Given the relative nascence of the Indian merger control regime, some transactional parties are uncomfortable about subjecting their transactions to the wide-ranging powers vested in the CCI, even though the regulator has been proactive in listening to and meeting the various needs of Indian industry. The CCI has not structurally modified a single notified transaction to date, besides completing the pre-merger scrutiny within 30 days, excluding the time taken by parties to respond to queries or offer modifications.
Notwithstanding this, transactional parties often take advantage of their tax or securities law-induced transactional structure to evade CCI's pre-merger review process. This is primarily done by structuring a transaction in a series of steps such that few or all of the steps, on a stand-alone basis, could avail of a particular exemption from the requirement of pre-notifying the CCI even though the transaction without the disaggregation would not be able to avail of such an exemption.
The CCI had an opportunity to address this issue while scrutinising Etihad Airways' recent acquisition of a 24 per cent stake in Jet Airways for $339 million. The CCI found that although the parties did notify it, in May 2013, of Etihad's acquisition of the 24 per cent stake in Jet, a smaller inter-connected transaction preceding Etihad's equity acquisition was consummated before the May notification. This transaction related to the sale of certain landing/take-off slots of Jet at the London Heathrow Airport to Etihad.
The parties defended the non-filing mainly on the ground that the slot-sale transaction was independent to Etihad's equity acquisition and, on a stand-alone basis, could avail of certain exemptions from CCI's pre-merger review process. Exemptions to notify a transaction to the CCI has been set out in the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination regulations).
The CCI disagreed with this view on the grounds that the slot-sale transaction and Etihad's equity acquisition constituted a composite transaction, with each transaction having a contemporaneous commercial bearing on the other. The CCI penalised the parties for Rs 1 crore, and held that both the components of the composite transaction i.e., the slot-sale agreement and the equity acquisition, should not have been consummated without notifying the CCI.
Under the terms of the Competition Act, the CCI could penalise Jet-Etihad up to one per cent of the parties' combined turnover or assets, whichever is higher, for consummating parts of the composite transaction without notifying the CCI for statutory clearance. One per cent of the combined value of turnover of Jet-Etihad is more than Rs 400 crore and one per cent of their combined assets amounts to approximately Rs 700 crore, and CCI could have penalised Jet-Etihad up to latter amount. However, the CCI considered certain mitigating factors in limiting the penalty to only Rs 1 crore. Such mitigating factors included the fact that the parties had not tried to intentionally conceal the slot-sale transaction and had genuinely erred in believing that the transaction did not qualify to be notified to the CCI for pre-merger review.
To close this loophole, the CCI amended its Combination Regulations, effective March 28. The amendment clarifies that in determining if a particular transaction should be notified for pre-merger scrutiny the CCI shall consider the "substantive business rationale" or the "economic linkages" of a transaction rather than its "structure" or "legal form".
Therefore, structuring a transaction to acquire securities/assets of a target entity in multiple tranches, with the intention that each tranche could avail of certain exemptions from the notice requirements, where such exemption would not be available if the acquisition was completed in a single tranche, will no longer work. The CCI will not allow a single tranche of the composite transaction to avail of an exemption if the purpose of such disaggregation is to avoid the CCI's pre-merger scrutiny.
Thus, each tranche can be consummated only after obtaining clearance for the entire composite transaction or after the review period of 210 days has passed.
One will have to see how the CCI will interpret this new "substantive test", but merger & acquisition lawyers and deal managers must be careful while structuring transactions to make them non-notifiable, especially if the transactional parties have plans for subsequent transactions that would breach the asset/turnover thresholds and require pre-merger clearance from the CCI. Applications for such subsequent notifiable transactions may reveal the details of the previous transaction, which was structured to evade CCI's jurisdiction. This could then subject the transactional parties to pecuniary penalties besides complicating the merger review of the subsequent notifiable transaction.
Therefore, the message is: if a transaction would ordinarily breach the asset/turnover threshold or would not be exempted from pre-merger scrutiny by the CCI, it cannot escape such scrutiny by innovative structuring. The CCI by amending its regulations has reminded us of the old legal maxim: what cannot be done directly cannot be done indirectly.
The writer is a competition lawyer with the Competition Commission of India
These views are personal