CCI issues revised guidance for merger filings - A mixed bag of clarifications

While the countrywide lockdown on account of COVID-19 has deferred the introduction of an amendment to the Competition Act, 2002 (Competition Act), it has not yet slowed the Competition Commission of India’s (CCI) efforts towards an improved competition law framework. Continuing with the trend of refining the merger control regime, the CCI published revised Guidance Notes to Form I (short form) on 27 March 2020 (Guidance Notes).

Guidance Notes were first introduced by the CCI in 2015, and revisions to them had to be made in light of numerous recent changes to the Combination Regulations[1] and Form I itself. The revised Guidance Notes provide a number of new clarifications, including on the scope of information and documents to be submitted along with a Form 1 filing. In general, some of the changes and clarifications are helpful, though some concerns continue to remain.

Key changes made by the CCI to its earlier guidance are discussed below.

Relaxation in providing market information for 3 years

Prior to August 2019, filing parties were required to provide market share figures for only one year in the filing. However, the burden on the parties increased substantially with the amendments in 2019, where the CCI extended the scope of market share information to three years.

The CCI has now clarified that the market shares of the parties for three preceding years must be given only in cases where the combined market share is 10% or more in any plausible market (in case of horizontal, vertical or complementary activities). This is surely a helpful and welcome move and may substantially reduce the burden on parties in filing a short form.

Upfront identification of business team of the parties

The CCI has also clarified that parties must provide details of their business team/senior management who are well versed with the business and will be meeting the CCI. Clients will need to decide upfront and ensure that they identify business personnel for any business meeting with the CCI and provide their details in the notification form.

However, it is not clear how much flexibility will be available to the parties in this regard, particularly in case of unavailability of the identified personnel for justifiable reasons.

Clarity on the meaning and scope of ‘complementary’ products/ service

One of the most significant changes in the revised Guidance Notes is the inclusion of guidance on what ‘complementary’ products and services are. Complementarity of products and services has emerged as a new focus point for the CCI in its assessment of combinations. Especially since the introduction of the Green Channel (i.e., the deemed approval for certain combinations), the CCI has increasingly been keen on assessing any possible anti-competitive effects arising out of complementary activities of the parties to a combination.

The CCI has previously examined the concept of ‘complementary’ activities in Bayer/Monsanto (2018) and Schneider/ L&T (2019), where it raised concerns in relation to possible portfolio effects of the combinations (i.e., bringing together complementary portfolios of products). Even so, there was limited guidance available to filing parties about the CCI’s view on what constitutes complementary activities, and the revised Guidance Notes provide helpful clarification.

Drawing guidance from the Canadian Merger Enforcement Guidelines, the CCI has clarified that complementary products are those which are: (i) related because they are combined and used together; and (ii) do not compete with each other, actually or potentially, and are not vertically related. The CCI cites the example of printers and ink cartridges as complementary products.

This clarification is most helpful for filing parties notifying combinations which are looking to use the Green Channel route. In fact, the CCI’s stated objective in introducing the revised Guidance Notes was to bring clarity on the eligibility criterion for Green Channel filings. Filing parties making a short form notification to the CCI are also likely to welcome the increased clarity on this. However, a key question which arises is whether this will prove to be an onerous task in certain sectors. For instance, for automotive components, where even the steering components could be seen as complementary to clutch and brake products. Likewise, there could be similar implications in various other sectors.

Mere right of an Observer will require an overlap assessment – Private Equity to be mindful

The express wording of Form 1 requires the disclosure and assessment of information pertaining to any entity over which the parties have any shareholding in the identified relevant markets. The CCI has now clarified that parties are required to provide disclosures and undertake assessment of horizontal, vertical or complementary with any entity in which the parties have:

(i) direct or indirect shareholding of 10% or more; or

(ii) a right or ability to exercise any right (including any advantage of a commercial nature with any of the parties) that is not available to an ordinary shareholder; or

(iii) right or ability to nominate a director or an observer in another enterprise.

A shareholding threshold of 10% is an extremely welcome change and is likely to reduce the burden of collecting and providing information on many large, global companies. However, one key onerous change is that a party will have to provide details and undertake overlap mapping with an entity in which it has a right or ability to appoint a director or even merely an observer on the board. Based on this guidance, in case a private equity investor has less than 10% but has an observer in another company, which may not be unusual, the investor will be expected to disclose and undertake overlapping mapping with that entity.

Based on the CCI’s decisional practice, the intent of the CCI behind this addition seems to be to investigate common minority shareholdings in competing enterprises or enterprises placed at different levels of a production chain due to concerns of information sharing and likelihood of collusion between such enterprises. However, it is important to note that the regulatory concerns regarding common investors stem from an economic theory of control, in the absence of which there should be no competition concerns. This is not addressed in the clarification.

This clarification is likely to impose a significant compliance burden on investors in tracking their portfolio companies which are in the same line of business, or vertically related or in the complementary space even where there are only observer rights.

Moreover, detailed information required to be furnished in the notification of activities (and product level or sales) of companies where there may be a prior minority shareholding can be near impossible to obtain, particularly where the prior shareholding is not a controlled investment. As such, it would be onerous and unreasonable to require the disclosure of all investments with an observer/board seat (where there is less than a 10% shareholding) in horizontally or vertically linked or complementary businesses as the target enterprise, especially where such downstream investments: (i) do not require the prior consent of the investor; and (ii) are not controlled investments. It is unclear where the CCI would draw the line.

Other changes

In addition to the above, the Guidance Notes also clarify that:

• Parties must provide details of all orders passed by the CCI and other anti-trust authorities in the same industry and sector;

• Details of all rights arising out of the combination have to be spelt out in the CCI filing and simply providing the transaction documents will not be sufficient. Complete details on information rights, veto rights, board seats, and any advantage of a commercial nature are to be highlighted specifically.

• Parties are separately required to assess and provide information on actual and potential vertical and complementary overlaps

• The CCI is looking for more comprehensive information (including the number of players and growth trend) for the last 5 years in the sector to which the combination pertains.

Conclusion

The CCI’s revised Guidance Notes bring many important and welcome clarifications. It signals a greater focus of the CCI on increasing transparency and improves the ease of doing business. However, along with the changes which will substantially reduce the burden on filing parties, there are a few which will require parties to collate and present much more detailed information.

The CCI has shown willingness to have open and helpful discussions with filing parties in pre-filing consultations. This will assist the M&A world to approach the CCI to seek any further clarifications that they may need and highlight genuine and justifiable practical impediments in meeting any increased information burden.

Aparna Mehra, Partner, Competition Law, Shardul Amarchand Mangaldas & Co. and assisted by Anjali Kumar & Kajori De, Associates, Competition Law, Shardul Amarchand Mangaldas & Co.

[1] Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011.