Jurisdiction - India
Reports and Analysis
India – Minority Acquisitions And CCI.

12 January, 2015

 

 

In November 2014, the Competition Commission of India (‘CCI’), while approving the combination between Abbot Laboratories (‘Abbott’) and Mylan Inc (‘Mylan’) (‘Abbott/Mylan Decision’), made a critical observation on the qualitative nature of an acquisition that could exempt it from notification to CCI under Item 1, Schedule 1 of the Competition Commission of India (Procedure in regard to the transactions of business relating to combinations) Regulations, 2011 (‘Item 1 Exemption’) (‘Combination Regulations’).


The Item 1 Exemption exempts an acquisition of under 25% of the total shares or voting rights of a target enterprise, when made solely as an investment or in the ordinary course of business, so long as it does not lead to the acquisition of control. The Item 1 Exemption has proved critical over time, particularly for routine minority investments made by private equity firms, which accrue only investment protection rights, and have no discernible market effect. However, neither the Competition Act, 2002 (‘Competition Act’) nor the Combination Regulations provide any guidance on the meaning of ‘in the ordinary course of business’ or ‘solely for investment purposes’. Previously, the only available guidance came from CCI’s decision in SAAB A.B./Pipavav Defence and Offshore Engineering Company Limited1, wherein the acquisition of a mere 3.329% share was seen as ‘strategic’, since the parties entered into a strategic technical partnership agreement to jointly participate for projects.


In the Abbott/Mylan Decision2, CCI approved Mylan’s acquisition of Abbott’s established pharmaceuticals products division. This included the 22% shareholding that Abbott would acquire in consideration, solely as an investment, in New Moon B.V., a Mylan subsidiary incorporated to facilitate the combination. While the latter acquisition of 22% was thought to be exempt from notification under the Item 1 Exemption, CCI observed that an acquisition of shares or voting rights, even under the threshold of 25%, could raise competition concerns if the acquirer and the target are either engaged in business of substitutable products/services or activities at different stages or levels of the production chain. Such acquisitions need not necessarily be made ‘solely as an investment’ or ‘in the ordinary course of business’, and thus merit competition assessment, on a case-by-case basis, under the relevant provisions of the Competition Act.


In a recent interview dated December 12, 2014, the Chairman of CCI has further whittled down the Item 1 Exemption by stating that where an acquirer is making strategic minority investments in a number of companies in the same sector, such acquisitions may materially alter the competitive landscape. He has also stated that investments of less than 25% shares in the target entity, would not be considered as being in the ‘ordinary course of business’ or ‘solely for investment purposes’ if the investor already holds investments in another enterprise that is present in the same / similar line of business as the target entity. The Chairman has recommended that where private equity investors are making a fresh investment in sectors where they have already invested they should approach CCI under the mechanism of a pre-merger consultation to determine whether or not the transaction must be notified to CCI. These statements and decisions increase the number of exceptions to the ability of investors to avail of the Item 1 Exemption for minority investments.


CCI’s interest in minority acquisitions could be driven by the interest taken by the European Commission (‘EC’) in this area. In fact, the EC White Paper geared towards more effective Merger Control dated July 9, 2014 (‘White Paper’) contains specific proposals to address issues related to potential competitive harms arising from minority acquisitions.
The theories of harm postulated in the White Paper in relation to minority acquisition include, the resultant potential for non-coordinated effects where the acquirer chooses to unilaterally raise its prices and restrict output and internalize the resultant profit. There is a greater risk of this occurring when the acquirer has a financial interest in its competitor’s profits. In certain limited situations, the acquirer could potentially use its position to limit the competitive strategies available to the target firm, or cause input foreclosure to competing enterprises where the acquisition is in vertically related entities.


That said, the White Paper categorically notes that competition concerns are more likely to be serious when a minority acquisition grants the acquirer some degree of influence over the target firm’s commercial decisions. To the contrary, CCI’s observation in the Abbott/Mylan Decision does not appear to consider the absence of the accrual of any control rights, or the extent of overlaps between the parties. The decision, and the subsequent statements by the Chairman, could narrow the scope of use of the Item 1 Exemption significantly, and in the absence of any guiding principles, result in the notification of investments where there are any horizontal overlaps or vertical arrangements between the parties to the transaction, however minimal.

 

While minority investments could in certain specific instances warrant scrutiny, the mere existence of overlaps between parties to the combination is unlikely by itself to cause an appreciable adverse effect on competition (‘AAEC’) in India. To avoid rendering the Item 1 Exemption obsolete, CCI must conduct a comprehensive assessment of the nature of the acquisition, the rights accrued to the acquirer, and the impact that a minority investment could genuinely have on the competitive landscape.

 

End Notes:

 

1 (C-2012/11/95)
2 New Moon B.V. (C-2014/08/202) order dated 10 November 2014.

 

AZB

 

For further information, please contact:

 

Zia Mody, AZB & Partners
zia.mody@azbpartners.com

 

Abhijit Joshi, AZB & Partners 
abhijit.joshi@azbpartners.com

Shuva Mandal, AZB & Partners 
shuva.mandal@azbpartners.com

 

Samir Gandhi, AZB & Partners
samir.gandhi@azbpartners.com

Percy Billimoria, AZB & Partners 
percy.billimoria@azbpartners.com

 

Aditya Bhat, AZB & Partners 
aditya.bhat@azbpartners.com

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