Merger control regime in India provides for a suspensory regime wherein the ‘combinations’ (i.e. the notifiable transactions under the provisions of Section 5 of the Act) cannot be implemented unless approved by the Competition Commission of India (CCI) or expiry of the 210-day review period following notification. Failure to notify a reportable combination and consummating the deal may expose the parties to a penalty which may extend up to 1% of the total turnover or the assets, whichever is higher, of the combination. The CCI has used this power increasingly and levied penalties under Section 43A of the Act.
Procedural and substantive gun jumping and issues regarding partial implementation:
Gun jumping, broadly defined, can occur in two distinct contexts i.e. (i) procedural gun-jumping, which occurs when the merging parties fail to comply with the mandatory premerger notification and the waiting period under the merger control regulations, and (ii) substantive gun jumping, which implies that the merging parties coordinate their competitive conduct or consummate the transaction prior to approval of the same by the competition authority, thus resulting in an anti-trust violation.
However, defining or determining what constitutes a gun jumping is not easy as many forms of pre-merger co-ordination between the merging parties are indeed reasonable and necessary during the merger negotiation process. The competition agencies are not insensitive or averse to such a requirement. However, they want the combining parties to maintain the fine distinction between planning activities, which may be permissible, and integrating activities, which are prohibited. It is, therefore, important for the combining parties to ensure that they understand the fine distinction between the two, so as to avoid any inadvertent violation of the suspensory regime.
The European Commission (EC) and other merger control authorities of the world take firm action against gun jumping violations under the merger control regulations. Mostly the gun jumping cases in EU, as well as in India, pertain to cases of failure to notify. However, recently the EC imposed a fine of €124.5 million on Altice, the multinational cable and telecommunications company, for implementing its acquisition of the Portuguese telecommunications operator PT Portugal before notification or approval by the Commission, being the first case of its kind wherein the fine was imposed on the ground of breach of both the notification and standstill obligations. In this regard, the EC concluded that certain provisions of the purchase agreement resulted in Altice acquiring the legal right to exercise decisive influence over PT Portugal, for example by granting Altice veto rights over decisions concerning PT Portugal's ordinary business. Further, in certain instances, Altice actually exercised decisive influence over PT Portugal's business, for example by giving PT Portugal instructions on how to carry out a marketing campaign and by seeking and receiving detailed commercially sensitive information about PT Portugal outside the framework of any confidentiality agreement.
In the US, Department of Justice (DOJ) has also prosecuted companies for illegal pre-closing activities on numerous occasions. Illustratively, in November 2014, the DOJ announced a U$5 million settlement with two companies for illegal pre-merger coordination, a violation under the US's HSR Act. In this case, Flakeboard America and SierraPine had executed an asset purchase agreement, and while the transaction was under review, SierraPine had closed one of its mills, which competed with Flakeboard's mill.
Interestingly, as regards the distinction between permissible planning activities and prohibited implementation activities, the CJEU dealt with the issue for the first time whether preparatory steps to prepare and facilitate a concentration constitute (partial) implementation of the concentration within the meaning of Article 7(1) of EUMR vide its recent decision dated 31st May 2018 in case No.C‑633/16 pertaining to proposed merger of KPMG DK companies and Ernst & Young. The CJEU held that KPMG DK's termination of the cooperation agreement with KPMG International did not contribute to the change of control over the target undertaking and hence did not qualify as gun-jumping in breach the Article 7 of EUMR.
CCI’s Decisional Practices on gun jumping cases:
It may be pertinent to state at the outset that since the implementation of the merger control regime in India w.e.f. 1.6.2011, significant changes have been introduced from time to time by the government for streamlining the merger review process. As per the original scheme, Section 6(2) of the Act, provided that an enterprise proposing to enter into a combination was required to give a notice to the CCI within 30 days of executing the ‘trigger document’. However, the 30-day deadline for notifying the proposed has since been eliminated by the government by a suitable notification. Further, the scope of de minimis exemption has also been broadened to include mergers, which was earlier available only to transactions structured as acquisitions. Further, while determining the availability of the de minimis exemption, only the value of assets of/and turnover attributable to the target’s division or business being transferred is to be taken into account and not the entire assets or turnover of the seller. In light of the above, a large number of cases relating to (i) belated notification filed after the deadline of 30 days of the trigger document, (ii) computation of threshold at the enterprise level and not at the level of business division or the assets being acquired, and (iii) non - application of de minimis exemption to mergers, which were treated as violation of Section 43A by the CCI, are now beyond the scope of penalty provisions.
Discussed below are some of the relevant issues that the stakeholders will still be required to keep in mind to avoid any gun jumping proceedings:
Gun jumping as violation of law in India: (Section 43A applies to both failure to notify and waiting period violation cases): In Baxalta Incorporated case, (combination registration No. C-2015-07-297), the CCI made it clear that “If the parties to the combination are allowed to give effect to the proposed combination either before filing of the notice with the Commission or after filing of the notice but before the expiry of the period given in sub-section (2A) of Section 6 of the Act, then it will tantamount to violation of sub-section (2) of Section 6 of the Act”. The same position was reiterated by the CCI in a recent case (combination registration No. C-2017/06/516), wherein a suo moto cognizance of transaction under the provisions of Section 20(1) of the Act was taken that involved acquisition of right to use of spectrum by Reliance Jio Infocomm from Reliance Communications. The erstwhile Competition Appellate Tribunal (COMPAT) had also made a similar observation in the case of SCM Soilfert and ors. v. CCI (2016) Comp. L.R. 1111 (combination case No. C-2014/05/175) that “The ex-ante nature of notification under Section 6(2) is buttressed by a reading of sec. 6(2A) which deliberately used the phrase ‘no combination shall come into effect’ until 210 days from date of notice or passing of order under Sec. 31.”
Market purchases which are not solely as an investment: The CCI lists certain categories of combinations mentioned in Schedule I to the Combination Regulations which are normally not required to be notified. A significant exemption provided under Item I of Schedule I pertains to acquisition, directly or indirectly, of less than 25% of shares or voting rights, if made ‘solely as an investment’ or in the ‘ordinary course of business’, not resulting in control.
An acquisition is considered ‘solely as investment’ if the acquirer is not engaged in the same line of business and / or the investment does not lead to control. Vide Amendment Regulations 2016, the CCI laid down threshold providing that an acquisition of less than 10% of the total shares or voting rights shall be treated as ‘solely as an investment’ provided the acquisition is carried out without (i) rights which are not exercisable by ordinary shareholders (ii) right / intention to nominate a director and (iii) intention to participate in the affairs or management of the target company. However, it is noticed that acquisition of non-controlling stake below 10% threshold, if in a horizontal or vertically linked business, is still required to be notified to the CCI.
For example, in the combination case no. C-2017/12/538, filing was made for acquisition of non-controlling minority stake of 5% in Shoppers Stop by the investment arm (a category III foreign portfolio investor) of online retailer Amazon.com Inc. In the statutory appeal in SCM Soilfert case (combination case No. C-2014/05/175), the Supreme Court vide its judgement dated 17.04.2018 held that since the acquirers and the target were engaged in similar businesses, the market purchase of equity share capital of Mangalore Fertilizers and Chemicals made on a single day by SCM Soilfert through a number of block and bulk deals, not being solely as an investment or in ordinary course of business, ought to have been notified. Similarly, in the combination case no. C-2014/06/181, involving acquisition of 16.43% equity interest in Mangalore Fertilizers and Chemicals by Zuari Fertilisers and Chemicals, in separate tranches of open market purchases, the CCI observed that the exempt categories under Item I of Schedule I do not include combinations that are likely to cause a change in control or are in nature of strategic combinations and rejected the plea to treat market purchases as solely for investment.
Part-payment of the consideration amounts to gun jumping: A transaction is seen as partly consummated even before its closure, if the parties to the transaction take any step which is considered as integration of their business. Illustratively, in combination (case No.C-2015/08/299) regarding acquisition of bitumen business plant of Shell India Markets Pvt Ltd (SIMPL) by Hindustan Colas, a joint venture of Hindustan Petroleum Corpn and Colas S.A. France, filed before the CCI on 21.08.2015, while the CCI approved the proposed combination, it noticed that Hindustan Colas had paid a sum of INR four crore to SIMPL on signing of the Share Purchase Agreement (SPA) with balance amount to be paid on the date of completion of the combination. The CCI concluded that the part-payment of the consideration amounted to the consummation of the transaction before it was approved by the CCI.
Pertinently, the acquirer submitted that as per the terms of the SPA, part payment of INR four crore was a refundable deposit in good faith and not a pre-payment of consideration. It was further submitted that the refundable deposit had not resulted into any benefit or gave control to it other than showcasing its commitment to SIMPL towards the combination and that since there were other potential competing buyers, it was necessary and commercially expedient to pay this deposit to demonstrate their earnestness in acquiring the asset. It was also submitted that no step was taken for integration of businesses before receiving approval of the CCI and that there was no exchange of commercially sensitive information or cessation of competition with each other during the waiting period. It was also stated that customers of SIMPL were not assigned to Hindustan Colas, which implied lack of possibility of Hindustan Colas being able to exercise influence on SIMPL by using their customer information.
However, as regards the pre-payments, the CCI held a view that it could potentially reduce the incentive and will of the target to compete as the said deposit was actually payment of part consideration and not merely a refundable deposit made in good faith as claimed by the acquirer. The CCI also noted that that pre-payment of consideration may have the impact of creating a tacit collusion which may cause an adverse effect on competition even before consummation of the combination. The CCI noted that gun jumping takes many forms and pre-payment of consideration being one such form, has the potential to distort the competition dynamics of the markets.
Unlawful implementation of part of transaction is gun jumping: In Jet- Etihad (combination case No.C-2013/05/122) case, which was the first case in India where a penalty had been imposed by the CCI for gun jumping, Etihad had sought approval for acquisition of 24 per cent equity interest in Jet. While approving the transaction on 12.11.2013, the CCI noted that certain provisions of the commercial cooperation agreement had already been implemented and the sale of certain lending / take-off slots of Jet at London Heathrow airport had not been notified for approval of the CCI before consummation.
Period of limitation prescribed under the Act for commencement of suo-moto inquiry is not a bar for initiation of penalty proceedings under Section 43A: In terms of Section 20 (1), the CCI may inquire whether an acquisition or merger or amalgamation has caused or is likely to cause an appreciable adverse effect on competition in India provided that such an inquiry cannot be initiated after expiry of one year from the date on which such combination has taken effect. 
While assessing a combination notice (registration No. C-2015/12/348), the CCI noticed that through a ‘scheme of arrangement cum demerger’, approved by the board resolution on 18.03.2014, Polaris Financial Technology had demerged its ‘products business’ on a going concern basis which was subsequently acquired by Intellect Design Arena. However, the notice regarding the proposed combination was not filed by the acquirer within thirty days of the execution of the binding agreement as per the extant provisions of Section 6(2), as applicable at the relevant point of time, and that the transaction stood consummated. The CCI, therefore, in its meeting held 04.02.2016, decided to initiate penalty proceedings under Section 43A against the acquirer for failing to give notice under Section 6 (2).
The acquirer, in its defence, submitted a plea that as provided under Section 20(1) of the Act, such an inquiry by the Commission itself provided for a bar of limitation of one year from the date of coming into effect of the ‘combination’. In this regard, the CCI noted that the proviso to Section 20(1) provides limitation of one year on competition assessment of a combination, which is not applicable on initiation of proceedings under Section 43A as it relates to imposition of penalty for non-submission of information on a notifiable combination before consummation.
Acquisition of right to use spectrum is not in ordinary course of business: The CCI recently took suo-moto cognisance under Section 20 (1) and imposed penalties in instances of failure to file notice by some TSPs regarding their acquisition of right to use spectrum and consummating the transaction before expiry of waiting period as provided in Section 6(2A).
The CCI considered the following issues for determination in respect of these three transactions:
- Whether the spectrum transactions, being regulated by the sector regulators, fall outside the purview of the CCI’s jurisdiction?
- Whether the spectrum transactions amount to ‘acquisition of assets’ within the meaning of the term under Section 5 of the Act?
- Whether the spectrum transaction is covered under Item 3 of Schedule I of the Combination Regulations as an exempted category of ‘ordinary course of business’?
As regards the jurisdiction issue, the CCI noted that merely because the sectoral regulator allows an activity and prescribes conditions does not mean or imply that the competition law would not apply to the concerned sector. The Competition Act, 2002 does not also contain or envisage any exemption to sectors wherein the sectoral regulator guidelines contain any provision which may relate to the competitiveness of the sector. The CCI noted that the clauses included in spectrum trading guidelines primarily relate to market share of the parties in terms of spectrum holding. In this context the CCI observed that market share is just one of the several factors, as contained in Section 20(4) of the Competition Act 2002, for assessing likelihood of a proposed combination leading to appreciable adverse effect on competition.
As regards the issue whether spectrum transaction amounts to ‘acquisition of assets’, the CCI, on the basis of the economic significance of spectrum in terms of potential of generating turnover, inferred that spectrum constitutes business (i.e. amounts to an asset) and hence market turnover can be attributed to it.
As regards the issue whether the acquisition of spectrum can be considered as an exempted category to be in ‘ordinary course of businesses’ under Item 3 of Schedule I, the CCI observed that the term ‘ordinary course of business’ refers to the transactions which correspond to revenue transactions. In this regard, it observed that spectrum is directly related to the business of the acquirers, being TSPs. It further observed that activities relating to acquisition / transfer of resources such as spectrum are strategic capital transactions, which cannot be equated to ordinary revenue activities. The CCI also observed that the acquirers recognize spectrum as an intangible asset i.e. a non-current asset in the balance sheet and not as asset held for sale which would have been reflected as a current asset. The CCI, therefore, held that acquisition of spectrum cannot be considered to be in ‘ordinary course of business’ under Item 3 of Schedule-I.
In view of the foregoing discussions, it is imperative for the parties to a combination to note the following:
- Once a transaction meets the requirement of pre-merger notification, the parties must obtain clearance from the competition authority prior to completing the transaction.
- The merging parties must continue to act independently in the market. Co-operation between them, prior to obtaining the regulatory clearance and completion of transaction, must be within the permissible limits of pre-merger planning process that does not result in control (even partial).
- Competitively sensitive information (especially regarding the prices, planning or strategies) must not be shared, or in case, when it is absolutely necessary, it must be subject to ‘clean team’ arrangements towards the last stages of the negotiations.