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15 February, 2018
The Competition Commission of India (‘CCI ’) has made rapid strides in the development of its merger control regime in six short years. Despite facing a significant increase in the volume of notified transactions (almost 150% from 2013-14 (43) to 2016-17 (111)), CCI has cleared more than 450 transactions in a timely fashion.
However, CCI ’s decisions on the acquisition of minority, non-controlling shareholding appear to have created some uncertainty in respect of the notification assessment under Section 6(2) of the Competition Act, 2002 (‘Act ’).
In Alfa Laval1 and TPG Manta,2 CCI appears to have taken an expansive view of indirect acquisitions.
In Alfa Laval , CCI treated the acquisition of shares in the offshore holding company (Alfa Laval) as an acquisition of shares in the indirect Indian subsidiary, Alfa Laval India. In this case, Tetra Laval had raised its shareholding in Alfa Laval from 18.83% to 26.1%, still a minority non-controlling stake (as recognized by CCI itself in the approval order),3 which was interpreted by CCI to mean that Tetra Laval had acquired an indirect 23.1% stake in Alfa Laval’s indirect Indian subsidiary, Alfa Laval India.
Similarly, and more recently, in TPG Manta, GIC and Thoma Bravo had acquired certain non-controlling shareholding in TPG Manta (acquirer/immediate target) pursuant to a co-investment agreement.4 In the meantime, TPG Manta sought to acquire 51% of the shareholding of another entity, FTW (target) and notified its proposed acquisition of shares in FTW to CCI . In its decision, CCI expressly acknowledged that neither GIC nor Thoma Bravo would acquire any shares or voting rights in FTW . Yet, CCI held that as a result of its shareholding in TPG Manta, Thoma Bravo would acquire “economic interest” in FTW commensurate with its shareholding.
CCI observed that Thoma Bravo received “economic interest” in FTW along with the right to appoint a director on the board of FTW . Based on this perceived ‘acquisition’ of an ‘economic interest’, CCI went on to review the applicability of the specific exemption available for minority non-controlling acquisitions under Item I, Schedule I of CCI (Procedure in regard to the transaction of Business relating to Combinations) Regulations, 2011 (‘Minority Acquisition Exemption ’).
CCI then concluded that despite there being no acquisition of shares, voting rights (or assets or control5 ) in FTW , Thoma Bravo’s acquisition of ‘economic interest’ did not benefit from the Minority Acquisition Exemption.
In light of CCI ’s decisions in TPG Manta and Alfa Laval , we examine more closely the concerns that arise with CCI ’s interpretation of indirect acquisitions, particularly in the context of the Minority Acquisition Exemption.
Consider the following example: Immediate Target Co. (‘IT ’) holds a 55% stake in Target Subsidiary (‘TS ’). Acquirer Co. (‘A ’) subsequently proposes to acquire a 20% non-controlling stake in IT . To what extent can it then be argued that A has ‘acquired’ an indirect stake in TS under the Act, such that it now needs to carry out a notification assessment not only with respect to the acquisition of shares in IT , but also in TS. Section 2(a) of the Act defines an ‘acquisition’ as “directly or indirectly , acquiring or agreeing to acquire – (i) shares , voting rights or assets of any enterprise; or (ii) control over management or control over assets of any enterprise .” Applying this definition to the illustration above: while A may have directly acquired shares (and attendant voting rights ) in IT , may it equally be said that A has acquired ‘shares’ or ‘voting rights’ in TS ? Or per the definition of ‘acquisition’ above, has A arguably indirectly ‘acquired’ shares, or voting rights, in TS?
Notably, the Securities and Exchange Board of India (‘SEBI ’) does not follow a pro-rata approach when examining a party’s obligation to make an open offer under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘Takeover Code ’) for indirect share acquisitions. Under the Takeover Code, investments that confer upon the acquirer, control over the immediate target company would qualify as an indirect acquisition of all the shares held by the immediate target company in the ultimate target.6 However, a non-controlling investment in the immediate target by the acquirer does not imply an indirect acquisition of a prorated percentage of shares in the ultimate target company. Similar treatment can be found in the merger control provisions in the United States.
Per the Hart–Scott–Rodino Antitrust Improvements Act of 1976 (‘HSR ’) – only controlling investments in a company would constitute indirect acquisitions of the shares held by the immediate target in the ultimate target company
The argument that A may have made an ‘indirect’ acquisition of shares in TS may not be in consonance with the spirit and purpose of the definition of ‘acquisition’ under Section 2(a) of the Act. Reference to ‘indirect’ acquisition is more likely to include those acquisitions where an ultimate acquirer uses a controlled intermediate corporate vehicle to carry out the intended acquisition, e.g. a special purpose vehicle set up for an acquisition. In such a case, an acquisition by the otherwise inconsequential controlled entity may effectively be viewed as an acquisition by the controlling holding entity. To go beyond this, as in the example above, raises several uncertainties for businesses while assessing the notification requirements for acquisitions.
The first uncertainty arises while assessing the applicability of the target based (de minimis ) exemption.7 Even if the intended/immediate target, IT satisfies the de minimis asset or turnover thresholds in India, the indirect, unintended target, TS , may not benefit from the target based (de minimis ) exemption.
The second set of uncertainty arises on account of CCI ’s fairly conservative view on ‘strategic acquisitions.’ Apart from the limited carve-out provided under the Minority Acquisition Exemption, 8 CCI appears to have taken the position that any acquisition of shares in a competitor will likely be viewed as a ‘strategic’ acquisition i.e . neither in the ‘ordinary course of business’, nor made ‘solely as an investment.’9 Accordingly, besides the very narrow exception provided for in the explanation to the Minority Acquisition Exemption, acquisition of minority, non-controlling shares in inter-competitor transactions engaged in the same or similar business is unlikely to benefit from the Minority Acquisition Exemption.10
The difficulty with this interpretation is illustrated below using the example above. Assume that A (acquirer) and T (ultimate target) are engaged in the same business, but IT (immediate target company) is neither a competitor to A nor T. If A is viewed as having indirectly acquired a 14% shareholding in T, by way of its acquisition in IT , A’s acquisition in IT would result in a separately notifiable transaction, on account of A being unable to benefit from the Minority Acquisition Exemption (since, A and T are engaged in similar businesses).11
Extending CCI ’s reasoning further, in the example above, consider a situation where A holds 50% or more of the shareholding of IT and IT is engaged in a similar business as T. If IT were to acquire a minority stake (5%) in T such that ‘it is viewed as triggering an indirect acquisition by A in T, then, in light of CCI ’s expansive definition of ‘strategic acquisitions,’ T will once again be unable to benefit from the Minority Acquisition Exemption (having an indirect horizontal overlap with T (on account of IT ’s shareholding in T). As a result, even though A is not actually acquiring shares in T and has no overlaps with T, it will nonetheless be subject to a notification requirement.
The situations contemplated above create a great deal of uncertainty, particularly when assessing the notifiability of non-controlling acquisitions. The uncertainty means that potential acquirers would need to assess notification requirements in all such companies where their intended target company may have a shareholding.
The uncertainty with this interpretation is exacerbated on account of CCI ’s selective application of its interpretation of ‘indirect acquisition.’ In several other cases, CCI has not always followed or at the very least expressed in writing, its expansive interpretation of what it consider as an indirect acquisition.
An overly broad interpretation of ‘indirect’ acquisition may create additional difficulties for non-controlling shareholders. Take the same example as above, and assume that once A has acquired the 20% non-controlling stake in IT , which then subsequently decides to acquire a 55% stake in A’s competitor, C. Now, as a minority, non-controlling shareholder in IT , A may not have any meaningful ability to control such a decision by IT . Yet, owing to its minority shareholding in IT , A may nevertheless be subjected to notification requirements before CCI , on account of it having acquired an indirect stake in a competing concern. Thus, even though the acquisition was not contemplated by A, and could not therefore have been a ‘strategic’ investment, this acquisition would still be unable to benefit from the Minority Acquisition Exemption.
CCI’s approach for implementation of indirect acquisitions is inconsistent with the practice followed by other jurisdictions (e.g,, European Union, United States, Australia, Canada, etc.). CCI has in the past been proactive in addressing similar problematic provisions and interpretations within merger control. We look forward to receiving definitive guidance from CCI to address the ambiguities associated with its selective interpretation of ‘indirect acquisitions’.
1 Alfa Laval and Tetra Laval (C-2012/02/40)
2 Manta Holdings LP and Thomas Bravo Funds XII LP (C-2016/10/439)
3 Paragraph 11, Alfa Laval and Tetra Laval (C-2012/02/40)
4 From the approval order published by CCI, the shareholding in TPG Manta by Thoma Bravo and GIC is not clear.
5 CCI acknowledged that Thoma Bravo had only the right to appoint one director on the board of FTW. Accordingly, such purely investor protection rights may not reasonably be regarded as an “acquisition of control”
6 See, https://www.sebi.gov.in/sebi_data/faqfiles/aug-2017/1503313163982.pdf. As the SEBI website explains, if A acquires 40 per cent shares of IT along with majority control of IT which, in turn, holds 70 per cent shares of TS, a listed company, along with majority control of TS, then A, in effect, acquires control over 70 per cent shares of TS held by IT.
7 Any transaction where the ‘target’ enterprise (i.e. the enterprise whose shares, voting rights, assets or control are being acquired or are being merged/amalgamated, and including such enterprise’s subsidiaries) either has assets not exceeding . 3,500 million (approx. US$ 54.4 million) in India, OR has a turnover not exceeding . 10,000 million (approx. US$ 155.3 million) in India, are currently exempt from the mandatory notification requirement.
8 Per the explanation to the Minority Acquisition Exemption, acquisition of shares of less than 10 per cent, subject to the satisfaction of certain additional conditions (no board seat, acquisition of ordinary shareholder rights, no intention to nominate board seat or participate in the management of the target), would be deemed to be as “solely as an investment” and absent any acquisition of control, would be eligible for the Minority Acquisition Exemption.
9 Copper Technology/ ANI Technologies, C-2017/08/525. Abbott/ Mylan – C-2014/08/202
10 See Alibaba/Singapore, C-2015/08/301; Tencent/Flipkart, C-2017/04/501
11 In this example, as well as in the others, we assume that the parties satisfy all jurisdictional thresholds.
For further information, please contact:
Rahul Rai, AZB & Partners
rahul.rai@azbpartners.com
