This article is written by Ashu Bhargav, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.
Table of Contents
Introduction
An M&A transaction generally requires various approvals from within the company boards as well as from different regulators and tribunals. In the specific arena of competition law, an M&A transaction is categorized as a combination which is subject to scrutiny under various provisions of the Competition Act, 2002 (‘the Act’). In this regard, any transaction which is likely to cause an appreciable adverse effect in competition (‘AAEC’) in India is subject to modifications or disapproval by Competition Commission of India (‘CCI’).
In order to assess these transactions, every M&A transaction beyond a certain threshold is required to be notified to CCI for review. It is pertinent to note that the framework of competition law on combinations is suspensory in nature. It means that the parties in a transaction have to necessarily put the consummation of the combination on hold until approved by CCI. Alternatively, the parties are permitted to go ahead with the combination after passing 210 days since filing the notice and no order corresponding to the combination is passed by CCI. This requirement is a usual feature in most jurisdictions with some minor differences and in India, falls under Section 6(2) of the Act. It puts the onus on the parties involved in an M&A transaction to establish with the CCI that the transaction does not have any anti-competitive concerns. The parties are not permitted to give effect to their deal until it is completely reviewed and approved by the antitrust regulator. It is the failure on the part of the parties to notify a merger, whether voluntary or involuntary, that violates key provisions of the Act. The act of failure to notify a merger is also commonly known as ‘gun-jumping’.
What is gun-jumping?
Although the concept of gun-jumping has not been expressly defined in the Act, it is meant to be understood through other provisions of the Act. The legal mechanism of combination approval puts a ‘standstill obligation’ on the parties to maintain a status quo of competition between themselves while the combination is reviewed by CCI. The rationale behind the concept of gun-jumping is to ensure that the parties in a transaction remain independent competitors in the market until the transaction is reviewed for AAEC. The standstill obligation ensures that no irreversible harm is caused to the competition in the market, as otherwise, it is difficult to backtrack on even a partially completed transaction to restore the previous levels of competition. In this regard, Section 43A of the Act gives powers to CCI to initiate penalty proceedings against the parties and impose a penalty up to 1 percent of their total assets or turnover, whichever is higher. There is no dearth of such penalty proceedings against contravening parties by CCI.
Significantly, there are two types of gun-jumping acknowledged by the legislation and decisional practice of CCI:
- Procedural Gun-Jumping
- Substantial Gun-Jumping
Procedural gun-jumping
Procedural gun-jumping is the voluntary or involuntary failure to notify a combination. As per Section 6(2) of the Act, the parties involved in a combination must notify CCI within thirty (30) days of execution of any document or other document in terms of Section 5(a) i.e. any document which gives one of the parties the rights to exercise control over the other. However, businesses are currently exempted from the deadline of 30 days. It is safe to assume that such an exemption has been provided to businesses by the Government to promote awareness of competition law and to allow businesses to organize and orient themselves towards competition law.
However in the early days of CCI, when parties were required to file the notice within 30 days, some combinations were penalized on account of delay in filing.
In a combination between Titan International and Titan Europe[1], which was executed outside India, also resulted in an indirect acquisition of an India-based subsidiary of one of the parties. It was submitted that as the merger regime of the CCI was still in a nascent stage, a lenient approach should be taken by CCI against the parties. CCI acknowledged lack of awareness of Indian competition law at that time and imposed a lesser penalty on the parties jumping the gun.
It is pertinent to note that penalty proceedings are attracted irrespective of parties’ deliberate action or not.
The SC in their decision in SCM Solifert Ltd. v. Competition Commission of India[2] provided clarification on this point. It was held that mens rea is not a requirement to be fulfilled to impose penalty under Section 43A of the Act. Such a requirement is only applicable to disputes of criminal and quasi-criminal nature, whereas failure to notify is violation of a civil statutory provision.
Substantial gun-jumping
Substantial gun-jumping occurs when parties prematurely put their combination into effect during the waiting period till CCI approves the transaction or before 210 days of filing the notice. This form of gun-jumping is triggered in instances when, inter alia, parties allocate customers among themselves, share confidential information, initiate combined marketing schemes.
As per their decisional practice, CCI has made it clear that parties are not permitted to undertake any activity in pursuant to the combination, while it is under review, which may cause the combination to take effect even partially. The above restriction is placed on the parties to ensure that the competition in the relevant market is not harmed in the interim period i.e. when the transaction is under review. In this regard, the parties are required to compete against each other during this period.
In the penalty proceedings against UltraTech Cement Limited in relation to their acquisition of two plants of JAL[3], UltraTech provided a corporate guarantee to the bank in favour of JAL for a short term loan. Although the Acquirer had duly filed the notice under Section 6(2) of the Act, providing a corporate guarantee was held to be partial consummation of the combination while it was under review. As per CCI, the acquirer violated their standstill obligation and, thus, competition was harmed in the relevant market.
In another penalty proceedings[4], CCI held that payment of refundable deposit under a Share Purchase Agreement amounts to pre-payment of consideration and, thus, consummating a part of the transaction before the approval. In this case, the Acquirer, Hindustan Colas Private Limited was ordered to pay a penalty of rupees of 5 lakhs.
Jet/Etihad case[5] was one of the first in the series of substantive gun-jumping in India. The acquirer, Etihad, had notified the CCI of their acquisition of a 24 percent stake in Jet Airways. However, certain parts of the transaction had not been notified i.e. (a) commercial cooperation agreement and; (b) purchase of takeoff/landing slots of Jet at the Heathrow Airport, London. It was contended by the Acquirer that such arrangements occur regularly in the ordinary course of business, in the airline industry. CCI rejected the above contention. It was held by CCI that the Acquirer consummated the two ancillary transactions without prior approval and imposed a penalty for violation of the Act.
Whose responsibility is to file the merger notification and when
In acquisition, it is the responsibility of the Acquirer to file the notice with CCI on behalf of all the parties involved in a transaction. The above position is applicable in the case of acquisition of shares, control and assets. On the other hand, the responsibility to notify the regulator falls upon both the parties, in the case of merger or amalgamation.
In relation to acquisitions, Regulation 9(1) of the Combination Regulations provides that –
“9. Obligation to file the notice-
(1) In case of an acquisition or acquiring of control of enterprise(s), the acquirer shall file the notice in Form I or Form II, as the case may be, which shall be duly signed by the person(s) as specified under regulation 11 of the Competition Commission of India (General) Regulations, 2009.
Provided that in case of a company, apart from the persons specified under clause (c) of sub-regulation (1) of regulation 11 of the Competition Commission of India (General) Regulations, 2009, Form I or Form II may also be signed by any person duly authorised by the company.”
Regulation 9(3) of the Combination Regulations is applicable in the case of merger or amalgamation. It states that –
“(3) In case of a merger or an amalgamation, parties to the combination shall jointly file the notice in Form I or Form II, as the case may be, duly signed by the person(s) as specified under regulation 11 of the Competition Commission of India (General) Regulations, 2009.”
As for the question as to when the notice is to be filed, Section 6(2) of the Act offers guidance. It states that –
“(2) Subject to the provisions contained in sub-section (1), any person or enterprise, who or which proposes to enter into a combination, shall give notice to the Commission, in the form as may be specified, and the fee which may be determined, by regulations, disclosing the details of the proposed combination, within thirty days” (emphasis supplied).
As per the relevant provisions, the requirement to give notice arises after the approval of the Board of Directors, in the case of merger or amalgamation. On the other hand, for the purpose of acquisitions, the requirement arises after the execution of a document of execution or any other document. As per the aforementioned provision, the notice must be filed within 30 days, in both the cases of merger/amalgamation or acquisition.
That being said, as per the notification issued by the Ministry of Corporate Affairs[6], the strict deadline of 30 days to file the notice has been suspended for the next 5 years. In other words, parties are exempted from filing the notice within 30 days. It can be said that giving the above exemption plays out well with the aims of the government to promote trade and ease of business.
Possibility of unintentional gun-jumping
Although most legal mechanisms envisaged by the Act have been aging well since the inception of CCI in 2009, gun-jumping still has a lot of scope for clarity and guidance. It is pertinent to note that risks of unintentional gun-jumping are bigger in the context of substantial gun-jumping. It is because M&A transactions require thorough due diligence which also involve sharing of substantial information. Other risks include execution of pre-deal documents and interim covenants. Although, from the perspective of the deal makers, undertaking the above tasks are necessary to secure the transaction as well as its value, but, it may also trigger penalty proceedings against the parties involved. Therefore, it is advisable to be adequately cautious during the pre-approval period.
In Bharti Airtel/Tata Teleservices[7], CCI pronounced its stance on interim covenants. In most deals, there is a gap between execution date and closing date. During this interim period, the acquirer seeks interim covenants. The interim covenants require the ‘target’ to adhere to certain actions during the interim period. It is done by acquirers/investors to safeguard the transaction, its value and to mitigate commercial risks. In this case, CCI acknowledged the need of the acquirers to include certain clauses to safeguard their deals and stated that “to ensure that the value of business is preserved, the acquirer of a business may also be permitted to impose customary standstill and interim arrangements on the target”. However, as per CCI, the parties had included an anteriority clause (confidential) relating to certain conduct that identified a notional date for the transaction to take effect before the approval. On the basis of this, it was held that the parties had violated the standstill obligation and, accordingly, a penalty was imposed.
On this point, it becomes extremely crucial for parties to conduct a proper review of their interim documents to avoid unintentionally violating the standstill obligation.
In this regard, CCI has come up with a few points of guidance for businesses. As per the Compliance Manual for Enterprises, parties in a transaction may mitigate the risks of unintentional gun-jumping by taking the following steps:
- For the purposes of due diligence and/or integration planning, parties will benefit by forming a ‘Clean Team’ consisting of limited individuals, preferably members of the senior management, internal legal team and external legal counsel.
- For handling commercially sensitive information of the other party, the ‘Clean Team’ should be the handler.
- Such ‘Clean Teams’ should not involve personnel working in pricing, marketing, sales, etc. to avoid risk of anti-competitive practices.
Conclusion
As per the above cases referred to, it is worth noting that companies must be extremely careful to comply with the notification requirement of CCI. If not so, then there is a substantial risk of unintentionally jumping the gun. There have been situations where parties to a transaction were under the impression that they did not have to notify certain provision or ancillary agreements but were, eventually, penalized by CCI. Going by the decisional practice of CCI, parties are required to notify the regulator at the first instance of acquiring economic or strategic control over the ‘target’. In Baxalta/Baxter[8], the acquirer entered into a global transaction to take over the assets of its wholly-owned subsidiary. Being careful, they decided to not cover India-based assets as a part of the global transaction so as to avoid triggering stringent notification requirements. However, CCI held that the requirement to notify arose at the execution of a global transaction as it affected competition in India as well.
Careful considerations of various documents and building ‘Clean Teams’ are a key to smooth compliance of the notification requirements of the competition law, as it stands, in India. It is also important to reiterate that CCI has been strict on gun-jumping by imposing penalty on even the smallest of infirmities in compliance with the law. Accordingly, it is advisable that businesses implement a proper mechanism of due diligence which includes compliance to merger notifications.
References
[1] Combination Registration No. C-2013/02/109, available at < https://www.cci.gov.in/sites/default/files/P-C-2013-02-109_0.pdf >.
[2] (2018) 6 SCC 631
[3] Combination Registration. No. C-2015/02/246, available at < https://www.cci.gov.in/sites/default/files/246_43A_PubicV.pdf >.
[4] Combination Registration. No. C-2015/08/299, available at < https://www.cci.gov.in/sites/default/files/Notice_order_document/Order%20under%20Section%2043A-299.pdf >.
[5] Combination Registration No. C-2013/05/122, available at < https://www.cci.gov.in/sites/default/files/Per%20Member%20%28AG%29%20131213.pdf >.
[6] Notification No. S.O. 2039(E)., issued by the Ministry of Corporate Affairs on 29 June 2017, available at < https://www.cci.gov.in/sites/default/files/notification/S.O.%202039%20%28E%29%20-%2029th%20June%202017.pdf >.
[7] Combination Registration. No. C-2017/10/531, available at < https://www.cci.gov.in/sites/default/files/Notice_order_document/531_43A_NC.pdf >.
[8] Combination Registration No. C-2015/07/297, available at < https://www.cci.gov.in/sites/default/files/faq/Order%20under%20Section%2043A-297.pdf >.
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