Merger Control Amendments: Plus Ca Change...?
Published on Mon, Feb 27,2012 | 20:22, Updated at Mon, Feb 27 at 20:45Source : Moneycontrol.com
By: Rahul Singh, Senior Associate, Trilegal
We live in interesting times where the Minister for Corporate Affairs (Indian competition authority’s administrative Ministry) speaks about helping Kingfisher Airlines and slaying the dragon of runaway inflation through the so-called second Big Bang reforms of the National Competition Policy in the same breath!
And, while the Minister is presumably busy contemplating how to reconcile the two, within 9 months of enforcement of the Merger Regulations, the Competition Commission of India (CCI) has announced the first set of amendments to the Regulations. The accompanying press release claims that the changes are intended to provide “relief to the corporate entities from making filings which are unlikely to raise adverse competition concerns, reduce their compliance requirements, and make filings simpler and to move towards certainty in the application of the Act and the Regulations”. The amendments are based on the CCI’s past experience with merger review. Following are my comments on the amendments:
• The draft Merger Regulations issued on February 28, 2011 in the run up to the final Merger Regulations announced on May 11, 2011 had undergone a relatively more transparent process of stakeholder consultation. Certain sector specific regulators, such as the Airports Economic Regulatory Authority of India (AERA), are specifically mandated by the parent legislation to undertake effective consultation with stakeholders. To be sure, unlike AERA, the Competition Act, 2002 (Competition Act) does not contain any specific legislative mandate for the CCI to undertake stakeholder consultation. Nevertheless, in the interest of engendering good governance best practices, the CCI ought to have continued with the precedent of seeking stakeholder comments before the finalization of amendments.
•In the absence of an effective consultation process, the CCI ought to have issued a detailed set of reasons behind the changes undertaken through the amendments. The absence of regulator’s intent is bound to exacerbate uncertainty.
• Through the amendment to Regulation 5(2), the CCI has done away with the shortest form (erstwhile Form I, Part I) filing in the following instances: (a) conglomerate mergers (i.e. mergers which entailed neither horizontal nor vertical overlaps between parties); (b) where the parties are predominantly engaged in exports; (c) acquisition/acquisition of control by a liquidator, administrator or receiver appointed through court proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Sick Industrial Companies (Special Provisions) Act, 1985; (d) an acquisition resulting from gift or inheritance; and (e) an acquisition of a trustee company arising from a change of trustees of mutual fund established under the Securities and Exchange Board of India (Mutual Fund) Regulations, 1996. The effect of the amendments is that for the aforementioned instances, Form I (in entirety, as amended) will be required to be filed. Perhaps the reason behind this change is the disingenuous argument of the acquirer in the case of AICA Japan (Combination Registration No. C-2011/09/04 decided on September 30, 2011).
In AICA Japan, the acquirer had created an SPV in India for the purpose of acquisition and since the new entity did not engage in any independent business of its own, the acquirer argued that the proposed transaction can seek the benefit of erstwhile Regulation 5(2)(a) i.e. conglomerate mergers and file the shortest form (Form I, Part I). CCI rejected the argument and the acquirer was asked to file Form I (Part I and Part II).
The acquirer’s argument was misconceived as the language of erstwhile Regulation 5(2)(a) mirrors that of section 3 (anticompetitive agreements) of the Competition Act and unlike section 4 (abuse of dominant position) and sections 5 & 6 (related to mergers) does not use the phrase “relevant market” to denote horizontal and vertical nature of overlaps between parties. Unfortunately, the CCI, in AICA Japan did not analyze the jurisprudence of ‘market’ in section 3 juxtaposed with ‘relevant market’ in section 4, 5 and 6. It appears that due to the ill-conceived argument of the acquirer in AICA Japan, the CCI has now decided to throw the baby with the bath water! While the CCI’s concerns related to AICA Japan like situations is understandable, its rationale behind doing away with other instances such as predominant exports is unclear.
• The new Regulation 5(3) does not add anything new but restates what was already provided under erstwhile Regulation 5(2)(f) and (g) - the long form (Form II) is required to be filed where the market share is > 15% (in horizontal mergers) and > 25% (in vertical mergers). Interestingly, like the extant Merger Regulations, the amendments continue to treat the long form (Form II) as “punitive” in nature.
There are two circumstances where the long form (Form II) is required to be filed by the parties: (a) at the option of the parties; and (b) where parties fail to notify in spite of an obligation to notify. The usage of the word “preferably” in Regulation 5(3) means that parties will continue to be reluctant to file the long form (Form II) as “relevant market” is usually a contested concept in competition law.
• The new second proviso to Regulation 5(5) means that where the long form (Form II) is filed, the time period of 210 days will restart with the filing of the long form (Form II). This is contrary to what was intended earlier; under the older regulations, the clock would have started with the filing of short form (Form I, Part I and Part II) and the time taken by parties for the filing of long form (Form II), if required, would have been excluded from the timelines. The amendment is likely to increase transaction cost. As mentioned above, the definition of “relevant market” provided by the parties in the forms is likely to become extremely critical.
• The new Regulation 5(9) is related to direct v. indirect acquisitions and mergers/amalgamations. Since there is an exemption based upon the size of the acquired enterprise through a Ministry of Corporate Affairs notification, parties could have (theoretically) escaped Merger Regulations by divesting assets to a newly created entity. The general rule of thumb in law that what you cannot do directly, you cannot do indirectly was earlier contained in Regulation 9(4).
Perhaps the new Regulation 5(9) has been added as a matter of abundant caution arising out of the case of acquisition of shares of Navyug Special Steel Private Ltd. (Navyug) by Sanyo Special Steel Co. Ltd. (Sanyo) and Mitsui & Co., Ltd, (Mitsui) [Combination Registration No. C-2011/12/14 decided by the CCI on January 31, 2012]. In this case, Navyug was incorporated on November 8, 2011 as a wholly owned subsidiary of Mahindra Ugine Steel Company Ltd. (Musco).
Three days later, on November 11, 2011, Musco transferred its steel and rings division to Navyug through a business transfer agreement. Simultaneously, on November 11, 2011, Musco, Mitsui, Sanyo and Navyug also executed a shareholders agreement through which Sanyo and Mitsui would, respectively, hold 29% and 20% share capital in Navyug. Under the older regulations, parties could have (theoretically) claimed exemption based upon the size of the acquired enterprise i.e. Navyug. Since the new regulations clarify that what cannot be done directly, cannot be done indirectly, parties will not be able to seek the benefit of such a contrived argument.
•The new Regulation 6(1) mandates that a certified copy of the loan agreement or the investment agreement executed by the public financial institution, foreign institutional investor, bank or venture capital for their acquisition is required to be filed with Form III. The form is required to be filed post facto within 7 days of the acquisition. The requirement of a certified copy of the loan agreement/investment agreement is in conformity with the parent legislation i.e. the Competition Act and was earlier mentioned in item # 5 of Form III. The new Regulation 6(1) is, therefore, clarificatory in nature.
•The new Regulation 6(2) states that the CCI may permit filing of Form III beyond the period of 7 days mentioned in section 6(5) of the Competition Act. This is of doubtful legal validity as regulations cannot override the parent legislation.
• The new Regulations 9(1) and 9(3) permit Company Secretary, duly authorized by the board of directors, to sign Form I or Form II for acquisitions and mergers/amalgamations. This is expected to ease the burden on the companies as the CCI in certain earlier cases had insisted upon signatures of the Managing Director or a duly authorized Director. (In this context, I must add that personally I have had a better experience with the CCI.)
• Through Regulation 11(a) and 11(b), the CCI has increased the filing fees by 20 times for Form I (INR 10,00,000) and by 4 times for Form II (INR 40,00,000). This takes the Regulations back to the February 28, 2011 draft version of the Merger Regulations. This is one inflation which the angels of Reserve Bank of India will fear to tread!
•The new Regulation 13 (1A) requires parties to file a summary along with the forms. While Regulation 13(1) mandates merely two copies of the form to be filed, the new Regulation 13(1A) mandates nine copies of the summary to be filed. Nine copies are presumably required for seven members of the CCI.
Regulation 13(1A) mandates that the summary shall contains details of (a) the products, services and businesses of the entities; (b) the value of assets/turnover; (c) relevant market; (d) details of agreements or other documents or board resolutions; (d) the nature and purpose of the merger; and (e) likely impact of the transaction on competition. Incidentally, this requirement is not new and earlier parties were filing similar details in section 5.2 of Form I.
• As mentioned by Menaka Doshi earlier (http://goo.gl/90EN1 ), through new item # 1, Schedule I, the amendment of 15% to 25% is intended to align Merger Regulations with the Takeover Code. However, it is inaccurate to read the phrase “entitle the acquirer to hold” to mean that convertibles have now been added to be covered. On the contrary, section 2(v) of the Competition Act defines “shares” to mean “shares in the share capital of a company carrying voting rights” and includes “any security which entitles the holder to receive shares with voting rights”.
Clearly, the phrase “entitle the acquirer to hold” has been added to align the meaning of the term “shares” with the definition of “shares” in the Competition Act. Therefore, under the Competition Act convertibles were always intended to be covered when they were “compulsorily convertible” and not intended to be covered when they were merely “optionally convertible”. Of course, the Securities and Exchange Board of India (SEBI) treats convertibles differently as the purpose of the two enactments are different.
• Through the new item # 6, Schedule I exemption the buy back of shares has been added as another category which is “ordinarily not likely to cause an appreciable adverse effect on competition in India”.
• New Item # 8A (Schedule I) read with amended item #8 (Schedule I) has resulted in an interesting situation. Through the new item #8A (Schedule I), the CCI has sought to clarify that besides the intra-group acquisitions mentioned in item # 8 (Schedule I), intra-group merger/amalgamation of either wholly owned subsidiaries (WOS) of an ultimate parent entity (UPE) inter se or intra-group merger/amalgamation of the WOS into the UPE will be exempt from Merger Regulations.
This is unlikely to satisfy the businesses’ demand to amend item # 8 (Schedule I) to include mergers/amalgamations. To add to the confusion, through the new item # 8 (Schedule I), the CCI has done away with the explanation which mandated the CCI to interpret “group” in accordance with Explanation (b) to section 5 of the Competition Act. This leaves little guidance for the interpretation of the term “group”.
• The rest of the amendments in Schedule II, Form I are consequent to the above referenced changes. The million dollar question remains: do the above amendments live up to the CCI’s claim that the changes make the process of filings simpler and provide relief to corporate entities?