legal aspects of mergers and · pdf file• acquisitions by public financial institutions,...

MERGER CONTROL

AVIMUKT DAR

PARTNER

2

• Overview

• Definitions

• Thresholds

• Notification Event

• Determining the ‘relevant market’

• Determining ‘AAEC’ in the relevant market

• Latest Amendments & Implications

• Exemptions from Notification

• Residual Issues

INTRODUCTION

Provided on request only. Private and Confidential.

OVERVIEW

• Regulation of combinations (an acquisition, merger or amalgamation) by theCompetition Commission of India (“CCI”) is governed under Sections 5 & 6 of theCompetition Act, 2002 (“Act”)

• Introduction of the Competition Commission of India (CCI) (Procedure in regard to thetransaction of business relating to combination) Regulations, 2011 (“CombinationRegulations”)

• Notification to the CCI

Threshold breach - Eligibility

Notification Event – Time Limit

• Concept of Appreciable Adverse Effect on Competition (“AAEC”) in the relevant marketin India


DEFINITIONS

• ‘combination’ - an acquisition of one or more enterprises by one or more persons or mergeror amalgamation of enterprises if the thresholds prescribed under Sec. 5 of the Act are met.

• ‘control’ - includes controlling the affairs or management by (i) one or more enterprises,either jointly or singly, over another enterprise or group or; (ii) one or more groups, eitherjointly or singly, over another group or enterprise.

• ‘enterprise’ - a person or a department of the Government, who or which is, or has been,engaged in any activity, relating to the production, storage, supply, distribution, acquisitionor control of articles or goods, or the provision of services, of any kind, or in investment, orin the business of acquiring, holding, underwriting or dealing with shares, debentures orother securities of any other body corporate, either directly or through one or more of itsunits or divisions or subsidiaries, whether such unit or division or subsidiary is located at thesame place where the enterprise is located or at a different place or at different places, butdoes not include any activity of the Government relatable to the sovereign functions of theGovernment.

• ‘group’ - means two or more enterprises which, directly or indirectly, are in a position to (i)exercise twenty-six per cent. or more of the voting rights in the other enterprise or (ii)appoint more than fifty per cent, of the members of the board of directors in the otherenterprise or (iii) control the management or affairs of the other enterprise;


THRESHOLDS


IN INDIA

Assets (INR) OR Turnover (INR)

Individual 1500 crores 4500 crores

Group 6000 crores 18000 crores

IN INDIA AND OUTSIDE INDIA

Assets OR Turnover

Total (USD) Minimumaggregate in India (INR)

Total (USD) Minimumaggregate in India (INR)

Individual 750 million 750 crores 2250 million 2250 crores

Group 3 billion 750 crores 9 billion 2250 crores

NOTIFICATION EVENT

• 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.

• Time Limit for filing of Form I or Form II (as may be applicable): Within 30 days of

such Notification Events.

• Form I to be filed ordinarily; Form II to be filed if the combination is likely to lead to a

15%(horizontal) or 25% (vertical) overlap or if the CCI requires it.

• Time Limit for filing of Form III: to be filed in an acquisition by Public Financial

Institution, FII, Bank, VCF within 7 days of date of acquisition.

• Penalty for contravention: Higher of 1% of the combined turnover or assets.


• Relevant Geographic Market

Conditions of competition for demand or supply are distinctly homogenous

Can be distinguished from conditions prevailing in the neighbouring areas.

Regulatory trade barriers, Local specification requirements, National procurement

policies, Adequate distribution facilities, Consumer preferences, Transportation costs.

• Relevant Product Market

Comprises of interchangeable or substitutable products/services – characteristics,

price & intended use

Physical characteristics, End-use, Price, Consumer preferences, Specialised producers,

Classification of industrial products.

DETERMINING THE ‘RELEVANT MARKET’


DETERMINING ‘AAEC’ IN THE RELEVANT MARKET

• Actual and potential level of competition through imports

• Extent of barriers to entry

• Level of combination

• Degree of countervailing power

• 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

• Extent to which substitutes are available or are likely to be available

• Market share of the persons or enterprise in a combination, individually and as a

combination

• Likelihood that the combination would result in the removal of a vigorous and effective

competitor or competitors


EXEMPTIONS FROM NOTIFICATION

• Acquisitions by public financial institutions, banks, venture capital funds and foreigninstitutional investors (defined under Income Tax Act, 1961) pursuant to a covenant inan investment agreement/ loan agreement (Section 6(4) of the Act)

• Transactions involving practices or agreements or relating to a certain class ofenterprises, exempted specifically from the application of the Act by notification issuedby the Central Government under Section 54 of the Act, as follows:

Where the target enterprise has either assets in India of less than INR 250 croresor turnover in Indian of less than INR 750 crores

(Clarificatory Corrigendum to Notification GSR No.482 (E) dated 27 May 2011 -valid till 3 March 2016)

Combinations involving failing banking companies

(MCA Notification S.0.93 (E) dated 8th January, 2013)


EXEMPTIONS FROM NOTIFICATION

• Regulation 4 provides that “notification under Section 6 need not normally be filed forcombinations which are ordinarily not likely to cause an adverse appreciable effect oncompetition”. Very subjective in nature.

• Some Exempt Transactions under Regulation 4:

Solely as an investment/in the ordinary course of business provided resultantholding is less than 25% and not leading to control.

Acquisition of additional shares or voting rights of up to 5% in a FY (eligibleholding from 25% to 50%); provided no sole or joint control by Acquirer group.

Where acquirer already has 50% holding of the target except when going from jointto sole ownership.

Intra-group acquisitions – except where target is owned jointly controlled byenterprises not part of the same group.

Merger or amalgamation – one already has more than 50% or if more than 50% heldwithin same group except when going from joint to sole ownership.


• Concept of “other document” introduced under Section 6 of the Act.

Implication: Any binding document conveying an agreement or decision to acquirecontrol, shares, voting rights or assets would now qualify as a trigger for a NotificationEvent

• Power of CCI to invalidate any notice not in conformity with the CombinationRegulations

Implication: CCI has accordingly issued ‘Introductory Notes to Forms’ and ‘Notes toForm I’ aimed at providing detailed guidance.

• Summary of Combination

Implication: Summary of 500 words or less required to be submitted along with the noticewhich shall be published by the CCI on its website.

LATEST AMENDMENTS & IMPLICATIONS


• New category for exemption under Regulation 4 of the Combination Regulations –

Acquisition of shares, control, voting rights or assets approved by the CCI pursuant toand in accordance with its order under Section 31 of the Act.

Implication:Whenever a third party is required to be involved (eg: SunPharma-Ranbaxy)

by virtue of the order of the CCI, no fresh notice is required to be filed in respect of carrying outtransaction with such third party, being an ‘Approved Purchaser’.

• Other key amendments

Amendment of Form I making it very detailed and closer to Form II.

Time limit available to CCI for forming its prima facie opinion has now beenqualified as 30 working days as opposed to the earlier position of 30 days. Further,any additional time taken for requisitioning information will be excluded.

LATEST AMENDMENTS & IMPLICATIONS


RESIDUAL ISSUES

• Joint ventures (“JV”) - Section 5 of does not explicitly address JVs. Clarity is required on a

JV, from a Greenfield as well as Brownfield perspective as to whether any difference

between the two. Section 5 mentions an enterprise, which is a going concern, therefore, a

new JV may not require notification.

• Definition of “Control”

While control must be ascertained on a case-by-case basis, the CCI (as per Orders

made) appears to be taking an expansive view in that the ability to veto any strategic

commercial operation is sufficient to confer control.

As a result, many pure financial investment and private equity transactions involving

acquisitions of entitlements to less than 25 per cent shareholdings in companies have

now become subject to review by the CCI.

• Statutory definition of “Composite Combinations” - required to provide clarity on

whether CCI needs to be notified when a transaction meeting the threshold limits is

completed by way of numerous smaller steps/transactions which, when taken

independently, do not require to be notified to the CCI.


DISCLAIMER

The material in this presentation is only a summary of legaldevelopments and is intended only to provide information. It doesnot, and is not intended to constitute legal advice, and should not beconsidered as such. Readers who have specific questions on legalissues should seek advice from qualified lawyers. IndusLaw makesno representations or warranties, express or implied, with respect toinformation provided in this Presentation, including completenessor accuracy. Readers should not regard dissemination of thePresentation as an attempt by the firm to solicit business.


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