[Aditya Sinha is a 5th year B.B.A., L.L.B (Hons.) student at College of Legal Studies, University of Petroleum and Energy Studies, Dehradun]
Introduction
In the legal antitrust world, the practice of actualizing a transaction before receiving the statutory clearance from the competition authority, or unauthorized co-ordination between the merging parties prior to approval, is referred to as ‘jumping the gun’ or “gun-jumping”. Gun- jumping is not defined in any statute and this has evolved as a concept through the dos and don’ts in competition laws and their judicial interpretation.
Legal Framework in India
In India, the Competition Act, 2002 (“Competition Act”) and the Competition Commission of India (Procedure in regard to the transaction of Business relating to Combinations) Regulations, 2011 (“Combination Regulations”) read with the Competition Commission of India (General) Regulations, 2009 govern business combinations.
Section 6(2) of the Competition Act provides that parties who propose to enter into a “combination” (as defined under section 5[1] of the Competition Act)are required to give a notice to the Competition Commission of India (“CCI”) in a specified format[2], disclosing the details of the proposed combination, within 30 days of (a)approval of the proposal relating to merger or amalgamation by the board of directors of the enterprises concerned; or (b)execution of any agreement or other document acquiring of control.[3]
Section 6(2A) provides further teeth to section 6(2) by stating that no combination shall come into effect until 210 days have passed from the day on which the notice has been given to the CCI or the CCI has passed orders in relation to such notice, whichever is earlier. This period is very important to be factored into the timelines of any transaction which attracts the provisions of section 6(2) to set the business plans and expectations right. Non-compliance with section 6(2) could result in the imposition of penalties which could be as significant as up to 1% (one percent) of the total turnover or assets of such combination whichever is higher[4] and could, therefore, significantly derail not just the transaction but the financial health of the enterprises.
As a part of passing an order upon notification, the CCI also has the right to void a combination or suggest modifications to a combination so as to remove the adverse effect of such combinations to a transaction. Non-compliance with the CCI’s orders could result in such transactions being declared anti-competitive and therefore, penalized by the CCI. The power to impose penalty is bestowed by the Competition Act upon the CCI which follows a set procedure for these cases[5] including confirming to principles of natural justice in terms of giving the parties to the proceeding a show cause notice and a reasonable opportunity to represent their case orally as well as in writing.
A common confusion during implementation of a transaction is the stage at which it should be notified to the regulators and the time until which a standstill status is to be maintained. Section 6(2) provides the stage at which a transaction should be notified; however, the Combination Regulations provide a wide connotation to the term “other document” by defining it as any binding document conveying an agreement or decision to acquire control, shares, voting rights or assets and further carve out exceptions for “other documents” with reference to acquisition of an enterprise without its consent.[6] This definition can, therefore, result in numerous interpretations where even the execution of a term sheet or a letter of intent with binding obligations could be construed as consummating a transaction and require the parties to tread with caution.
Instances of Gun – Jumping
The Competition Act is just over a decade old; however, there have been instances where the Indian regulator CCI has been vigilant in cases of gun-jumping and has come down heavily on the parties to such processes. One of the first such cases was the celebrated consolidation of Jet Airways (India) Limited with the Middle East based carrier, Etihad Airways.[7] In this case, the acquirer, Etihad Airways notified the CCI of its proposed acquisition of 24% equity stake in Jet Airways. The transaction was approved by the CCI; however, the CCI observed that certain provisions of the commercial cooperation agreement between the two parties had already been implemented including, the sale of certain landing/take-off slots of Jet Airways at the London Heathrow Airport which had not been notified to the CCI before consummation. For such consummation of transaction before approval, the CCI imposed a penalty on Etihad under section 43A of the Act.
Another instance of gun jumping was noted in the combination of Thomas Cook (India) Limited (“TCIL”) and Sterling Holiday Resorts (India) Limited (“SHRIL”). In this transaction, the resorts and time share business of SHRIL was proposed to be transferred by way of a demerger from SHRIL to TCISIL (a subsidiary of TCIL) and the residual business of SHRIL was proposed to be amalgamated into TCIL. The CCI approved the combination but imposed a penalty of INR 10,00,00,00 on the parties, for consummating the market purchases of equity shares of SHRIL before giving notice to the CCI for the proposed transaction.[8]This order was set aside by the Competition Appellate Tribunal[9] on the grounds this transaction was covered under an exemption granted by the Central Government under section 54(a) of the Competition Act;[10] however, had this transaction not been covered by an exemption, it would have been construed as a case of “gun jumping”.
Regulatory Framework Outside India
While the CCI has been proactively identifying the issues with respect to gun-jumping, this concept is more developed and actively implemented in the international markets, more particularly in the United States of America (“US”) and European Union. In the US, the concept of gun-jumping is derived from a combined reading of the Sherman Act of 1890 and the HSR Act of 1976. The HSR Act provides for a provision similar to section 6(2) and 6(2A) of the Competition Act which requires pre-merger notifications in certain circumstances and also provides for a waiting period.[11] During the waiting period, the HSR Act prohibits an acquirer from exercising ‘substantial control’ over an acquired firm prior to the expiration of the HSR waiting period (30 days) after filing the HSR, unless the government requests for additional information. The prohibition under the HSR Act gets terminated after the HSR waiting period expires, whereas the Sherman Act continues to prohibit anti-competitive agreements between merging firms until in fact the merger is completed. The laws in the US focus on the conduct of the parties during the pre-merger period. An example in this regard is the case of United States v. Flakeboard America Ltd[12]wherein the Department of Justice announced a US$5 million (€4.7 million) settlement with two companies for illegal pre-merger coordination. According to the complaint, Flakeboard America Limited and Sierra Pine had executed an asset purchase agreement, while the transaction was under review and therefore, was subject to a fine.
In EU, the restriction on gun-jumping is reflected in the EC merger regulations under Article 7(1).[13] It states that a concentration cannot be completed or implemented either before its notification to the competition authority or until it has been declared compatible with the common market. An exception can be a public bid, provided that the concentration has been notified to the commission without delay and the acquirer only exercises voting rights attached to the securities to maintain the full value of its investment. It further says that derogation may be granted by the commission following a reasoned request by the parties if the effect of suspension of concentration on one or more undertakings concerned exceeds the threat posed by the concentration. In the Electrabel/Compagnie Nationale du Rhône[14]case, the Commission fined Belgian electricity producer Electrabel €20,00,00,00 for failing to notify the acquisition of a minority stake in Compagnie Nationale du Rhone, another electricity producer. The Court of Justice confirmed this approach in July 2014 in Electrabel v Commission,[15] stating that the breach of the standstill obligation is serious, as it undermines the essence of EU merger control.
Conclusion
From the above, it is evident that while legislations try to control gun-jumping, the types of actions that constitute gun-jumping is given a wide interpretation and is subject to facts and circumstances of different cases. Further, as the concept has developed, it is pertinent to note that instances of gun jumping can be divided into two main categories, i.e. substantial and procedural gun jumping. Substantive gun jumping occurs when parties co-ordinate their competitive conduct prior to the actual closing of the transaction whereas procedural gun jumping occurs when parties fail to notify the regulators of a transaction which is eligible for notification.
Further, while the legislation controlling gun jumping refer to generic concepts when it comes to actions constituting gun jumping, an analysis of judicial precedents read with the regulations outlines that pre-closing actions such as exchange of competitively sensitive information, co-ordination of competitive behavior, efforts made to bring in line the respective business of the buyer and target, involvement or interference of the acquirer in the target’s business usually constitute gun jumping.
Parties to a transaction can avoid gun-jumping risk if they are well informed and vigilant. The parties need to make sure that all notification obligations are known to them and implemented by them before entering into a transaction. To ensure this the CCI has come up with a “Competition Compliance Manual” for enterprises, which can be a ready reference and a beginning point for planning and implementing a transaction. The widespread use of the Competition Compliance Manual will grow the culture of compliance across the industry and enhance competition, improve reputation of businesses, and help avoid unnecessary litigation and intervention by a regulatory authority.
– Aditya Sinha
[1]Section 5 of the Competition Act defines a “combination” and provides for thresholds in terms of assets/turnover for a transaction requiring mandatory notification to the Commission.
[2]Form I/II/III as specified in Schedule II to the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (“Combination Regulations”).
[3]An explanation to section 5(b) defines “control” as follows: “control” includes controlling the affairs or management by— (i) one or more enterprises, either jointly or singly, over another enterprise or group; (ii) one or more groups, either jointly or singly, over another group or enterprise.
[4] Section 43 A of the Competition Act.
[5]Regulation 48 of (General) Regulations, 2009 provides for procedure for imposition of penalty.
[6]Regulation 5(8) of Combination Regulations- Provided that if the acquisition is without the consent of the enterprise being acquired, any document executed by the acquiring enterprise, by whatever name called, conveying a decision to acquire control, shares or voting rights shall be the “other document”.
[7]Combination Registration No – C-2013/05/122; date of order – 19/12/2013 http://www.cci.gov.in/sites/default/files/faq/Order%20191213.pdf.
[8]Combination Registration No – C-2014/02/153; date of order- 21/05/2014http://www.cci.gov.in/sites/default/files/C-2014-02-153R.pdf.
[9]Order dated 26/08/2015 in matter of Thomas Cook India Limited(TCIL), TCISIL, Sterling Holiday Resorts India Limited(SHRIL) v. Competition Commission of India (Appeal 48 0f 2014 filed against order dated 21/05/14 passed by the CCI).
[10] Section 54(a) of the Competition Act, 2002 provides that the Central Government may, by notification, exempt from the application of this Act, or any provision thereof, and for such period as it may specify in such notification— any class of enterprises if such exemption is necessary in the interest of security of the State or public interest. Such exemption is provided under Notification [S.O. 481 (E); S.O. 482 (E)] dated 04/03/2011.
[11]15 U.S. Code§18a – Premerger notification and waiting period.
[12]3:14-CV-04949 (N.D.Cal. 2014).https://www.justice.gov/atr/case-document/file/496496/download.
[13]Council Regulation (EC) No 139/2004.
[14]Electrabel/CompagnieNationale du RhôneCase No COMP/M.4994 decided by the European Commission on June 10, 2009
http://ec.europa.eu/competition/mergers/cases/decisions/m4994_20090610_1465_en.pdf.
[15]Electrabel v. CommissionCase C-84/13 .
http://curia.europa.eu/juris/document/document.jsf?text=&docid=131705&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=339457.