[Abhishek Tripathy is a IV year student and Akshita Totla a III year student, both at the Institute of Law, Nirma University]
The Ministry of Corporate Affairs introduced the Draft Competition (Amendment) Bill, 2020 in February 2020. The Bill was a result of efforts of the Competition Law Review Committee, which was established with the objective of suggesting amendments to the Competition Act, 2002.
Among various changes, the draft Bill aims to settle the (control) conundrum in Indian competition jurisprudence by proposing a definite test for assessing control over an enterprise or group. The scope of the term control is essential in terms of meeting with the requirement of the notification and also to act as a tool for the analysis of combinations under section 5 of the Competition Act. Presently, ‘control’ is defined under explanation (a) to section 5 of the Act, as controlling the affairs or management by one or more enterprises, either jointly or singly, over another group or enterprise and vice versa. The juxtaposition of contrasting opinions of the Competition Commission of India (CCI) creates an anomaly as to the nature of rights necessary to amount to control.
In its order relating to Zero Coupon Optionally Convertible Debentures (ZOCDs), the CCI recognises the ability of a party to exercise decisive influence over management and affairs as amounting to control for the purposes of the Act. In this case the right to convert the ZOCDs into equity shares within ten years from the date of subscription was sufficient to amount to the acquisition of control. But, the CCI took a varied stance in the combination case of UltraTech-JAL, wherein mere material influence (the lowest degree of control)was considered enough to amount to control for the purposes of the Act. To put the dichotomy to rest, the draft Amendment Bill defines ‘control’ to include the broader test of material influence as the standard for assessment. This post attempts to understand the changing jurisprudence with respect to the meaning and degree of the term control and its role in combination regulation.
The term ‘control’ does not have a single definition. Given the broad interpretation and lack of guidance, it varies according to the regulator. Under its Takeover Regulations, 2011, the Securities and Exchange Board of India (SEBI) includes in its definition of ‘control’: the right to appoint majority of the directors, the right to control the management and the right to influence the policy decision. The present framework provides SEBI with sufficient discretion in its interpretation of the term. While the SEBI regulations prefer the use of the expression ‘management or policy decisions’, the Competition Act prescribes a much broader connotation with the use of the phrase ‘affairs or management’. It is imperative to observe that the Competition Act provides for a more purposive definition that applies to specific cases of combinations to prevent appreciable adverse effect on competition (AAEC) in the market.
Initially, in SPE Holdings-MSM India and Century Tokyo-Tata Capital, the CCI considered a hold over the strategic commercial operations, hiring or termination of key managerial personnel and an influence on the budget as clear tests of control. Moreover, the CCI had construed the scope of the term to include the affirmative and negative rights provided to the acquirer. It was also of the opinion that investor protection rights are permissible under the scope of combinations and does not necessarily need scrutiny. Thus, a comprehensible differentiation was imperative to distinguish between investor protection rights and that of the acquisition of control. Schedule I to the Combination Regulations provide exemptions to notification requirements by ascertaining certain pre-requirements such as acquisitions below 25% shareholding, the lack of possession of special rights, non-participation in the affairs and management, and no voting rights. In the case of Jet-Etihad, the CCI drastically lowered the threshold as Etihad’s 24% stake with no veto or quorum rights and a right to appoint two directors to the board was deemed sufficient to amount to acquisition of control. Even though the case created more confusion as to the interpretation of control, it highlighted the non-restrictive approach of the CCI to effectively regulate any AAEC as a result of the combination.
The Test of Material Influence
The draft amendment introduced the material influence standard as a suitable test for the determination of control. In the case of UltraTech-JAL, the CCI defines material influence as “the lowest level of control, implies presence of factors which give an enterprise ability to influence affairs and management of the other enterprise including factors such as shareholding, special rights, status and expertise of an enterprise or person, Board representation, structural/financial arrangements etc.” In this case, CCI expanded its reach from de facto control to that of material influence. Among various degrees of control, de facto control implies a situation wherein an enterprise holds less than majority of the shares but controls more than half of the votes. Moving further, de jure control means a shareholding of more than 50 percent of the voting rights of an enterprise. The CCI had also recognised situations of joint control in many of its cases wherein only one enterprise can have a controlling interest in the other enterprise but more than one enterprise can control the other enterprise. Thus, the expansive approach of the CCI is aimed at ascertaining a broader yardstick to meet the notification requirement and thereby assess AAEC post transaction.
Position under EU and US Law
In the European Union, ‘control’ is defined under article 3(2) of the Merger Regulation as the possibility of exercising decisive influence on an undertaking. It is not necessary to show that the decisive influence is or will be actually exercised, but a mere possibility of such exercise is sufficient. The European Commission also released a Consolidated Jurisdictional Notice to aid and act as a comprehensive guidance tool for interpretation. The position in the United States stands starkly contrary as compared to India and EU. The HSR Act, 1970 mandates merger notification based on the factors of size of transaction, voting securities, assets, etc. The broad classification in the US antitrust framework allows for a review in almost all its cases. According to section 7 of the Clayton Act, any acquisition of stock or assets can be challenged even without the fulfilment of the requirements of the HSR Act.
The draft Amendment Bill is a welcome change to the present framework, which does not ascertain any indication of rights that might amount to control. The test of material influence, as a base line test for assessing control, was earlier suggested by the Competition Law Review Committee. The Committee was of the opinion that “introduction of the test of material influence will serve as a twin benefit of bringing more certainty to the meaning of control while retaining the power of the Commission to assess a wide range of combinations that may have AAEC.” It also noted that subordinate legislation should bring more clarity to the test of material influence while giving due regard to the rights of minority shareholders and investors. The present amendment can also construed to be more investor friendly as it will remove vagueness and ambiguity while assuring definite protection to the rights of the investors.
– Abhishek Tripathy & Akshita Totla