[Ahkam Khan is a 3rdYear B.A., LL.B. (Hons.) student at Dr. Ram Manohar Lohiya National Law University in Lucknow]
India contemplates an ex ante merger control regime under the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations). The process for filing of combinations with the Competition Commission of India (CCI) has been laid bare in section 5 and 6 of the Competition Act, 2002 (the Act). They provide for a prior notification to CCI in respect of combinations satisfying the conditions under section 5 of the Act. However, the Combination Regulations in Schedule I carve out certain exemptions from notification under section 6(2) of the Act for transactions that are not likely to cause appreciable adverse effects on competition (AAEC).
Non-Controlling Minority Acquisition Exemption
Among the exemptions, the one most widely resorted to is the exception for non-controlling minority acquisitions (Item 1 Exemption) in the aforementioned schedule. The components for a successful Item 1 Exemption as enforced in 2011 are acquisition of shares or voting rights in an enterprise such that the total shares held by the acquirer, either directly or indirectly, do not exceed 25%; ‘solely as an investment’ or in the ‘ordinary course of business’; and not leading to control over the enterprise. The term ‘solely as an investment’ led to confusing interpretation by the CCI in a number of cases.
The CCI in its bid to provide clarity to the parties to a combination added an explanation to the Item 1 exemption in 2016. The explanation provided that an acquisition of less than 10% of total shares or voting rights would be deemed ‘solely an investment’ if it only provided ordinary shareholder rights and did not allow the acquirer a seat at the board of directors or the capacity to influence the management of the acquired entity. However, it only added confusion and harsh criticism ensued, with the critiques labelling the exemption as obsolete because the parties, irrespective of their transaction falling under Item 1 Exemption, started notifying the CCI due to fear of being penalised for gun-jumping under section 43A of the Act. This led to immense burden on the CCI to evaluate even those transactions not likely to have any AAEC.
Nonetheless, the CCI with an aim to ameliorate the existing situation came out on July 25, 2017 with a draft amendment to the Item 1 Exemption to help remedy the confusion. The proposed amendment seeks to crystallise the erstwhile-accepted practices of the CCI in the past cases and clearly elucidate the requirements to invoke the Item 1 Exemption.
Background: The Practical Interpretation of Item 1 Exemption
The CCI has had a number of encounters with the Item 1 Exemption right from the inception of the merger control regime. The conditions adopted to judge the applicability of the Item 1 Exemption have been the simultaneous satisfaction of both the ‘investment only’ and the ‘control’ test. The application of these tests has been non-uniform over the years and the CCI has placed reliance on a number of factors depending upon the peculiar facts of the case to identify the strategic nature of the transaction or the transfer of control to the acquirer.
The Investment-Only Test
This requires the acquisition to be a passive investment without any intention to participate in the decision-making and policy formulation on part of the acquirer. Sumitomo Mitsui Trust Bank Limited had to notify its acquisition of 2.77% of Reliance Capital Limited’s shares because they intended to form a strategic alliance for the establishment of a universal bank. Furthermore, the CCI has also uncovered an element of strategic intent through a host of other factors in the past, which include but are not limited to a press release labelling the acquisition as strategic, or the capacity of the acquirer as a competitor of the target entity. The CCI in Abbot/Mylan had also held that an acquisition of less than 25% of shares or voting rights might still raise competition concerns if the acquirer and the target enterprise engage in an identical or a linked business.
The Control Test
It states that there should be no shifting of control and no acquirer should obtain such rights that allow it to exercise an influence over the decision-making processes of the acquired entity. The CCI considered voting rights granted to Piramal Enterprises in its acquisition of 20% equity in Shriram Capital as transferring controlling rights insofar as the share purchase agreement empowered Piramal enterprises to participate, inter alia, in the determination of business plan and annual budget.
The Proposed Amendment
The proposed amendment seeks to do away with the explanation to the Item 1 Exemption relating to acquisitions not extending beyond 10% of the total shares or voting rights. It intends to replace the explanation with a proviso laying down four conditions which should also be fulfilled to claim the Item 1 Exemption in addition to the three previous conditions of acquisition of less than 25% shares, ‘solely as an investment’ or in the ‘ordinary course of business’, such that it does not lead to the transfer of control.
The four additional conditions that require fulfilment include the two conditions of grant of ordinary shareholders rights only and no seat or the right to nominate a member to the board of directors of the target entity that previously found place in the proviso to the less than 10% carve-out explanation. The third condition crystallises CCI’s view in Abbot/Mylan while stating that there shall be no exemption with respect to acquisition of entities engaged in a similar/identical or linked activities at a different stage/level of production as the acquirer. The fourth condition is a caveat related to the term ‘in the ordinary course of business’, which disallows application of exemption in cases where a pooled investment vehicle acquires more than 5% of total shares in a target while already holding shares in an entity engaging in business of similar goods or services or in a linked market.
The Mature Jurisdictions
The judgment brings India in tandem with mature jurisdictions like EU and UK while allowing for a similar exemption in cases of non-controlling minority acquisition. The merger control regime in the EU only examines transactions where the parties to the combination have ‘a competitive significant link’. The European Commission establishes this link through similar factors, i.e., if the parties are present in a similar or a vertically linked market and there is an acquisition of more than 20% of total shares without any special rights or of 5% to 20% with a seat on the board of directors or access to commercially sensitive information, etc. The UK follows a similar approach wherein the Competition and Markets Authority makes no presumption of anti-competitive effects with respect to minority acquisitions below 25% of total shares; only investigating acquisitions conferring special rights to the acquirer in acquisitions not below 15% of total shares.
While the proposed amendment significantly narrows down the scope for exemption under Item 1 of Schedule 1, it clarifies the existing position of law much to delight of the parties intending to acquire a non-controlling minority shareholding in the target entity. The Act provides for notification by the parties to the combination under section 6(2) and any confusion as regards exemption led to parties’ voluntary filing before the CCI and waiting for its approval. This welcome clarification not only allows the parties to gauge whether their transaction is exempted but also allows them to complete the formalities of the transaction without waiting for the CCI’s approval. Hence, the proposed amendment enhances the ‘ease of doing business’ at a time when India is striving hard to be a favourable investment destination, bringing India in accord with mature merger control regimes and the international best practices.
– Ahkam Khan