Transcript Merger Control: Issues and Challenges

Challenges related to merger
control in India
11 April 2015
NLU, Jodhpur
Yaman Verma
Competition and Mergers/Acquisitions
• Purpose of Competition Act
• Approach in Section 3 and 4 different from
approach in merger control
• Look a priori at potential effects of a
combination-check for appreciable adverse
effects on competition (AAEC)
• Assess unilateral and coordinated effects
(more on this later)
• Clear/Prohibit/Modify proposed transactions
What is a Combination?
• Section 5: An acquisition, merger or amalgamation
which meets the relevant asset or turnover
thresholds stipulated under the Competition Act is a
“combination”
• Section 6: Combinations (that don’t qualify for any
exemption) require notification to and approval from
the CCI before they can be implemented
• Exemptions provided under
– Relevant Government of India Notifications
– Competition Commission of India (Procedure in regard to
the Transaction of Business relating to Combinations)
Regulations, 2011
Combinations – Prescribed
Thresholds
• Thresholds in Competition Act increased
by notification (Section 54 gives the CCI
the central government the power to do
this)
• Consider the consolidated, audited
financial statements of the previous
financial year
Combinations – Prescribed
Thresholds
In India
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Applicability
Assets
Turnover
For individual
Parties (i.e.
acquirer and
target)
(Combined)
INR 15 billion
INR 45 billion
For ‘Group’ (to
which target belongs
post acquisition)
INR 60 billion
INR 180 billion
Privileged & Confidential
Combinations – Prescribed
Thresholds
Applicability
In India and
Outside
India
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Assets
Turnover
Total
Minimum
in India
Total
Minimum
in India
For individual
Parties (i.e.
acquirer and
target)
(Combined)
USD 750
million
INR 7.5
billion
USD 2.25
billion
INR 22.5
billion
For ‘Group’ (to
which target
belongs post
acquisition)
USD 3
billion
INR 7.5
billion
(USD 150
million)
USD 9
billion
INR 22.5
billion
(USD 450
million)
Privileged & Confidential
Combinations—What is notifiable
• Acquisitions of:
– Shares
• Any security (as defined in the Competition Act/SCRA)
• Indirect acquisition of shares of a downstream entity
– Voting Rights
– Assets
– Control
• including positive, negative, direct, indirect, joint, or sole
• Demergers and Joint Ventures
• Mergers and Amalgamations
• Interconnected Transactions: Analyse separately,
file together, implement after approval
Combinations—Statutory Exemptions
• Section 6(4): Acquisitions by public financial
institutions, banks, venture capital funds and
foreign institutional investors (as deifned
under the Indian Income Tax Act, 1961)
pursuant to an investment agreement or a
loan agreement are excluded from the prior
notification requirement
• A post facto intimation under Form III is
required to be made within 7 days of the
acquisition
Combinations—Government Exemptions
• Section 54
• Target Exemption: Acquisitions where the
target enterprise has either assets in India of
less than INR 250 crores or turnover in Indian
of less than INR 750 crores
– Clarificatory corrigendum dated 27 May 2011,
Valid till 3 March 2016
• Failing banks: Notification exempting
combinations involving failing banking
companies (notified under S. 45 of the
Banking Regulation Act, 1949)
Combination Regulations-“Exemptions”
• “Ordinarily” unlikely to cause an AAEC and
“normally” do not need to be notified
• Key exemptions for Acquisition of shares/voting
rights
• Less than 25% + Not leading to control + Solely as
an investment/in the ordinary course of business
• Creeping acquisitions of up to 5% a year from
25% to 50%
• All acquisitions where acquirer already has 50%
except when going from joint to sole
• Intra-group acquisitions and mergers
When is a merger notification required?
Is it an Acquisition, Merger or Amalgamation?
YES
Is it Excluded or Exempted?
NO
Are the Notification Thresholds exceeded?
YES
TRANSACTION IS NOTIFIABLE
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Privileged & Confidential
Scope of Merger Control
• Mandatory requirement of prior notification and
approval
• Suspensory effect: Cannot give effect to any part of
the transaction till clearance is received or 210 days
pass from notification
• Covers both domestic and international transactions
• Penalties for failure to file/belated filings: Up to 1% of
combined assets or turnover of the Combination
• Combinations causing or likely to cause an AAEC will
be void
• Modifications may be ordered by the CCI or offered by
the Parties
• Pre merger consultation—informal and non-binding
When to notify
• Obligation to file the notification within 30 days of:
• Mergers/Amalgamation: final approval of scheme of
amalgamation by the boards of directors of the
amalgamating companies
• Acquisitions: execution of a final binding agreement or
other document conveying an intent to acquire--communication to statutory body
• Aditya Birla/Pantaloons: Sufficient finality required in the trigger
document—MoU missing several important terms of the transaction
• Tesco/Trent: FIPB application considered trigger-fine of INR 3 crores
for delayed filing
• Thomas Cook and ZFCL: Implemented market purchases of less
than 25% shares before notifying agreement to purchase more than
25% shares: Fined INR 1 crore for implementing part of a notifiable
transaction
Which Form to file
• Form I: Short Form and Default Form
• Form II: Detailed form requiring much more
information: CCI “prefers” that this form be used when
transactions involve parties that have:
– A horizontal overlap with market shares over 15%
– Vertical relationships with market shares of over 25%
• If you get it wrong: Show cause (Jet) and asked to file
again in Form II (invalid notice, and no return of fee)
• Material change to combination: File again (restart
clock but fee credit)
• Form III: Intimation after transaction: Section 6(4)
• Inter-connected transaction: File a composite form
Contents of Forms
• Form I - Simple, short & relatively user
friendly Form requiring basic information
on the Combination
§
§
§
§
§
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§
§
§
§
Type, nature and purpose of the proposed Combination
Area of activity of parties
Expected timeframe for completion
Relevant market to which the Combination relates
Horizontal overlap or vertical arrangements post
combination
Information on products/services of parties
Market size by volume and value
Details of sales and volume of parties
Estimate of marketPrivileged
shares
of parties
& Confidential
Contents of Forms
• Form II - Extremely detailed:
» All analysis, reports, surveys, studies etc. - could include due
diligence reports
» Assets/turnover information on the size of the Combination
» Details of ownership and control of and by the parties, list of
group companies, etc.
» Details of all products to be provided, not just overlapping
products -industrial classification, end-use, availability of
specialised producers, licensing/registration requirements, etc.
» Information on market structure - determination of relevant
markets, factors influencing entry, extent of overlap,
import/export details, demand structure, level of concentration,
information on competitors/customers/suppliers, etc.
» Copies of orders/decisions passed by any global Competition
Authority with respect to the Combination
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Privileged & Confidential
Factors to be considered

In analyzing a transaction, the CCI will evaluate the possibility of unilateral
effects, coordinated effects and conglomerate/portfolio effects of the
combination to see if it causes an AAEC in the relevant market in India

Factors considered by the CCI:
− Actual and potential level of competition through imports in the market
− Extent of barriers to entry into the market
− Level of combination in the market
− Degree of countervailing power in the market
− Likelihood that the combination would result in the parties to the combination
being able to significantly and sustainably increase prices or profit margins
− Extent of effective competition likely to sustain in a market
− Extent to which substitutes are available or are likely to be available in the
market
− Market share, in the relevant market, of the persons or enterprise in a
combination, individually and as a combination
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Privileged & Confidential
Factors to be considered
− Likelihood that the combination would result in the removal of a vigorous
and effective competitor or competitors in the market
− Nature and extent of vertical integration in the market
− Possibility of a failing business
− Nature and extent of innovation
− Whether the benefits of the combination outweigh the adverse impact of
the combination, if any
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Key Issues
• Definition of control for the purposes of defining what
is an acquisition as well as the scope of the Schedule I
exemption
– Broadening the scope to include minority protection rights
• Scope of “ordinary course of business” and “solely
for the purpose of investment”
• Notifiability of Inter-connected transactions
– Scope of the Thomas Cook/ZFCL decisions
• Notifiability of Joint Ventures
– Greenfield and Brownfield Joint ventures
• Applicability of the target exemption
– Mergers
– Sale of businesses (Regulation 5(9))
Key Issues
• Modifications
– Behavioural or Structural
• Non-compete
– Phase I remedies
• MIAL
– Phase II remedies
• Holcim/Lafarge and Sun Pharma
– Counter Proposals and Timelines
• Consequences of Gun Jumping
– Transaction void if it causes an AAEC
– Penalty Proceedings: Jet Airways/Etihad Airways
• Consequences of late filing/failure to file
–
–
–
–
Section 43A: Up to 1% of the combination’s assets or turnover.
For acquisitions, this is imposed on the acquirer
No penalties in the first year of enforcement
Penalties of between INR 5,00,000 (Dewan Housing) and INR
3,00,00,000 (Tesco/Trent)
Review Timelines
• Phase I: Prima Facie view within 30 days
– “Clock stops” mean that this actually takes closer to
60 days
– “continuing defect” notices
– Meeting with the CCI to explain the case
• Phase II:
– Show cause notices
– Publication and third party comments
– DG Report
• 6 Form II notifications and over 230 Form I
notifications have been cleared, and all but 2 in
Phase I
Modifications
• Unconditional clearances in all but 5 cases
– Orchid/Mylan-modification of non-compete clause
– Gujarat Gas-competition law compliance report
– MIAL-voluntary contractual commitments in
phase I
– Sun Pharma-divestments
– Holcim/La Farge-divestments
• Procedure for remedies under Section 31
• Divestments triggering fresh notifications
CCI Combination Division –
Organizational Structure and Role
The case team plays the largest role in the
assessment of M&A filings
•
•
Briefing
Identify (i) defects, (ii)
competitive concerns,
and (iii) additional
information required;
Analyze market(s) at
issue and the economic
arguments put forth in
filing
Issue competition
assessment report
(CAR)
Presentation of CAR before
the Commission
•
The Commission
Member
Advisor
Director
Joint Director
Third party
interface
Case Team* (CT)
Notice Received
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Addressing the CT’s concerns is key to allow the
process to move forward
Privileged & Confidential
Key Cases- Thomas Cook/Sterling
Inter-connected transactions
Parties:
Thomas Cook India Limited (TCIL), Thomas Cook Insurance Services (India)
Limited (TCISIL) and Sterling Holiday Resorts (India) Limited (SHRIL)
Transaction:
• The resort and time share business of SHRIL was proposed to be
transferred to TCISIL by way of a demerger – SHRIL shareholders would
get shares in TCIL. SHRIL, with its residual business was proposed to be
amalgamated into TCIL – SHRIL shareholders would get shares in TCIL
(Transaction).
•
The Transaction would result in an open offer.
•
Transaction approved by the respective Boards on 7 February 2014 and
CCI received the filing on 14 February 2014.
•
On 10 and 11 February 2014, TCISIL acquired 9.93 % of the shares of
SHRIL through market purchases.
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Privileged & Confidential
Key Cases- Thomas Cook/Sterling
Inter-connected transactions
•
The Transaction was notifiable to the CCI but the market purchase was
target exempt.
• CCI imposed a penalty of INR 10 Million for completing market purchases
pending CCI approval of the Transaction, despite target exemption being
available for the market purchases.
Key Takeaways
•
If one step is notifiable, the entire transaction may be notifiable
•
Any exemptions claimed must be clearly available at such step
•
No single step of the transaction can be consummated until the receipt of
the CCI approval for the entire transaction
ZFCL/MCFL Transaction with similar issues also saw a fine imposed
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Privileged & Confidential
Key Cases
Aditya Birla/Pantaloons & Tesco/Trent
Trigger Event
Obligation to file CCI notice within 30 calendar days of:
•
Mergers/amalgamations – final approval of merger by the boards of
directors of all companies involved
•
Acquisitions - execution of a final binding agreement or other
document for acquisition
 Aditya Birla/Pantaloons – Trigger document should be of sufficient
finality, interim arrangements which do not determine the exact scope of
the transaction not accepted as trigger for filing.
 Tesco/Trent – Parties incorrectly assessed trigger document. Application
to Department of Industrial Policy and Promotion (DIPP) and Foreign
Investment and Promotion Board (FIPB) was the relevant trigger. 73
days delay in filing notice. CCI imposed penalty of INR 30 Million.
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Privileged & Confidential
Key Cases– Mumbai Airport International
Creation of an Aviation Fuel Farm Facility
Modifications
Parties:
Mumbai International Airport Private Limited (MIAPL), Indian Oil Corporation Limited
(IOCL), Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation
Limited (HPCL), and Mumbai Aviation Fuel Farm Facility Limited (MAFFFL)
Transaction:
Creation of a joint venture company, MAFFFL, with MIAPL, IOCL, BPCL and HPCL
holding 25% each of the shares of MAFFFL. MAFFFL will provide open access fuel farm
at the Mumbai International Airport and will be responsible for receiving ATF from ATF
suppliers, storing, handling and delivering the same to the aircrafts.
CCI sent letters to Airports Economic Regulatory Authority, Petroleum and Natural Gas
Regulatory Board and certain private oil companies seeking comments/views on the
proposed transaction.
CCI formed a prima facie opinion that the proposed combination is likely to cause an
AAEC.
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Privileged & Confidential
Key Cases– Mumbai Airport International
Creation of an Aviation Fuel Farm Facility
Concerns raised by the CCI in the Show Cause Notice include:
– Non-availability of off site infrastructure to other ATF suppliers
– Certain restrictive clauses in the SHA, like lock-in, minimum
shareholding requirements and RoFR
– Conflict of interest given the dual role of the Oil PSUs
– Reduction in storage capacity
Parties offered voluntary contractual amendments as modification to the
CCI, avoiding a full phase 2 investigation
In addition to the commitments, the parties also agreed to provide certain
safeguards in the operation of MAFFFL
Based on the commitments offered, the CCI approved the combination
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Privileged & Confidential
Key Cases – Sun Pharma/Ranbaxy
Divestment
Parties:
Sun Pharmaceutical Industries Limited (Sun Pharma) and Ranbaxy Laboratories Limited
(Ranbaxy)
Transaction:
Merger of Ranbaxy into Sun Pharma pursuant to the scheme of arrangement. The
proposed combination would also result in the acquisition of 46.79 % equity share capital
of Zenotech by Sun Pharma from Ranbaxy
CCI formed a prima facie opinion that the proposed combination is likely to cause an
AAEC.
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Privileged & Confidential
Key Cases– Sun Pharma/Ranbaxy
•
On the basis of (i) combined market share of the Parties, (ii) incremental market
share as a result of the proposed combination, (iii) market share of the competitors,
(iv) number of significant players in the relevant market, etc., the CCI focused its
investigation on 49 (forty nine) relevant markets where the proposed combination
was potentially to have an AAEC in the relevant market in India.
•
Based on further investigation, the CCI identified 7 products where the combined
market shares of the parties to the combination was likely to causes an AAEC in
India. Therefore, on the basis of the combined market shares along with other
factors, the CCI proposed modifications to the structure of the transaction.
•
The Final Divestment Package consisted of divestment of seven (7) product lines (1
from Sun Pharma and 6 from Ranbaxy), including the relevant brands as well as all
strengths, dosages, and packaging (in all forms), IP rights, contracts, Inventories, all
licenses and permits. (Divestment Products).
• Holcim Lafarge divestment order passed last week:
– 6 months to find a purchaser for 2 lafarge units
– Process of counter proposal
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Amendment Regulations
• Change the Phase I Review period
• Change to nature of non-confidential
version by adding a verification
• Change the authorized signatory
• Solve the divestment notification problem
• Invalidation of the notice
• Change meaning of “other document”
Thank You
Questions?
Yaman Verma
e: [email protected]