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Tesco Trent: Mudding The Waters Of Merger Control

Published on Thu, Aug 28,2014 | 08:04, Updated at Thu, Aug 28 at 08:04Source : Moneycontrol.com 

Tesco Trent: Mudding The Waters Of Merger Control In India[i]

By: Karan Singh Chandhiok - Head, Competition and Dispute Resolution Practice, Chandhiok & Associates

The Competition Commission of India (CCI) recently fined the British supermarket operator, Tesco, a sum of INR 30 million (approximately US$ 500,000) for delay in filing a premerger notification.[ii] The fine is the largest imposed on a corporation under section 43A[iii] of the Competition Act, 2002 (the Competition Act) and adds to the INR 65.55 million (approximately US$ 1 million) in fines already levied to date.[iv]

Indian merger control, like most jurisdictions, adopts a mandatory filing requirement[v] with a “standstill obligation”[vi]. Accordingly, parties in most transactions are required to notify the CCI within thirty calendar days of (i) execution of any “agreement” or “other document”, in cases of acquisitions; or (ii) approval from the respective board of directors of the combining parties, in cases of mergers or amalgamations.[vii]

The Competition Act defines an “agreement” as any arrangement or understanding between parties irrespective of whether or not it is formal or in writing, or is intended to be enforceable by legal proceedings.[viii] While there was a concern that this wide definition will lead to speculative notifications, stakeholders also viewed this as an opportunity to kick-start the CCI’s 210 calendar days review period as quickly as possible.[ix] Nevertheless, the CCI took the approach that the notification requirement under the Competition Act is triggered only upon the execution of definitive documents. In ABNL[x], the CCI rejected a formal notification that was filed consequent upon the execution of a memorandum of understanding and a subscription and investor rights agreement between the combining parties. Although, the combination related to a merger, the regulator based its rejection on the premise that such documents were only steps towards negotiations between the concerned parties. The competition bar and businesses would have preferred the flexibility in approaching the regulator as long as they conveyed a good faith intention to consummate the transaction, the CCI’s position had the merit of providing certainty to a new merger control regime. Consequently, it was the accepted position that the obligation to notify the regulator was triggered only upon the signing of definitive documents.

The Tesco decision has muddied these waters. On 31 March 2014, Tesco notified the CCI of its proposed acquisition of a fifty percent equity stake in Trent Hypermarket Limited (Trent). The notification followed the execution of a joint venture agreement and share purchase agreement between the parties. The combination was approved, but proceedings against Tesco were initiated for delay in filing by 73 days.[xi]

The CCI referred to its the Combination Regulations) which defines “other document” to include a document which “has not been executed but the intention to acquire is communicated to the Central Government or State Government or a statutory authority”.[xii]  According to the CCI, the 30-day notification period commenced on 16 December 2014, when Tesco approached the Department of Industrial Policy and Promotion (DIPP), followed on 17 December 2013 by contact with the Foreign Investment Promotion Board (FIPB) for approval under India’s foreign investment control laws. This was the triggering date, not when the agreements were executed.

Tesco argued that at the time of submitting its proposal to the DIPP and FIPB, the respective board of directors of the parties had only provided an in-principle approval of the proposal and the communication to the government bodies was only a step towards negotiation of the deal. A notification to the CCI at that stage would have been premature and incomplete on basis of the ABNL[xiii] decision. The CCI rejected the arguments and observed that the proposal to the government bodies provided adequate details about the type, nature and purpose of the contemplated combination.

The CCI’s order is contrary to its own decisional practice. First, in ABNL[xiv], the CCI specifically noted that the transaction was subject to the execution of an implementation agreement and required the approval by the respective board of directors of the concerned parties. Similarly, the Tesco board resolution expressly stated that the transaction was subject to the execution of definitive agreements. Second, the CCI was only notified of the Jet/Ethiad[xv]combination following execution of definitive documents. In that case, the combining parties had been in several rounds of discussions with various ministries and government departments prior to the execution of definitive documents. The proceedings under section 43A were confined to gun jumping and were silent on whether or not Ethiad notified the regulator within time.[xvi] 

The Tesco decision has raised an important question on merger enforcement: what is the real scope of section 43A? The provision allows the CCI to impose a penalty up to one percent of the total turnover or the assets of the combining parties, whichever is higher, on any enterprise that fails to give notice under section 6(2) of the Competition Act. In the author’s view, this penalty should be limited to parties that have indulged in gun jumping or deliberately avoided a notification. It should not extend to parties, like Tesco, who in good faith approach the CCI and ensure that a combination is only consummated after it had received the requisite approval. As such, the obligation to notify the CCI within 30 days should be taken as directory and not mandatory. In this context, an analogy may be drawn with Order VIII Rule 1 of The Code of Civil Procedure, 1908 (the Code) which obligates a defendant to file a written statement of his defence within thirty days of receiving summons. Both the rule of the Code and section 6(2) of the Competition Act use the word ‘shall’. In this regard, the Supreme Court of India has held:

The use of the word ‘shall’ in O. VIII, r1 by itself is not conclusive to determine whether the provision is mandatory or directory. We have to ascertain the object which is required to be served by this provision and its design and context in which it is enacted. The use of the word ‘shall’ is ordinarily indicative of mandatory nature of the provision but having regard to the context in which it is used or having regard to the intention of legislation, the same can be construed as directory…[xvii]

Even the International Competition Network (ICN) in its Recommended Practices for Merger Notification Procedures has espoused the view that suspensory jurisdictions should not impose a deadline for pre-merger notifications.[xviii] 

The Tesco decision will no doubt create confusion for the notifying parties, especially considering the myriad of regulators and government bodies with which need to engage. Moreover, the most innocuous of notification to other regulators or statutory bodies may trigger an immediate filing requirement with CCI. The silver lining in this case, to the extent one can be found, is that the decision opens a back door for parties to make an early notification to the CCI.

The CCI has consistently been looking at ways to improve the merger control regime on the basis of feedback it receives, and it is hoped that the CCI will lend some clarity on these issues in the near future. Until such time, parties will be well advised to scrupulously plan their transaction and notification timetables and informally engage with the CCI early in the process, as this may avoid fines on account of any inadvertent delays.[xix]  

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[i] Originally published in International Antitrust Bulletin, Volume 2, August 2013. © 2014 by the American Bar Association. 

[ii] Combination case no. 2014/03/162; order under section 43A issued on 27 May 2014.

[iii] Section 43A of the Competition Act:

“Power to impose penalty for non-furnishing of information on combinations: If any person or enterprise who fails to give notice to the Commission under sub-section (2) of section 6, the Commission shall impose on such person or enterprise a penalty which may extend to one per cent. of the total turnover or the assets, whichever is higher, of such a combination.”

[iv] The CCI’s decisions under section 43A of the Competition Act can be accessed at http://www.cci.gov.in/index.php?option=com_content&task=view&id=171 

[v] Section 6(2) of the Competition Act.

[vi] Section 6(2A) of the Competition Act. Parties to a combination cannot close their transactions for a period of 210 calendar days or receipt of an approval from the CCI, whichever is earlier. 

[vii] Section 6(2) of the Competition Act. There are also limited categories of transactions that only require a post-closing notification to the CCI (see section 6(5) of the Competition Act.

[viii] Section 2(b) of the Competition Act.

[ix] Section 31(11) of the Competition Act provides for a 210 calendar day period to the CCI to review combinations. At the end of this review period, combinations are deemed to be approved.

[x] Combination Case no. C-2012/07/69.

[xi] Ibid, n. ii.

[xii] Competition Commission of India (Procedure in regards to the transaction of business relating to combinations) Regulations, 2011 at regulation 5(8).

[xiii] Ibid, n.x.

[xiv] Id, ¶7.

[xv] Combination Case no. C-2013/05/122.

[xvi] Id, order under section 43A issued on 19 December 2013.

[xvii] Salem Advocate Bar Association, Tamil Nadu v Union of India, AIR 2005 SC 3353.

[xviii] Int’l Comp. Network, Recommended Practices for Merger Notification Procedures, at 6 (“Jurisdictions that prohibit closing while the competition agency reviews the transaction . . . should not impose deadlines for premerger notification.”), available at http://www.internationalcompetitionnetwork.org/uploads/library/doc588.pdf

[xix] In Uttam Galva Steels Limited/Shri Uttam Steel and Power Limited (Combination Case no. C-2013/11/140), the CCI did not impose a penalty for a delay in filing, as the parties were engaging with it during the period of delay.

 
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