This article has been written by Simran Bais, pursuing the Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.

Why do companies engage in combination transactions?

To understand the important considerations for a combination it is imperative to look into the fact that what are the factors which attract the companies to engage themselves in Mergers and Amalgamations (hereinafter referred to as ‘M&A’) in the very first place. Fundamentally, these combination transactions are a vital component of any organization’s growths because of the concatenation of reasons some of them are enumerated below-

1.  They are essentially observed as a factor to increase market share and provide access to some of the new distribution channels, new products as well as emergence of markets.
2.  The organizations are equipped with new capabilities, access to technology or know-how, and access to talent which is needed to drive growth in the future.

A critical point to note is that in the industries that are consolidating due to the reason for overcapacity in such a situation the company is mainly identifying potential opportunities so as to achieve competitive advantage through increased scale or scope to improve operations. From a competitive standpoint, these cost savings and efficiency opportunities arise with the advent of technology, globalization, regulation, and other market developments with a focus on a larger scale or scope of economies. (See here)

It is important to note that the companies with an objective to trigger revenue and growth can stimulate innovation by creating of a new businesses which can add value to their consumers. For instance, consider the acquisition of 64.3% of the total share capital of Supermarket Grocery Pvt Ltd. (SGS) which operates BigBasket’s online retail business by Tata Digital (See here). The value creation is achieved when the technology giant Tata Digital (WOS of Tata Sons) acquires and gives some value addition in terms of better technology to BigBasket. Strategically speaking, whether to go for an M&A is all about having a crystal-clear idea on a deal which is in the process and generation of the new opportunities so as to create a competitive advantage and value. 

Common mistakes to be avoided during combination transactions

During the process of M&A, it has been observed that companies commit common mistakes during the transaction and a few of the key mistakes are elaborated below-

• Improper planning centers itself on the inability to screen targets by adopting certain appropriate criteria which are aligned with the creation of value. Another mistake that is committed during the transaction is failing to move the discovery process in an expeditious manner this certainly implies that time is a critical aspect during the discovery process however, the value proposition aspect of the deal should be made transparent between the parties within a reasonable time. 
• It becomes imperative to note that substantial due diligence forms the bedrock to gain an in-depth understanding and accordingly evaluate a deal. Therefore, this particular process of due diligence facilitates uncovering potential issues with respect to legal and regulatory measures, latent liabilities, and ongoing critical initiatives to sustain the operations. 

Therefore, it is vital to understand that it is favorable to avert the key problems as discussed above and to note that in order to commence a transaction a variety of resources are needed in terms of expertise of accounting, legal and regulatory issues (See here).

Presenting the 3 laws of business combinations

 It is rather important to understand the strategic question which is not cornered around the fact that whether combinations are necessary but the question of due consideration is how will they create value and how is that particular value captured? These three laws of business combinations are not basically formulated as orders but these are mandatory conditions that ensure success.  the practical implications of the law are elaborated as under-

1. The first law of the business combination relates to the fact that the potential combination must have the capacity to create more value than the businesses of the parties alone.
2. The second law of the combination attempts to realize the joint value of the business structure.
3. The third law deals with the aspect that the value which is earned by the parties must encourage them to benefact from the combination. 

These three laws, when taken together, provide a more robust, systematic approach for creating as well as capturing value from the partnerships and ensuring that returns are being made on the investment at hand. (See More)

Combination transactions from the lens of Competition Act, 2002

For the purposes of Section 5 of the Competition Act, 2002 it needs to be emphasized that any corporate reorganization such as acquisition, Mergers, and Amalgamation that meets the jurisdictional thresholds is a combination for the purposes of the act.  The thresholds revolve around the assets and turnover of the parties to the combinations that are the target company and the acquirer company or an Acquirer group or merging parties to the transaction. 

The Competition Commission of India (hereinafter referred to as ‘CCI’) has revised guidance notes for the applications seeking approval for combinations which is a move that facilitates a more standardized review process. It is important to note that the applications which are predominantly used for seeking approval for combinations is Form 1 and speaking in the language of Competition law, mergers and acquisitions are fundamentally termed as combinations. The guidance notes as issued by the CCI provide the scope and limitations of information and the documents required to be submitted along with the form.

The amended Form 1 (See here) fundamentally includes guidance on the subject matter which explains the scope of the proposed combination, elaborates on the rights accruing from the proposed transactions in terms of voting rights, any right which is more of a commercial nature, the appointment of a Board of Directors, value constituents of the combination as proposed and certified copy of orders/decisions passed in other jurisdictions. In the revised notes, CCI clarified its position with respect to the phrase any other relevant information related to the combination by stating that it may include the information that has a significant bearing or is material for the assessment like the regulatory approvals as issued by the government authorities and identical orders of CCI or other jurisdictions.

Introduction to the route of ‘Deemed Approval’ by CCI

Upon the filing of a receipt by the combining parties, the route of ‘Green channel’ is an automatic approval system by considering deemed approval by CCI. As introduced in the amendment regulations, Part VII concerning the amended Form 1 enlists the eligibility criteria for the green channel in Schedule 3. It is important to note that the applicability of green channel came into the picture in circumstances where the parties, respective group entities, or any other entity in which they hold a share or control directly or indirectly;

1. do not produce or provides similar or identical or substitutable products or services;
2. are not indulged in any activity with respect to production, supply, distribution, storage, sale, or provision of services which are at different stages levels of the production chain; and
3. are not indulged in any activity relating to production, supply, distribution, storage, sale, provision of services, and trade in products that are complementary to each other. (See here)

In the amended Form 1, the notifying party was required to indicate the applicability of the green channel in simpliciter terms but now the position is such that the notifying parties are required to tick appropriate boxes stating yes or no. 

The procedure to avail green channel

To make a filing under the green channel it is necessary that the notifying parties should undertake a self-assessment that all the criteria of the green channel are being followed and in furtherance to this if such criteria are fulfilled, the notifying parties are required to file the Form 1 in its entirety and submit a declaration to the effect that the proposed combination does not prejudice competition. The CCI will issue an acknowledgment subsequent to such filings which acts as an indicator for ‘deemed approval’ from the side of CCI.  On the basis of this particular ‘deemed approval’, the parties in the proposed combination can consummate the transaction. 

The important point of consideration for this green channel route is that it entails very few disclosure compliances and significantly the points concerning market shares, competitor information is not required to present before the competition regulator. However, if subsequently, CCI finds that the green channel route is not satisfied, then the deemed approval can be given the effect of void ab initio and the filings will be examined under the provisions of Competition Act, 2002.  However, before revoking ‘deemed approval’ the parties are given an opportunity to be heard and present their contentions before the CCI. 

On the availability of the green channel route, the competition regulator motivates the parties to avail of a Pre-Filing Consultation (‘PFC’) and obtain relevant suggestions from the CCI officers on a particular transaction and its filings (See here). According to a report (See here) almost one out of five combinations were approved under the ‘green channel’ route provided that there are no horizontal, no vertical, or potential vertical relationships and no complementary business relationships between the parties to the combinations.

The Kyndryl Holdings and Grand Ocean Managed Infrastructure Services’ proposal was approved under the Green channel route for the internal restructuring of International Business Machines Corporation (‘IBM Corporation’) (See here).

Conclusion

It is very critical to understand that the approval of combination is very significant from the view of Competition law so that the combination does not have an appreciable adverse effect on competition. The Green channel route is an approach that in a way promotes ease of doing business in India because it attempts to streamline the entire M&A process however, it also has some potential challenges attached with it. There is also an imposition of a penalty if the combining parties contravened the conditions and got approval under the said route. It would be interesting to note how this route will change the landscape and facilitate in reducing the burden on CCI. 

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: