenario it merely wants to regulate the M & A transactions rather than prohibiting them and that is exactly where the merger control regime of the Competition Act becomes relevant. Before dwelling extensively into the merger control regime in the subsequent section of the article the two important terms and definitions that one should be aware/familiar of are ‘appreciable adverse effect on competition (AAEC)’ and ‘combinations’.
Now, AAEC has been mentioned under Section 3(1) and it is this adverse effect on the fair competition that CCI wants to avoid at all costs and it is the blanket term’ combination’ which is used to cover all mergers, acquisitions or amalgamations which require an approval from the CCI to go ahead and the CCI wants to regulate the same. The CCI doesn’t believe that every merger, acquisition and amalgamation has the potential to adversely affect the competition in the market and that is why it has laid down certain thresholds if crossed by the transactions only then they shall be liable to be notified to the CCI and are termed as ‘combinations’ under the Competition Act,2002. This is exactly where the work of a practicing M and A lawyer kicks in whereby they are the one’s that often do research on whether their transactions breach the various thresholds and even need to be notified to the CCI.
Merger control regime
Relevant Preliminary Assessment Tests within the Merger Control regime
Even though the act was enacted in 2002 the relevant provisions with regards to ‘combinations’ came into effect only in 2011 as the regulations with regard to relevant procedures were laid down in 2011. As mentioned in the above section that the M and A practitioners always need to conduct certain preliminary tests to determine whether their transaction be it a merger, acquisition or even an amalgamation falls under the category of a ‘combination’ and needs to be notified to the CCI to get an approval. The relevant section under which these tests or the thresholds are stated is Section 5 of the Act. The Section in itself doesn’t lay down tests per se however for the purpose of practicality, there are three major tests that have been interpreted from the same and help in conclusively answering the question if the exemptions granted within the section apply to a transaction.
Target Exemption Test
This exemption is relevant only If the transaction in question is an acquisition, whereby one party is acquiring stake within another party also known as the ‘Target Party’ then according to subsection (a) of section 5 all the acquisitions would be exempted from notifying the CCI if either the total assets of the Target Company (including its all the units, subsidiaries) do not exceed the threshold of INR 350 crores or if total turnover of the Target Company is less than INR 1000 crores. One caveat that exists specifically for ‘acquisitions’ is that in cases where only certain divisions of a company or entity are being acquired then only the assets and turnover of that specific division are used while calculating the thresholds. So, essentially if either the total assets or the turnover fall below the stated thresholds the exemption is granted to that acquisition and they need not be notified to the CCI and one does not even have to go and check other subsequent exemptions.
The Parties Test
The following test applies to all kinds of transactions i.e., acquisitions, mergers, and amalgamations. Within the parties test the thresholds are calculated combining the total assets and turnover of both the parties. Under subsection (b) of Section 5 it has been stated that to get an exemption the total assets and the total turnover of both the parties (including units, divisions, subsidiaries) combined shall be less than INR 2000 Crores and INR 6000 Crores, respectively. The difference here one should keep in mind is the fact that exemption would only be granted if the thresholds are not breached in both the categories i.e., the total assets and the total turnover unlike in the case of target exemption test whereby either was sufficient.
The Groups Test
This test again only becomes relevant if the transaction does not get exemption under the parties test and from a practical perspective usually the following test very rarely helps in getting exemptions if the transaction breached the party test and cannot avail the exemption. For this test the total assets and turnover of all the group companies is also included of both the parties while calculating the threshold and under Section 5 of the act the threshold for total assets and total turnover are INR 8000 Crores and INR 24000 Crores. Due to such a huge ambit of the test practically very rarely a transaction specifically gets an exemption under the groups test and not under the parties test already. Here as well similar to parties test the exemption would be granted only if both the thresholds haven’t been breached.
So, according to Section 5, if a transaction isn’t able to avail exemptions from these three tests they shall be called ‘combinations’ and are required to be notified as they do have the potential to adversely affect the competition in the market. However, the final set exemptions that apply to such ‘combinations’ are present within Schedule 1 of The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 and they consist of 10 sets of exemptions/items, which are specific scenarios which in case apply to your combination also give exemption from notifying the CCI.
Discussing all the items extensively one by one is beyond the scope of this article however, from the practitioner’s perspective the most used and relevant exemption is under Item 1 of the Schedule whereby all the minority acquisitions i.e., below 25% stake in the Target Company if done only for the purposes of ‘investment only’ need not be notified but as this term for ‘investment only’ has been kept wide by the CCI and is something that they look into from case to case basis and the jurisprudence of the same is still evolving an absolute discussion of which is again worthy of one article on its own and beyond the scope this one.
Gun-Jumping and Merger control
In order to make sure that the parties always notify the CCI about their transactions whenever they cannot avail the various exemptions discussed above, the competition act penalizes the act of not notifying, under Section 43 A of the Competition Act and this act of not notifying the transaction is colloquially also known as ‘gun-jumping’, having its roots in the phrase jumping the gun i.e., going ahead with a transaction under the nose of the CCI and not giving the appropriate notification to the CCI. The underlying principle behind having sections that ensure no gun-jumping occurs is that the transaction in no way adversely affects the competition in the market in any form until and unless it has been reviewed and approved properly because often the harm that might be caused also becomes irreversible. Now, from the M and A perspective the two types of gun-jumping that have been acknowledged within the competition act and by the CCI are:
- First type of gun-jumping is quite straightforward in nature whereby either voluntarily or involuntarily (often involuntarily) the parties do not notify a transaction which ideally should have been notified under Section 6(2) of the Act following all the procedures properly and, in such scenarios, the Mens rea of the party is irrelevant something that the Supreme Court has already clarified in its order in the case of CM Solifert Ltd. v. Competition Commission of India and this exact stand has been taken by the CCI as well always in its orders, this is because of grave harm such an act would cause to the competition within the market and would also lead to a substantial amount of ambiguity while determining whether the intention was absent or not.
- It is this second type of gun-jumping which has been a point of discussion and more relevant due to the various complexities attached with it. In these cases, the parties do notify the CCI about their transaction however within the gestation period under procedural law where the CCI is assessing the relevant transaction, the parties commit an act which amounts to the transaction ‘taking effect’ even partially. This threshold of what amounts to the ‘consummation of the transaction or taking effect partially’ has been quite narrow and is something that the CCI determines from case-to-case basis. For example, CCI has viewed giving a guarantee to the bank in favour of the Target Company is enough to break the threshold and giving effect to the transaction. In another scenario it was held that paying refundable deposits within a share purchase agreement amounts to giving effect to the transaction as essentially it can be viewed as prepayment of the consideration. Hence, currently, this type of gun-jumping is highly arbitrary, and the law is still very much evolving.
So, complying with these gun-jumping regulations is very much important and of relevance for a practicing M and A advocate as the penalties for not complying with it are not only financially huge but also cause enormous harm to the reputation of the parties involved within the market.
The need for a specific legislation for the interest of the stakeholders within the market was the gap that the Competition Act, 2002 filled. Even though the merger regime for the practical purposes came into effect in 2011 and currently numerous aspects of the regime are still in its nascent stage, but still inclusion of a robust and sophisticated Merger Control regime within the ambit of the Competition Law was definitely a welcoming change in the context of the economic growth that our financial and capital market had witnessed post the economic liberalisation. Even in its short tenure the merger regime has become highly relevant within the M and A practices and this article tried to discuss the most pertinent aspects of the competition law from an M&A practitioner’s perspective.
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