Jumping the Gun – An Antitrust Law Perspective
[Sakshi is a student at Jindal Global Law School. The following piece was selected as the second-best entry in the IRCCL Blog Writing Competition 2020.]
In common parlance, “jump the gun” is a phrase which means to act prematurely. In the antitrust law context, it specifically refers to the initiation of actions that further combination transactions between the merging parties prior to the approval of the Competition Commission of India (CCI). To elaborate, CCI is tasked with the duty to regulate competition in the market including regulation of combinations between entities to prevent any appreciable adverse effect on competition (AAEC). Under Section 6 of the Competition Act 2002 (Act), any entity that proposes to enter into a combination (M&A as defined under Section 5) must notify the CCI, and the implementation of such a combination is suspended until the CCI has approved it or until 210 days have passed since the day of notice.
This standstill obligation is imposed on the combining parties to ensure that they continue competing with each other as they were prior to the combination proposal and allow the CCI to analyse the possible effects of such a combination. The rationale behind this is to ensure that the actions of the combining parties do not result in an AAEC and defeat the very purpose of the legal provisions while the implications of the proposed combination are being analysed. However, in some cases, the merging parties fail to fulfil these obligations and jump the gun on their combination transaction either by not notifying the CCI (procedural gun jumping) or by violating the standstill obligation by consummating the transaction before the expiry period (substantive gun-jumping).
The First Stage of Implementation
The competition law regime is still young in India. However, there have been numerous cases of gun-jumping since the introduction of merger control provisions. The jurisprudence has evolved to a great extent to make these provisions easier for the entities to comply with and the competition regulator to monitor it. In an OECD Competition Committee meeting, India submitted that during the initial years of enforcement, there was a lack of clarity regarding various aspects of the legal provisions. These included the computation of asset turnover threshold requiring CCI approval, the very requirement of the notification, the exemptions rule and the applicability of the de minimis exception to mergers leading to instances of procedural gun-jumping. In the first year of its implementation, the CCI even condoned delays in filing the notice for combination proposal and did not impose any penalty as per Section 43A.
Since then, most of the confusion with regard to the procedural gun-jumping has been cleared with the issuance of various notifications and FAQs easing M&A deals by demystifying the position on intra-group amalgamations, the applicability of de minimis exemption to mergers and computation of turnover, inter alia. Instances of substantial gun-jumping, however, have been more complex from the regulators’ point of view. While CCI has attempted to illuminate the “guiding post” in dealing with these cases, there is still a possibility of unintentional gun-jumping since the jurisprudence is not wholly developed. In this regard, the lawmakers have been pro-active and the significant statutory issues have majorly been resolved with subsequent amendments to simplify the requirements around merger control and prevent gun-jumping.
Developing Gun-Jumping Application
As the jurisprudence developed in India, the competition watchdog increased its diligence. Numerous cases were adjudicated and major penalties were imposed on merging or acquiring parties for gun-jumping. In one instance, the CCI imposed a penalty of INR 5 crores! With the high cost of non-compliance, the entities must become increasingly aware and fulfil the merger control requirements under the Act. It becomes imperative since an honest mistake is no excuse under the law and mens rea is not a factor to be considered when dealing with cases of the statutory requirement of combination notice (although it may act as a mitigating factor in certain cases depending on the facts and circumstances). Nevertheless, the compliance itself has been complicated, to say the least.
Prior to 2017, the merging parties had a strict timeline of 30 days to file a notice with the CCI from the date of board approval of a merger or the execution of an agreement for the acquisition, i.e. the “trigger document”. This policy resulted in confusion and numerous unintentional delays in notice due to inaccurate identification of the trigger document or filing of incomplete documents due to the haste in meeting the timelines. The restrictive timeline did little to achieve the objectives of the CCI. Another significant problem with this was identified in the Combination of Zulia and Kinder Investments. There was a delay in filing the combination notice for which a penalty under Section 43A was imposed. However, the acquisition fell through while the approval was pending before the CCI, and the entities filed to withdraw the notice since the combination would no longer proceed. However, the CCI determined that failure to file the notice within the stipulated 30 days and the actual fate of the combination were separate issues and the acquirers had to pay the fine!
This was clearly contrary to business interests in general. The strict timeline was unappreciated at best and impeded corporate restructuring at its worst. Therefore, it was finally suspended for a period of five years in 2017 to the belated relief of entities. In the new scenario, while it is not necessary to notify the CCI of a combination proposal within 30 days of the trigger document or board approval of a merger, it must be mandatorily notified before the transaction is actualized/closed/consummated. While flexibility has been granted to avoid the same mistakes, the strict requirement of compliance remains. Further, there has also been an increase in the number of cases dealing with this issue before the CCI that sheds light on the identification of “trigger documents” to avoid a violation of Section 6. Issues like these were, unfortunately, not isolated. While this development and enhanced general awareness of the competition regulations reduced the cases of procedural gun-jumping, the substantial gun-jumping is another complex story.
The CCI has, through its decisional practice, clarified that the test for substantial gun-jumping is to check whether the parties continue to compete as they were competing before the formulation of the proposed combination or have ceased to do so, and additionally to assess whether they are acting independently with regard to their ordinary business activities. Even with this established test, confusion arises regarding the kinds of actions of the parties that could amount to “consummation” of the transaction. On one hand, more than a decade has passed since substantial gun-jumping cases have been adjudicated by the CCI wherein attempts have been made to clarify the regulator’s position on the subject. On the other hand, business operations and restructuring are complex concepts, and the legal framework cannot envelop all kinds of transactions.
The CCI has held several transactions to have “an effect” of actualizing the combinations. For instance:
Part-payment of consideration as “token money” was held to be a violation of substantive gun-jumping since the possible implications of such a payment could reduce incentives for the target company to compete or facilitate access to confidential information.
An acquirer providing a corporate guarantee to the bank of the seller party was held to be an integral part of the combination rather than an independent transaction. The CCI held that this was a tactical decision and imposed a penalty under Section 43A on the acquirer.
The CCI adjudicated that inclusion of an anteriority clause that identified a notional date for operational control of a target asset before the date of CCI’s approval was likely to distort the competition as it disincentivized the target company from competing. A penalty was imposed even when the actual act of taking over the operations was not performed before CCI’s combination approval.
Analysis and Conclusion
The CCI appears to hold a strict view when it comes to cases of gun-jumping and has imposed penalty whenever the action of the parties seems to have the potential to affect the competitive incentive of the relevant parties before the concerned combination proposal. However, it should be noted that due regard is given to the intention of the parties, their regard to competition compliance and the willingness to corporate with the investigation of the CCI. These can act as mitigating factors in the imposition of penalty even though the interpretation of the gun-jumping provisions can be considered strict and narrow. It may be noted that merger control is strict in mature jurisdictions like the EU and the penalties imposed are far higher as any relaxation could cause an irreversible AAEC and harm the competitors and the consumers alike.
Moreover, there is another apprehension with the introduction of “green channel” for M&A approvals. If the CCI finds that the declaration forms filed by the entities for a fast-track approval did not qualify for it or that the documents submitted were inaccurate, the notification of the combination is considered void ab initio. It is unclear whether the CCI will then impose fines on the entities for failure to file the notice. Needless to say, the CCI must issue clarifications on the same.
It is evident that the gun-jumping jurisprudence has evolved as the regulator continues to keep a watchful eye over enterprises. The lawmakers have grappled to keep up with the practical realities of the dynamic business competition and structuring and the decisional practices of the CCI. However, gaps are evident. The CCI itself has been flexible in its approach and accommodate the particular facts and circumstances of cases in its pursuit to balance the interest of business with the competition law objectives. This flexibility, however, is inconsistent and contributes to the blurry jurisprudence of gun-jumping. Therefore, bringing clarity into the domain is necessary.
To this effect, the CCI has issued a compliance manual for enterprises in an attempt to disseminate important information regarding gun-jumping. It has been recommended to constitute a “clean team” that includes managers and external legal counsels. All commercially sensitive data of the other party should be accessible only to them to avoid any influence. This would necessitate that anyone involved in valuation, sales, etc. is not a part of the clean team. This would minimize the risk of anti-competitive effects and gun-jumping. This recommendation is increasingly important to ensure that the due diligence conducted is on the safe side of the legal provisions.
The necessity to define the scope and ambit gun-jumping is especially relevant considering the overwhelming “ease of business” policy that has been pushed in India, slowing seeping its way into every legislative document that touches the business world. It is imperative to develop the jurisprudence around the gun-jumping issues to reconcile government policy and regulate corporate restructuring to protect the competitive process. Competition law policy heavily depends on the economy of a particular country, and therefore, every effort must be made to ensure that the laws are attuned towards our commercial practices and public policy. An initiative to make competition compliance easy and providing incentive for the same will benefit all the players and the economy as a whole. A holistic approach must be taken by all stakeholders collectively, to promote the interests of all and encourage a dynamic competitive environment.