Challenging a merger filing before the CCI during Phase I review stage

With more than 340 merger filings before the Competition Commission of India (CCI), so far we have not seen any opposition of the merger/ combination transaction by any third party, challenging the merger on grounds of appreciable adverse effect on competition (AAEC) in India. 

However, many transactional lawyers are now witnessing a trend recently where third parties are looking to challenge or block the transaction and are now willing to try CCI as one more medium for blocking the deal. Often, there are parties, who wants to block a merger but are not privy to information filed by the parties to the combination transaction and are not sure what could be their best argument, which could persuade the CCI to look or delve into the matter more deeply.

It may be noted that during the phase I review, Combination Regulations does not provide for a provision, where an aggrieved third party can approach the CCI and challenge the combination. 

Under the Combination Regulations, the onus is on CCI to ask for any additional information from any other enterprise, if it deems necessary for review of AAEC due to the combination transaction.

Here are some ideas of these genuine parties, who propose of block the transaction on grounds of AAEC:

First, file a right to information (RTI) application to the CCI for challenging and obtaining the materials and more information about the transaction of which the combination filing have been made to the CCI. While filing RTI application, RTI Act, 2005 provisions are required to be taken into considered.

Second, file a preliminary objection before the CCI asking to stop the combination transaction to be stopped as it may have AAEC and may impact your business. The basic information on the combination may be obtained from the 500 words summary submitted by the parties of the combination transaction. While filing the preliminary objection, the parties may also like to obtain the combination filings/ notification submitted with the CCI.

CCI may on both cases say ‘no’ and may also refuse to share any information with the challenging applicant. In that event, the challenging applicant may approach the High Court in a writ petition case and try to obtain the material / documents submitted by the parties to the transaction and try to block the combination transaction or delay the transaction.

Another situation to challenge the combination transaction is when the matter goes to Phase II i.e., when the CCI asks for public comments, while analysing the transaction and its AAEC.

Drafting a correct merger filing in India for CCI approval – Part I (Defining Relevant Market)

Over a past few months, I have been receiving quite a few queries from various colleagues in the industry as to the problems they are facing with the Competition Commission of India (CCI or the Commission) and its seemingly long approval process. Many are perplexed by the range of questions CCI is hitting back at the parties to a proposed combination transaction after the submissions of the prescribed forms. 

In this blog and some others (coming soon), in parts I will make an attempt on how to draft a legible and complete merger/ combination filing before the CCI.  My submissions are part based on my time at CCI, where I was working as an Expert in the Combination Division of CCI and part on the working experiences I have encountered.

For the sake of simplicity, I have tried to model my submissions with respect to the relevant/ respective question of the form I prescribed by the CCI under the Combination Regulations.

8.1 – What, according to the parties to the combination, is the relevant product and geographic market? Provide a detailed explanation regarding the delineation of relevant product and relevant geographic market.

8.2 – Whether the parties to combination are engaged in any business activities in the same relevant market? If yes, please specify.

Introduction

The delineation or defining of relevant market in a combination transaction is the backbone for any merger analysis.  The definition of relevant market is the key for any merger analysis. A lot will depend on how a relevant market is defined by the parties to a transaction.

Basis the relevant market, the CCI will ascertain that there is or will be any appreciable adverse effect on the competition in the markets in India due to such transaction post consummation.

CCI has provided guidance notes for assisting the parties for determining and ascertaining relevant market in a combination transaction. However, it is up to the parties to determine what a relevant market is and to submit to the CCI its reasons along with evidences of why the parties considers a relevant market defined or ascertained by them to be considered by CCI as relevant market for analysis of the combination transaction.

Relevant market comprises of (a) relevant product market; and (b) relevant geographic market.  When conducting market definition analysis, it is generally practical to describe the relevant product market first, and then to determine the relevant geographic market.

Practically, in the interest of time, it is advisable that the parties, defines relevant market as narrowly as possible so that the charges of any lacuna are not there and the risk of CCI coming back on the definition of relevant market is minimized.

Determining relevant product market

When ascertaining product market scope, substitutability from both demand and supply side is commonly considered.

Demand-side substitutability (DSS)

This involves assessment of the extent to which customers could and would switch among substitute products in response to a change in relative prices or quality or availability or other features. DSS involve analysis of customer’s behaviour by applying hypothetical monopolist test or SSNIP test (small, but significant non-transitory increase in price). For CCI submissions, it is necessary to obtain evidence on possible substitution by customers.

Other factor required to analyse are switching costs and brand loyalty, buying pattern of the customers (how have they responded to previous price rises).

It will also be helpful to analyse the commercial strategies and other internal documents such as internal communications, public statements, and studies on consumer preferences, market research, advertising plan, general marketing plans or business plans. Some information/ documents which are relevant may also be asked by the CCI for submissions.

Supply-side substitutability (SSS)

To address the question of whether, to what extent, and how quickly, undertakings would start supplying a market in response to a price increase in that market.  Proper evidences as to substitutability of the products have to collect.

The conclusion for ascertainment of relevant market has to be supported by econometric evidence, derived from data collected from various sources and elasticity of demand.

CCI on occasions may refer or connect with the competitors of the parties to a combination transaction and try to obtain from them the material on the relevant market and any effect of such a combination on the markets in India. CCI have an internal prepared set questionnaire for such queries which it shares with the competitors.

Additionally, now a brief summary of 500 words about the combination transaction is available at the CCI’s website. Any competitor or party who is affected by such a combination may approach the CCI with its analysis about the combination and try to block the merger or slow the process of merger approval by the CCI.

As per the guidance note issued by the CCI, for assessment of relevant product market, the parties are required to provide to CCI the information with evidences with full and true disclosures of the following (wherever applicable):

·        

•  the analysis of why the products or services in these markets are included an why others are excluded
• classification of industrial products
• substitutability of products and services
• physical characteristics or end-use
• price
• consumer preferences
• cross-price elasticity of demand
• supply side substitutability

Determining relevant geographic market

 

In many cases CCI has applied ‘Elzinga Hogarty Test’ for determining the relevant geographic market. It also use ‘Critical loss analysis Test’ for determining the relevant geographic market.

Data on imports may also be informative for analysing the competitive constraints such a relevant product market faces. Any anti-dumping issues which the industry in question faces should also be taken into consideration while determining the relevant geographic market.

As per the CCI guidance note in order to help the CCI in its investigation for relevant geographic market, for assessment parties have to provide:

• the nature and characteristics of the products or services concerned
• regulatory trade barriers
• local specification requirements
• national procurement policies
• transport costs
• need for secure or regular supplies or rapid after-sales services
• language
• consumer preferences
• adequate distribution facilities,
• appreciable differences in the parties market shares between the neighbouring geographic areas,
• substantial price difference

While analysing the relevant geographic market on the basis of any of the factors enumerated above, the parties are also required to give evidences with full and true disclosures to the CCI.

Other remarks

On many occasions while analysing the combination transaction from the perspective of Competition Act, CCI has not defined relevant market as defining of relevant market will not or will have no impact on the analysis of AAEC by CCI and has left the definition open.[1]

There could be an instance where the parties to combination are not sure about the exact relevant market; they may have one or more markets (based on their analysis) that could be classified as relevant market. In that event, parties should go with the definition of the relevant market which it deems most appropriate and in parallel bring to the CCI’s attention other possible relevant market which they identified. The fall back of this could be that the CCI may treat the other identified market as the relevant market and resultantly the notification made by the parties will or might have to be amended, which may prolong the approval process. 

In my view, the parties should stick to ‘one relevant market approach’ and should only disclose about the other relevant market if they are really confused (which is very unlikely) or they have done robust analysis of the requirements under Section 20(4) of the Competition Act, and they are sure that in spite of disclosing two or more relevant markets, CCI will not stop or delay the merger approval process.

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[1] VISCAS Corporation C-2014/10/219

 

Recent Amendments in Combination Regulations

The Competition Commission of India (CCI) on July 1, 2015 amended the Competition Commission of India (Procedure with regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations) for the fourth time[1] keeping in view some of the issues it faced while dealing with some of the recent combination transactions and in line with some of the best international practices in other jurisdictions.

This blog piece seeks to summarize certain substantive and procedural changes made in the Combination Regulations.

Revised Form I for notifying combinations

In Schedule II of the Combination Regulations, a new Form I (wherein certain information is required to be filed by the notifying parties as to the combination transaction (Combination) to the CCI) has been substituted.

Form I now comprise of eight parts, namely:

Part I: Basis Information – Information about each party to the Combination for e.g., legal name, registration number, address, date of pre-filing consultation (if any) etc.,;

Part II: Proof of payment of fees – Details of fees deposited and mode;

Part III: Authorization regarding communication –Information to be provided is similar to information provided under Part I (but for an individual);

Part IV: Meeting the thresholds – Describing the nature of the combination and breach of threshold in a specified format;

Part V: Summary of Combination – Parties to a Combination are required to file a short and a long summary in the prescribed formant;

Part VI: Description of the Combination – Information to the furnished as regards structure and purpose of the Combination, furnishing the copies of the merger filings in other jurisdictions, information and justification on non-compete agreements etc,;

Part VII: Details about parties to the combination and sector overview – Information about details of the products (manufactured/ sold) and/ or services of the parties to Combination, details of horizontal overlaps and vertical relationships, details of supply chain, customers etc,;

Part VIII: Relevant Market – Information regarding the relevant product market and relevant geographic market of the products/ services involved in the Combination.

Guidance notes for filing of Form I and Form II

CCI on its website has published fairly detailed guidance notes (Guidance Notes) for filing of Form I on the information it requires from the parties to the Combination to be submitted for its review of the transaction. CCI has also published an introductory note on its website giving details on purpose of Combination filings, filing requirements, requirement of correct and complete information and notification process. Guidance Notes for Form II is not yet published on its website.

Trigger event for notification of Combination: Limiting the definition of “other documents”

In case of acquisition transaction, the requirements for filing the notification under the Competition Act, 2002 (Competition Act) and Combination Regulations occurs, when the parties to a Combination executes, a definitive agreement or any ‘other document’. The parties are required to file the notification within 30 days of execution of such agreement or other document. Under the requirements of the older Combination Regulations, ‘other documents’ included the documents submitted to the Central or the State Governments indicating the intention of the parties to enter into a Combination transaction.[2] The definition of ‘other document’ is now limited to intimation of the intention to acquire another enterprise to a statutory authority (for e.g., public announcement under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011).

Number of copies required to be filed

CCI has reduced the filing copies to be submitted from two copies to one copy in case of submission of Form I, Form II and Form III.

Failure to file notice

CCI has now clarified that in case of failure to file the requisite notification within prescribed time limits, the parties shall be required to file the notification in Form I or Form II (along with requisite fees) as directed by the CCI. Earlier the requirement was to file only Form II as per the directions of the CCI.

Authorised signatory to the notifications

CCI has amended the requirement for signing of the notification by the managing director, director or company secretary of an enterprise. Now, any person duly authorized by the board of directors of the company for the purposes of Combination can sign the notification (Form I or Form II) to be submitted to the CCI.

Combination filing in case of inter-connected transactions

CCI has clarified that in case of series of inter-connected or inter-dependent transactions/ composite transactions, comprising of several steps or smaller transactions, a single notification (Form I or Form II) is mandatorily required by the parties to the Combination to be filed with the CCI.

Confidential treatment of information

CCI has codified the practice currently being followed in relation to the request of the parties to the Combination for confidential treatment of the price sensitive and commercially sensitive information files by the parties to the CCI. In terms of the Competition Commission of India (General) Regulation, 2009, parties to the Combination are required to also file a public version of the notice (and an electronic version) to the CCI. The parties are also required to clearly state the reasons, justifications and implications for keeping the information disclosed to the Commission as confidential.

Summary of the Combination and publication on summary on CCI website

The parties to Combination are now required to file a summary of the Combination in not more than 500 words comprising details among other things of type of combination, area of activities of the parties to Combination and relevant market to which the Combination relates to. The summary submitted shall be published on the website of the CCI. According to Ministry of Corporate Affairs press release dated July 3, 2015, such publication will provide stakeholders an opportunity to submit their comments to CCI regarding the proposed Combination.

Treatment of invalid notices

CCI has been expressly granted the power to invalidate the incomplete notification (Form I or Form II) filed with it. The CCI may do so (such invalidation) after recording reasons for the invalidation which shall be communicated to the parties to Combination with 7 days of such decision by the CCI.

Termination of the proceedings in cases of modifications

In case a modifications or structural changes (as regards the Combination), suggested by the CCI to the parties, the proceedings for review of Combination by the CCI will be terminated upon acceptance of the compliance report submitted by the parties to the CCI. This amendment clarifies the position already existing in the old Combination Regulations.

Timelines for Phase-I review

CCI has modified the timelines for Phase-I review of Combination from 30 calendar days to 30 working days and have also given itself a clock stop of 15 working days during Phase-I review for seeking comments from the third parties.

Exemption from filing of notification

The amendment exempts the purchaser/acquirer (of shares control, voting rights or assets) for filing the notification (Form I or Form II) for review by CCI, in case such acquisition has been approved by the CCI in terms of the Competition Act. For e.g., acquisition of certain divested assets by the purchaser, in case where CCI directs the parties to a primary Combination transaction to divest certain products in a relevant market before approving the transaction.

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[1] The gazette notification for the amended Combination Regulation was published on the CCI website on July 6, 2015

[2] There were cases where the details of the transaction were not even clear to the parties as their submission for approval were pending before the government agency such as Foreign Investment Promotion Board (FIPB). In the case of Tesco/ Trent (C-2014/03/162), CCI treated the FIPB submission of the parties to Combination as ‘other document’ and since the parties had not filed the notification within 30 days after FIPB submission the Tesco was fined with Rs. 30,000,000 for delay in filing of the notification.