Application of Competition laws in M&A transaction – Case study of Thomas cook and Sterling Holidays

In this article, Shamika Vaidya discusses the application of competition laws in mergers and acquisitions transactions.

Introduction

Competition boosts growth in the market and benefits the consumer through price control and rise in the quality and choice of services. Simultaneously, companies can indulge in malpractices by forming cartels to control the prices or quality. Article 102 of the Treaty on the functioning of the European Union states that the abuse of power by the undertakings in the dominant positions shall be prohibited. There are more than 130 systems of competition in the world and at least 110 of them include the merger control regulations. The global reach of competition is evident by the creation of a virtual organization, International Competition Network. This clearly reflects the belief that the evolution of competition law is beneficial to consumer welfare.

What is competition?

As discussed by the Commission in the FAQ’s, in common parlance, competition in the market means sellers striving independently for buyers’ patronage to maximize profit (or other business objectives). Unfair competition practices are indulgence in practices like (1) Barrier creation to entry (2) Allocation of markets (3) Discriminatory Pricing (4) Collusive Price Fixing (5) Predatory Pricing (6) Deliberate reduction in output to increase the price.

Competition Laws, Policies and Adjudicating Authority

In India, The Competition Law consists of The Competition Act along with the following regulations –

1.CCI(Procedure in regard to the transaction of business relating to combinations) Regulations, 2011( Combination Regulations)  (See link here).

2. CCI (General) Regulations, 2009
3. CCI (Manner of Recovery of Monetary Penalty) Regulations, 2011
4. CCI (Lesser Penalty) Regulations
5. CCI (Meeting for the transaction for business)

Competition policies are helpful in improving the competitiveness of enterprises, bridging the gap between industrial and trade policies and promoting convergence which helps to boost the competition like relaxed FDI policies or liberalized trade policies.

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Memorandums of CCI

CCI had signed MOU’s with competition authorities of other countries like 1) Competition Bureau, Canada 2) Federal Antimonopoly Services, Russia for cooperation in the field of competition. This extensively helps the commission to get hold of the companies incorporated or functioning outside India creating an appreciable adverse effect on the competition (AAEC) (See the list here).  

Authorities

The Adjudicating Authority for the Competition Laws is the Competition Commission of India (CCI). Vide a notification the Central Government had set up Competition Appellate Tribunal in 2009, however later the National Company Law Appellate Tribunal (NCLAT) was declared to be the appellate body. The appeals are further taken to the Supreme Court of India.   

Competition laws are concerned with the practices –

• Anti-competitive agreements
• Abusive Behavior
• Merger
• Public restriction of competition.

Before we step into the application of CCI in M&A let us see the two examples mentioned below –

Two examples of CCI indulgence

• The Competition Commission of India was recently in the news for imposing a whopping fine of Rs. 6,300 crores on the cement companies and industry body Cement Manufacturers Association for their indulgence in cartelization. The Builders Association of India filed a petition against 11 leading cement companies as there was a deliberate act intended to have a shortage of cement in the market   The NCLAT upheld the decision by the commission, however, the SC ordered a stay on the fine imposition and asked to deposit 10% of the amount.
• The second such instance was when the CCI slammed Google with a fine of $20 million for abuse of its power, the plea filed by CUTS and matrimony.com. The released press link is attached(See Link Here ). However, the NCLAT stayed the imposition and ordered to deposit 10% of the penalty amount.

From the above examples, the hierarchy of the appeals is clear as well as the indulgence of CCI whenever necessary.

M&A Transactions

M&A transactions involve restructuring of the companies both internally and externally, which allows them to operate efficiently making use of the synergies however one cannot deny of the possibility of the merged combination having an adverse effect on the competition. Therefore, an approval from the Competition Commission is essential along with approvals from various other authorities.

Section 6 of the Competition Act states that combinations adversely affecting or likely to affect the competition in the Indian market are deemed to be void. Further, S.6(2) also mentions that no combination can come to effect unless two hundred and ten days have passed from the day notice is passed to the commission or pursuant to the order passed by the commission.

Exemptions

Banking companies under S. 45 of the Banking Regulations,1949 are exempted by a notification from the Ministry of Corporate Affairs in August 2017 for a period of ten years. (See notification here)

Ministry of Corporate Affairs also vide a notification exempted Central Public Sector Enterprises (CPSE) operating in the Gas and Oil sector under the Petroleum Act, 1934  for a period of 5 years (See notification here)

The Ministry vide a notification also exempted Groups that exercise Voting Rights less than 50% in other enterprises from the provisions of S.5 of the Act for a period of five years. (See notification here)

The purpose for ex-ante regulations

Ex-post regulations relate to those regulations which post the happening of event whereas Ex-ante regulations relate to those regulations which are before the happening of the event. The anti-competitive agreements and abuse of dominance are enforced ex-post, while M&As are to be regulated ex-ante. Even before the companies merge and form a new entity, it is prevented from creating future however the purpose of competition laws is not just prevention but also maintaining competitive markets. However, an investigation into the conduct of dominant firms are cumbersome, complex and lengthy and the authorities may lack resources to police every alleged infringement.

Theories of competitive harm

1. Unilateral effects 2)Coordinated effects 3) Vertical Effects 4) Conglomerate effect.

Suo-moto

1. 18 gives the commission power to suo moto initiate an inquiry if it is of the view that any combination has an adverse effect on the competition. The commission can also get into arrangements with agencies of foreign countries with prior approval of Central Government.  

Filing the notice

Reg. 9 states that if the combination is an acquisition is with or without the consent of the target company then the notice is to be filed by the acquirer. In the case of an amalgamation or merger, the same is filed by both the parties jointly.

Inquiry

When the companies fail to send the notice to the authority as per the requirement of (S.)  then according to the Regulation 8 of the Combination Regulations an inquiry is initiated by the commission to check the adverse effect of the combination if any. The commission can with regards to Reg.8(2) ask the parties of the proposed combination file notice in the requisite form.

Investigation

Section 29 explains the procedure of investigating by the Commission, notices are sent to the concerned parties for them to state the reasons as to why the combinations have no AAEC. Similarly, the commission can invite the affected parties and ask them to file written objections.

Show cause notice

The commission can issue a show cause notice if it is of the view that the combination, whose parties have applied for the approval has an adverse effect on the competition.

Report

The commission may call for a report from the Director-General and invite the affected people with written objections.  

Landmark cases

Thomas Cook Vs. Sterling Holidays  ( CRNo. C-2014/02/153)

CCI imposed a penalty of 1 crore on three entities during a merger was proposed between two entities namely-

(1) Thomas Cook (India) Limited (TCIL) (2) Sterling Holidays Resort (India) Limited(SHRIL)  (3) Thomas Cook Insurance Services (Private ) Limited (TCISIL)

Scheme of Amalgamation and Arrangement

TCISIL was a subsidiary of TCIL the following was the scheme that was proposed between the parties –

The resort and time business of SHRIL was initially proposed to be demerged from the company and later transfer to TCISIL in lieu, the shareholders of SHRIL were to receive equity shares from TCIL as per the decided ratio. The residual business of SHRIL was to be amalgamated into TCIL in lieu of equity shares of TCIL to the shareholders of SHRIL.

The issue

In accordance with the proposed scheme, the parties entered into the Subscription Agreement and Share Purchase Agreement. Later, an Open offer had to be made in accordance with the SEBI guidelines. According to the Competition Commission, the market purchases were consummated before issuing a notice to it. Therefore, the parties had failed to adhere to Section 6(2) of the Act where they failed to issue a notice and make disclosures before getting into a combination to the commission

Show Cause Notice

A show cause notice was issued to the parties in accordance to Regulation 48 of CCI (General) Regulations, 2009 along with 41A of the Competition Act to show cause in writing as to why a penalty should not be imposed, within fifteen days from the date of the receipt. In the Show cause notice, the commission demanded a clarification as to (1) Why SHRIL had to purchase TCIL and its subsidiary when SHRIL business was going to emerge and amalgamate with TCIL.

The parties in their replied presented a logic as below-

1) That the market purchases were not the part of the transaction and there is no mentioning of the same in any of the agreement, an approval is not necessary from the commission from the same.

2)The approval of the Market Purchases happened through separate Board Resolutions

However, not convinced by the reply the commission was of the view that the two transactions were interconnected and not independent and replied as below –

1) That the time of market purchases was almost simultaneous as that of entering into SPA and SA and it was difficult not to believe that the whole transactions are part of a composite transaction by the act of the parties.

Order

Section 43A mentions the penalty that could extend to 1 percent of the turnover or the assets of the combination. In this case, the commission was of the view that although the disclosures were made pursuant there was no effort to conceal any information, therefore, it wasn’t a severe breach and imposed a fine of 1 crore on the parties.(See complete order)

Other cases

Similarly, the CCI had also penalized companies where they failed to comply with the regulations.

• Tesco Overseas Investment Limited (TOIL) and Trent Hypermarket Limited (THL)

The CCI passed an order giving a green light to the proposed combination. However, a   fine was imposed for not notifying in accordance with Regulation 5 of the Combination Regulations, which mentions of giving a notice within thirty days of execution of any agreement or other documents for acquisition. According to the commission, the Merger control provisions are triggered within 30 days of filing application seeking approval from the Government authorities like DIPP and FIPB (in this case). There was a delay of 73 days by TOIL and therefore under Section 43A, it attracted penalty. The Section mentions the penalty value to be 1 percent of the total value of transactions, however, taking into consideration the voluntary filing by the company the penalty was reduced to 30 million INR.

Therefore, although the Commission approves the proposed combination it can impose a penalty on non-compliances, making proceedings under S.43A independent to the evaluation. (View the full judgment here).   

• Ultra Tech Cement and Jaiprakash Associates Limited

There was a proposed combination related to business and asset transfer of two cement plants. A fine of Rs. 10,00,000/- was imposed by the commission for the failure to send a notice under Section 6(2)

Extraterritorial Jurisdiction

1. 32 of the Act empowers the CCI with extraterritorial jurisdiction, that is the power to inquiry in cases where the combination has taken place out of India, any of the party to the agreement is outside India, anti-competitive agreement is entered outside India, party to combination is outside India or any enterprise abusing the dominant position is outside India

1) Any party outside India looking forward to merging or acquire an Indian Company.

2)  International businesses having the objectives of eliminating local competition by forming cartels and other unfair practices

Temasek Holdings an investment arm of Singapore Government and its two subsidiaries in India have imposed a penalty of Rs. 50 lakh by the CCI for delayed submission during its proposed acquisition of shares from the DBS group. (View complete Judgement here)

Conclusion

There are several norms relaxed like-

• Companies with assets less than of Rs. 350 crore or revenue of Rs. 1,000 crore going ahead with M&A were exempted from seeking approval of the commission.  
• CCI had penalized dozens of companies for not filing the notice within 30 days and later issued a notification relaxing the norm(See notification here)

Competition law is evolving with time and through ex-ante and ex-post regulations keeping a check on the M&A transactions as to whether they are creating AAEC.

Sources

• Competition Law Eighth Edition by Richard Whish & David Bailey published by Oxford University Press
• https://www.livemint.com/Opinion/hjwUWOw6j0UFH1lgopIPbI/The-role-of-competition-policy-for-development.html
• https://www.cci.gov.in/sites/default/files/whats_newdocument/FAQ%27s_Combinations.pdf
• https://www.cci.gov.in/notification/111

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