Will Deal Value Thresholds Kill the Threat of Killer Acquisitions?
[Milind is a student at National Law University Delhi.]
The Competition (Amendment) Bill 2020 (Bill) has received an approval from both houses without any debate or discussion. The Bill is the Parliament’s attempt to give life to the suggestions made by the Competition Law Review Committee (Committee) in its 2019 report. One of the key features of the Bill is the introduction of deal or transaction value thresholds for the notification of combinations. Any combination that exceeds a deal value of INR 2,000 crores will have to be notified to the CCI. Previously, notification was only mandated based on turnover / assets of the combining parties. These new thresholds were recommended by the Committee with the aim of trapping ‘killer acquisitions’ within the purview of the CCI. Killer acquisitions are those acquisitions aimed at removing a nascent but threatening competitor from the market and is especially common among big tech companies. In the digital sector, it is common for startups that provide innovative technologies to be focused on amassing a user base rather than maximizing their turnover. Thus, they do not fall under the notification requirement under the Competition Act 2002 (Act). These firms are offered lucrative deals by dominant players in the market that are both willing and able to pay extraordinary amounts to maintain their dominance in the market. These types of transactions have gone under the CCI’s radar time and again. The acquisitions of Myntra by Flipkart, TaxiforSure by Ola, WhatsApp by Facebook, and Freecharge by Snapdeal are some examples given by the Committee in its report. Deal value thresholds have been implemented by some other jurisdictions, e.g. USA, Canada and Germany. However, in the Indian context, such a change would be incomplete without also reviewing the CCI’s power to take cognizance of non-notifiable transactions.
Can CCI Do Anything About Transactions That Do Not Trigger Thresholds?
The Bill has selectively implemented the Committee report by introducing deal value thresholds, but not extending the power of the CCI to go beyond those thresholds. The CCI does not have any ability to investigate a combination that does not meet their notification requirements. This is why the aforementioned combinations were able to fly under the CCI’s nose. Even if the CCI believes a merger will have an appreciable adverse effect on competition (AAEC), its hands are tied unless it is notified of the combination. In the EU, when the infamous Facebook / WhatsApp merger did not meet their turnover thresholds, the EC was able to review the merger due to its referral system. The lack of any such mechanism in the statutory framework for antitrust law in India puts it in a precarious position where it cannot afford to have any false negatives arising from its threshold requirements.
False Positives v/s False Negatives: The Lesser Evil
With any kind of an numerical threshold requirement, there will be some false positives and false negatives. Some combinations that triggered the notification requirement unnecessarily, and some that did not trigger the requirement when they should have. No threshold can be perfect, such that it catches all and only anti-competitive combinations. India cannot afford to have false negatives, since the CCI can take no ex ante measures against such transactions. It is only once the combination goes through and the anti-competitive effects start manifesting in the market, that the CCI will be able to take action. By this stage, irreversible harm may be made to the market.
Can CCI Really Afford Either?
While setting the value of the threshold requirement, the legislators are faced with a trade-off. If they set a high number, they maximize false negatives and minimize false positives and vice versa. The only apparent choice with the CCI seems to be to set the requirement so low that it almost guarantees no false negatives, but on the other hand, maximizes false positives. Keeping a low threshold for transaction value would mean the CCI has to conduct at least Phase 1 investigations on unnecessary transactions, which is incongruent with the legislative intent. The Bill aims to reduce the overall time taken for Phase 1 and Phase 2 investigations. The Chicago school of antitrust thought argues that false positives come with a higher social cost than false negatives due to the self-correcting nature of the market. The argument is a false negative may allow some firms to reap monopolistic profits, such profits would attract more entrants into the market and the market would self-correct over time. The point is that fixing an arbitrary threshold forces legislators a dichotomy where neither option is acceptable. An option for the CCI seems to be to keep a high deal value threshold while empowering the CCI to investigate non-notifiable mergers. This would help minimize both false positives and negatives. Alternatively, the EU has adopted an approach that does not restrict the Competition Authority to an arbitrary threshold value. The EU has introduced the Digital Markets Act (Regulation 2022/1925) (DMA) and the Digital Services Act Regulation 2022/2065, that use a ‘gatekeeper method’ to keep a watch on the dominant players in the market.
Lessons From the EU
The EU has adopted a gatekeeper approach, where they identify certain ‘gatekeepers’ in the market. There are some objective criteria for a firm to be labelled a gatekeeper, these are listed in Article 3(1) of the DMA. While the DMA has a much wider ambit, in the context of merger control, it introduces a notification requirement for such gatekeepers. Gatekeepers must notify the competition authority about any acquisitions. This should be beneficial in handling killer acquisitions in particular since these are predatory acquisitions by large tech firms in particular. What is interesting about this approach is the lack of a threshold and thus not being forced to choose between false positives and false negatives. Such a provision can be introduced in consonance with, if not as a replacement for the deal value thresholds. There should be lenient requirements for a firm to be termed a gatekeeper, and the final decision should lie with the CCI. The CCI is a body of experts that should be trusted with greater discretionary power like its global counterparts.
While the deal value thresholds are a welcome change and are in line with international practices of advanced jurisdictions, the strict adherence to such a threshold system is particularly dangerous for the CCI. Unlike the EU, the CCI has no referral system or any mechanism for it to review non-notifiable mergers. This only leaves the law makers with one option, that is to set low thresholds that envelope all anti-competitive combinations within its ambit, which would lead to a lot of false positives and add to the regulatory burden of the CCI. The CCI is a body of experts and should not be limited by the thresholds set by Parliament. Greater discretionary power should be given to the CCI so it can act when needed, and refrain when it is not. It should not be forced to investigate all combinations that meet a straightjacket threshold, and combinations should not be completely immune from scrutiny by simply not meeting a threshold. The determination of AAEC is based on a number of factors and the impact of a combination cannot be assessed based on any one indicator, be it turnover or deal value. The CCI should decide which mergers it wants to review and which it does not based on a mélange of reasons such as barriers to entry, existing competitors, maturity of the market, etc. It is time for the CCI to break out of the arbitrary limits on its jurisdiction imposed on it by the Parliament for a more successful antitrust regime in India.