Jurisdiction - India
Reports and Analysis
India – Merger Remedies At CCI.

15 April, 2013

 

In a little over a year and half since the merger control related provisions of the Act became operational, CCI has cleared more than 80 transactions. While each decision of CCI clearing a transaction is important, two of its recent decisions indicate a perceptible shift in CCI’s approach to merger review.

 

In a clear departure from the rather ‘soft’ approach to merger review, CCI, for the first time, appears to have used its powers to require parties to a combination to modify certain aspects of their transaction and also undertake commitments for ensuring compliance with the provisions of the Act. Last month, CCI approved the proposed acquisition of the active pharmaceutical ingredients (‘API’) business of Orchid Chemicals and Pharmaceuticals Limited (‘Orchid’) by the Indian subsidiary of Hospira Inc. USA (‘Hospira’). This is the first time in eighteen months of the merger control enforcement in India that CCI has approved a proposed transaction subject to certain modifications to the terms of the business transfer agreement (‘BTA’) entered into between the parties. In this case, these modifications were offered by the Orchid and Hospira when

 

CCI sought justification from them regarding certain terms of the BTA, including the duration of the non-compete obligation of Orchid and the restriction on the Orchid to carry out research and development of certain types of API. In a more recent decision, CCI approved the acquisition of 65.12% of the equity share capital of GGCL by GDNL subject to a broad undertaking by GDNL that it will ensure that GGCL’s contracts with its customers comply with the provisions of the Act.

 

Interestingly, CCI’s decisions in both these cases are silent on the specific competition concerns that prompted it to seek modifications to the transaction between Orchid and Hospira, or require GDNL to give an undertaking ensuring compliance with the provisions of the Act.


Equally, CCI’s orders clearing both the transactions do not shed any light on how the perceived competition concerns would be addressed, by requiring the concerned parties to modify certain aspects of the transaction or give an undertaking to address any potential competition concerns. CCI’s reluctance to highlight the possible competition concerns in the transactions between Orchid-Hospira and GGCL-GDNL, coupled with the absence of any indication on how the modifications or undertakings offered by the respective parties would allay the competition concerns brings to fore the issue of ‘remedies’ in merger review. Further, in the absence of any clear guidelines to this effect under the Act, the larger question that looms is how will CCI clarify to companies involved in merger cases how best to address competition concerns and ensure that competition concerns are dealt with more effectively.

 

This article seeks to examine how competition authorities across the world address competition concerns surrounding mergers and acquisitions, by suggesting modifications to transactions and highlighting the need for adopting similar guidelines in India.

 

In competition law parlance, modifications to a proposed transaction, with a view to eliminate possible competition concerns identified by a competition authority are known as remedies. 

 

Typically, in most jurisdictions including the European Union (‘EU’), it is the responsibility of the competition authority to show that a proposed transaction would significantly impede competition. Once the competition authority identifies the likely competition concerns, it communicates its apprehension to the concerned parties and gives them an opportunity to formulate appropriate and corresponding remedial proposals. The responsibility then shifts to the concerned parties to put forward commitments/remedies.


Generally, merger remedies are classified as either structural or behavioral (or conduct). Structural remedies may include sale of a physical part of a business or the transfer or licensing of intellectual property rights. Behavioral remedies, on the other hand, include restrictions on certain future commercial behavior or an obligation to perform a specific prescribed conduct for a given period of time, following the consummation of the transaction. They often consist of non-discrimination obligations, firewall provisions, non-retaliation obligations, transparency provisions or contracting limitations.

 

Different competition law concerns warrant different remedies and therefore the selection of the remedy must always be guided by its suitability to address the competition risk at hand. 


Both structural and behavioral remedies have their own benefits and drawbacks. Therefore, the decision on which type of remedy may best address the identified competition law risks must be based on a careful evaluation of the advantages and disadvantages that structural and behavioral remedies may hold in a particular situation.


Given the intricacies surrounding the selection of an appropriate remedy, several jurisdictions including EU, the United Kingdom and the United States (‘US’) have put guidelines on merger remedies in place. In US, the Department of Justice Antitrust Division’s Policy Guide to Merger Remedies (‘US Remedy Guide’) provides guidance to Antitrust Division staff in their work analyzing proposed remedies. Similarly, in EU, the Commission Notice on Remedies Acceptable under Council Regulation (EC) No 139/2004 and Under Commission Regulation (EC) No 802/2004 (‘EU Remedy Notice’) forms the touchstone of merger control remedies, in particular commitments by the concerned undertakings to modify a transaction.

 

These guidelines provide a cogent framework of the respective agencies’ approach and requirements in the selection, design and implementation of remedies in merger inquiries.


In many jurisdictions, there is a strong presumption, at least for horizontal mergers (mergers between two or more competitors), that structural remedies are preferable over behavioral remedies. In line with such international practice, the US Remedy Notice makes it clear that if a competitive problem exists with a horizontal merger, the typical remedy is to prevent common control over some or all of the assets, thereby effectively preserving competition. Consequently,


in a vast majority of cases involving horizontal mergers, the Antitrust Division generally pursues divestiture as the remedy. While doing so, the Antitrust Division may consider a number of factors regarding the assets to be divested, which are again described in significant detail in the US Remedy Guide.


In the US, conduct remedies are considered an effective method for dealing with competition concerns raised by vertical mergers (mergers between two or more enterprises operating at different levels of trade). At times, conduct remedies are also used to address concerns raised by horizontal mergers where they are usually implemented in conjunction with structural remedies.

 

In this regard, the US Remedy Guide specifically indicates, by way of examples, the kind of behavioral remedies that may be appropriate in a given situation. For instance, if an upstream monopolist proposes to merge with one of three downstream firms competing in the same relevant market, the Antitrust Division may be concerned that the upstream firm will have an incentive to favor the acquired downstream firm by offering less attractive terms to, or refusing to deal with, the acquired firm’s competitors. Given this, the merging parties may be asked by the agency to adopt non-discrimination provisions which incorporate the concepts of equal access, equal efforts, and equal terms.


The approach of EU competition authorities on merger remedies is slightly different from that of the US authorities. The EU Merger Remedy Notice indicates that divestiture commitments are the best way to eliminate competition concerns resulting from both horizontal overlaps and vertical or conglomerate mergers. On the other hand, in the EU, behavioral remedies i.e. commitments relating to the future behavior of the merged entity are acceptable only in very specific
and exceptional circumstances.


In addition to providing broad guidelines on the type of remedy that may be best suited in different types of transactions, the EU Merger Remedy Notice also lays down in some detail the manner in which different types of remedies are to be implemented. For instance, if divestiture is proposed as a possible remedy, it would only be effective in addressing the competition concerns if the divested business unit goes to a suitable purchaser. 


To help identify a suitable purchaser, the EU Merger Remedy Notice provides detailed guidelines on ways to identify such a purchaser, by clarifying, for example, what type of buyer will be appropriate in a given situation. In EU, since behavioral commitments are exceptions rather than the norm, the EU Remedy Notice deals extensively with situations when behavioral commitments by merging parties may be acceptable to the European Commission.


Experiences from the EU and the US demonstrate that since antitrust practitioners, as well as parties notifying transactions to a competition regulator, desire transparency and certainty in the process of competitive assessment and selection of remedies, the competition agencies have responded by clearly identifying and communicating the likely competition concerns which the merging parties may address through modifications to their deal terms.

 

To further make this process as seamless as possible, competition agencies have put in place guidelines on merger remedies CCI has the benefit of best practices and principles from various jurisdictions, including the relatively more developed jurisdictions like the US and the EU. While CCI deserves credit for clearing most transactions well within the stipulated 210 days waiting period, it would be helpful if its orders specify the likely competition concerns that may have prompted it to explore remedies while reviewing transactions. Further, it may also be helpful if CCI were to formulate guidelines on merger remedies on similar lines as its counterparts in EU and US.

 

Merger remedy guidelines may help the parties to a transaction gauge, in advance, the type of concern that CCI may raise, and what possible remedial measures may work to address the concerns. This may not only make the merger review process more transparent, but also reduce the time lost in exploring possible remedies mid-way through the merger review process.

 

AZB

 

For further information, please contact:

 

Bidisha DasAZB & Partners
bidisha.das@azbpartners.com
 
 
 
  

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