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Merger Control_ Issues and Challenges - Jodhpur

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Challenges related to merger control in India
11 April 2015NLU, JodhpurYamanVerma
Competition and Mergers/Acquisitions
Purpose of Competition ActApproach in Section 3 and 4 different from approach in merger controlLooka prioriat 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:Anacquisition, merger or amalgamationwhichmeets the relevant asset or turnover thresholdsstipulated under the Competition Act is a “combination”Section 6:Combinations (that don’t qualify for anyexemption) require notification to and approval from the CCIbeforethey can be implementedExemptions provided underRelevant Government of India NotificationsCompetition 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
Privileged & Confidential
Combinations – Prescribed Thresholds
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Combinations—What isnotifiable
Acquisitions of:SharesAny security (as defined in the Competition Act/SCRA)Indirect acquisition of shares of a downstream entityVoting RightsAssetsControlincluding positive, negative, direct, indirect, joint, or soleDemergers and Joint VenturesMergers and AmalgamationsInterconnected 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 (asdeifnedunder the Indian Income Tax Act, 1961)pursuant toan investment agreement or a loan agreement are excluded from the prior notification requirementApost factointimationunderForm IIIis required to be madewithin 7 daysof the acquisition
Combinations—Government Exemptions
Section 54Target Exemption: Acquisitions where the targetenterprisehas either assets in India of less than INR 250croresor turnover in Indian of less than INR 750croresClarificatorycorrigendum dated 27 May 2011, Valid till 3 March 2016Failing 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 notifiedKey exemptions for Acquisition of shares/voting rightsLess than 25% + Not leading to control + Solely as an investment/in the ordinary course of businessCreeping acquisitions of up to 5% a year from 25% to 50%All acquisitions where acquirer already has 50% except when going from joint to soleIntra-group acquisitions and mergers
When is a merger notification required?
Privileged & Confidential
Is it Excluded or Exempted?
Is it an Acquisition, Merger or Amalgamation?
Are the Notification Thresholds exceeded?
Scope of Merger Control
Mandatory requirement of prior notification and approvalSuspensoryeffect: Cannot give effect to any part of the transaction till clearance is received or 210 days pass from notificationCovers both domestic and international transactionsPenalties for failure to file/belated filings: Up to 1% of combined assets or turnover of the CombinationCombinations causing or likely to cause an AAEC will be voidModifications may be ordered by the CCI or offered by the PartiesPre 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 companiesAcquisitions: execution of a final binding agreement or other document conveying an intent to acquire---communication to statutory bodyAdityaBirla/Pantaloons:Sufficient finality required in the trigger document—MoUmissing several important terms of the transactionTesco/Trent:FIPB application considered trigger-fine of INR 3croresfor delayed filingThomas Cook and ZFCL:Implemented market purchases of less than 25% shares before notifying agreement to purchase more than 25% shares: Fined INR 1crorefor implementing part of anotifiabletransaction
Which Form to file
Form I: Short Form and Default FormForm 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 CombinationType, nature and purpose of the proposed CombinationArea of activity of partiesExpected timeframe for completionRelevant market to which the Combination relatesHorizontal overlap or vertical arrangements post combinationInformation on products/services of partiesMarket size by volume and valueDetails of sales and volume of partiesEstimate of market shares of parties
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Contents of Forms
Form II -Extremely detailed:All analysis, reports, surveys, studies etc. - could include due diligence reportsAssets/turnover information on the size of the CombinationDetails 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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Factors to be considered
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In analyzing a transaction, the CCI will evaluate the possibilityof unilateraleffects, coordinated effects and conglomerate/portfolio effects of the combination to see if it causes an AAEC in the relevant market in IndiaFactors considered by the CCI:Actual and potential level of competition through imports in the marketExtent of barriers to entry into the marketLevel of combination in the marketDegree of countervailing power in the marketLikelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit marginsExtent of effective competition likely to sustain in a marketExtent to which substitutes are available or are likely to be available in themarketMarketshare, in the relevant market, of the persons or enterprise in a combination, individually and as acombination
Factors to be considered
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Likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the marketNature and extent of vertical integration in the marketPossibility of a failing businessNature and extent of innovationWhether the benefits of the combination outweigh the adverse impact of the combination, if any
Key Issues
Definition ofcontrolfor the purposes of defining what is an acquisition as well as the scope of the Schedule I exemptionBroadening the scope to include minority protection rightsScope of “ordinary course of business” and “solely for the purpose of investment”Notifiabilityof Inter-connected transactionsScope of the Thomas Cook/ZFCL decisionsNotifiabilityof Joint VenturesGreenfield and Brownfield Joint venturesApplicability of the target exemptionMergersSale of businesses (Regulation 5(9))
Key Issues
ModificationsBehavioural or StructuralNon-competePhase I remediesMIALPhase II remediesHolcim/Lafarge and SunPharmaCounter Proposals and TimelinesConsequences of Gun JumpingTransaction void if it causes an AAECPenalty Proceedings:Jet Airways/EtihadAirwaysConsequences of late filing/failure to fileSection 43A: Up to 1% of the combination’s assets or turnover.For acquisitions, this is imposed on the acquirerNo penalties in the first year of enforcementPenalties of between INR 5,00,000 (DewanHousing) and INR 3,00,00,000 (Tesco/Trent)
Review Timelines
Phase I:Prima Facieview within 30 days“Clock stops” mean that this actually takes closer to 60 days“continuing defect” noticesMeeting with the CCI to explain the casePhase II:Show cause noticesPublication and third party commentsDG Report6 Form II notifications and over 230 Form I notifications have been cleared, and all but 2 in Phase I
Unconditional clearances in all but 5 casesOrchid/Mylan-modification of non-compete clauseGujarat Gas-competition law compliance reportMIAL-voluntary contractual commitments in phase ISunPharma-divestmentsHolcim/LaFarge-divestmentsProcedure for remedies under Section 31Divestments triggering fresh notifications
CCI Combination Division –Organizational Structure and Role
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Notice Received
Case Team* (CT)
Joint Director
The Commission
Presentation ofCARbefore the Commission
Review and evaluation of the CAR
Corrections, suggestions and direction
Third party interface
Addressing the CT’s concerns is key to allow the process to move forward
Identify (i) defects, (ii) competitive concerns, and (iii) additional information required;Analyze market(s) at issue and the economic arguments put forth in filingIssuecompetition assessment report (CAR)
The case team plays the largest role in the assessment of M&A filings
Inter-connected transactionsParties: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 ofSHRILwas proposed to be transferred toTCISILby way of a demerger –SHRILshareholders would get shares inTCIL.SHRIL, with its residual business was proposed to be amalgamated intoTCIL–SHRILshareholders would get shares inTCIL(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,TCISILacquired 9.93 % of the shares ofSHRILthrough market purchases.
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Key Cases- Thomas Cook/Sterling
Key Cases- Thomas Cook/Sterling
Inter-connected transactionsThe Transaction was notifiable to the CCI but the market purchase was target exempt.CCI imposed a penalty of INR 10 Millionforcompleting market purchases pending CCI approval of the Transaction, despite target exemption being available for the market purchases.Key TakeawaysIf one step is notifiable, the entire transaction may be notifiableAnyexemptions claimed must be clearly available at such stepNosingle step of the transaction can be consummated until the receipt of the CCI approval for the entire transactionZFCL/MCFL Transaction with similar issues also saw a fine imposed
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Key CasesAdityaBirla/Pantaloons & Tesco/Trent
Trigger EventObligation to file CCI noticewithin 30 calendar daysof:Mergers/amalgamations– final approval of merger by the boards of directors of all companies involvedAcquisitions- execution of a final binding agreement or other document for acquisitionAditya 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 30Million.
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ModificationsParties: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, withMIAPL,IOCL,BPCLandHPCLholding 25% each of the shares ofMAFFFL.MAFFFLwill 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 anAAEC.
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Key Cases– Mumbai Airport InternationalCreation of an Aviation Fuel Farm Facility
Key Cases– Mumbai Airport InternationalCreation 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 suppliersCertain restrictive clauses in theSHA, like lock-in, minimum shareholding requirementsandRoFRConflict of interest given the dual role of the OilPSUsReduction in storage capacityPartiesoffered voluntary contractual amendments as modification to the CCI, avoiding a full phase 2investigationIn addition to the commitments, the parties also agreed to provide certain safeguards in the operation ofMAFFFLBased on the commitments offered, the CCI approved the combination
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Key Cases – SunPharma/Ranbaxy
DivestmentParties: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 ofZenotechby Sun Pharma fromRanbaxyCCI formed a prima facie opinion that the proposed combination is likely to cause an AAEC.
Privileged & Confidential
Key Cases– SunPharma/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 marketswhere 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 SunPharmaand 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).HolcimLafarge divestment order passed last week:6 months to find a purchaser for 2lafargeunitsProcess of counter proposal
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Amendment Regulations
Change the Phase I Review periodChange to nature of non-confidential version by adding a verificationChange the authorized signatorySolve the divestment notification problemInvalidation of the noticeChange meaning of “other document”
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Merger Control_ Issues and Challenges - Jodhpur