This article is written by Sparsh Agrawal, from Symbiosis Law School, Hyderabad. In this article, he discusses the regulation of combinations in the light of Competition act and various other jurisdictions. Moreover, laws relating to gun-jumping in case of combinations and composite combinations are also discussed in length.
Table of Contents
Introduction
The concept of combinations which had been common in developed countries. This particular concept was not popular in India until the policies introduced by liberalization, privatization and globalization. Such policies also resulted in the entering of multinational companies (MNC’s) in the Indian markets. Pertinently, the Indian Companies now had to compete with the MNC’s for surviving in the market. Furthermore, these MNCs opted for acquiring companies in the Indian market through mergers and acquisitions, instead of building its business from scratch. Therefore, in the light of increasing such combinations between the companies, India has enacted the Competition Act 2002.
The Competition Act 2002 binds the parties to the combination and sends the mandatory notification to the CCI for a combination and the aforesaid act provides for high thresholds with regard to assets and turnover.
According to Section 5 of the Competition Act, 2002 a combination is an “acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises”.
In simple words, a combination can be defined as a merger, acquisition, amalgamation between two or more enterprises or businesses. The aforesaid act puts up a responsibility on the government to control such merger, acquisition and amalgamations by the MNC’s, as MNCs with their huge power and resources tend to dominate the Indian small scale industries. Therefore, the provisions of the Competition Act, 2002 ensures that there is fair competition in the market.
Types of combinations
The types of combinations can be classified into three parts: Horizontal Combinations, Vertical Combinations, Conglomerate Combinations.
Horizontal combinations
The Horizontal Combinations are formed between the enterprises that operate in the same level of production process and there are substitute goods available for the same. Sometimes such a combination can be bad in law as it reduces the competition in the market and which leads to “high pricing power of one power” of one combination. This is bad for the consumers because they are forced to buy the goods at a higher price value.
Vertical combinations
Vertical combination is a non-horizontal combination, wherein the firms are in different levels of supply and distribution of a product. The formation of vertical combinations leads to a pro-competitive environment in the market which further results in process control, more market share and establishing a better supply chain.
Conglomerate combinations
Conglomerate Combinations involve enterprises or firms that are unrelated in their business fields and they form a merger or combination. For example: If one company is involved in the production of goods, while another company provides services for the same. Then they tend to collaborate with each other for making better profit standing in the market.
However, the huge disadvantage for such a combination can lead to monopolization of this conglomerate which eventually to denial of entry for the new competitors in the market.
Foreign antitrust regulators on combinations
USA
Sherman Antitrust Act, 1890
It is pertinent to note that the application of Sherman Anti-Trust Act, 1890 pertaining to mergers and acquisitions under the ambit of combinations vary from case to case, as it is highly subjected to interpretation by the U.S Supreme Courts.
The statue simply condemns:
(1) the combinations, contracts and conspiracies which causes restraint in the market.
(2) Any conspiracies, monopolization, and conspiracies that attempt to monopolize.
However, the aforesaid act is vague and general as the laws are dependent upon the judicial interpretations made by the U.S Supreme Courts. Therefore, the judicial interpretations made by the courts are more significant than the Sherman Act, 1890.
It is worth mentioning that in the case of North Securities Co. v. United States U.S 197(1904) the court in the U.S adopted that all the mergers formed between the firms who are in direct competition with each other shall be a restraint of trade and violation of Sherman Act. Pertinently, this decision by the court hindered the creation of new monopolies through the formation of horizontal mergers.
Clayton Anti-trust Act, 1914
The monopolizing activities which were condemned under the Sherman act of 1890 were specified and further extended to the Clayton Anti-trust Act, 1914. Furthermore, this act prohibited price discrimination, mergers, and exclusive dealing in the market.
In the case of U.S v. General Dynamics US 486 184 rejected the review of anti-trust regulators on the exclusivity of market share for determining the anti-competitive effects. The court stated that a merger’s history, structure, and probable figure can be of significant use for determining the probable anticompetitive effect on the merger.
Federal Trade Commission Act, 1975
The Federal Trade Commission Act of 1975 declares the unlawful methods of competition, unfair or deceptive acts or practices that tend to affect the market. Section 5 of the aforesaid act, prohibits the “unfair method of competition in the market” and empowers the Federal Trade Commission to have an independent jurisdiction for enforcing the Anti-trust laws. Furthermore, this commission is empowered to take action against anti-competitive conduct which is violative of the Clayton Anti-Trust Act,1914 and Sherman Act,1890.
Hart-Scott-Rodino Antitrust Improvements Act, 1975
The Hart-Scott-Rodino Antitrust Improvements Act, 1976 (HSR) introduced an important reform with respect to combinations. The act established a mandatory pre-merger notification procedure for the parties to a merger or a combination. This act made it mandatory for the parties to a merger or a combination to notify the U.S Justice Department and FTC before completing the transactions.
Merger Guidelines
In May 1992, both FTC and Justice Department issued clarifications and guidelines for mergers. Such guidelines we issued not as “law” but for the enforcements of policy statements. The 1992 guidelines recognized that most of the horizontal mergers are pro-competitive and are beneficial for the consumers. These guidelines prescribe five questions to identify horizontal mergers as anti-competitive:
- Does a merger cause a significant increase in concentration and produce a concentrated market.
- Does merger have the potential to cause adverse competitive effects in the market.
- Would entering into a merger can potentially frustrate the anti-competitive conduct in the market.
- Does a merger have the potential to generate efficiencies which parties could not get by any other means?
- If at all the merger is not formed, does either of the parties likely fail and leave its assets.
European Union
The European Community Merger Regulation (ECMR), 2004
Prior to the enactment of the European Community Merger Regulation (ECMR), 2004 there were no provisions explicitly dealing with the mergers and combinations in the European Economic Community. The regulation prescribed a relatively high threshold for the net turnover. Moreover, the regulation introduced the term “concentration” in the market rather than the “mergers” per se. This was done because “concentration” applies to mergers of two entities as well as when there is a concentration which falls short of a full concentration.
Furthermore, the “Council Regulation(EC) No.139/2004 of January 2004 on the control of concentration between the undertaking (The EC Merger Regulations) OJ 2004L24/1” laid down the detailed rules for the application of principles set out in Articles 81 and Article 82 of the treaty establishing the European Community. Pertinently, the regulation discussed the appropriate regulations and directives with regard to control of concentration between the undertakings. Therefore, the aforesaid regulation applies to a concentration with a Community dimension.
United Kingdom
The competition policy in the U.K can be traced back to Restrictive Trade Act 1956. It is pertinent to note that legislation of mergers and monopolies was introduced in the Fair Trading Act of 1973. Moreover, in order to regulate the antitrust domestic laws the Competition Act, 1998 and Enterprise Act, 2002 were introduced in the United Kingdom.
The Competition Act, 1998
The Competition Act, 1998 is based upon the Article 81 and Article 82 of the E.C treaty. Chapter I of the act like the article 81 of the EC Treaty prohibits the anti-competitive agreements, Chapter 2 of the act like Article 82 of the EC treaty talks about the abuse of dominant position in the market. The Director-General of the Fair Trading and Competition Commission, which replaced the Monopolies and Mergers Commission, will enforce the act.
The Enterprise Act, 2002
The enactment of Enterprise Act, 1998 had a positive impact on the United Kingdom’s economy. Part 5 of the act dealt with the mergers and combinations, while Part 4 and Part 5 of the aforesaid act dealt with market investigations and the regulating Commission respectively. Moreover, the creation of relevant mergers is defined under Section 23 of the Enterprise Act.
Stepwise procedure regarding the regulation of combinations under Indian competition regime
Section 29 of the Competition Act, 2002 deals with the “procedure for investigation of a combination”. Combinations can only be regulated when they tend to cause an appreciable adverse effect in the market or they abuse their dominant position in the market. Moreover Section 5 and Section 6 of the Competition Act, 2002 covers the definition and provisions for regulation of combinations.
Step 1: To notify
The parties to the combination have an obligation to notify the Competition Commission of India (CCI) regarding the merger or combination as per prescribed under Section 6(2) of the Competition Act, 2002. CCI asks the parties to notify in order to determine whether such a merger or combination can potentially cause an appreciable adverse effect (AAEC) in the market. Furthermore, in order to test the AAEC in the market, CCI takes into consideration factors such as actual and potential level of competition, level of competition through imports in the relevant market, the existence of entry barriers in the relevant market, the level of combination in the market etc.
Moreover, the Amendment Regulations 2016 brought in the procedure pertaining to transactions of business with regards to combinations. The 2016 Amendment stated that any new enterprise recognized by the Competition Commission of India (CCI) has to be in compliance of 6(2) of the Competition Act.
Step 2: Inspection of the notice
CCI will carry out an inspection in accordance with CCI Amendment Regulations, 2016. Moreover, if there are any defects found in the merger or combination, the parties to the combination are asked to remove such defects.
Step 3: Prima Facie Opinion
As per Section 29(1) of the Competition Act, 2002 the Competition Commission of India needs to have a prima facie opinion within 30 days of the receipt of the notice. Moreover, in accordance with the 2016 Amendment Regulations, the commission may order the parties to the combinations to file additional information.
Furthermore, the parties to a combination or a merger are asked to publish the requisite details of the combinations in accordance with Section 29(2) which creates an open invitation to the public to come forth with a statement of objections within the 15 days from the publishing under Section 29(3). Moreover, the Competition Commission of India reserves a right to demand additional information regarding the combination or merger under Section 29(4) read with Section 29(5).
Step 4: Proceedings with regards to the final order
The Competition Commission, as per Section 31 of the Competition Act, 2002 decides as to whether the combination will have an adverse effect in the relevant market. If at all, the commission findings state that there is no adverse effect in the market, then the transaction will be approved under Section 31(1) of the Competition Act, 2002.
If the findings of the Commission states that the combination shall have an adverse effect in the market, then it will declare the requisite transaction null and void as per Section 31(2) of the Competition Act, 2002.
There can be a third case wherein, the Commission can provide the parties with the modifications to be made in the transaction to curb out the provisions which have the potential to cause an adverse effect in the market. This is done in compliance with Section 31(3) of the Competition Act, 2002.
Gun Jumping
Gun Jumping refers to a situation wherein the parties to the combination consummate the combination directly without seeking approval from CCI. Such an act by the parties is punishable with a fine in accordance with Section 43A of the Competition Act,2002.
Pertinently, the Indian merger control regime has been suspensory in nature. If at all the parties to the combination want to consummate with the transaction for a combination (i.e merger/acquisition/amalgamation), they need prior approval from the CCI.
For seeking permission for merger or amalgamation, or execution of an agreement for the acquisition, the merger had to be filed with the CCI within 30 days of approval. However, the 30 days requirement period has been removed. But, the requirement notifying the CCI about the combination and seeking CCI’s prior approval before consummating the transaction is a mandatory procedure and failure to comply with the same, exposes the parties for gun-jumping.
The Supreme Court in its catena of Judgements has dealt the law with regard to gun-jumping. It can be discussed in three parts:
- Firstly, the legislative intent behind the prohibition of gun-jumping.
- Secondly, the existence of men’s rea.
- Thirdly, notification regarding the interconnected transaction.
Legislative intent behind the prohibition of gun-jumping
In the case of SCM Solitifert Ltd. and Anr v. Competition Commission of India, 2018 the Supreme Court outlined the legislative intent behind the prohibition of gun-jumping. It stated that the legislative mandate of Section 6 is that every combination would have to be notified prior to entering into the same. This gives the opportunity to CCI that such a combination will have an appreciable adverse effect on the market. The Supreme Court duly recognized that if the approval for the combination is sought after the combination has been consummated, it will defeat the whole purpose of the act.
The Supreme Court held that when the approval had been gained subsequently by the parties from CCI, it does not have that penalty under Section 43A of the Competition Act,2002 will not be imposed for gun-jumping. There are two separate issues to be dealt with:- Firstly, the approval of transactions by the parties. Secondly, the necessity of adherence to the suspensory regime of CCI.
Therefore, in the light of the aforementioned Judgment, if the parties to a combination have internally approved for the combination, the transaction cannot be further processed until notifying the CCI about the combination and CCI approves the same. Therefore, no provision for ex-post facto approval (i.e.CCI approval after consummation of the combination) is envisaged under the act.
Existence of mens rea
In the Solifert Judgement itself, the Supreme Court dealt with another pertinent legal issue. The issue was whether ‘mens rea ‘ of the notifying party is relevant for penalty under gun-jumping cases. The SC held that whether the notifying party has an intention to evade the notice is immaterial for the imposition of penalty under Section 43A of the act. The SC justified this by stating that “mens rea” is an essential element in deciding the criminal matters. However, when it comes to civil matters, the application of mens rea is not necessary, like in the present case.
Notification regarding interconnected transaction
The Supreme Court in the case of Competition Commission of India v. Thomas Cook(India) Ltd. and Anr, 2018 stated that when there are multiple interconnected transactions, they form a composite transaction. Therefore all these interconnected transactions have to be notified at the time of notifying the principal combination. The Supreme Court in the aforementioned case observed that there were certain purchases that were related to the main combination. Therefore, parties to the combination contravened the provisions of the Competition Act,2002, by consummating these purchases prior to notifying the Commission.
Composite combinations
The provisions pertaining to the composite combination were enacted in the form of Regulation 9(4) to facilitate the goal made by the Raghvan committee. Regulation 9(4) states that the transactions which are interconnected or interdependent are known as composite regulations. The object behind such enactment is when there are multiple interconnected transactions that wish to consummate the combination, then the details of every single transaction must be provided to the CCI.
However, CCI by Amendment Regulations, 2016 omitted the words “ or interdependent on one another” from Regulation 9(4). Therefore, there is confusion in the jurisprudence of composite legislations in the light of the 2016 Amendment.
Issues arising because of 2016 Amendment
There have been a number of issues that arose because of Amendment Regulations 2016 which omitted the words from Regulation 9(4). There is no adjudicatory authority that addressed the issue pertaining to ‘inter-dependence’ and ‘interconnected’. The Merriam-Webster Dictionary defines interdependence as dependent on each other and interconnected as “mutually joint or related”. Therefore, it can be stated that definitions of both terms depict different types of relationship between the two entities.
This aforementioned difference was needed to be addressed especially in the light of the 2016 Regulations. Prior to the 2016 Amendment CCI’s approach regarding composite combinations to find ‘interconnectedness’ and ‘inter-dependent’. However, post-2016 Amendment CCI shifted its focus only to interconnected, without even shedding light on the difference made by the omission of ‘inter-dependent’.
With regard to the legislative intent of Regulation (4), it was significant to define the difference pertaining to inter-connected and inter-dependent. Not defining it has created obstacles for its operationalization. When the parties to the combination in the case of Thomas Cook/SHRIL went before the Supreme Court for adjudication for the same, the court still did not deal with the two terms.
Conclusion
In the Indian Competition law regime, the mergers and amalgamations have not been classified into horizontal, vertical and conglomerate combinations. It must be done to regulate these three forms of combinations which are having divergent combinations. Such a classification in the regimes such as the United States, United Kingdom and European regimes has helped them in strengthening their antitrust laws.
In the light of the aforementioned discussion, it can be stated that no combination can be consummated by the parties without having prior approval from the CCI. If at all, an ex-post facto approval is obtained, it will not protect parties from being penalized for gun-jumping. It is pertinent to note that, in gun-jumping cases, the intention of the parties is immaterial even if they are bonafide intentions. Furthermore, every single transaction building up to a composite combination needs to be notified to the CCI.
There can be a number of factors which can be taken into consideration to determine whether a merger or combination is causing adverse effects in the market and abusing its dominant position. However, the CCI, as well as other antitrust regulators, tend to assess the combination based on the principle that whether the combination will have pro-competitive effects or anti-competitive effects.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:
