By Subramanya .V. Mysore, LL.M. Candidate at Jindal Global Law School
The term “control” is defined under explanation to Section 5 of the Competition Act, 2002 (the Act) as “control includes controlling the affairs or management by one or more enterprises, either jointly or singly, over another group or enterprise….” In order to assess control, firstly, a proposed merger shall meet the thresholds of asset and turnover set forth under Section 5. Thereafter, the concerned party shall notify the Competition Commission of India (the CCI) under Section 6 to assess whether or not such mergers result in an appreciable adverse effect on competition in India. However, the notification requirement can be waived if the concerned deal falls within list of exemptions provided under items 1 to 10 of Schedule I to the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 (Combination Regulations).
As a matter of fact, there is no one overarching legislative definition of control under the Act. Rather, it is left to the CCI to define “control” with the aid of Combination Regulations. It is on this vein, the CCI has tri-furcated varying degrees or levels of control. The lowest level being “material influence” – which gives an acquiring entity the ability to decisively influence the affairs of the target enterprise, the mid-level threshold of control being “de-facto control” – which implies a situation where an entity even though a minority has the ability to influence more than half of the shareholders and the highest level threshold being “de-jure control”- which occurs when an entity has more than 50% shareholding in the target enterprise.
In Independent Media Trust / Network 18, Combination Registration No. C-2012/03/47, the CCI interpreted control as an ability to exercise decisive influence over the management or affairs of a target company in the forms of majority shareholding or contractual obligations or veto rights associated with the minority shareholding and departed by not clearly defining the term “decisive influence”.
Similarly, in SPE Holdings / MSM / Grandway and Atlas, Combination Registration No. C-2012/06/63, the CCI observed that the ability to veto on strategic business calls such as approval of annual business plans or proposals on business diversification or recruitment and remuneration of senior management amounts to control.
Likewise, in USL / Diageo Combination Registration No. C-2012/12/97 the CCI held that the ability to contractually bind shareholders to vote as per the acquirer’s instruction shall represent control.
However, the CCI in Caladium / Bandhan Combination Registration No. C-2015/01/243, came out with a concept of “joint control” and was rather imprecise in identifying whether or not there is acquisition of control from the merger. In this regard, it was decided that changes to the memorandum/ articles or the share pattern through buy-back/further issue etc. or to the dividend policy or the appointment of auditors shall amount to joint control and these can be considered as investment protection rights during mergers.
Identically, in SAAB / Pipavav, Combination Registration No. C-2012/11/95, it was decided by the CCI that a 3.3% holding in the target and the ability to nominate a director on the board amounts to a strategic investment, in order to protect the investment and preserve its worth, rather than an acquisition made in the ordinary course of business. The CCI in Ultratech / JAL Combination Registration No C-2015/02/246 was able to churn out a definition of control for group mergers by laying down a test i.e. if two companies belonging to the same group can exercise 50% or more in voting rights and/or the ability to control the majority quorum in board meetings and/or the ability to control or manage the affairs of other company then it would correspond to control.
“Control” Under the Regulations
In the same light, the CCI has interpreted the Combination Regulations to define control in certain settings, especially, Item 1 of Schedule I of the Combination Regulations lays out an exception for filing notice, which reads as, an acquirer not holding more than 25% of the shareholding and/or not in possession of special rights and/or not a member of the board and doesn’t intend to participate in the affairs of the company will make such acquisition solely as an investment or acquisition made in due course of business. The terms that need to be evaluated here are the “25% limit” on exemption activation and “solely for the purposes of investment”.
Firstly, the 25% limit exempting notification was constricted by the CCI in Jet / Etihad, Combination Registration No. C-2013/05/122, even though the acquirer only held 24% i.e. within the limit and without any veto or quorum rights but with the ability to appoint two directors on board and joint initiatives on shareholders’ agreement, commercial cooperation agreement and investment agreement were decided to amount to acquisition of control. The point to note is that CCI was vigilant to recognize the market realities or commercial effect of the said deal and not merely the post transaction structure.
Secondly, in SCM / DFPCL, Combination Registration No. C-2014/05/175, it was decided by CCI that even though an acquisition of only 24.46% is made in the target without any say in its management or any contractual entitlements but a subsequent press release by the acquirer stating that the acquisition is “a strategic fit to the company’s business” led the CCI to declare the acquirer company ought to have filed a notification, as this acquisition was more of a strategic investment rather than a passive investment. The decisions of CCI can create chaos for minority investors because even if their investment doesn’t breach the thresholds on paper, the CCI has found a way to make their investments reviewable on intangible grounds.
By noticing the conundrum over interpretation of the term “control”, the Competition Law Review Committee – 2019 (CLRC-2019) recommended amending the Act in various dimensions resulting in the Draft Competition Amendment Bill, 2020, which redefined ‘control’ under point 6 for explanation clause (a) to Section 5 of the Act as “’control’ means the ability to exercise material influence, in any manner whatsoever, over the management or affairs or strategic commercial decisions by – i) one or more enterprises, either jointly or singly, over another enterprise or group or ii) by one or more groups, either jointly or singly over another group or enterprise;”
This effectively placed the “material influence” benchmark as the preferred route to analyze combinations by CCI and the CCI had defined it as “the lowest level of control, implies presence of factors which give an enterprise ability to influence affairs and management of the other enterprise including factors such as shareholding, special rights, status and expertise of an enterprise or person, Board representation, structural/financial arrangements etc.” in Ultratech / JAL Combination Registration No C-2015/02/246.
The introduction of a concrete definition and a test to asses control “will serve as a twin benefit of bringing more certainty to the meaning of control while retaining the power of the Commission to assess a wide range of combinations that may have AAEC” as was observed by the CLRC – 2019.
Lastly, it would be worthy to rethink the way control is analyzed; Factors such as the market realities, nature of the concerned industry and the intangible implications of a merger as was recognized in Jet / Etihad combination need to be nudged forward. In the spirit of CLRC-2019 report and Competition Amendment Bill, 2020, it would be judicious to asses combinations based on “material influence” criteria over “decisive influence” because the former enlarges the area of probe for the CCI than the latter, “decisive influence” possibly can oust joint or negative control/ combinations made in non-ordinary course of business/ informational arrangements etc. from the CCI’s vigil.
Whereas, the use of “material influence” yardstick can red flag a proposed merger with even a minimum level of influence over the affairs of the target through expertise of a person or enterprise/ strategic or financial arrangements/ board representation/ veto rights/ shareholding pattern etc. However, a straightjacket test based analysis by CCI would become inadequate in coming days; rather by keeping the tests as an instruction, a case to case observation would yield benefit. Suitably, the CCI should make an attempt at expanding the tests laid down in a multifaceted context if not defining it wholly.