Mergers and acquisitions

MERGERS AND ACQUISITIONS

CONTENTS -
Competition Act-Main features
Overview on regulation of “combinations”
Threshold limits for “Notice”
What “combinations” are prohibited
Merger control in other jurisdictions
Industry’s concerns
Other concerns

COMPETITION ACT, 2002 – MAIN FEATURES
I Prohibits Anti - Competitive Agreements.
II Prohibits Abuse of Dominant Position.
III Provides for Regulation of Combinations.
IV Enjoins Competition Advocacy.
[Sections 3, 4, 5, 6 and 49 ]
* Off-market, not in-market. Ex-post, not ex-ante, except in combinations. .

Overview on regulation of “Combinations”
“ Combinations”-meaning under section 5
Combination is a broad term: includes Mergers, Amalgamation, Acquisition of shares, acquiring of control, etc.
Includes any acquisition, along with acquiring of control and mergers or amalgamations.
High threshold limits – only large combinations subject to regulation . [ Section 5 ]
Mandatory notification regime.
Commission to decide in 210 days, else combination is deemed approved. [ Section 6 ]
Commission can take suo moto action within 1 yr after combination. [ Section 20 ]

Scheme of regulation of Combinations-
SECTION 5 -- SECTION 6 -- SECTION 20 --- SECTION 29&30 --- SECTION 31
Procedure for investigation u/s 29-
First prima facie opinion on possible AAEC - Show-cause Notice-30 days to respond – May call for report from DG-Second prima facie opinion on possible AAEC –in 7 days-direction to publish details of combination in 10 days-May invite objections from the Public to proposed combination in 15 days from date of publication of details- May call for additional informations from parties-to be given in 15days.
Procedure for “orders” u/s 31- May approve or reject proposed combination or approve with “modifications” –to be first suggested by CCI and if not accepted by parties-proposed combination not to take effect-failing which –

Contravention of Order- Penalty of fine up to Rs. 10 crores plus possible imprisonment up to 3 years and additional fine up to Rs 25 crores on non payment of fine by CMM, Delhi u/s 42
Penalty for non-furnishing of “Notice” u/s 6 -mandatory fine up to 1% of total turnover or assets, whichever is higher u/s 43A.
Penalty for furnishing false informations or omission to furnish material information u/s 6- Minimum fine of Rs. 50 lakhs-u/s 44.

Either:
combined assets of more than Rs. 1000 crores (Rs. 10 billion; approx. US$ 230 million; EUR 157 million) in India; or
combined domestic turnover of more than Rs. 3000 crores (Rs. 30 billion; approx. US$ 691 million; EUR 472 million) in India; or
combined worldwide assets of more than US $ 500 million (approx. EUR 340 million) (including at least Rs. 500 crores (Rs. 5 billion; approx. US$ 115 million; EUR 79 million) assets in India); or
combined worldwide turnover more than US $ 1.5 billion (including at least Rs. 1500 crores (Rs. 15 billion; approx. US$ 346 million; EUR 236 million) turnover in India);Or if the merged entity belongs to a group:
Combined group assets in India exceed Rs. 4000 crores (Rs. 40 billion; approx. US$ 922 million; EUR 629 million);

Or if the merged entity belongs to a group:
Combined group assets in India exceed Rs. 4000 crores (Rs. 40 billion; approx. US$ 922 million; EUR 629 million); or
combined group turnover in India exceeds Rs. 12000 (Rs. 120 billion; approx. US$ 2.8 billion; EUR 1.9 billion); or
Combined worldwide assets of the group value more than US $ 2 billion (approx. EUR 1.4 billion) (including at least Rs. 500 crores (Rs. 5 billion; approx. US$ 115 million; EUR 79 million) group assets in India); or
Combined worldwide group turnover exceeds US $ 6 billion (approx. EUR 4.1 billion) (including at least Rs. 1500 crores (Rs. 15 billion, approx. US$ 346 million; EUR 236 million) group turnover in India).

What “combinations” are prohibited
Combinations which cause or likely to cause AAEC within the relevant market in India are void u/s 6(1).
Prediction of possibility of AAEC has to be theoretical. Regulator has to have some proved “theory of competition harm”.
Besides, evidence in support of the theory of harm by empirical tests required.
Mitigating factors such as increase in “efficiency” due to proposed merger (includes marginal cost, complementary assets, new business model, R&D etc.) or “failing firm” defense to be considered.
Mainly horizontal and rarely vertical mergers raise competition concerns. Conglomerate mergers very rarely, except “port folio effect” (e.g. GE and Honeywell merger – allowed in USA but disallowed in EU).

Merger control in other jurisdictions Jurisdiction First Phase Second Phase (i.e. usually where competition issues are anticipated) China 30 working days 90-150 working days from filing EU 25 or 35 working days 90-125 working days from decision to enter a second phase Japan 30 calendar days Later of 120 calendar days from filing or 90 calendar days from receipt of additional material US 15 or 30 calendar days 10 or 30 days from substantial compliance with Second Request (in practice up to 6 months)

Industry’s Concerns
Mandatory notification
Too long waiting period – 210 days
Suspensary merger control regime – No initial specific waiting period in “First Phase” of 30 days like US, EU, China, Japan.- ICN’s “Recommended Practices” suggest that “in suspensive jurisdictions, initial waiting periods should expire within a specified period following notification”.
Biased against Indian Cos. – e.g. an Indian Co. with turnover of Rs. 3000 crore cannot acquire another Co. without prior notification and approval of CCI, whereas a Foreign Co. will turnover outside India of more than $ 1.5 billion (or Rs. 4500 crore) may acquire an Indian Co. with sales just short of Rs. 1500 crores.
“ Salami – Styled acquisitions by Foreign acquirer who structures the transactions in parts so that each part is acquired separately in a way that acquisition of each part falls below the thresholds Rs. 1500 crores, thereby escaping notification to CCI.

Even Intra-group acquisitions by promoter of listed public Co., including internal reorganizations with in a corporate group, require mandatory notice, though they do not affect competition.
Conflict with SEBI Takeover Code – Regulation 22 (12) of the SEBI Code makes it compulsory for the acquirer to pay interest to shareholders for delay beyond 15 days required for “Statutory approvals” if such non-receipt of the approvals is due to any willful default or neglect. Further Regulation 22(13) of the SEBI Code provides that where the acquirer fails to obtain approvals with in 15 days on account of willful default etc., the entire amount to be deposited in the Escrow account under Regulation 29 will be forfeited and the acquirer will also be liable for penalty. Where CCI after receipt of Notice decides to refer the matter to DG for investigation or after forming the second prima facie opinion decides to invite objections from the public against the proposed acquisition, the clearance cannot be given within 15 days thereby placing the acquirers of listed companies in a disadvantageous position under the SEBI Code. This may lead to conflict between SEBI and CCI also.

What “other documents” can trigger a notice to CCI u/s 6(2)- Apart from definitive agreements for acquisitions of shares etc., other felicitating documents such as non-binding letters of Intent, agreement in principle, MOU, public announcement, non-disclosure agreement etc. are also executed before mergers. Are such innocuous documents included in “other documents” for triggering a notice to CCI u/s 6(2)?
A notification of such documents is likely to compromise confidentiality of the business deals before they are closed and may be against efficiencies .

Other Concerns-
Why include any acquisition-whether or not effect competition ? [ Section 5(a)]
Should acquisition of assets ,say, for pure investment purposes be not exempted?
Should it not be confined only to acquisitions where “ the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly”, as in the US?
Why should “Full Functional Joint Ventures” be also not included under merger regulations , as in the EC ?
Why only large enterprises above threshold limits included, why can’t all mergers be examined regardless of size , as in the US?
Should there be exemptions for Banking and Shipping sectors?

DISCLAIMER
This presentation provides only an introduction to competition law, and should not be relied on as a substitute for the law itself.
Further, this presentation is subject to any amendments which may be made in the competition law at anytime in future.

THANK YOU

Mergers and acquisitions

by Babasab Patil on Feb 03, 2012

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Mergers and acquisitions — Presentation Transcript