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Is The CCI Making M&A Difficult?

Published on Sun, Jun 29,2014 | 23:12, Updated at Mon, Jun 30 at 07:58Source : CNBC-TV18 |   Watch Video :

This week, the Competition Commission of India slapped a Rs 1 crore penalty on Thomas Cook and Sterling Holiday for gun jumping. In a separate order, the CCI recently imposed the highest penalty for late filing- that’s Rs 3 crore on Tesco and Trent. In both these cases, the CCI has deviated from precedent which is giving lawyers and companies sleepless nights. Payaswini Upadhyay tells you how and why the CCI is making M&A difficult in India.
The Competition Commission of India’s Combination Regulations exempt a transaction from filing requirements if it results in the acquisition of a target that has less than Rs 250 crore in net assets or Rs 750 crore of turnover. If individual inter-connected or interdependent transactions are made above these thresholds, CCI allows parties to notify it via a single filing.

In March this year, the CCI amended its regulations to say for transactions filed with it for approval, it will look at the substance of the transactions and disregard any structure that aims to avoid a notice.

Sandeep Bhagat
Partner, S&R Associates
“I think the intention is to catch certain kinds of structurings where you think you can avoid notification in a particular set of circumstances and may be they were trying to say we’ll read transactions as a whole.”

This week, Thomas Cook & Sterling Holiday became the first casualty of the amended regulations.

Earlier this year, Thomas Cook approved Sterling Holiday acquisition via a multi-stage process. On 7th February, Thomas Cook’s Board approved 4 resolutions to this effect:  

- a scheme of arrangement with Sterling Holiday
- Subscription to Sterling’s shares via a preferential allotment
- Open offer to Sterling’s shareholders
- And market purchases of Sterling’s shares

On 14th February, Thomas Cook & Sterling notified the CCI of the first transaction and as a matter of disclosure, also mentioned market purchases made by Thomas Cook between 10-12th Feb amounting to 9.93% in Sterling Holiday.

The CCI concluded that this market purchase made by Thomas Cook before the filing is a violation of Sec 43A of the Competition Act. The Section allows the regulator to impose penalties if parties fail to notify a transaction. Thomas Cook argued that the market purchase was a separate resolution- one that did not breach the exemption thresholds. And at the time the on-market purchase was made, there was no certainty of completion of transaction. The regulator disagreed saying all the resolutions were passed on the same day and that the market purchase was also part of the whole transaction.

Nisha Uberoi
Partner, Amarchand Mangaldas
“Thomas Cook does come as a surprise simply because what has happened earlier if that there is a facility that you can file a single composite notification if you have a series of steps interconnected or inter-dependent which comprise of one single transaction. The view taken by the industry and also the CCI by way of decisional practice was that if you have a non-notifiable part of the transaction, then you can avail of that exemption and not file that particular part of the transaction. When the CCI came out with its anti-circumvention rule in March this year, essentially what it said was it can go beyond the structuring of a transaction, can disregard the structuring to see if the substance of the transaction is such that it requires a merger notification. Now to link that with parts of a composite transaction is effectively wrong because when you look at anti-circumvention, you’re trying to see if the parties are trying to completely avoid a merger notification; not that you’re trying to consummate one part of a not notifiable transaction.”

Sandeep Bhagat
Partner, S&R Associates
“In a market purchase, for eg, you are never going to notify the Commission before you do the market purchase- how does that even practically work? We’ve had situation of clients asking that they may not have a transaction in mind with a particular company or its promoter but they may want to accumulate some shares in that company through on-market purchases. Was that fine? At least, on that, the advice has been as long today the market purchase is not triggering the target exemption, you should be fine. Now you have to look at in the context of linking it together with another transaction and seeing whether fist transaction itself is notifiable. I think it has muddied the waters on what advice we’re going to give to clients.”

Thomas Cook and Sterling Holiday now need to pay a Rs 1 crore penalty to the regulator. The worry for future deals is that if CCI expects parties to file such on-market purchases that do not breach filing thresholds and precede a notifiable transaction, it is essentially diluting the exemption.

Now on to the Tesco’s late filing penalty surprise but first, let’s look at the relevant regulations.

The Competition Act gives parties 30 days to file the details of a proposed transaction with the CCI. The thirty day clock starts ticking from the day any agreement or other document for an acquisition is signed by the parties.

The Act does not lay down what ‘other document’ means but CCI’s Combination Regulations define it to mean any binding document conveying an agreement or decision to acquire control, shares, voting rights or assets. Where such a binding document has not been signed, the date on which parties notify any statutory authority becomes the trigger for filing requirements.

Avaantika Kakkar
Partner, Khaitan & Co.
“Thus far we had imagined, in fact much of the competition bar had imagined, based on the reading of the Statute and the Regulations that definitive agreements would trigger the 30 day period available to parties to make a filing to seek the CCI’s approval. We had looked at ‘other documents’ but we had again imagined that ‘other documents’ would apply in situations where there is no need to sign an agreement such as a hostile takeover. So if you’re asking that the Tesco order is a surprise- yes, it has come as a surprise.”

Here’s the background to the Tesco surprise!

On 17th December last year, Tesco applied for the FIBP approval to acquire a 51% stake in Trent Hypermarket. It filed with the CCI on 31st March 2014- 10 days after it signed the Joint Venture and Share Purchase Agreement with Trent.

CCI concluded this to be a late filing by Tesco and said the filing should have been made within 30 days of FIPB application. Tesco argued that its application to the FIPB did not convey an intention to acquire control, shares, voting rights or assets and so it did not amount to a filing trigger. And that if it had indeed treated the FIPB application as the trigger for filing, details needed by the CCI to review the proposed transaction would have been missing.

But the CCI disagreed with Tesco’s argument and concluded that the FIPB application had enough details on the type, nature and purpose of the transaction. The 73 day delay cost Tesco Rs 3 crore.

Avaantika Kakkar
Partner, Khaitan & Co.
“We are all imagining that a CCI filing is in fact necessary in every case where one goes to a Statutory Authority – what if parties are still discussion veto rights or affirmative rights. And what if the acquirer is acquiring less than 25%- as you know there is an exemption under the Competition Act- you can acquire up to 25% of a company minus control and control includes a variety of factors. But what if I am not acquiring those or I am not sure I am acquiring those and I am acquiring say 20% - do I still make a filing with the CCI and does the CCI spend its time examining a combination that they may not have otherwise examined.”

Nisha Uberoi
Partner, Amarchand Mangaldas
“There are two approaches available essentially. One, you amend the Act and make it very clear that the trigger would always be a binding agreement because that is the view the CCI has taken all along. Or on a case-by-case basis, until that amendment to the Act happens, parties will have to go in for a pre-merger consultation to get the CCI’s pre-clearance on whether something will actually trigger a merger notification and can be consummated or not.”

This order by the CCI is self destructive too as it gives rise to administrative difficulties. If the regulator is ready to give its opinion as long as the type, nature and purpose of the transaction are known it, what happens in a situation where the definitive agreements are materially different from the details originally filed? That aside, for the optimists, there is a bright side to this order. For parties who want to accelerate their timelines and who thus far had to wait for the signing of definitive agreements to be able to file with the CCI, can now to do so merely on the basis of a statutory filing! But for transactions that may not trigger filing thresholds, the new precedents and interpretations that come with Thomas Cook and Tesco mean painful M&As.

In Mumbai, Payaswini Upadhyay


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