(The
following post is contributed by Avirup Bose, who holds
law degrees from the West Bengal National University of Juridical Sciences and
the Harvard Law School and is qualified to practice law in India and the U.S.
Avirup has worked in the New York office of Weil Gotshal & Manges and in
the New Delhi office of S&R Associates. He has also briefly worked at the
Mumbai office of Trilegal. He can be reached at avirup.s.bose@gmail.com)
following post is contributed by Avirup Bose, who holds
law degrees from the West Bengal National University of Juridical Sciences and
the Harvard Law School and is qualified to practice law in India and the U.S.
Avirup has worked in the New York office of Weil Gotshal & Manges and in
the New Delhi office of S&R Associates. He has also briefly worked at the
Mumbai office of Trilegal. He can be reached at avirup.s.bose@gmail.com)
The
Competition Commission of India (“CCI”) in a recent order dated May 17, 2012,[i] while approving a
transaction between the Reliance Industries and the TV18 group of companies
gave an interesting interpretation to the term “control” under the [Indian]
Competition Act, 2002, as amended (“Act”)[ii]. The CCI held that the
subscription of convertible securities (in the given case, Zero Coupon
Optionally Convertible Debentures (ZOCDs)) with an option to convert such
convertible securities into equity shares of the company confers upon such
holder the “ability to exercise decisive influence over the management and
affairs” of the acquired company and therefore amounts to control for the
purposes of the Act. For a detailed analysis of the order refer to the discussions
in the blog post by Prof. Umakanth, dated May 31, 2012.
Competition Commission of India (“CCI”) in a recent order dated May 17, 2012,[i] while approving a
transaction between the Reliance Industries and the TV18 group of companies
gave an interesting interpretation to the term “control” under the [Indian]
Competition Act, 2002, as amended (“Act”)[ii]. The CCI held that the
subscription of convertible securities (in the given case, Zero Coupon
Optionally Convertible Debentures (ZOCDs)) with an option to convert such
convertible securities into equity shares of the company confers upon such
holder the “ability to exercise decisive influence over the management and
affairs” of the acquired company and therefore amounts to control for the
purposes of the Act. For a detailed analysis of the order refer to the discussions
in the blog post by Prof. Umakanth, dated May 31, 2012.
The
order provides an interesting opportunity for discussing why control is
necessary for analyzing the competitive effects of a merger under any
competition law regime. This is primarily because through a merger previously
independent competitors can co-ordinate their price and output decisions to the
possible detriment of the customers if such decisions are not sufficiently
constrained by competition from rivals. In the context of merger analysis, a
noted authority on antitrust law, sums up stating that: “[f]or antitrust purposes,….[a]ll
that matters is that what used to be separate businesses pursuing independent
profit motives have now been combined into one common ownership structure that
gives the businesses a joint profit motive.”[iii] Therefore who controls
the decision making of such common ownership structure is an important element
for analyzing the probable anti-competitive behaviour of the post-merger
entity. So if A acquires a rival firm B the determination of who controls the
management and corporate decisions of the merged entity is important but also
simple. However, the problem arises when A acquires only a part of the share
capital of firm B or does so only for a passive investment purpose. For example
in transaction referred to in the aforesaid order between Reliance Industries
and the TV18 group of companies the subscription of the ZOCDs (without any
voting rights) by a trust established for the benefit of Reliance Industries
Limited could be perceived as granting the acquirer a mere financial interest
and no corporate control over the affairs of the TV18 group of companies. The
CCI thought differently and we shall discuss the reasons below.
order provides an interesting opportunity for discussing why control is
necessary for analyzing the competitive effects of a merger under any
competition law regime. This is primarily because through a merger previously
independent competitors can co-ordinate their price and output decisions to the
possible detriment of the customers if such decisions are not sufficiently
constrained by competition from rivals. In the context of merger analysis, a
noted authority on antitrust law, sums up stating that: “[f]or antitrust purposes,….[a]ll
that matters is that what used to be separate businesses pursuing independent
profit motives have now been combined into one common ownership structure that
gives the businesses a joint profit motive.”[iii] Therefore who controls
the decision making of such common ownership structure is an important element
for analyzing the probable anti-competitive behaviour of the post-merger
entity. So if A acquires a rival firm B the determination of who controls the
management and corporate decisions of the merged entity is important but also
simple. However, the problem arises when A acquires only a part of the share
capital of firm B or does so only for a passive investment purpose. For example
in transaction referred to in the aforesaid order between Reliance Industries
and the TV18 group of companies the subscription of the ZOCDs (without any
voting rights) by a trust established for the benefit of Reliance Industries
Limited could be perceived as granting the acquirer a mere financial interest
and no corporate control over the affairs of the TV18 group of companies. The
CCI thought differently and we shall discuss the reasons below.
One
of the key elements in any merger analysis is to evaluate if any proposed
transaction will create a corporate structure which will not be sufficiently
constrained by competition from other rivals. When a firm acquires full
ownership of its rival firm, the acquiring firm’s unilateral pricing incentives
are affected by the fact that it now controls its erstwhile competitor. For every
customer that the acquiring firm would lose for a give increase in the price of
its products may now be directed towards its merged partner. This allows the
acquiring firm to recapture some of the profits that would be otherwise lost
absent the merger. However, when firm A acquires only a partial financial
interest in a rival firm B, its rivals incentive to compete may remain
unaffected thereby effectively constraining any anti-competitive pricing or
output decisions of Firm A or the rival firms may tacitly cooperate to create a
market concentration that leads to oligopolistic co-ordination. In these latter
situations the degree of control or influence that Firm A has over the managers of Firm B, how
such partial ownership may translate into control or influence, and how this
influence may translate into competitive effects is the most vital aspect of
the transaction’s merger analysis[iv].
of the key elements in any merger analysis is to evaluate if any proposed
transaction will create a corporate structure which will not be sufficiently
constrained by competition from other rivals. When a firm acquires full
ownership of its rival firm, the acquiring firm’s unilateral pricing incentives
are affected by the fact that it now controls its erstwhile competitor. For every
customer that the acquiring firm would lose for a give increase in the price of
its products may now be directed towards its merged partner. This allows the
acquiring firm to recapture some of the profits that would be otherwise lost
absent the merger. However, when firm A acquires only a partial financial
interest in a rival firm B, its rivals incentive to compete may remain
unaffected thereby effectively constraining any anti-competitive pricing or
output decisions of Firm A or the rival firms may tacitly cooperate to create a
market concentration that leads to oligopolistic co-ordination. In these latter
situations the degree of control or influence that Firm A has over the managers of Firm B, how
such partial ownership may translate into control or influence, and how this
influence may translate into competitive effects is the most vital aspect of
the transaction’s merger analysis[iv].
This
brings us to the crux of the question that in my view the CCI attempted to
analyze in the aforesaid order. How does one determine if a transaction is solely for investment purpose
or otherwise?[v]
The term ‘investment’ has not been defined under the Act, however, under the
U.S. antitrust law, the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(“HSR Regulations, the U.S. equivalent to section 6 of the Act) provides that
an acquisition made ‘solely for an investment purpose’ is when the acquirer has
no intention of participating in the formulation, determination, or direction
of the basic business decisions of the issuer.[vi] If the acquiring firm is
investing in the share capital of the rival firm such intention can be
evidenced by the lack of veto rights, quorum requirements at board and
committee meetings etc[vii]. However, when the
acquiring firm subscribes to convertible securities without any voting rights,
how does one analyze lack of an intention to control the business decisions of
the acquired firm. In the context of the transaction between Reliance
Industries and TV 18 group of companies, the CCI perceived the ability of the
acquiring firm to convert the ZOCDs anytime within ten years from the date of
subscription, into 99.99 per cent of the fully diluted equity share capital of
the acquired firms to confer upon the acquirer the ability to exercise decisive
influence over the management and affairs of the acquired firms[viii]. If a company has a
debenture holder who can convert its debentures into almost 100 per cent of the
firm’s share capital anytime, it cannot but be deferential to such debenture
holders views about the affairs and management of the company.
brings us to the crux of the question that in my view the CCI attempted to
analyze in the aforesaid order. How does one determine if a transaction is solely for investment purpose
or otherwise?[v]
The term ‘investment’ has not been defined under the Act, however, under the
U.S. antitrust law, the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(“HSR Regulations, the U.S. equivalent to section 6 of the Act) provides that
an acquisition made ‘solely for an investment purpose’ is when the acquirer has
no intention of participating in the formulation, determination, or direction
of the basic business decisions of the issuer.[vi] If the acquiring firm is
investing in the share capital of the rival firm such intention can be
evidenced by the lack of veto rights, quorum requirements at board and
committee meetings etc[vii]. However, when the
acquiring firm subscribes to convertible securities without any voting rights,
how does one analyze lack of an intention to control the business decisions of
the acquired firm. In the context of the transaction between Reliance
Industries and TV 18 group of companies, the CCI perceived the ability of the
acquiring firm to convert the ZOCDs anytime within ten years from the date of
subscription, into 99.99 per cent of the fully diluted equity share capital of
the acquired firms to confer upon the acquirer the ability to exercise decisive
influence over the management and affairs of the acquired firms[viii]. If a company has a
debenture holder who can convert its debentures into almost 100 per cent of the
firm’s share capital anytime, it cannot but be deferential to such debenture
holders views about the affairs and management of the company.
Another
interesting issue regarding partial stock ownership in rival firms that needs
to be made in the passing (although it definitely merits a much more elaborate
discussion) is the fiduciary obligation of the directors nominated by the
acquiring firm to the board of directors (“Board”) of the acquired firm. A
partial equity ownership interest usually entitles the acquirer to appoint one
or more directors to the Board of the acquired firm. The appointed directors of
the acquirer will owe their fiduciary obligations to the shareholders of the
acquired firm which would require such directors to act solely in the interest
of the acquired firm and ignore the impact of its actions on the acquiring firm,
even though the acquiring firm may have a large financial interest in the
acquired firm. To avoid such conflicts the investment agreements between the
acquirer and the acquired firms usually require that certain specific
pre-determined corporate actions (‘reserved matters’) can only be adopted at a shareholder
meeting of the acquired firm’s shareholders where the acquiring firm as a
shareholder can vote according to its economic interests. However, items on
reserved matters list should be properly scrutinized before the consummation of
the transaction such that it does not raise anti-competitive issues or at-least
be neutral from a competition perspective. Also, the manner in which the
acquirer and its nominated directors deal with any confidential information
relating to the acquired firm that such directors may become privy to in their
capacity as members of the Board of the acquired firm is also a sensitive issue
from a merger analysis perspective to determine anti-competitive behaviour.
interesting issue regarding partial stock ownership in rival firms that needs
to be made in the passing (although it definitely merits a much more elaborate
discussion) is the fiduciary obligation of the directors nominated by the
acquiring firm to the board of directors (“Board”) of the acquired firm. A
partial equity ownership interest usually entitles the acquirer to appoint one
or more directors to the Board of the acquired firm. The appointed directors of
the acquirer will owe their fiduciary obligations to the shareholders of the
acquired firm which would require such directors to act solely in the interest
of the acquired firm and ignore the impact of its actions on the acquiring firm,
even though the acquiring firm may have a large financial interest in the
acquired firm. To avoid such conflicts the investment agreements between the
acquirer and the acquired firms usually require that certain specific
pre-determined corporate actions (‘reserved matters’) can only be adopted at a shareholder
meeting of the acquired firm’s shareholders where the acquiring firm as a
shareholder can vote according to its economic interests. However, items on
reserved matters list should be properly scrutinized before the consummation of
the transaction such that it does not raise anti-competitive issues or at-least
be neutral from a competition perspective. Also, the manner in which the
acquirer and its nominated directors deal with any confidential information
relating to the acquired firm that such directors may become privy to in their
capacity as members of the Board of the acquired firm is also a sensitive issue
from a merger analysis perspective to determine anti-competitive behaviour.
In
a subsequent post, I shall discuss how the issue of control and partial stock
ownership is dealt in certain other major antitrust jurisdictions of the world
and if they bear any resemblance with the interpretation of the CCI in the
order discussed above.
a subsequent post, I shall discuss how the issue of control and partial stock
ownership is dealt in certain other major antitrust jurisdictions of the world
and if they bear any resemblance with the interpretation of the CCI in the
order discussed above.
–
Avirup Bose
[i] CCI
order No. C-2012/03/47, dated May 28, 2012.
order No. C-2012/03/47, dated May 28, 2012.
[ii] For a detailed
discussion on how the term ‘control’ has been defined under other statutes and
regulations of India, See Sandip Bhagat et
al., India: Defining Control, International
Financial Law Review (IFLR), June 10, 2010.
discussion on how the term ‘control’ has been defined under other statutes and
regulations of India, See Sandip Bhagat et
al., India: Defining Control, International
Financial Law Review (IFLR), June 10, 2010.
[iii] Einer Elhauge and
Damien Geradin, Global Competition Law
and Economics, (Hart, 2011), p. 913
Damien Geradin, Global Competition Law
and Economics, (Hart, 2011), p. 913
[iv] What
amounts to effective control depends on the facts of a particular case. The U.S.
Department of Justice and the Federal Trade Commission has brought complaints
and entered into consent orders under the U.S. Clayton Act limiting partial
stock acquisitions for as low as ten (10) per cent of holding of voting stock (Medtronic Inc. 63 Fed. Reg. 53, 919, 53,
920 (1988)
amounts to effective control depends on the facts of a particular case. The U.S.
Department of Justice and the Federal Trade Commission has brought complaints
and entered into consent orders under the U.S. Clayton Act limiting partial
stock acquisitions for as low as ten (10) per cent of holding of voting stock (Medtronic Inc. 63 Fed. Reg. 53, 919, 53,
920 (1988)
[v] An acquisition of
shares or voting rights solely as an
investment that does not entitle the holder to more than 25 per cent of the
total shares or voting rights of the acquired firms are ordinarily not required
to be filed for pre-merger approval to the CCI. See Regulation 4 and Schedule
I(1) of the Competition Commission of India (Procedure in regard to the
transaction of business relating to combinations) Regulations, 2011, as amended
(“Regulations”). The term ‘investment’ is not defined under the Act or the
Regulations.
shares or voting rights solely as an
investment that does not entitle the holder to more than 25 per cent of the
total shares or voting rights of the acquired firms are ordinarily not required
to be filed for pre-merger approval to the CCI. See Regulation 4 and Schedule
I(1) of the Competition Commission of India (Procedure in regard to the
transaction of business relating to combinations) Regulations, 2011, as amended
(“Regulations”). The term ‘investment’ is not defined under the Act or the
Regulations.
[vi] 16 C.F.R. § 801(1)(I)
[vii] For a discussion on
whether such affirmative rights amounts to control under the Takeover Code, see
the transcript of a discussion titled, Subhkam
Settled; Private Equity Unsettled, November 26, 2011 at www.moneycontrol.com.
whether such affirmative rights amounts to control under the Takeover Code, see
the transcript of a discussion titled, Subhkam
Settled; Private Equity Unsettled, November 26, 2011 at www.moneycontrol.com.
[viii] CCI order No.
C-2012/03/47, dated May 28, 2012, para. 15.
C-2012/03/47, dated May 28, 2012, para. 15.