CCI Issues Updated FAQs On Merger Control

The Competition Commission of India ("CCI") recently updated the Frequently Asked Questions ("FAQs") on merger control. Set out below are the key clarifications provided under the FAQs:

1. Clarification on the definition of 'control': Under the Competition Act, 2002, as amended ("Competition Act"), 'control' is relevant to determine the notifiability of a transaction to the CCI. The CCI has previously considered shareholding, voting rights, board/observer seat(s), and certain veto rights/affirmative rights in the other entity to determine 'control'. The FAQs further clarify that 'control' is not necessarily indicated by (i) information rights; and (ii) a single board seat or an observer seat (see Section I below for further details).

2. Clarification on the deal value thresholds ("DVTs"): On September 10, 2024, the CCI introduced DVTs pursuant to which transactions where (i) the 'value' of a transaction exceeds INR 20 billion (approximately USD 234 million) ("Deal Value"), and (ii) the target has substantial business operations in India ("SBO"), will require prior notification to the CCI.

In relation to the DVTs, the FAQs clarify that (see Section II below for further details):

1. Transactions involving part acquisition(s) or a portion of the business: Where a transaction involves an acquisition/merger/amalgamation of only a portion or division or business of an enterprise, only such portion should be considered while calculating Deal Value;
2. Deal Value does not include: (i) value of corporate guarantee for loan taken by the target; or (ii) future transactions (such as top up acquisitions) that are not contemplated at the time of the acquisition;
3. Deal Value includes: (i) additional amounts proposed to be paid to the seller for continuing as a key managerial personnel ("KMP") of the target following closing, (ii) the value of prior acquisitions by 'affiliates' of the acquirer in the same target (in the previous 2 years), and (iii) the value of future investments contemplated in the same target (based on best estimates);
4. Transactions involving debt: In the event that an acquisition includes the assumption of debt by the acquirer, the Deal Value will include the value of the debt so assumed; and
5. Greenfield or newly formed joint ventures: Green field joint ventures or newly formed joint ventures are not required to be notified to the CCI based on the DVTs.

3. The exemption for Stock Exchange Purchases (defined below) is not applicable to preferential allotment of securities (these cover bulk/block deals on stock exchanges) (see Section III below for further details).

4. Acquisitions of 'call options' independently require a notification to the CCI as these fall within the definition of 'shares' under the Competition Act (see Section II below for further details).

5. Clarifications in relation to inter-connected transactions: The Competition Commission of India (Combinations) Regulations, 2024 ("Combination Regulations") require that where the 'ultimate intended effect' of a business transaction is achieved by way of a series of steps or smaller individual transactions which are inter-connected, and one or more of such steps require CCI's approval, a single notice covering all these transactions shall be filed. The FAQs clarify that the key consideration for assessment of inter-connection between transactions by multiple investors is whether there is a meeting of minds between the parties in respect of the decision to invest in an entity. In this regard:

1. acquisitions by several investors in a funding round should not be considered as inter-connected if there is no meeting of minds between them (unless they take the investment decision as a single unit); and
2. simultaneous closing of investments by multiple investors is not sufficient for such investments to be considered as inter-connected (see Section IV below for further details).

Section I: Clarification on 'control' under the Competition Act

1. Clarification on the definition of 'control': The FAQs list certain specific rights which (a) raise a presumption of 'control', and (b) are ordinarily not considered as 'control' conferring (see queries 15 to 18 of the FAQs).

2. Consultation rights, rights allowing participation in management and affairs and/or the de facto operational dynamics may grant the ability to influence the strategic commercial decisions of the other enterprise, depending on the facts of a case. Therefore, such rights are not presumed to be 'control' but are rather a matter of determination (see query 17 of the FAQs).

3. Certain other situations may also indicate 'control', such as the following:

1. where the director(s) nominated by one party possess the expertise, status, etc. which allow such party to influence other members, thereby gaining ability to influence strategic commercial behavior of the other enterprise; and
2. where an enterprise holds the largest and most significant block of shares (with the remaining shareholding being dispersed), it may have the ability to influence strategic policy outcomes even in the absence of any contractual arrangements (see query 19 of the FAQs).

Section II: Clarification on DVTs

On September 10, 2024, the CCI introduced DVTs under which transactions (i.e., acquisition of any control, shares, voting rights or assets of an enterprise, merger or amalgamation) where (i) the Deal Value is more than INR 20 billion (approximately USD 234 million), and (ii) the target has SBO, will require prior notification to the CCI.

Under the DVTs, an enterprise shall be deemed to have SBO, if:

1. for digital services: the number of its business users or end users in India is 10% or more of its total global number of such users; or

2. for non-digital/ other services:

1. its gross merchandise value for the period of twelve months preceding the relevant date in India is (i) 10% or more of its total global gross merchandise value, and (ii) more than INR 5 billion (approximately USD 58.47 million); or
2. its turnover during the preceding financial year in India is (i) 10% or more of its total global turnover derived from all the products and services, and (ii) more than INR 5 billion (approximately USD 58.47 million).

The FAQs further clarify as follows with respect to the DVTs:

1. Transactions involving a part or a portion of the business: The FAQs clarify that where a transaction involves the acquisition/merger/amalgamation of only a portion or division or business of an enterprise:

1. Relevant Deal Value: Only the value of the relevant portion or division or business of the enterprise, shall be the relevant Deal Value of the transaction; and
2. Relevant non-digital/ other services: For calculation of SBO for non-digital/other services, only the number of the target's business users or end users, gross merchandise value or turnover (as applicable) of the relevant portion shall be considered (see queries 36 and 37 of the FAQs).

2. Treatment of different types of securities and transactions while calculating the Deal Value: The FAQs clarify as follows:

Section III: Preferential allotment is not covered within the scope of stock exchange purchases

(see query 165 of the FAQs)

On September 10, 2024, open offers, and acquisitions of convertible shares or securities on a regulated stock exchange ("Stock Exchange Purchases") which require the approval of the CCI, were permitted to be completed under the Competition Act (subject to certain conditions). The FAQs clarify that a preferential allotment is not covered within the scope of Stock Exchange Purchases since a preferential allotment is in the nature of a primary acquisition, where fresh shares are allotted by the company on a preferential basis.

Section IV: Clarifications in relation to inter-connected transactions

(see queries 169 and 170 of the FAQs)

The Combination Regulations require that where the 'ultimate intended effect' of a business transaction is achieved by way of a series of steps or smaller individual transactions which are inter-connected, and one or more of such steps require CCI's approval, a single notice covering all these transactions shall be filed. The FAQs clarify that:

1. Meeting of mind test: The key consideration for assessment of inter-connection is whether there is a meeting of minds between the parties in respect of the decision to invest in an entity. In this regard:

1. acquisitions by several investors in a funding round should not be considered as inter-connected if there is no meeting of minds between them (unless they take the investment decision as a single unit); and
2. simultaneous closing of investments by multiple investors is not sufficient for such investments to be considered as inter-connected.

2. Overlaps analysis is not required to be provided in the CCI notification for inter-connected transactions that are otherwise exempt: The FAQs clarify that overlaps analysis is not required to be provided in the CCI notification for inter-connected transactions that are otherwise exempt. However, based on the facts and the circumstances of the matter, the CCI may direct the acquirer(s) in the inter-connected transactions to furnish overlap details, if required.

Section V: Clarification on 'ultimate controlling person' for the purpose of mapping of overlaps between the parties

(see queries 77 to 79 of the FAQs)

The FAQs clarify that for the purpose of mapping of overlaps between parties:

1. For the acquirer: For the purpose of mapping of overlaps for the acquirer, the controlled entities of the 'ultimate controlling person' ("UCP") of the acquirer, affiliates of the UCP, affiliates of controlled entities of the UCP, and controlled entities of affiliates of the UCP are to be considered;

2. For the target: For the purpose of mapping of overlaps for the target, the target along with its downstream controlled entities, its affiliates, affiliates of its controlled entities, and controlled entities of its affiliates are to be considered; and

3. Multiple UCPs: An enterprise can have multiple UCPs.

Section VI: Definition of Commercially Sensitive Information ("CSI")

The FAQs provide examples of certain information which may or may not constitute CSI (see queries 166 to 168 of the FAQs):

1. What constitutes CSI: CSI relates to information that is important for an undertaking to protect, maintain or improve its competitive position in the market and includes the following information: (a) prices, pricing, costs, profit margins; (b) capacity, capacity utilization, production, output, quantities (including inventories, dispatches, etc.); (c) quality; (d) sales, market shares, territories; (e) terms with customers, customer Iists; (f) variety or innovation, pipeline products; (g) technologies, research and development, trade secrets, marks and product patents; (h) strategic planning, marketing plans/strategy/initiatives, promotion plans, plans to enter or exit markets, risks, investments, or information concerning other important elements of a firm's strategy including current operating and future business plans; (i) budgets, annual business plan; and (j) minutes of board meetings.

2. What does not constitute CSI: CSI does not including the following information: (a) unaudited/audited financial statements prepared in accordance with generally accepted accounting policies; (b) information available to an ordinary shareholder of a company, dated (historic information, i.e., it has lost its commercially sensitive nature) that is not ordinarily considered by the management for its commercial decision making; (c) information that is disclosed by an enterprise in the public domain; (d) information that is readily ascertainable through appropriate means; (e) information that can't be linked to a specific company; and (f) ownership structure.

3. Access to a company's unaudited financials (monthly, quarterly, annual) is not considered as access to CSI, provided that such periodic unaudited financial statements contain only the information that are contained within the annual financial statements of the same entity that is furnished with the Registrar of Companies (or other equivalent authority outside India).

Section VII: Guidance on mitigation risks to comply with standstill obligations

(see query 146 of the FAQs)

Given that the Indian merger control regime is suspensory in nature (i.e., the parties to a notifiable transaction are not allowed to consummate the transaction in any manner before the CCI grants formal approval), any action in furtherance of the transaction, including sharing of CSI before such approval is granted, is likely to be seen as an instance of violating standstill obligations and may attract penalties under the Competition Act.

To mitigate such risks, the FAQs recommend that while conducting due diligence/integration planning, parties constitute a limited team of individuals, preferably comprising members of the senior management, internal legal team as well as external legal counsel ("Clean Team"). CSI of the other party should only be accessible to such Clean Teams. The Clean Teams should not include personnel involved in pricing, marketing, sales, etc., in order to ensure that such personnel are not (consciously or unconsciously) influenced by any CSI in the course of the day-to-day operations of the business (such as determining pricing, pricing strategy, sales quantity, marketing strategy, terms of consumer contracts, etc.).

This insight/article is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.