The Indian merger control regime is a suspensory one which means that, any acquisition, merger or amalgamation that is notifiable to the Competition Commission of India (CCI) may be consummated only after the CCI grants approval, or until a certain waiting period has lapsed.
Section 6(2) of the Competition Act (Act), provides that when an enterprise proposes to enter into a combination, it is required to give a notice to the CCI, disclosing the details of the proposed combination, within 30 days of executing the ‘trigger document’. Further, Section 6(2A) of the Act provides that no combination shall come into effect until 210 days have passed from the day on which the notice has been given or unless the CCI passes orders under Section 31 of the Act, whichever is earlier. In sum, the suspensory regime is an absolute one. Combinations cannot be consummated, in part or full, before either the CCI grants approval or until 210 days post the notification.
Understanding the scope of the term ‘consummation’
The debate has thus shifted to the meaning of the term ‘consummation’, which is not synonymous with ‘closing’. A transaction may be seen as (partly) consummated long before it is closed, if the parties to the transaction initiate any steps to integrate their business, etc.
Recently, on 18 February, 2016, the CCI approved the acquisition of a bitumen business plant of Shell India Markets Private Limited (SIMPL) by Hindustan Colas.While the notice was filed on 21 August, 2015, the CCI observed that Hindustan Colas paid a sum of INR 40 million to SIMPL on the date of signing the sale and purchase agreement (SPA), which was 23 July, 2015. The CCI concluded that this part-payment of consideration amounted to the consummation of the transaction before it was notified or approved by the CCI.
The CCI considered the submissions made by the parties but went on to observe that such pre-payments can potentially lead to a strategic advantage for the acquirer, as it may reduce the incentive and the will of the ‘target’ to compete.
Hindustan Colas argued that, as per the SPA, the prepaid sum was but a refundable deposit made in good faith and could not be seen as a pre-payment of consideration. Further, this sum was to be refunded if the CCI chose to not grant approval to the transaction. The parties submitted that this payment was essentially in the form of an escrow payment, and cited the Brazilian competition authority guidelines on gun jumping (CADE Guidelines) to argue that escrow payments (as in the present case) should be seen as being outside the scope of payment made to consummate an agreement. Hindustan Colas further argued that the payment did not provide it with any benefit or control over the affairs of SIMPL and, additionally, no actions were taken for the integration of businesses before receiving approval from the CCI.
The CCI considered the submissions made by the parties but went on to observe that such pre-payments can potentially lead to a strategic advantage for the acquirer, as it may reduce the incentive and the will of the ‘target’ to compete. In addition, this may become a reason/ basis to access the confidential information of the ‘target’. The CCI also concluded, through a close perusal of the SPA, that the pre-payment in question was actually in the form of part consideration and not merely a refundable deposit made in good faith. It was held that in the current case, the CADE guidelines are not very persuasive, since the amount paid, in light of the above, did not amount to a payment made in escrow.
It was reiterated that unless the CCI has a chance to examine the anti-competitive effects of a proposed combination before it is consummated, it will lead to a scenario where an anti-competitive acquisition has already taken effect, thereby making unraveling of the transaction complex, or in some cases impossible. In sum, the CCI concluded that such pre-payment, even in the form of a refundable deposit, was a step towards the eventual consummation of the transaction, and accordingly imposed a penalty of INR 0.5 million for gun jumping.
While the CCI in this case did not rule upon the legality of escrow arrangements, it is interesting to note that in SCM Soilfert & Ors vs. Competition Commission of India, the Competition Appellate Tribunal held that even if the consideration amount was transferred to an escrow account (as opposed to the seller) and the buyer undertook to abstain from exercising any rights typically held by an acquirer of shares, such acquisition without the prior permission of the CCI would be seen an instance of gun jumping and was liable to be penalised.
Implications for Global Transactions
Another tangent of the debate on part consummation of M&A transactions is with respect to jurisdictional ring-fencing. There are multiple instances where global M&A transactions are broken up into several smaller ones, which are designed specific to jurisdictions. In such cases, the general practice of the parties to such transactions is to enter into a global transaction agreement and several jurisdiction-specific implementation agreements. In essence, the agreements ring-fence the transaction into several, smaller parts.
However, if there is a requirement to notify the CCI in respect to a global transaction, it is likely that, at the time of entering into the global transaction agreement, the India-specific implementation agreement will not be entered into until later. Accordingly, the global transaction needs to be placed in suspended animation until the India-leg is approved by the CCI, and no part thereof may be consummated before such approval.
In Baxter/Baxalta, the transaction involved the acquisition of the bio-sciences business and related assets of Baxter International Inc. by Baxalta, under the terms of a global separation and distribution arrangement. The target assets were transferred to Baxalta under the agreement, except in certain ‘deferred jurisdictions’ including India. The CCI concluded that the notification requirement to the CCI arose under the global agreement and that the transfer of the target assets was a clear case of gun jumping. A penalty of INR 10 million was accordingly imposed upon Baxter.
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