On 15-16 March, the International Bar Association, the Bar Association of India and the Confederation of Indian Industry, among others, held an International Conference on India’s New Merger Notification Regime.
Leading competition law practitioners and regulators from the EU, US and Canada shared their experiences and officers of the Competition Commission of India (CCI) shared their thoughts on the merger control implementing rules.
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During pre-conference meetings on 15 March, an interesting question was raised: What would be the legal implications of deferring the application of the substantive merger control rules in sections 5 and 6 of the Competition Act, 2002, while allowing the remainder of the act to enter into force? While the prospect of a deferment might delight the innocent, the consequences of such an initiative should make the bravest cringe.
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If the government were to defer the application of the merger control rules and notify the entry into force of the rules prohibiting cartels and abuse of a dominant position, the CCI may be left with no option but to apply the rules prohibiting anti-competitive behaviour in sectins 3 and 4 of the act to structural changes, such as mergers and acquisitions, unless the government were also to prohibit the regulator from regulating M&A deals under the Competition Act (an unlikely outcome).
Section 3(1) prohibits anti-competitive agreements that cause or are likely to cause an appreciable adverse effect on competition. Section 3(2) makes such agreements void. Section 4 prohibits abuses of existing dominant positions. Unlike sections 5 and 6, sections 3 and 4 are not predicated on any sales or assets thresholds. There are also no procedures under sections 3 and 4 to notify the CCI to seek an exemption from these prohibitions. The CCI could apply these provisions months or years after the M&A transaction has closed. Nor is there any requirement that the CCI render a decision within a specified time frame. Thus, there is nothing to prevent the CCI from extending the application of sections 3 and 4 to the merger or acquisition itself.
Every merger or acquisition is based on an agreement. It is conceivable that if the government defers the application of the merger control rules, the CCI could apply sections 3 and 4 to M&As.
The highly distasteful impact of this approach can be demonstrated by an example in which the CCI challenges an acquisition months after the fact because the acquisition agreement could have an adverse effect on competition.
The acquisition would be declared “void” under section 3(2) and the CCI could then impose fines of up to 10% of the average turnover for the last three years on both the seller and buyer. The CCI could also challenge the acquisition if the buyer has a dominant position in any market affected by the deal because the acquisition itself could be deemed to be a prohibited “abuse”.
To move from the ludicrous to the bizarre, the government could also rely on sections 108 A through 108 I of the Indian Companies Act to prohibit mergers and acquisitions that give rise to dominance or where one party is dominant.
The application of the rules regulating conduct to M&As is not without precedent even in mature antitrust jurisdictions. In the EU, for example, the EUCommission applied the rules prohibiting cartels and abuse of dominant position to structural changes with devastating effect. In Continental Can, the EU Commission applied then-Article 86 of the Treaty of Rome (prohibiting abuse of dominant position) to a deal in which one of the parties was dominant and the transaction eliminated residual competition. To regulate mergers in oligopolistic markets where none of the parties possessed dominance, the EU Commission invoked then-Article 85 of the Treaty of Rome (prohibiting cartels) to regulate acquisitions of shares and relied on the European Court’s judgment in Philip Morris.
Between 1975 and 1990, the EU established an elaborate merger enforcement regime based only on rules prohibiting cartels and abuse of dominant position. Nowhere was the approach more evident and more illogical than in the regulation of joint ventures, where in all cases but one, the EU Commission granted exemptions to notified joint ventures under the exemption procedure implementing then-Article 85(3). Only with the adoption of the EU Merger Regulations in 1989 did EU competition policy become more coherent.
Vinod Dhall, acting chairman of the CCI, said at the conference that all of the major components of a competition law are incorporated in the Competition Act, 2002, and “these components are inter-related and mesh into each other … It would be difficult to amputate one limb without leaving the body of the law grievously wounded.”
I would go further. “Amputation” of the merger control rules would not only severely damage the development of an effective competition policy but result in catastrophic legal uncertainty. In the interest of legal certainty, the CCI should unambiguously state that it will not apply sections 3 and 4 to M&As regardless of whether transactions meet section 5 thresholds. This would eliminate uncertainty from the possibility that the CCI could use section 6 to regulate M&As that satisfy the section 5 thresholds and sections 3 and 4 to regulate those that don’t.
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Anand S Pathak is partner-in-charge of P&A Law Offices in New Delhi. He can be contacted at apathak@palawoffices.com.
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Email: apathak@palawoffices.com
