In two similarly worded merger control penalty orders issued in February, the Competition Commission of India (CCI) has provided further clarity on the relaxations provided in Schedule I of the CCI (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations), especially with reference to the acquisition of less than 25% of shares or voting rights.
The CCI previously issued a penalty order against Thomas Cook in similar circumstances, i.e. market purchases of stock of acquisition target Sterling Resorts, without notifying the CCI.
Hostile takeover bid
The backdrop transaction for the current orders was the hostile takeover bid for Mangalore Chemicals & Fertilizers. The penalty was imposed on Zuari Fertilisers and Chemicals and Zuari Agro Chemicals, and separately on SCM Soilfert and its subsidiary Deepak Fertilisers and Petrochemicals Corporation, for not notifying the market purchases of shares in the target.
The two sets of acquirers were involved in a competitive bid for a majority stake, and although their respective applications to the CCI pursuant to the public announcement for the open offer were approved, they were penalized for market purchases made almost a year prior to the open offer.
Schedule I of the Combination Regulations provides a list of combinations which are ordinarily not likely to cause an appreciable adverse effect on competition and need not normally be filed.
The CCI observed that: (i) the categories of combinations listed in Schedule I must be interpreted in light of the intent of Schedule I and the objectives of the CCI (to eliminate practices having an adverse effect on competition, promote and sustain competition, protect the interests of consumers, and ensure freedom of trade carried on by other participants, in markets in India); and (ii) these categories do not include combinations which are likely to cause a change in control or are in the nature of strategic combinations such as between competing entities or entities active in vertical markets.
One relaxation listed under item 1 of Schedule I is the direct or indirect acquisition of less than 25% of shares or voting rights, which (i) does not lead to change in control, and (ii) is made “solely as an investment” or in the ordinary course of business.
The CCI held that the phrase “solely as an investment” indicates “passive investment”, which does not include an investment done with a strategic intent, i.e. the acquisition cannot have been done with an intention of participating in the formulation, direction or determination of the basic business decisions of the target through voting rights, agreements, board representation or affirmative veto rights. The CCI also stated that strategic intent may exist despite the absence of written and binding documents, and the surrounding circumstances must be considered when assessing the applicability of the item 1 relaxation.
The CCI inferred the (strategic) intent of the acquirers on the basis of various factors in both the cases. Firstly, the CCI relied on a press release from Deepak to the stock exchange, issued after the market purchase, which said the acquisition was “very strategic and a good fit with the company’s business”. For Zuari, the CCI relied on an interview given by the chairman in which he admitted that that the market purchases were made after consulting a major shareholder of the target, with the intent to operate the target as a joint venture between Zuari and the major shareholder.
Secondly, on the contention that the only benefit from market purchase would be earning dividends, the CCI observed that if made only for earning dividends the investment did not seem to be sound since the target had declared a dividend of only 12% in 2012-13.
Thirdly, the CCI noted that publicly available media reports indicated that both the acquirers were seeking to take over the target, so the market purchases could not be considered as solely an investment or in the ordinary course of business.
The CCI has in the past as well read down the scope of the relaxations in Schedule I, especially the less than 25% relaxation in item 1. On previous occasions this relaxation was diluted on the issue of “control” (given CCI’s expansive interpretation). The CCI has now clarified its position with respect to “solely as an investment”.
As the CCI has started to decipher the intent of the parties in making investments (including from press releases and interviews), it is advisable to seek clarity on the notifiability of the transaction at the earliest stage to avoid this. Acquirers may no longer be in a position to use the element of surprise in their takeover bids.
Kunal Chandra is a counsel at Trilegal and Gautam Chawla is an associate. The views expressed are their personal views. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.
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