[Siddarth P. Chokkalingam is a 4th year student of the National Law School of India University, Bangalore]
Section 6(2A) of the Competition Act, 2002 has been interpreted by the Competition Commission of India as well as the Supreme Court to impose standstill obligations on the parties, refraining them from consummating any combination, until the expiry of the 210 days mentioned therein or until the Commission passes orders under section 31 of the Act, whichever is earlier. This post argues that section 6(2A) is uniquely worded and that it does not impose any obligations on the parties but rather affects any act consummating a combination, in whole or part thereof, covering the act in an “invalidity cloak” until the expiry of the specified period.
The Supreme Court in its judgment in SCM Soilfert Ltd. v. Competition Commission of India unambiguously stated that the use of the word “proposes” in section 6(2) read along with section 6(2A) is very clear in its implication that a combination should not only be proposed at the stage of notification but also remain proposed until the expiry of the period stated in section 6(2A). This apex court judgment is in line with a slew of orders passed by the Commission under section 43A, such as the Baxalta/Baxter and the Etihad Airways/Jet Airways rulings, wherein it was held that any act of the parties in violation of their standstill obligations to consummate or give effect to the transactions before or after filing notification to the Commission in terms of section 6(2), but before the expiry of the period provided in section 6(2A), would amount to a violation of section 6(2) since the combination would no longer be in the proposal stage. Advocating a joint reading of sections 6(2) and 6(2A), the Commission in its Ultratech Cement/JAL order, classified any act to consummate the combination in the lead up to filing of notice or during the review process as “gun-jumping”. This is in consonance with the usage of the term in the United States.
In fact, as has been argued in a post “Gun Jumping – The Antitrust Way” on this Blog that the interpretation of sections 6(2) and Section 6(2A) by the Commission as well as the Supreme Court is on par with the understanding of “standstill obligations” under the United States and European Union jurisdictions. However, the interpretation in these jurisdictions is following the language used in their respective laws and regulations. In accordance with the Hart-Scott-Rodino Act, 15 U.S.C. § 18a, which amended the Clayton Act in the United States, it is clearly specified that the obligation is on the parties to not complete the acquisition until the expiry of 30 days from the notification or until the Antitrust Division approves, whichever is earlier. Similarly, article 7 of the EC Merger Regulations, states that a “concentration…shall not be implemented” by the parties until the period stated therein. Significant to note is that the wording of section 6(2A) is different in the sense that it states that the combination “shall not come into effect” till the expiry of the period stated therein.
It is a well-established principle of the Supreme Court that the words of a statute must be interpreted with regard to the “literal meaning of the words and expressions” used in the statute. That, with respect to section 6(2A), the rule of literal interpretation has not been followed is very clear from the SCM Soilfert ruling where the Court has read the words “no combination can be entered into” within the ambit of section 6(2A) so as to impose standstill obligations on the parties. On the contrary, the words of section 6(2A), on their own, do not impose any restraints on the parties. Rather they clothe acts of the parties in an invalidity cloak until the expiry of the stated period.
The rationale for adopting an interpretation which imposes standstill obligations is found in the Commission’s ruling in the Ultratech Cement/JAL case, wherein it reasons that standstill obligations are necessary to ensure independence of the parties until the Commission grants its approval and to maintain the “incentive to compete”. The Commission states that such an approach would be in line with the preamble of the Act to “prevent” practices which have an adverse impact on competition. However, it is argued that the invalidity cloak approach would also be in consonance with the preamble. There are various steps in implementing a combination such as making arrangements and entering into contracts for transferring control, assets, and voting rights. A literal interpretation would permit an enterprise to make these arrangements and contracts which would fructify on the expiry of the period stated in section 6(2A). Since they are draped in an invalidity cloak, they do not affect the independence of the parties but allow parallel work to be done which saves on time and effort.
The SCM Soilfert judgment makes a valid point when it states that such parallel activities are prohibited so as to prevent parties from reaching a position from where there is no return without great loss to the parties. However, in a market governed by self-interest, this risk must be left to the parties. In fact, it would be a calculated risk since going by the Commission’s Annual Report 2016-17, it approved 94% of proposed combinations. Alternatively, it would incentivize parties to notify the Commission at the earliest, without dispute on the trigger documents, so as to remove the invalidity cloak.
Most significantly, the invalidity cloak approach would put an end to the Commission’s pick and choose policy on what constitutes consummation. By this approach, section 6(2) read with section 6(2A) would imply all combinations would be in the proposed stage until the expiry of the period stated in section 6(2A). It will put an end to the Commission’s arbitrariness for declaring situations varying from transferring shares to an escrow account to executing a guarantor agreement as constituting consummation without laying down strict standards for the same.
Are we ready to move to the “invalidity cloak” regime?
– Siddarth P. Chokkalingam