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12 November, 2019
INTRODUCTION
The cartel prohibition contained in Section 3(3) of the Competition Act, 2002 (‘CA02’) prohibits certain types of agreements that are entered into between competitors i.e. enterprises engaged in identical or similar trade of goods or provision of services, if such agreements result in the fixation of prices, limitation of supply or results in bid-rigging. An agreement between competitors to exchange competitively sensitive information (‘CSI’) must result in the fixation of prices, limitation of supply etc., and cannot in and of itself be termed as contravention under the CA02. However, the Competition Commission of India (‘CCI’) is likely to consider the exchange of CSI as indicative of the existence of an anti-competitive arrangement and competitors must ensure that CSI if exchanged for lawful purposes must be subject to certain basic ‘hygiene’ processes, such as the establishing of ‘clean teams’. One such instance where competitors may legitimately access each other’s CSI is at the time of entering into potential transactions (e.g. mergers, acquisition or joint ventures) involving competing enterprises. Naturally, enterprises involved in or contemplating a potential deal would typically have a legitimate need to access CSI[1] about the counterparty’s business in order to negotiate and evaluate the viability of the transaction, and in certain cases, to implement the transaction.
WHAT IS A ‘CLEAN TEAM’?
A ‘clean team’ generally consists of employees, consultants or advisors of each party who do not carry out any operational activities or who are, for a reasonable period of time, not involved in the operational business, coupled with non-disclosure agreements (‘NDA’).
Members of such clean teams must not pass on CSI to other members of the transaction /operational teams working on the deal, unless the information is sufficiently aggregated or anonymized so as not to reduce competitive uncertainty in the interim. Further, it would be prudent to appoint a ‘custodian’ in such clean teams.
These custodians are individuals who are tasked with the responsibility to destroy and/or return all CSI obtained upon the termination of any potential transaction/agreement between competing enterprises.
In addition, it would be necessary for members of clean teams to be subject to a ‘cooling off’ period. During this period (typically one to two years), these members should not return to their roles in the the company’s day to day operations or take up responsibilities which may enable them to use the CSI obtained through their participation in such clean teams.
NECESSITY OF CLEAN TEAMS
The primary objective of establishing a ‘clean team’ is to limit access to CSI to a set of pre-identified individuals in either corporation, with clear processes in place to ensure that such individuals utilize the CSI for the limited purpose of evaluating the viability of and completing the transaction.
Such individuals are usually precluded from making or influencing business decisions of the parties during this evaluation process and are subject to strict non-disclosure requirements.
A clean team ensures that as long as the two (competing) entities continue to operate independently and the transaction is not completed, the two parties are insulated from a potential cartel risk.
Further, a clean team also ensures that should the transaction not be completed for any reason, the CSI exchanged during the negotiation and the due diligence (‘DD’) process is not misused by either party to collude in an anti-competitive manner.
In the one instance where CCI was called upon to look into an issue of this nature[2], it penalized two enterprises for using bid-related CSI obtained during negotiations for an acquisition which did not ultimately get completed.
The CSI obtained in that case was subsequently used by the parties to co-ordinate their bids while tendering for the procurement of broadcasting services.
The case underscores the necessity for transacting parties to ensure strict adherence to clean team protocols while negotiating transactions with competitors, so that they insulate themselves from potential cartel scrutiny under Section 3(3) of CA02.
The CCI’s (non-binding) compliance manual also recommends that the information obtained during DD exercises must not be commercially used by the company which is conducting the DD. While the manual acknowledges the need to share CSI during DD exercises, it essentially suggests that: (i) a DD should be conducted by a limited team of individuals not involved in the company’s day to day operations; and (ii) appropriate NDAs should be executed by members of such teams. In terms of information that it considers to qualify as CSI, the guidance suggests that
(i) forward-looking planning documents, pipeline project details and strategic plans; and
(ii) cost data, pricing and discount policies that are not publicly available; may reduce competition and therefore should not be exchanged between parties.
A secondary but related risk that a clean team will help mitigate, is that of potential ‘gun-jumping’. Indian competition law provides for a suspensory regime i.e. the parties to a notifiable transaction are restricted from taking any steps towards consummation of such a transaction prior to the receipt of CCI’s approval.
The rule of thumb is that the parties to the transaction should conduct their business operations as usual i.e. as if no transaction was contemplated, until the transaction closes. Arguably, the exchange of CSI if acted upon by either party may entail either or both of them taking business decisions to give effect to their proposed combination prior to the receipt of CCI approval.
The existence of robust clean teams may mitigate the risk of CCI viewing the conduct of business as being directed at giving effect to a transaction prior to its approval.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
[1] Examples of information that is generally CSI: (a) current and future pricing – including discounts, rebates, price formulae, timing of price reductions or increases; (b) sales and market shares; (c) profit margins; (d) current and future confidential product or brand-specific costs; (e) production, capacity or investment levels or limits; (f) customer lists and customer sales/orders; (g) commercial terms with customers and suppliers; customer or commercial strategies and marketing plans; (h) non-public R&D plans, strategies, investments or results.
[2] Suo Motu Case No. 02 of 2013.
