Role of due diligence in mergers and acquisition

Jayant Mudgal, Student of Law, Amity Law School – I

Introduction

Ever since the Indian Economy opened itself to the foreign market after the economic liberalization reforms of 1991, Mergers and Acquisitions have become a common phenomenon throughout India. In a highly competitive global environment, mergers and acquisitions have turned out to be one of the fastest strategic options for companies to gain competitive advantage. While a merger is a combination of two companies, with one company merging itself into the other and losing its identity, while the other prominent company gains more importance and either absorbs the other company or consolidates itself with the other company, an acquisition is the action whereby the acquiring company purchases the interests of the acquired company’s shareholders and ceases to have any interest or right after the acquisition.

Merger is an arrangement that assimilates the assets of two or more companies and vests their control under one company. Acquisition simply means buying the ownership in a tangible or intangible asset such as purchase by one company of controlling interest in the share capital of another company or in the voting rights of an existing company. In the merger context, both companies pool their interests, which mean that the shareholders of both companies still hold on to their portfolio interests from their company and also gets interests in the other enterprise.

The term ‘amalgamation’ is used synonymously with the term merger and both these terms are used interchangeably but both these terms are not precisely defined in The Companies Act, 1956. Section 390 to 395 of Companies Act, 1956 deal with arrangements, amalgamations, mergers and the procedure to be followed for getting the arrangement, compromise or the scheme of amalgamation approved in India but the term merger or acquisition is not defined within the Act ((News Legal , ‘Role of Due Diligence in Mergers and Acquisition’ [July 18, 2013] 3(2) Legal Articles
available at http://www.legalindia.com/role-of-due-diligence-in-mergers-and-acquisition, last accessed on 2nd april,2016)).

However, the Income Tax Act, 1961 defines the term ‘amalgamation’ under section 2(1B) of the Act as the merger of one or more companies to form one company in such a manner that all the properties and liabilities of the amalgamating company(s) become the properties and liabilities of the amalgamated company, and not less than three-fourth shareholders of the amalgamating company become the shareholders of the amalgamated company.

Under Section 5 of the Competition Act, 2002, “combinations” are defined with reference to assets and turnover of merging companies located exclusively in India or located in India and outside India. Section 6 of the Competition Act, 2002 states that, no person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. All types of intra-group combinations, mergers, demergers, reorganizations and other similar transactions are thus within the purview of the Competition Act, 2002 unless specifically exempted.

Further, mergers and acquisitions are also governed by the SEBI Takeover Code, 1994 and requires mandatory permission from High Courts of the respective jurisdiction of such companies to enable any scheme of amalgamation or merger or arrangement to come through.

Now, even though Mergers and Acquisitions have several advantages, but the risks involved are equivalent too. The real motive behind mergers or acquisitions should be on the table for all the parties concerned to ensure real success of such merger or acquisition. The post implementation phase is a very critical part where several mergers or acquisitions fail and before onset of any deal, most companies should conduct due diligence to ascertain the real risks and profitability of such deals. Due Diligence in Mergers and Acquisitions is the process of evaluating and investigating a prospective business decision by getting information about the financial, legal, intellectual and other material information from the other party ((http://www.divest.nic.in/Due_Diligence Last accessed on 3rd April 2016)).

The ultimate goal of such activities is to make sure that there are no hidden drawbacks or traps associated with the business transaction under consideration. By performing due diligence, a perfect strategy can be evolved to carry out the merger or acquisition. Failure to exercise due diligence prior to entering into a transaction of enormous proportions such as a merger or acquisition may lead to a precarious situation where the asset acquired, may be marred by encumbrances, charges and other liabilities which get automatically transferred to the acquirer as a result of such acquisition. While the cost involved in performing a due diligence is on the higher side, as it usually involves the services of a CA and an attorney, the importance of conducting a thorough due diligence before undertaking a transaction cannot be undermined under any circumstances. To any company involved in merger or acquisition, the due diligence investigation will attempt to reveal all material facts and potential liabilities relating to the target company/unit/business.

The purpose of due diligence is to confirm that the business actually is what it appears to be. While gaining information about the business, the company conducting the due diligence can definitely identify deal killers and eradicate them. Further, information for valuing assets, defining representations and warranties, and/or negotiating price concessions can also be obtained vide due diligence. The information learned while conducting due diligence will further help in drafting and negotiating the transaction agreement and related ancillary agreements.

This information will also be helpful in allocating risks in regards to representations and warranties, pre-closing assurances and post-closing indemnification rights of the acquirer, organizational documents to determine the stockholder and other approvals required to complete the transaction, contracts, including assignment clauses, and permits and licenses, to determine whether the transaction is contractually prohibited or whether specific consents are required, regulatory requirements, to determine if any governmental approvals are required, and debt instruments and capital infusions, to determine repayment requirements. Why Due Diligence? Mergers and Acquisitions revolve around certain specific steps and due diligence is the first step to make the end business successful.

Mergers and Acquisitions

Mergers and Acquisitions is an important way for companies to grow and become stronger and better organizations. The main reasons underlying such operations are:

  1. Enhanced reputation in marketplace or with stakeholders
  2. Reduction of operating expenses or costs
  3. Access to management or technical talent
  4. Access to new product lines
  5. Growth in market share (complement/extend current business)
  6. Quick access to new markets or entry into new industry (diversification)
  7. Reduction in number of competitors
  8. Access to new technology, manufacturing capacity or suppliers

Now, even though Mergers and Acquisitions have several advantages, but the risks involved are equivalent too ((JohnH Sykes , ‘Abstract:’ [ July 17, 2013] 10(1) Role of Due Diligence in Mergers and Acquisition available on http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2294836 Last accessed on 2ndApril 2016)). The real motive behind mergers or acquisitions should be on the table for all the parties concerned to ensure real success of such merger or acquisition. The post implementation phase is a very critical part where several mergers or acquisitions fail and before onset of any deal, most companies should conduct due diligence to ascertain the real risks and profitability of such deals.

Due Diligence

Due Diligence in Mergers and Acquisitions is the process of evaluating and investigating a prospective business decision by getting information about the financial, legal, intellectual and other material information from the other party.

The ultimate goal of such activities is to make sure that there are no hidden drawbacks or traps associated with the business transaction under consideration. By performing due diligence, a perfect strategy can be evolved to carry out the merger or acquisition. Failure to exercise due diligence prior to entering into a transaction of enormous proportions such as a merger or acquisition may lead to a precarious situation where the asset acquired, may be marred by encumbrances, charges and other liabilities which get automatically transferred to the acquirer as a result of such acquisition. While the cost involved in performing a due diligence is on the higher side, as it usually involves the services of a CA and an Attorney, the importance of conducting a thorough due diligence before undertaking a transaction cannot be undermined under any circumstances.

To any company involved in merger or acquisition, the due diligence investigation will attempt to reveal all material facts and potential liabilities relating to the target company/unit/business. The purpose of due diligence is to confirm that the business actually is what it appears to be. While gaining information about the business, the company conducting the due diligence can definitely identify deal killers and eradicate them. Further, information for valuing assets, defining representations and warranties, and/or negotiating price concessions can also be obtained vide due diligence. The information learned while conducting due diligence will further help in drafting and negotiating the transaction agreement and related ancillary agreements ((Available at mergers-acquisitions/what-is-merger-and-acquisition-due-diligence available at http://www.cio.com/article/2931585/ Last accessed on  3rd April 2016)).

This information will also be helpful in allocating risks in regards to representations and warranties, pre-closing assurances and post-closing indemnification rights of the acquirer, organizational documents to determine the stockholder and other approvals required to complete the transaction, contracts, including assignment clauses, and permits and licenses, to determine whether the transaction is contractually prohibited or whether specific consents are required, regulatory requirements, to determine if any governmental approvals are required, and debt instruments and capital infusions, to determine repayment requirements ((Matt Matt h evans, ‘Course 7: Mergers & Acquisitions (Part 1)’ [March 2000] 16(3) Excellence in Financial Management 16-24 available at  http://www.exinfm.com/training/pdfiles/course07-1Last accessed on 3rdApril 2016)).

THE PURPOSES OF A DUE DILIGENCE INVESTIGATION

When a company is considering the acquisition of a target, the purposes of a due diligence investigation include:

  1. To ascertain the appropriate purchase price to be paid by the buyer, and the method of payment, including earn outs;
  2. To determine details that may be relevant to the drafting of the acquisition agreement, including the substance, extent, and limitations of representations and warranties and any relevant escrow or hold-back agreement for a breach of the same;
  3. To evaluate the legal and financial risks of the transaction;
  4. To evaluate the condition of the physical plant and equipment; as well as other tangible and intangible property to be included in the transaction;
  5. To analyze any potential antitrust issues that may prohibit the proposed merger or acquisition;
  6. To determine compliance with relevant laws and disclose any regulatory restrictions on the proposed transaction; and
  7. To discover liabilities or risks that may be deal-breakers.

The evolution of due diligence

After passing the Securities Act, the meaning of the term “due diligence” has become associated with the orderly investigation of a variety of matters pertaining to business and has been adapted for use in many situations. Regardless of how it is used, “due diligence” implies that the person conducting the investigation has made a “diligent” effort to obtain all of the relevant and meaningful information pertaining to the matter under investigation and has disclosed all of that information in a dutiful and forthcoming manner. In other words, thorough, conscientious due diligence continues to provide a defense to those who find themselves tasked with the investigation of an important business matter ((Wendy BE Davis, ‘The Importance of Due Diligence Investigations: Failed Mergers and Acquisitions of the United States’ Companies’ [2009] 5(3) The evloution of Due Diligence available at http://www.ankarabarosu.org.tr/siteler/AnkaraBarReview/tekmakale/2009-1/1.pdf Last accessed on  3rd April 2016.)).

Making Due Diligence

Work Since due diligence is a very difficult undertaking; you will need to enlist your best people, including outside experts, such as investment bankers, auditors, valuation specialist, etc. Goals and objectives should be established, making sure everyone understands what must be done. Everyone should have clearly defined roles since there is a tight time frame for completing due diligence. Communication channels should be updated continuously so that people can update their work as new information becomes available; i.e. due diligence must be an iterative process.

Throughout due diligence, it will be necessary to provide summary reports to senior level management. Due diligence must be aggressive, collecting as much information as possible about the target company. This may even require some undercover work, such as sending out people with false identities to confirm critical issues. A lot of information must be collected in order for due diligence to work. This information includes ((Frederick r.medero, ‘Understanding Mergers & Acquisitions: Due Diligence through a Different Prism’ [1998] 2(3) Financial Services & E-Commerce News letter available at http://www.fed-soc.org/publications/detail/understanding-mergers-acquisitions-due-diligence-through-a-different-prism Last accessed on 3rd April 2016.)):

  1. Corporate Records: Articles of incorporation, by laws, minutes of meetings, shareholder list, etc.
  2. Financial Records: Financial statements for at least the past 5 years, legal council letters, budgets, asset schedules, etc.
  3. Tax Records: Federal, state, and local tax returns for at least the past 5 years, working papers, schedules, correspondence, etc.
  4. Regulatory Records: Filings with the SEC, reports filed with various governmental agencies, licenses, permits, decrees, etc.
  5. Debt Records: Loan agreements, mortgages, lease contracts, etc.
  6. Employment Records: Labor contracts, employee listing with salaries, pension records, bonus plans, personnel policies, etc.
  7. Property Records: Title insurance policies, legal descriptions, site evaluations, appraisals, trademarks, etc.
  8. Miscellaneous Agreements: Joint venture agreements, marketing contracts, purchase contracts, agreements with Directors, agreements with consultants, contract forms, etc. Good due diligence is well structured and very pro-active; trying to anticipate how customers, employees, suppliers, owners, and others will react once the merger is announced. When 17 one analyst was asked about the three most important things in due diligence, his response was “detail, detail, and detail.” Due diligence must very in-depth if you expect to uncover the various issues that must be addressed for making the merger work.

What Can Go Wrong

Failure to perform due diligence can be disastrous. The reputation of the acquiring company can be severely damaged if an announced merger is called-off. For example, the merger between Rite Aid and Revco failed to anticipate anti-trust actions that required selling off retail stores. As a result, expected synergies could not be realized. When asked about the merger, Frank Bergonzi, Chief Financial Officer for Rite Aid remarked: “You spend a lot of money with no results.” A classic case of what can wrong is the merger between HFS Inc and CUC International. Four months after the merger was announced, it was disclosed that there were significant accounting irregularities.

Upon the news, the newly formed company, Cendant, lost $ 14 billion in market value. By late 1998, Cendant’s Chairman had resigned, investors had filed over 50 lawsuits, and nine of fourteen Directors for CUC had resigned. And in the year 2000, Ernst & Young was forced to settle with shareholders for $ 335 million. Consequently, due diligence is absolutely essential for uncovering potential problem areas, exposing risk and liabilities, and helping to ensure that there are no surprises after the merger is announced. Unfortunately, in today’s fast-paced environment, some companies decide to by pass due diligence and make an offer based on competitive intelligence and public information. This can be very risky ((Bill snow, ‘Mergers and Acquisitions For Dummies’ [1996] 2(1) The M&A Due Diligence Process available at
http://www.dummies.com/how-to/content/the-ma-due-diligence-process.html Last accessed on  3rd April 2016.)).

Due Diligence in India

The practice of undertaking a formal due diligence investigation is of comparatively recent origin in India and was mainly imported as a process by foreign investors/their legal and financial advisors after the economic liberalization reforms of 1991.

No statute defines the term ‘due diligence’. However, the SEBI mandates certain parties to undertake a due diligence, in the context of issuance of securities by a company. For instance:

Regulation 64 of Chapter VI of the ICDR Regulations, requires the BRLMs to exercise due diligence and satisfy themselves about all the aspects of the issue. The BRLM is also required to call upon the issuer, its promoters or in case of an offer for sale, the selling shareholders, to fulfill their obligations as disclosed by them in the offer document.

Regulation 65 requires the BRLM to submit post-issue reports to the SEBI. The BRLM is also required to submit a due diligence certificate as per the format specified in Form G of Schedule VI, along with the final post-issue report. (Regulation 65 (3))

Under Regulation 83, a qualified institutions placement shall be managed by BRLM(s) registered with the SEBI who shall exercise due diligence. The BRLM, while seeking inprinciple approval for listing of the eligible securities issued under the qualified institutions placement, is required to furnish to each stock exchange on which the same class of equity shares of the issuer are listed, a due diligence certificate stating that the eligible securities are being issued under qualified issuers placement.

Before the opening of the issue, the BRLM is required to submit a Due diligence certificate along with the draft offer document to the SEBI.

Under Regulation 8(2)(b), the lead banker is required to submit, after the issuance of observations by the SEBI or after the expiry of the stipulated period, if the SEBI has not issued observations, a due diligence certificate at the time of registering the prospectus with the Registrar of Companies ((Available at http://almtlegal.com/practice/mergers-acquisitions.htm Last accessed on 3rdAapril, 2016)).

Under Regulation 10(3)(a), the BRLM is required to submit to the SEBI, along with the offer document, a due diligence certificate including additional confirmations.

Diligence in Listed and Unlisted Companies in India

Listed companies entail more extensive review of compliances, as well as a greater degree of caution with respect to the sharing of information and structuring of a transaction, as compared to unlisted companies.

In case of a listed company, the provisions of the SEBI (Prohibition of Insider Trading) Regulations, 1992, as amended are applicable. The due diligence should not include review of unpublished price sensitive information except in certain special circumstances. However, publicly available information under the listing agreement signed by the listed companies with the stock exchanges may not be adequate to base an investment decision. Therefore, in case of a listed company, care must be taken to ensure (in consultation with the legal advisors and relevant members of the transaction team) that the insider trading regulations are not violated in the due diligence process. This matter has to be dealt with on a case-by-case basis.

For listed companies, analysis of potential triggers of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended, in the case of a proposed acquisition or transfer will need to be made.

Reverse Mergers

Reverse mergers are a very popular way for small start-up companies to “go public” without all the trouble and expense of an Initial Public Offering (IPO). Reverse mergers, as the name implies, work in reverse whereby a small private company acquires a publicly listed company (commonly called the Shell) in order to quickly gain access to equity markets for raising capital. This approach to capitalization (reverse merger) is common practice with internet companies like stamps.com, photoloft.com, etc.

For example, ichargeit, an e-commerce company did a reverse merger with Para-Link, a publicly listed distributor of diet products. According to Jesse Cohen, CEO of ichargeit, an IPO would have cost us $ 3 – 5 million and taken over one year. Instead, we acquired a public company for $ 300,000 and issued stock to raise capital. The problem with reverse mergers is that the Shell Company sells at a serious discount for a reason; it is riddled with liabilities, lawsuits, and other problems. Consequently, very intense due diligence is required to “clean the shell” before the reverse merger can take place. This may take six months. Another problem with the Shell Company is ownership. Cheap penny stocks are sometimes pushed by promoters who hold the stock in “street name” which mask’s the true identity of owners. Once the reverse merger takes place, the promoters dump the stock sending the price into a nose-dive. Therefore, it is absolutely critical to confirm the true owners (shareholders) of shell companies involved in reverse mergers ((Ptlb, ‘Online Petition And Survey By CCICI Regarding Cyber Law Due Diligence In India’ [ February 25, 2014] 5(3) Techno Legal Telecom Regulatory Compliances And Mergers And Acquisitions Legal And Consultancy Services In India available at http://perry4law.co.in/blog/?p=42 Last accessed on 3rd April 2016)).

Conclusions

Due diligence is an integral aspect of a merger and acquisition transaction. Integrating principles and techniques used in the management of risk can significantly enhance the effectiveness of due diligence by changing the focus from merely verifying facts to understanding the risk profile of the constituent institutions and the issues that can arise from efforts to integrate their businesses. A deeper understanding of those issues and the means for their resolution can lead to better and more efficient planning and execution of the integration process.

Once the Memorandum of Understanding and merger proposal has been approved by both the companies, each company should make an application under the Companies Act, 1956 to the High Court of the State where its registered office is situated so that it can convene the meetings of share holders and creditors for passing the merger proposal. Thereafter notices must be dispatched to the shareholders and creditors of the company to convene a meeting and such meeting must be subsequently held where at least 75% of shareholders of the company who vote either in person or by proxy must approve the scheme of merge.

Once the scheme of merger has been approved by the creditors and shareholders, another petition to High Court to confirm the scheme of merger must be presented and notices regarding the same published in two newspapers. After the High Court passes an order approving the scheme or merger or amalgamation, the certified true copies of the orders must be sent to the registrar of the companies and assets and liabilities of the companies stands transferred to the amalgamated company. It has been reported that mergers and acquisitions take about a three to four months for completion although the SEBI Takeover Regulations require the acquirer to complete all procedures relating to the public offer including payment of consideration to the shareholders who have accepted the offer, within 90 days from the date of public announcement ((Wendy b e davis, ‘ Mergers and Acquisitions of the United States’ Companies’ [2001] 4(2) The Importance of Due Diligence Investigations available at http://www.ankarabarosu.org.tr/siteler/AnkaraBarReview/tekmakale/2009-1/1.pdf Last accessed on 3rd April 2016)).

However, ultimately, whatever the time limit might be, mergers and acquisitions definitely help the companies to strengthen and expand their business operations to increase profitability and consolidate the business structure. With strict due diligence in place, companies can definitely hope to tackle the risks involved and make the end result successful for effective mergers and acquisitions. Today, India presents the right opportunities for companies to engage in cross-cultural transactions and amalgamations and Indian markets are registering massive growth in mergers and acquisitions with consolidation of international businesses in India and fierce competition amongst business houses who are seeking to expand their market.

Merger Control under Competition Act

Suchismita Pati, NUJS, Kolkata

After the opening of liberalization gates in 1991, the world economy has witnessed profound changes in the market. Corporate reorganizations in the form of mergers and acquisitions are having a positive prospect thereby increasing the competition in the market economy ((Yadav, A.K., Kumar, B.R., (2005), ‘Role of Organization Culture in Mergers and acquisitions’, SCMS Journal of Management, vol.2 (3), pp.51-63)). Mergers along with amalgamations and acquisitions have been categorized as combinations ((Combination under the act means acquisition of control, shares, voting rights or assets, acquisition of control by a person over an enterprise where such person has control over another enterprise engaged in competing businesses, mergers and amalgamations between or amongst enterprises when the combining parties exceed the threshold set in the Act.))under the Indian Competition Act, 2002 ((Section 5 of the Competition Act, 2002)). The purpose of a merger control regime is to assess, normally prospectively, the net competitive effects of a given transaction and provide for remedies that preserve competition ((Available at http://www.latinlawyer.com/reference/article/40979/introduction/ last visited on 05.10.2012)).

In India, mergers are regulated under the Competition Act, 2002 and also under the Securities and Exchange Board of India Act, 1992 (SEBI Act). With the enactment of the Competition Act in 2002, mergers have also come within the ambit of this legislation. In the Companies Act, 1956 mergers are regulated between companies inter alia to protect the interests of the secured creditors and the SEBI Act tries to protect the interests of the investors. Apart from protecting the interests of private parties, its objectives are different and mutually exclusive. In the Competition Act, 2002, the objective is much broader. It aims at protecting the appreciable adverse effect on trade-related competition in the relevant market in India ((Amukthamaalyada, Competition Regulation of Mergers and Acquisitions, available at http://consumer.indlaw.com/search/articles/?c09b7d9c-1477-4cda-b197-be5e695ae25d lat visited on 09.10.2012)).

This paper touches upon the mergers and the adverse effect the mergers cause in the market. It covers the various types of mergers and their adverse effects; procedures that an enterprise must duly follow to have a successful merger in the market. The present Indian Act is quite contemporary to the laws presently in force in the European Community as well as in the United Kingdom ((Neeraj Tiwari, Merger under The Regime of Competition Law: A Comparative Study of Indian Legal Framework With EC and UK. Available at http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1418&context=blr&sei-redir=1&referer=http%3A%2F%2Fwww.google.co.in%2Furl%3Fsa%3Dt%26rct%3Dj%26q%3Dguidelines%2Bsubstantive%2Bassessment%2Bm last visited on 08.10.2012)). It also deals with substantive assessment on mergers where US laws, EU laws and India laws. It also touches upon the remedies to anti competition and marks an expression of discontent with the concept of joint venture norms in India. During the research doctrinal method research was conducted and references were taken from books and articles.

OVERVIEW ON MERGERS

 “The fusion of two or more enterprises, through the direct acquisition by one of the net asset of the other or others. A merger is differs from a consolidation in that in the former no new concern is created, whereas in a consolidation a new corporation or entity acquires the net assets of all the combining units.”- Eric L Kohler

Merger or an amalgamation of enterprises is a combination which is forbidden under the law if it causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India ((“section 6(1) states that no person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void.”)). Section 2 (1B) Income Tax Act, 1961 defines “Amalgamation” as the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that – (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation;

(ii) All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation;

(iii) Shareholders holding not less than nine-tenths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first mentioned company.

Motives for Mergers

In case of merger, when two companies merge to form a third company or one is absorbed into one or blended with the other, the amalgamation company loses its identity ((Saraswati Industries Syndicate Ltd. V. CIT AIR 1991 SC 70)).

With the changing legal, political, economic and social environments the factors effecting mergers also change ((V.K Kaushal, (1995), Corporate Takeovers in India, Sarup & Sons, New Delhi)). In general, a company enters into merger agreements during its tough times. The strong companies buy other companies to create a more competitive and cost-efficient company. Because of these potential benefits, target companies often agree to be purchased when they know they cannot survive alone ((Available at http://www.investopedia.com/university/mergers/)). The synergy ((R.F Bruner,  Applied Mergers & Acquisitions, 2004, John Wiley & Sons, Inc., New Jersey))created leads to additional consumer demand after merger ((J. Sloman, (2006), Economics, 6th ed., Pearson Education Limited, England))and better access to facilities, brands, trademarks, technology and employees ((Cameron, E., Green, M., (2004), Making Sense of Change Management. A Complete Guide to the Models, Tools and Techniques of Organizational Change, Cogan Page Limited, UK)).  Although mergers sound easier and convenient compared to internal growth, there are risks in actually realizing the intended benefits of mergers. Moreover, companies with diverse background enter into mergers which often leads to possession of the necessary management and technical and marketing expertise which leads to an increase in market share ((B. Pearson, (1999), Successful Acquisition of Unquoted Companies. A Practical Guide, 4th ed., University Press, Cambridge, United Kingdom)).

Classification of Mergers

Concentrations in the form of mergers are broadly classified into two types, namely horizontal mergers, vertical mergers and conglomerate mergers ((Srinivas Pathasarathy, Competition Law in India, Wolters Kluwer Law & Business Publications, Page 178)).

Horizontal Mergers:

A horizontal merger is one between the parties that are competitors at the same level of production and/or distribution of a goods or service, i.e., in the same relevant market ((Abir Roy, Jayant Kumar, Competition Law in India, Eastern House Publications, Page123)). The merging ((Section 20(4) (h) of the Competition Act mentions market share in the relevant market, of the persons or enterprise in a combination, individually and as a combination’ as one of the factors to be considered by the CCI in determining whether a combination would have AAEC in India in the relevant market))parties may realize efficiency gains and in some circumstances this may intensify rivalry and be beneficial for consumers. It eventually result in market concentration as it reduces the number of firms competing in the relevant market. Such mergers give rise to a situation of single firm dominance. The competitive effect of which is also known as the unilateral effect of a merger ((Poulami Chatterjee, Horizontal Merger Guidelines: 2006.)). As per the Raghavan Committee, the following issues are required to be considered while assessing the permissibility oh horizontal mergers:

(i)                Determination of the relevant market.

(ii)              Establishing whether the higher concentration in the market resulting from the merger would increase the possibility of collusive or unilaterally determined harmful behavior.

(iii)            Political contestability. Even if no potential entrants are immediately visible, a larger enough price increase could encourage entry.

(iv)            Situation where mergers lead to an uncompetitive outcome which could result in certain ‘efficiencies’ that more than make up for the welfare loss resulting from this.

 Vertical Mergers:

The main objective of such mergers is to ensure the sources of supply ((Babu, G.R., (2005), Financial Services in India, Concept Publishing Company, New Delhi)). The process internalizes the benefits of supply chain management and as such cannot be perceived as injurious to competition ((Supra 16, Page 179)). The Committee ((D. P Mittal, Competition Law & Practice; As amended by Competiton (Amendment) Act 2007, 2nd Edition, Page 314.))besides indicated that the vertical integration may affect the competition under the following:

(i)                Fear of Foreclosure– through vertical mergers, a firm can create captive distribution channels. This will foreclose the rival firms from the market, represented by the captive distribution network.

(ii)              Entry blocking– monopolies can have the ability to prevent the entry of firms into the market. It through integration, firms are able to internalize different levels of production, artificial barriers to entry could be created which indicates a potential entrant’s capital requirement will be high.

(iii)            Price squeezes– vertical mergers and integration internalize the process of production and enable a firm to reduce costs. It is so because the firms choose to bypass market transaction in favour of internal control. Illegality can be determined by, inter alia, characterizing the nature of the market to be served and the leverage on the market which the particular vertical integration creates and the purpose or the intent with which combination was conceived ((United States v. Paramount Pictures 334 US 131 and Unites States v. Griffith 334 US 100.)).

Conglomerate Mergers:

Conglomerate mergers are those mergers which occur between firms that are unrelated by value chain or competition. They can also be explained as a merger between companies which are not competitors and also do not have a buyer seller relationship ((Gaughan, P.A., (2007), ‘Mergers, Acquisitions and Corporate Restructuring’, 4th ed., John Wiley & Sons, Inc., New Jersey)). The main motive behind it is to diversify risk as the successful performers would balance the badly performing subsidiaries of the group ((Coyle, B. (2000), ‘Mergers and Acquisitions’, Fitzroy Dearborn Publishers, USA)).

The Raghavan Commission ((Supra 22, page 320))came out with grounds of objections:

  • They create deep pockets which enables firms to devastate the rivals;
  • Lower costs below the marginal cost of the industry;
  • Raise barriers to entry;
  • Engage in reciprocal dealing to the disadvantage of the rivals;
  • Eliminate potential competition.

In practice the conglomerate merger category has been subdivided into further classes as follows:

(i)    A product extension merger: It occurs when such firms merge who sell non-competing products but use related marketing channels or production processes;

(ii)  A market extension merger: It is the joining of two firms selling the same product but in separate geographical markets; and

(iii)A pure merger: It is a merger between firms with no relationship of any kind.

MERGER AND ACQUISITION UNDER COMPETITION ACT

Mergers are regulated under Section 5 and 6 of the Competition Act.

Broadly, combination means acquisition of control, shares, voting rights or assets, acquisition of control by a person over an enterprise where such person has direct or indirect control over another enterprise engaged in competing businesses, and mergers and amalgamations between or amongst enterprises when the combining parties exceed the thresholds set in the Act. The thresholds are specified in the Act in terms of assets or turnover in India and outside India ((Rav Pratap Singh, Implications of cross border mergers under Indian competition law –a comparative analysis with US & EC jurisdictions, available at, http://consumer.indlaw.com/search/articles/?c09b7d9c-1477-4cda-b197-be5e695ae25d (Last visited on 25th March 2012).)).

The Act prohibits entering into such combinations which causes or is likely to have an appreciable adverse effect on the competition within the relevant market in India and such combination shall be void ((Section 6 of the Competition Act, 2002.)). Under the present regime, Competition Commission has investigative powers in relation to combinations ((Section 6 read with Section 20 and 29 of Competition Act lays down the procedure for investigation of combinations by the Competition Commission of India.)). The Competition Commission is required to have due regard to the factors listed in Section 20(4) include actual and potential level of competition through imports in market, barriers to entry in market, level of combination, degree of countervailing power in the market, likelihood of the combination significantly increasing prices or profit margins, extent of effective competition likely to sustain in a market, substitutes available in the market, market share of person or enterprise individually and as a combination, likelihood of removal of effective competitor, extent of vertical integration in the market, possibility of a failing business, extent of innovation, contribution to economic development , outweighing of adverse impact by benefits of combination.

Threshold under competition act

The laying down of threshold limit eases the pressure of competition authority of inspecting all mergers, as done in mandatory notifying systems and allows the authorities to focus only on most likely mergers to affect transactions. The Act provides for sufficiently high thresholds ((Alan H Goldberg, ‘Merger Control’ in Vinod Dhall (ed) Competition Law Today, Oxford University Press, 1st ed., 2007, 93; See also David M. Barton and Roger Sherman, The Price and Profit Effects of Horizontal Merger: A Case Study, The Journal of Industrial Economics, Vol. 33, No. 2 (Dec., 1984), pp. 165-177, available at http://www.jstor.org/stable/2098507; See also Alan A. Fisher et. al., Price Effects of Horizontal Mergers, California Law Review, Vol. 77, No. 4 (Jul., 1989), pp. 777-827, available at http://www.jstor.org/stable/3480524.))in terms of assets/ turnover  for mandatory notification to the merger bench (a part of the Competition Commission of India) as recommended by the High Level Committee ((High Level Committee (2000). Report of the High Level Committee on Competition Policy and Law- Dept. of Company Affairs, Govt. of India, New Delhi.))which advised that only big combinations should be placed under the regulations of Competition Act ((Mehta S. Pradeep, ‘A Fundamental Competition Policy for India’, ISBN: 81-7188-493-8.; Pg 62.)). The High Level Committee (2000) said that:

“It is extremely important that the law regarding mergers be very carefully framed and the provisions regarding prohibition of mergers be used very sparingly. This is particularly important at the current stage of India’s corporate development. Relative to the size of major international companies, Indian firms are still small. With the opening of trade and Foreign Direct Investment, Indian firms need to go through a period of consolidation in order to be competitive. Any law on merger regulation must take into account of this reality.”

The current thresholds for the combined assets/turnover of the combining parties are as follows:

(i)    Individual: Either the combined assets of the enterprises are more than Rs. 1,500 crores in India or the combined turnover of the enterprise is more than Rs. 4,500 crores in India.  In case either or both of the enterprises have assets/turnover outside India also, then the combined assets of the enterprises are  more  than  US$  750  millions,  including  at  least 750 crores  in  India,  or  turnover  is  more  than  US$ 2250  millions, including at least  2,250 crores in India.

(ii)  Group: The group to which the enterprise whose control, shares, assets or voting rights are being acquired would belong after the acquisition or the group to which the enterprise remaining the merger or amalgamation would belong has either assets of more than Rs. 6000 crores in India or turnover more than Rs. 18000 crores in India.  Where the group has presence in India as well as outside India then the group has assets more than US$ 3 billion including at least Rs. 750 crores in India or turnover more than US$ 9 billion including at least Rs. 2250 crores in India. For this purpose group ((Explanation (b) to Section 5 of the Act))means two or more enterprises, which directly or indirectly have:

(i)    The ability to exercise 26 per cent or more of the voting rights in the other enterprise; or

(ii)  The ability to appoint more than half the members of the Board of Directors in the Board of Directors in the other enterprise; or

(iii)The ability to control ((“control” includes controlling the affairs or management by— (i) one or more enterprises, either jointly or singly, over another enterprise or group; (ii) one or more groups, either jointly or singly, over another group or enterprise.))the affairs of the other enterprise.

The government has for a period of 5 years exempted “Group” exercising less than fifty per cent of voting rights in other enterprise from the provisions of section 5 of the Act ((Vide notification S.O. 481 (E) dated 4th March, 2011.)).

In exercise of the powers conferred by clause (a) of section 54 ((Section 54- Power to exempt.- The Central Government may, by notification, exempt from the application of this Act, or any provision thereof, and for such period as it may specify in such notification— (a)  any class of enterprises if such exemption is necessary in the interest of security of the State or public interest;))of the Competition Act, 2002, the Central Government, in public interest has exempted an enterprise, whose control, shares, voting rights or assets are being acquired and it has either assets of the value of not more than Rs. 250 crores in India or turnover of not more than Rs. 750 crores in India from the provisions of section 5 of the said Act for a period of five years.

The turnover shall be determined by taking into account the values of sales of goods or services. The value of assets ((The value of assets shall include the brand value, value of goodwill, or Intellectual Property Rights etc. referred to in explanation (c) to section 5 of the Act.))shall be determined by taking the book value of the assets as shown in the audited books of account of the enterprise, in the financial year immediately preceding the financial year in which the date of proposed combination falls, as reduced by any depreciation.

Notification

Section 6(1) prohibits ((Section 6(2) being an exception to the above clause, it provides that any person or enterprise proposing to enter into combination shall have to give notice to the Competition Commission of India.))a person or enterprise from entering into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India. A notice ((Regulation 5 (3) – Form of notice for the proposed combination, of The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (as amended up to 23rd February, 2012).))to the Competition Commission of India regarding mergers ((Regulation 5 (2) – Form of notice for the proposed combination, of The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (as amended upto 23rd February, 2012).))has to be in the prescribed format with the requisite fees ((Where the notice is filed in Form I the Fee payable shall be rupees ten lakhs (Rs 10,00,000) and if the notice is filed in Form II the Fee payable shall be rupees forty lakhs (40,00,000).))within thirty days of:

(i)                Execution of an agreement or other document for acquisition or acquiring of control;

(ii)  Approval by the board of directors of the enterprises concerned with merger or amalgamation.

The test for approval of the merger ((Supra 22, Page 328.))is based on the following:

(i)    The expected impact of the merger on market power and competition in the relevant ((Section 2(r) of the Competition Act defines relevant market as” the market that may be determined by the Commission with reference to the relevant product market or the relevant geographic market or with reference to both the markets.”))market.

(ii)  Given the size and growth of the market and the presence or absence of entry barriers, an assessment of how the market is expected to evolve.

(iii)Does the market of the merging entities overlap? There should be the limited cause for concern in case they do not, unless one of the firm has market power.

(iv)Is the market susceptible to collusive behavior?

Where the parties ((The Parties to the combination may opt to file a notice in Form II, Schedule II of the combination regulations instead of Form I, in the instances where- a. the parties to the combination are engaged in production, supply, distribution, storage, sale or trade of similar or identical or substitutable goods or provision of similar or identical or substitutable services and the combined market share of the parties to the combination after such combination is more than fifteen percent (15%) in the relevant market ;  b. the parties to the combination are engaged at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or trade in goods or provision of services, and their individual or combined market share is more than twenty five percent (25%) in the relevant  market.))to a combination fail to file notice under sub-section (2) of section 6 of the Act, the Commission may under sub-section (1) of section 20 of the Act, upon its own knowledge or information relating to such combination, inquire into whether such a combination has caused or is likely to cause an appreciable adverse effect on competition within India ((Regulation 8 (1)- Form of notice for the proposed combination, of The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (as amended up to 23rd February, 2012).)). Once the commission decides to commence an inquiry into the combination, it shall direct the parties to the combination to file notice in Form II, Schedule II of the combination regulations, duly filled in, verified and accompanied by evidence of requisite fee.

THEORIES OF COMPETITION HARM

Merger of two companies in the same field may involve reduction in the number of competing firms in an industry and tend to dilute competition in the market ((Supra 19, Available at  http://cci.gov.in/images/media/ResearchReports/HorrizontalMergerGuidelinesPoulamichatterjee09022007_ 200804111009 16.pdf, last visited on 06.10.2012)). They generally contribute directly to the concentration of economic power and are likely to lead the merger entities to a dominant position of market power. Such adverse effect could be the result of a unilateral conduct (exercise of dominance) or of coordinated conduct between two or more enterprises facilitated by the merger. Control of either type of conduct is prospective and aimed at preventing such conduct post- merger.

(i)    Unilateral Effects– Single Firm dominance and reduction in number of competing firms reduces effective competition between them and the “lost” competition gives rise to incentive to increase price due to “internalization’ of ‘lost’ sales. (e.g., merger between Coca-Cola and Campa- Cola or Thums-up – false impression of “interbrand competition”).

(ii)  Co-ordinated Effects– Collective Dominance- reduction in effective competition possible if changed market structure is favorable for sustainable tacit collusion, without formal agreements like cartel. (Co-ordination possible in prices, output and capacity expansions).

(iii)Vertical Effects – Generally, efficiency enhancing and pro competitive. However, merger between an upstream supplier and downstream manufacturer may foreclose the source of supply to other downstream competitors or foreclose downstream market to competing up stream suppliers.

(iv)Conglomerate Effects – Mostly pro-competitive but rarely raise concern because of either tie in of complementary products or port folio effect. Highly controversial.

In order to evaluate appreciable adverse effect on competition, the Act empowers the Commission to evaluate the effect of Combination on the basis of factors mentioned in sub section (4) of section 20 which are as follows:

a. Actual and potential level of competition through imports in the market;

b. Extent of barriers to entry into the market;

c. Level of concentration in the market;

d. Degree of countervailing power in the market;

e. Likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;

f. Extent of effective competition likely to sustain in a market;

g. Extent to which substitutes are available or are likely to be available in the market;

h. Market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination;

i. Likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;

j. Nature and extent of vertical integration in the market;

k. Possibility of a failing business;

l. Nature and extent of innovation;

m. Relative advantage, by way of the contribution to the economic development, by any combination having or likely to have appreciable adverse effect on competition;

n. Whether the benefits of the combination outweigh the adverse impact of the combination, if any.

SUBSTANTIVE ASSESSMENT ON MERGERS

A merger transaction would have certain pro-competitive as well as certain anti-competitive effects. Duty of the competition authorities is to balance out these effects, through substantive tests and procedures and determine whether the proposed transaction meets the requirements to be blocked ((Richard Wish, Competition Law, Oxford University Press, 6th ed., 2009,  Page 849)). It has been determined through series of cases by the European Courts that the burden of proof is on the competition authorities to produce convincing evidence that the transaction is anti-competitive in nature ((Jeffrey I. Shinder, Merger Review in the United States and the European Union available at http://www.constantinecannon.com/pdf_etc/Pres_USEC_merger.pdf)). There is no presumption for or against any transaction.

In United States, the Clayton Act prohibits transactions that may ‘substantially lessen competition or tend to create a monopoly ((US, Clayton Act, 1914,sec 7)).’ Subsequently various guidelines have laid down ‘test of efficiency’, which states that a merger transaction should not be blocked if it increases substantial efficiency in the market ((US, FTC guidelines, Supra note 44 at 29)). These guidelines also state that a merger should not be permitted to proceed if it will create or enhance market power or will facilitate its exercise. Merger transactions in US are usually analyzed through the following steps:

(i)          Identification of the relevant product and geographic markets which are likely to be affected by the transaction;

(ii)        Assessment of the market shares of the players involved in transaction and the degree of concentration in the market;

(iii)      Identification of possible anti-competitive activities to be carried out by the resultant entity of the transaction such as predation, barrier to entry, refusal to deal etc, and

(iv)      Acknowledging possible pro-competitive effects and efficiency created through the transaction such as reduction in market prices, consumer welfare etc ((Organization for Economic Co-operation and Development, Substantive Criteria used for Merger Assessment, October 2002, 293 available at http://www.oecd.org/dataoecd/54/3/2500227.pdf last visited on 07.10.2012.)).

The European Commission’s Guidelines on Merger Regulation (ECMR guidelines) prohibit any merger transaction which would ‘significantly impede effective competition in common market or in substantial part of it ((EC Merger Regulations, 2004, art 2(1).)).’ It lays special importance to check creation or strengthening of dominant position by the resultant entity of the proposed transaction. Similar, to the approach of the US antitrust agencies, these guidelines provide for analysis of the relevant market to be affected by the said transaction and the market shares of the players involved in the transaction. The 2004 amendment to the Merger Regulation of 1989 removed market dominance as the exclusive test and empowered the authorities to block any merger which would ‘significantly impede effective competition’. The guidelines also provide for ‘appraisal criteria’, whereby the authorities also look into a checklist of factors that should guide the Commission, few of them being: interest of consumers, development of technical and economic progress, alternative players and products in the market etc ((EC Merger Regulations, 2004, art 2(1)(a),2(1)(b).)).

The United Kingdom also follows similar approach in inspecting mergers and uses the Substantial Lessening of Competition (SLC) test in analyzing the pro-competitive and anti-competitive effects of a merger transaction ((UK, Enterprise Act, sec 35, 36  )). The antitrust authorities have laid down various procedures for analyzing merger transaction. The Office of Fair Trading has laid down procedures in the ‘Mergers: Substantive Assessment Guidance’ ((Office of Fair Trading, Mergers: Substantive Assessment Guidance(‘OFT guidance’), May 2003, ¶ 4.7 -4.10 available at http://oft.gov.uk/shared_oft/business_leaflets/enterprise_act/oft516.pdf))and the Commission has in ‘Merger References: Competition Commission Guidelines ((UK, Merger references: Competition Commission Guidelines(‘UKCC guidelines’), June 2003, ¶ 3.28-3.31 available at http://www.competition-commission.org.uk/rep_pub/rules_and_guide/pdf/cc2.pdf)).’ The guidelines provide for methods for defining market and market infiltration ((OFT guidance ¶ 3.12; CC guidelines ¶ 2.7))and inspection into the coordinated or non coordinated effects likely to be caused by the merger, which could lead to SLC and importantly also provide for relevance of efficiencies ((OFT guidance ¶ 4.39- 4.35; CC guidelines ¶ 3.26, 3.27, 4.34-4.45)). The efficiency test has also been laid down in the Enterprise Act which provides for decision making authorities to consider ‘relevant customer benefits’ from the merger transaction ((UK, Enterprise Act, sec 30,sec 22(b).)). A merger may be permitted in spite it causing SLC, if parties are able to prove efficiencies which are demonstrable, merger-specific and likely to benefit consumers ((OFT guidance ¶ 4.34)). Benefit to customers would denote lessening of prices, increase of choices, betterment of quality and other analogous benefits ((UK, Enterprise Act, sec 30(1)(a).)). The OFT guidance and Competition Commission guidelines, also in certain cases recognize the ‘failing-firm defense’, where three conditions are importantly analyzed viz. first, the firm would have to exit the market, if merger transaction does not take place; second, the firm is not in a position to stabilize its operations; and third, there is no other less anti-competitive approach than the merger ((OFT guidance ¶ 4.37; CC guidance 3.61-3.63; See also Morven Hadden, ‘EC Merger Control Regime’ in Gary Eaborn, Takeovers: Law and Practice, Lexis Nexis Butterworths, 2005, 714.)).

The Indian Competition which has largely followed the European and UK law prohibits any merger which is likely to cause ‘appreciable adverse effects on competition ((India, The Competition Act, 2002, Section. 6)).’ The law does not mention rigid modus operandi for inspection of merger transactions. Nonetheless, it does mention various factors to be considered by the competition authorities while analyzing a merger. These factors being similar to those present in the South African law, inter alia provide for consideration of actual and potential level of competition through imports; extent of barriers to entry; the degree of countervailing power in the market; likelihood of increase in market prices by the merged entities; possibility of failing business ((Ibid, section 20(4).)). However, the Indian law does not mention about contemplation of factors overtly ((India, The Competition Act, 2002, sec. 20(4) (m), uses the terminology ‘relative advantage by way of contribution to economic development.)), such as effects on employment, competition with international counterparts or historical course of the concerned parties before determining fate of a merger.

REMEDIES UNDER THE INDIAN COMPETITION ACT

Under the ECMR, no filing fees are required to be paid by the parties notifying a concentration to the authorities. However, the authorities can interfere and prohibit a transaction under certain circumstances. Implementing a notifiable merger before clearance has been obtained or after a prohibition decision has been issued would expose the companies concerned to fines of up to 10 per cent of their aggregate annual worldwide group turnover ((ECMR, Article 14 (2).)). The Commission may also impose periodic penalty payments of up to 5 per cent of average daily worldwide group turnover for each day that an infringement persists and fines of up to 1 per cent of aggregate worldwide group turnover may also be imposed in certain circumstances, for example, where misleading or incorrect information is supplied ((ECMR, Article 14 (1).))for non- furnishing of information on combinations, the Commission imposes a mere one percent of the total turnover or the assets, while the European counterparts impose a fine of 10 per cent of the total turnover. Further, for furnishing wrong information or for suppressing material facts the maximum fine imposed is one crore, while under the ECMR the fine imposed is one percent of the total world turnover. In order to ensure stricter compliance and deter parties from providing wrong or misleading information, the Commission must increase the amount of fines imposed ((Available at http://cci.gov.in/images/media/ResearchReports/VidyullathaKishor30jan2012.pdf, last visited on 08.10.2012)). The Central Government has notified a Competition Appellate Tribunal (COMPAT) to hear and dispose of appeals against any direction issued, decision made or order passed by the Commission under specified sections of the Act, such as orders relating to notification of combination, inquiry by the Commission and penalties.

JOINT VENTURES

The per se approach applied in the US with respect of practices such as price-fixing ((Section 3(3) prohibits price fixing, market allocation etc)), market allocation, collusive tendering or bid rigging etc., is the strongest type of probation. An agreement by way of joint ventures is an exception to which provisions to section 3(3) are not applicable, if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services. The term ‘joint venture’ is a commercial arrangement between two or more enterprises in order to achieve a particular commercial goal, which does not involve co-ordination of competitive behaviour of the parties in the market ((Supra 35 , Page 185)).

After the 2004 amendment in the European Community Law, ECMR, provide for ‘full function joint ventures’, whereby only fully functional joint ventures which meet threshold criterion have to be notified to the competition authorities. To fall within the jurisdiction ((Article 3(4) of EMCR))of the ECMR, three criteria must be satisfied:

(i)    The joint venture results in two or more entities sharing ‘joint control’;

(ii)  The parties’ aggregate and individual turnovers exceed the ECMR thresholds; and

(iii)The joint venture is ‘full function ((Izzet M Sinan and Jonathan NT Uphoff, Morgan Lewis & Bockius LLP, Review of joint ventures under the new EC Merger Regulation Available at http://www.morganlewis.com/pubs/Sinan_EARJointVentures05.pdf, last visited on 08.10.2012)).

The Indian Competition Law has not dealt with joint ventures except minor inclusions at few places.

The Competition Act, till date does not provide for definition of a joint venture. The Act under section 3(3) provides for applicability of per se rule whereby certain activities such as price maintenance, division of market shares, bid rigging, collusive bidding and other like activities are presumed to be illegal and anti-competitive in nature ((India, Competition Act, 2002, sec 3(3).)). A proposed joint venture transaction may fall within the ambit of section 5 if it met the threshold limits, else, it could as well be challenged under section 3 for an agreement being anti-competitive in nature, hence creating an ambiguity over the status of a proposed joint venture. There exists ambiguity as to the mandatory nature of the notification under Section 5 of the Act if the joint venture is established by way of subscription to the shares of a newly incorporated company. This is because Section 5 of the Act concerns the acquisition of an enterprise and the definition of “an enterprise” ((Competition Act, 2002, Section 2 (h) [“a person or a department of the Government, who or which is, or has been, engaged in any activity relating to the production, storage, supply, distribution acquisition of control of articles or goods…..”]))appears to capture an existing business, not a newly created business. Thus, there is scope for argument that a newly incorporated joint venture would not fall within the definition of a combination as it would not be an enterprise “which is or has been engaged in any activity ((Khaitan & Co, Joint Ventures under India’s Competition Act, available at, http://www.mayerbrown.com/publications/article.asp?id=10438 last visited on 08.10.2012)). The Competition Act, 2002 causes much confusion with respect to the terminology of acquisition. There is a need for reconsidering the provisions relating to waiting periods. Introducing the “working days” concept as opposed to an all-inclusive 210 days, would increase the possibility of quality output by the Commission. The need for qualitative determination of control as opposed to mere quantitative assessment based on shares, voting rights, securities or assets is imminent. A shift from a lenient regime that imposes insignificant amount of fees and penalty is also the need of the hour. Lastly, the grey area of joint ventures must be looked into by the Commission and all the existing loopholes are to be plugged.

Conclusion

The purpose of this project was to study the merger regulatory framework under the Indian Competition Act and compare it with the US and UK laws.  Merger regulation under the Indian Competition Act have imbibed several practices from the US and EU regimes. The law amongst other provision regarding merger control provides for definite threshold limits, the factors to be taken into consideration before determining the fate of a merger, prescribed time period for merger notification and the remedies. These provisions help the Competition authorities to work towards its duties of preventing adverse effects on competition, protecting interest of consumers and ensuring freedom of trade. However, there are certain factors which need to be deliberated upon and need further skilled escalation. Importantly, amongst these is a need for lucid and cogent guidelines or strategy principles on types of mergers and there effects ((Available at http://cci.gov.in/images/media/ResearchReports/Analysis%20of%20merger%20control%20under%20Indian%20competition%20law%20by%20Tejas%20K.%20Motwan.pdf)). Hence, the Indian Competition Law should deliberate and resolve these issues for smooth and effective functioning.