This article is written by Millia Dasgupta, from Jindal Global Law School. This article examines merger control and the Indian laws which regulate it.
Table of Contents
Introduction
With the increasing dominance of tech companies and other firms in the market, harsh competition regulation is becoming one of the key concerns of the government. Thus, merger control is an emerging sector for lawyers to enter for their careers. In this article, we shall be understanding the Competition Commission of India (CCI) guidelines for merger control.
Understanding of merger control
What are mergers, acquisitions, and combinations?
Mergers occur when two companies of the same size join forces to form a single entity. Both companies surrender their stock to form a new stock. The acquisition occurs when one company takes over another entity. The target company (the company that has been acquired) ceases to exist and the buyer company (the one acquiring) absorbs their business. The buyer’s stock continues to be traded while the target company’s stock does not exist. Hostile takeover or situations where the target company does not wish to be purchased are usually called acquisitions and friendly takeovers where the companies collaborate are usually called mergers. Consolidations create new companies by combining core business practices and abandoning the old corporate structures.
Thus, merger control is the process or procedure of reviewing these mergers and acquisitions under established competition law. Merger control is necessary so that firms do not form entities that have the contention to make the market a very volatile place because of the amount of power they have. In India, the Competition Act of 2002 regulates mergers and acquisitions.
Threshold
The current law states the limit or the threshold up to which parties can collaborate. There is the parties test and the group test.
Parties test
Parties that exceed these thresholds shall be up for review:
- Combined domestic assets exceeding Rs 20 billion;
- Combined domestic turnover exceeding Rs 60 billion;
- Combined worldwide assets exceeding 1 billion US dollars, including domestic assets of at least Rs 10 billion;
- Combined worldwide turnover exceeding Rs 3 billion dollars, including domestic turnover of at least Rs 30 billion.
Group Test
A group (which is either the buyer’s group or the target group) that has fulfilled the following criteria will be up for review.
- Combined domestic assets exceeding Rs 80 billion.
- Combined domestic turnover exceeding Rs 240 billion.
- Combined worldwide assets exceeding 4 billion US dollars, including domestic assets of at least Rs 10 billion.
- Combined worldwide turnover exceeding 12 billion US dollars, including domestic turnover of at least Rs 30 billion.
The new Competition Amendment Bill of 2020 allows for the CCI and the Central Government to define new thresholds for merger notification by introducing a provision in Section 5. This threshold can be issued in the public interest and will enable the CCI to make sector-specific thresholds.
The CCI which is the body that oversees all economic activity relating to the competition is a suspensory regime. Meaning that parties can not enter into any merger, acquisition, or amalgamation without the approval of the CCI. The CCI can not however access a merger or acquisition after one year of closing the transaction. However, it puts no limitation on penalty procedures against companies who fail to notify them.
Regulation of merger control
The Competition Act is the main law that regulates merger control. Specifically, Section 5 and 6 of the Competition Act 2002, which have been in force since June 2011, deal with merger control. Merger control is also overseen by the Ministry of Corporate Affairs, Government of India (MCA), and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations). The regulatory authority is the Competition Commission of India (CCI).
Notification requirements for mergers
If the thresholds mentioned in the abovementioned paragraphs are met, then the companies must notify the CCI. There are no exemptions stated for notification.
When can the notification be filed?
The notification can be filed after the following requirements are met:
- The Board of directors has approved the transaction.
- Execution of any agreement or other document for the acquiring of control.
Time period
Unlike before where companies would have to notify the CCI within 30 days of the transaction (merger, acquisition, etc), the current law states that the CCI needs to be notified before the transaction happens.
Pre Notification Guidelines
The CCI provides opportunities for companies to have pre-notification consultations with the CCI. The CCI usually takes 2-5 business days. Depending on the complexity of the transaction, the meeting may last for 2 hours.
Who files the notification?
When it is an acquisition, the buyer company or group must post the notification. When it is a merger, then it is the joint responsibility.
The form of Notification
The forms to give notification can be downloaded from the CCI website and can be done through form I and form II. The scope of information that has to be provided under the forms has been changed under a 2019 amendment of the Combination Regulations.
Filing Fee
For form I, the filing fee is Rs 2 million and for form II it is Rs 6.5 million. For acquisition, the responsibility of the filing fee is of the buyer company, for mergers is the joint responsibility of the companies. The transaction can not be consummated until there is a proper review by the CCI or a review period of 210 from the date of notification has passed.
Companies can also seek approval through green channel clearance. Here companies that do not share the same business practices will be deemed approved on the notification.
Applicable procedures of Investigation
Investigation happens in two phases-
Phase I
Within 30 days of filing the notification, the CCI needs to give a prima facie opinion (or an opinion on the bare reading of the circumstances) on whether the transaction would cause any adverse effects on the market. If the CCI can’t find any, it shall approve the transaction. The 30 days time period will restart if the CCI believes that notification is incomplete. Notifications given through the green channel are approved on notification so they do not have to wait for the CCI review to give effect to them. One must note that if the green channel requirements are not met, then the notification will be deemed void ab initio.
Before Phase II investigation starts, the CCI will issue a notice for initiating the investigation. The parties will be given 30 days to reply. If the parties state the investigation should not happen then the Director-General must submit a report in relation to the merger or the acquisition. If the CCI is not happy with the reasons given by the party, they shall commence with Phase II.
Phase II
- After the CCI has given notice, the parties involved must publish information of the non-confidential nature of the transaction in four of the leading daily newspapers and their own newspaper within 10 days.
- The third parties which are the competitors, the supplier, the customers, etc shall be invited to give their views on the transaction within 15 days of the publication.
- After 15 days, the companies shall reply to the comments.
- After considering the responses, the CCI shall pass an order of approval, disapproval, or modification of the transaction within 45 days.
Rights of third parties
Third parties are other entities or institutions that would be affected by the transaction. This can be your customers, suppliers, and other stakeholders of the market.
Representation
Third parties can make comments on the transaction during Phase II, and at the discretion of the CCI during Phase I. Through these mechanisms, they can make their voices heard.
Access to Documentation
Third parties are allowed to see documents that are submitted to the CCI by the parties about the transaction. Access can only be given if there is sufficient cause and is given at the discretion of the CCI. Permission to see documents can only be given to public documents that are non-confidential in nature.
Remedies and appeals
Remedies
The CCI has the power to modify the transaction so that it does not cause adverse effects to the competition.
Phase I
Parties have the power to offer remedies to the transaction during Phase I investigations. This can be done before the CCI gives a prima facie opinion about the nature of the transaction. If remedies are offered, then the period of review will be extended by 15 days.
Phase II
This can only be done if the CCI has proposed modifications to the transaction. Once the CCI has initiated Phase II review, the party can suggest changes in the modifications suggested by the CCI. If this counter-proposal is accepted, it means the CCI approves of the combination, merger, or acquisition. However, if the counter-proposal is not accepted, parties are given time to implement the modification suggested by the CCI. If the parties are unable to accept the modifications then the transaction shall not be approved by the CCI. This is extremely rare.
Appeal
Decisions by the CCI are appealable before the National Company Law Appellate Tribunal (NCLAT). Appeals can be filed against orders to block a transaction, recommendations to a transaction, penalties. Appeals can be filed within 60 days from the CCI’s order. The NCLAT can take time from 6 months to two years.
Penalty for the non-compliance
Failure to notify
- If parties fail to notify or implement a transaction without notifying then the CCI can impose a penalty of 1% of turnover or assets of the parties of the merger.
- When parties make false statements or fail to disclose facts, the CCI can impose a penalty from Rs 5 million to Rs 10 million
- If the parties do not pay the penalty, the Chief Metropolitan Magistrate of Delhi can impose fines up to Rs 250 million which may be accompanied by imprisonment of up to 3 years.
Failure to Observe Orders
If parties do not comply with the CCI, they are empowered to impose a fine of up to Rs 1 lakh per day which can be extended up to Rs 100 million. Failure to pay this fine can result in fines up to Rs 250 million and/or imprisonment of up to three years.
Recent mergers, cases, trends, and statistics
In recent news, 25 combinations have been notified under the green channel. According to watchdogs, this is the first of its kind and has led to easy access and transition of the business.
The CCI has also approved of PharmEasy’s merger with Rival Medlife. This is seen as a big merger since Reliance Industries and Amazon have entered the business. PharmEasy will acquire 100% equity shared with Medlife.
In Tata Sons and GMR, Combination Registration No C-2019/07/676., where Tata and sons acquired GMR Airports, the CCI was concerned that such a transaction would result in integration between airports owned by Tata and GMR. CCI would only approve of the transaction of Tata and sons did not appoint any director in any of the airports managed by GMR and that there will be no exchange of commercially sensitive information between GMR and Tata and sons.
One of the main indications that competition law is becoming a very hot topic, especially in the tech market is the implementation of the 2020 Amendment Bill of Competition Law. This law is being implemented not only to make the present law more efficient but also to capture the digital market.
Important roles that lawyers play in merger control
Advising on regulatory Requirements
As mentioned, there are many complexities to merger control. Lawyers play an important role in advising companies who wish to form a merger and whether such mergers are possible under competition law. They shall advise the client on the thresholds set by the government, as well as the disclosure and approvals they must go through before entering such transactions. They may also advise companies to modify their transaction so that they may be viable or help companies prepare counter-arguments to modifications suggested by the CCI.
Performing Legal Due Diligence
Lawyers are of great assistance when helping buyer company clients to identify the legal risks associated with target companies and how they can mitigate those risks. They can suggest ways to the client on how they can do their due diligence under the law.
Preparing Documentation and Following Guidelines
The lawyer can also guide companies through the notification and review procedure given under the CCI so that they do not have to incur any penalties. They may also fill up the forms to give notifications and advise companies on how they can navigate the procedure in the most efficient way possible.
Review and Appeal
A lawyer is important when appealing against an order of the CCI or providing legally viable modifications and counter-proposals to suggestions by the CCI.
Tips to become a proficient lawyer
- A proficient MA lawyer must be able to research a lot of information in order to make sure the deal or transaction is bulletproof. The lawyer must be able to analyze the various legal risks that might occur when getting into a transaction with another company.
- One must have efficient oral and written communication skills. This is required during the stages of negotiation.
- They must have the power of persuasion as well as they must have the ability to protect the rights and interests of their client when entering into a negotiation.
- They must have risk-taking abilities as it is important for an MA lawyer to step into the shoes of the client when taking such complex transactions so that one is able to propose the best possible outcome to the client.
- A MA lawyer must possess in-depth business awareness and understanding of the commercial world.
- They must have good problem-solving skills.
Conclusion
In this article, I have given a rundown of the guidelines of merger control and CCI policies. It is important that the CCI looks into mergers as if two powerful companies merge, they might cause an entity that will have an adverse effect on the market. But it is also important that firms are allowed to merge in order to promote economic growth. Thus, the CCI has set out guidelines through which mergers that have the possibility of crossing a certain threshold can be reviewed. The Competition Act defines the various thresholds and states that companies must notify the CCI if the merger shall cross the threshold. The CCI then will give a prima facie look at the transaction and if they feel the merger will affect the market, they will start an investigation. The CCI can either accept, decline, or add modifications to the transaction. The companies have the right to appeal.
References
- https://uk.practicallaw.thomsonreuters.com/0-501-2861?transitionType=Default&contextData=(sc.Default)&firstPage=true#co_anchor_a215505
- https://www.linkedin.com/pulse/lawyers-role-mergers-acquisitions-elsie-oyoo/
- https://blog.ipleaders.in/top-10-skills-ma-lawyer-have/
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