Astutya Prakhar and Prachi Shikha
Introduction
In the realm of competition law and regulations, killer acquisitions have garnered significant attention due to their far-reaching implications. These acquisitions occur when a dominant company strategically acquires a smaller and more innovative competitor who possesses a relatively moderate market presence. The underlying motive behind such acquisitions is to eliminate potential competition in the market and establish an unchallenged dominant position. In this industry, companies involved in such deals may operate below the threshold limit as prescribed under Section 5 of the Competition Act (‘the Act’), at the time of acquisition but still exert enough market power to hinder competition. This poses a potential threat to consumer welfare as it can lead to the consolidation of dominant positions by incumbent firms in the market.
In acknowledgement of this gap, the Ministry of Corporate Affairs established the Competition Law Review Committee in 2018. Tasked with evaluating the Act’s implementation and its alignment with India’s expanding economic landscape, the committee proposed several significant changes aimed at effectively managing market competition. In alignment with the committee’s recommendations, the Competition (Amendment) Act, 2023 (‘the Amendment Act’) has been published in the official gazette, aiming to reshape the mergers and acquisitions landscape. It introduces amendments to Section 5 of the Act, which deals with the acquisition or merger of one or more entities by one or more person ( ), by incorporating the concept of deal value threshold alongside the existing asset and turnover-based criteria. This amendment was introduced with the intention of enhancing the scrutiny of killer acquisitions, especially those involving dominant companies. However, the imposition of penalties based on global turnover and the shortened review timeline have raised several noteworthy concerns.
In light of the aforementioned discussion, the author explores the potential impact of the Amendment Act, shedding light on the proactive measures being taken to prevent killer mergers. Through critically analyzing international practices, this blog post suggests possible measures to effectively strengthen the curbing of killer acquisitions.
Unravelling the Deal Value Threshold
In recent years, concerns have emerged regarding killer acquisitions. Notably, certain acquisitions, such as Facebook’s acquisition of WhatsApp, Myntra’s acquisition of Jabong.com, Zomato’s acquisition of Uber Eats, Snapdeal’s acquisition of Freecharge, and Byju’s acquisitions in the edtech industry, have raised concerns. Surprisingly, these acquisitions managed to evade scrutiny from the Competition Commission of India (‘CCI’) due to falling below the mandated threshold limits provided under Section 5 of the Act, despite their substantial impact on the market. These acquisitions served as a potent illustration of the pressing need for a comprehensive regulatory framework to ensure adequate scrutiny of transactions affecting a substantial number of users and market dynamics.
To address this issue, the Amendment Act has introduced a significant provision mandating the approval of the CCI for transactions involving the acquisition of control, shares, voting rights, assets, mergers, or amalgamations if they breach the deal value threshold. Under the Amendment Act, the deal value threshold hinges on the transaction size of the merging entities or the amount an entity offers to pay as a consideration as part of the deal. The requirement applies if the enterprise being acquired, controlled, merged, or amalgamated has substantial business operations in India and the transaction value exceeds INR Twenty Billion. The determination of what constitutes substantial business operations has been entrusted to the CCI’s discretion. Furthermore, the term ‘value of transaction’ has been broadly defined to include all forms of valuable consideration, whether direct, indirect, or deferred, in relation to any acquisition, merger, or amalgamation. By using the word ‘include’ in the definition, the intention is to create an expansive definition encompassing a wide range of possibilities.
The significance of the amendment lies in the implementation of transactional value, following the footsteps of European nations. For instance, Austria, under the Competition Law Amendment Act, 2017, and Germany under the 9th Amendment to the German Competition Act, introduced the concept of deal value threshold to strengthen their regulation, as it becomes a crucial factor in expanding the investigative scope of the competition authorities. In a recent case, the Austrian regulators fined Facebook EUR 9.6 million due to its failure to notify about its acquisition of Giphy, surpassing the transactional value threshold. This enforcement action demonstrates the practical implications of this new threshold limit in curbing potential killer acquisitions. Therefore, it can be said that the introduction of the transactional value threshold under the Indian regime expands the scope of the CCI to tackle killer acquisitions, which previously evaded CCI vetting due to falling below the earlier threshold limit. This regulatory development signifies a positive step towards ensuring a balanced and competitive marketplace in India.
The Implications of Global Turnover on the Penalties
There has been a significant shift formulated under the recent amendment Act for the computation of the penalties. Consequently, penalties for anti-competitive practices will now be determined based on global turnover rather than relevant turnover. In the case of Excel Corp Care v. CCI, the Supreme Court construed relevant turnover as the entity’s turnover pertaining to the products or services that have been the subject matter of the contravention. In contrast to the earlier provision, the Amendment Act under Section 27(b) grants the CCI the power to impose penalties not exceeding ten percent of the average turnover or income of the last three preceding financial years, considering the global turnover derived from all products and services. While the intent behind this amendment is to strengthen the deterrent effect of the law, yet, the consideration of global turnover for penalties raises concerns about fairness and potential discrimination. As entities operating in the Indian market that commit similar contraventions can face different penalties based on their business size and presence in the Indian market, imposing penalties based on global turnover without establishing a fair, and well-defined procedure could endanger the interests of the entities operating in the Indian market.
In contrast, the European Commission, when imposing a penalty based on an entity’s global turnover for engaging in anti-competitive behaviour, considered various factors such as their cooperation, manner and duration of the infringement, and economic conditions of the entities. This reflects a common approach of imposing penalties based on global turnover while safeguarding the rights of the entities. As the implementation and effects of this Amendment Act unfold over time, it is essential to maintain a balanced approach in regulating killer acquisitions and imposing stricter penalties for the abuse of dominant positions, and similar measures could be adopted as European countries. The substantial penalties resulting from this Amendment Act could potentially harm business operations and create an unnecessary compliance burden, especially for multinational entities. Therefore, it is crucial to strike a balance to ensure effective regulation while maintaining the growth of the Indian market.
Reduction of the Review Timeline: A Major Concern
The reduction of the review timeline for proposed combinations from 210 days to 150 days has raised concerns about its implications for detecting and addressing killer acquisitions. The 210 days timeline already poses significant challenges in efficiently addressing these acquisitions. Therefore, the reduction of the timeline by 60 days could potentially overburden the CCI and limit their scope to thoroughly investigate the complex deals and make informed decisions within the shortened period. Additionally, within the framework of the deemed approval, the acquisition will be considered authorized if CCI fails to determine within 30 calendar days as opposed to the previous 30 working days regarding the potential concerns of an acquisition stifling the market.
The primary goal of competition law is to safeguard competition and protect consumers. The shortened timelines, along with the potential outcome of deemed approval, will create added pressure on the CCI to expedite the approval process for complex transactions. This, in turn, will place increased demands on parties to furnish information rapidly. Furthermore, due to these stringent timelines, we might observe a rise in the rejection of notices submitted by parties who have not engaged in substantive pre-filing consultation with the CCI. Another consequence of these revised timelines could be an increase in the issuance of information requests by the CCI, and it may lead to potential disruptions and delays in the transaction process.
Rushing through the review process within a shorter timeline may compromise the depth of analysis needed to identify the anti-competitive nature of a transaction. These cases often require a comprehensive examination of various factors, including market dynamics, competitive impact, and potential harm to consumers. It needs to be understood that while expediting the decision-making process is desirable for efficient operations, it is equally essential to strike a balance between efficiency and effectiveness. Therefore, the CCI must be provided with ample time to thoroughly investigate and consider all relevant aspects and assess potential competitive concerns comprehensively.
International Insights vis-à-vis Suggestive Measures for the Indian Competition Regime
In response to the issue of killer acquisitions, the European Commission has implemented significant changes to the procedures of the European Union Merger Regulation (EUMR). These changes aim to address the competition concerns raised by killer acquisitions, specifically focusing on the acquisition of nascent competitors that possess valuable assets. To provide guidance in this regard, the Commission issued a Guidance Paper outlining the application of Article 22 of the EUMR in certain cases. This guidance empowers Member States to refer transactions to the Commission, even if they fall below the threshold values specified in Article 1 of the EUMR, provided that the transaction affects the Member States or any other Member States and has the potential to stifle competition in the relevant market.
The need to implement similar measures within the Indian merger and acquisition control regime is evident, as some acquisitions below the threshold can still evade CCI scrutiny despite the recent amendments. One way to achieve this is by introducing an explanation for the exemption outlined in Section 5 of the Amendment Act for entities falling below the threshold limit. This explanation would clarify that this exemption does not apply in cases where there exists a genuine risk of eliminating a recent or future entrant, hindering entry or expansion, or leveraging a dominant market position from one market to another, especially in the case of dominant multi-national entities. They are often the primary acquirers of nascent companies, preempting potential future competition in order to maintain their dominant positions. This will safeguard smaller competitors from being pushed out of the market, thus preserving consumer choice and ensuring a fair market environment.
In a significant move, the Federal Trade Commission (FTC) has issued Special Orders to prominent companies, compelling them to disclose information about prior acquisitions that went unreported to antitrust agencies under the Hart-Scott-Rodino (HSR) Act. The objective behind these orders revolves around identifying potentially anti-competitive acquisitions that have gone unreported due to falling below the HSR filing thresholds. By examining the acquisitions that were not reported under the HSR Act, the FTC aims to determine if large companies have engaged in acquiring nascent or potential competitors to gain an undue market advantage.
Similarly, the CCI can also adopt an identical approach to the FTC to examine the reporting practices of companies involved in killer acquisitions occurring below the prescribed threshold limit. By doing so, they can uncover potential anti-competitive practices that stifle the market and have negative impacts on consumers. Additionally, it will also enable the authorities to identify any gaps or loopholes that might exist, allowing anticompetitive acquisitions to go unnoticed and unaddressed. Another viable option could be the expansion of the ex-post assessment period of acquisition within a comprehensive framework. This approach can be valuable in combating killer acquisitions since their impact often becomes evident only after a certain timeframe. This proactive measure can ensure that potentially harmful acquisitions which are below the threshold values are still subject to scrutiny and evaluation to safeguard competition in the market.
In light of the above discussion, similar policies could be chalked out to align with the unique characteristics of the Indian market. By incorporating a tailored approach, the Indian merger and acquisition control regime can effectively address the concerns posed by killer acquisitions and ensure a fair and competitive market environment.
Conclusion
The Amendment Act takes a significant step toward addressing the critical gaps in the existing governance framework. The introduction of a deal value threshold and a broadened definition of transaction value expands the CCI’s ability to scrutinise and regulate transactions that were previously beyond its reach, addressing the challenges posed by killer acquisitions. This comprehensive approach safeguards emerging and innovative players from premature elimination by dominant market forces, fostering a competitive environment and preventing the concentration of market power.
However, certain aspects require further attention. The implications of the reduced timeline for the proposed combination and the use of global turnover as the basis for calculating penalties need careful consideration and a balanced approach to ensure consumer benefit. Drawing inspiration from international insights, the Indian competition regime can further strengthen its measures to counter killer acquisitions. Implementing similar measures to the European Union Merger Regulation and the Federal Trade Commission’s Special Orders can enhance the scrutiny of acquisitions falling below threshold limits. In the pursuit of fostering a balanced and competitive business environment, it is imperative that the Indian competition law adapts to evolving market dynamics. Additionally, measures should be taken to review acquisitions falling below the threshold limit as dominating entities acquiring an innovative and smaller competitor could pose a threat to competition in the market. Addressing these challenges and incorporating proactive measures, the Amendment Act can set the stage for a vibrant and dynamic marketplace that benefits consumers and businesses alike.
The authors are fifth-year students at National University of Study and Research in Law, Ranchi and ICFAI Law College, Dehradun.
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