Mergers and acquisitions (M&A), which meet a prescribed threshold, are required to be notified to the Competition Commission of India (“CCI”), unless exempt in terms of the governing Regulations and / or the Notifications issued by the government. Globally, competition agencies assess as to whether M&A transaction enhances the market power of the parties so as to enable them to raise price, reduce output, diminish innovation and harm consumer as a result of diminished or weakening of competitive constraints, post combination. While making its competition analysis, the CCI examines as to whether the merger or acquisition leads to an appreciable adverse effect on competition (AAEC). In all such analysis, the change or acquisition of control plays a significant role.

Under the Competition Act, 2002, control is defined to include controlling the affairs and management of a group or enterprise by one or more enterprise or group, singly or jointly.1 The CCI through its decisional practices has also observed that control is ‘the ability to exercise decisive influence over the management and affairs’ of a target enterprise that could arise either as a result of shareholding or through contractual arrangements.2 In its decisions, the CCI has held that control over an enterprise ‘implies control over the strategic commercial operations of the enterprise’. Further, the ability to veto or cause a deadlock in respect of certain strategic commercial operations of an enterprise, for example, grant of affirmative rights to approval of annual operating and budget plans, commencement of new line of activity or business, change in capital and appointment/removal of key managerial personnel and their compensation confer joint control over the target.3

The OECD defines control to be ‘exercised when an individual or group of investors hold more than 50 per cent of the common voting stock of the enterprise or firm’. It further clarifies that ‘effective control’ may be exercised when the investor(s) holds a large block of voting stock even when it is less than 50 per cent but the remaining shares are widely held by many smaller investors. Control of enterprises may also be exercised through interlocking directorates and inter-corporate ownership links between firms as in the case of conglomerates.4

Under the EUMR, ‘control shall be constituted by rights, contracts or another means which (….) confer the possibility of exercising decisive influence on an undertaking (…) by (a) ownership or the right to use all or part of the assets of an undertaking; (b) rights or contracts which confer decisive influence on the composition, voting or decisions of the organs of an undertaking.5 However, acquisition of minority shareholding does not fall under the scope of EUMR unless it enables the minority shareholder to determine the strategic commercial behaviour of the target.6 The General Court confirmed this principle in the Aer Lingus case7 where it decided that Ryanair’s acquisition of non-controlling minority shareholding in Aer Lingus does not amount to concentration within the framework of the EUMR. The Court held that the concept of concentration cannot be extended to cases in which control has not been obtained.8 As per the U.S. Horizontal Merger Guidelines9, ‘when the Agencies determine that a partial acquisition results in effective control of the target firm, or involves substantially all of the relevant assets of the target firm, they analyze the transaction much as they do a merger.’ The CCI, like the US, also reviews minority acquisitions involving competing firms, even if such minority positions do not necessarily or completely eliminate competition between the parties to the transaction.

Partial acquisitions that do not result in effective control are viewed to present significant competitive concerns: First, a partial acquisition can influence the competitive conduct of the target firm. A voting interest in the target firm or specific governance rights, such as the right to appoint members to the board of directors, can lessen competition because the acquiring firm can use its influence to induce the target firm to compete less aggressively or to coordinate its conduct with that of the acquiring firm. Second, a partial acquisition can lessen competition by reducing the incentive of the acquiring firm to compete. Acquiring a minority position in a rival might significantly blunt the incentive of the acquiring firm to compete aggressively because it shares in the losses thereby inflicted on that rival. This reduction in the incentive of the acquiring firm to compete arises even if cannot influence the conduct of the target firm. Third, a partial acquisition can lessen competition by giving the acquiring firm access to non-public, competitively sensitive information of the target firm. Access to competitively sensitive information can lead to adverse unilateral or coordinated effects.

To address the concern of minority acquisition, these regimes focus on (a) quantitative threshold standard in terms of percentage shareholding, and (b) subjective determination centred around the intention of the acquirer i.e. whether the acquisition has been made as a passive investment or

the acquirer intends to participate in the management by acquiring influence over the actions and commercial decisions of the target enterprise. Illustratively, the U.S. Hart Scott Rodino (HSR) Rules formulated under the Hart Scott Rodino Act, 1976 exempt passive investment of up to 10 per cent of voting securities if made solely for purpose of investment (Rule 802.9) and up to 15 per cent of non-controlling shareholding (applicable in case of institutional investors) if made in ordinary course of business and solely for the purpose of investment (Rule 802.64). In addition, the HSR Rules set out the test for what constitutes solely for investment by providing that voting securities are acquired solely for the purpose of investment if the acquirer ‘has no intention of participating in the formulation, determination or direction of the basic business decisions of the issuer’. EU member states like Germany, Austria, and the UK also address minority acquisitions by focusing on objective standards of percentage shareholding and on subjective determination, such as whether such shareholding allows one to materially or substantially influence the business decisions of the issuer.

Pertinently, the CCI treats even the acquisition of non-controlling minority stake, and not merely the minority investment leading to acquisition of control of the target, to raise adverse competition concerns. As regard the minority acquisition concern, the CCI relies on the test of quantitative threshold of percentage shareholding as well as subjective determination centred around the intention of the acquirer i.e. whether the acquirer intends to participate in the management by acquiring influence over the actions and commercial decisions of the target enterprise. With a view to prevent filing of minority acquisitions which are not likely to cause AAEC, the CCI provides a 25 per cent exemption threshold for shares or voting right, made ‘solely as an investment’ or in the ‘ordinary course of business’, subject to the condition that such transaction should not result in the acquisition of ‘control’. Further, with effect from 01.01.2016, it has also been provided that an acquisition of less than 10 per cent shareholding would be regarded as a transaction made solely as an investment, where the acquirer does not have: (i) rights which are not exercisable by the ordinary shareholders; (ii) the right/intention to nominate a director; and (iii) the intention to participate in the affairs or management of the target.10 Accordingly, the case of acquisition of minority shareholding with control is assessed by the CCI irrespective of quantum of share acquisition.

The CCI has opined through its various decisions that an acquisition of shares or voting rights even if less than 25 per cent may also raise competition concerns if the acquirer and the target are either engaged in business of substitutable products/services or are vertically engaged in production chain and hence such acquisitions need not necessarily be termed as ‘solely as investment’ or in the ‘ordinary course of business’and thus would require competition assessment, on a case to case basis.11 In this context, while making its assessment of non-controlling minority acquisitions, the CCI also considers the portfolio investment of the acquirer in companies engaged in the same line of business. Thus, the acquisition by Alibaba.com Singapore E-Commerce of 4.14 per cent of non-controlling minority stake in Jasper Infotech was not exempt by the CCI since the acquirer and the target were both competitors.12 Similarly, acquisition of 2.77 per cent of the paid up share capital of Reliance Capital by Sumitomo Mitsui Trust Bank, even though not leading to any change in control, was not exempt by the CCI, being in nature of a strategic alliance for establishment of a bank.13 In EMC/McNally Bharat Engineering Company (MBEC), the CCI held that subscribing 12.32 per cent share capital of MBEC on an earlier occasion by a group company of EMC was strategic in nature, both the companies being competitors.14 In the case of acquisition by Deepak Fertilizers and Petrochemicals Corporation of 24.46 per cent equity share capital of Mangalore Fertilizers and Chemicals limited (MFCL), the CCI also noted that the phrase solely as an investment indicated ‘passive investment’ as against a ‘strategic investment’ and hence to qualify for the exemption, an acquisition must not have been made with an intention of participating in the formulation, determination or direction of the basic business decisions of the target which could be done through various means including voting rights, agreements, representation on the board of the target or its affiliate companies, affirmative / veto rights in the target, etc.15 Similarly, in Zuari Fertilisers and Chemicals, the Acquirer had purchased a 16.43 per cent equity interest in MFCL in open market purchases.16 In both the said cases, the CCI observed that the exemptions listed in Schedule I should not include combinations that are likely to cause a change in control or are of the nature of strategic combinations and must be interpreted in light of the CCI’s mandate to eliminate practices having adverse effect on competition.

Pertinently, despite introducing the 10 per cent threshold, the CCI has continued to apply the exemption of ‘solely as an investment’ restrictively in cases where the acquisition is not accompanied with acquirer’s (i) rights other than those exercisable by the ordinary shareholders, (ii) right/intention to nominate a director or (iii) intention to participate in the affairs or management of the target. For example, in P5/Indus Towers (Indus) case, acquisition of only 4.85 per cent equity shares of Indus, a JV between Bharti Infratel, Vodafone India and Aditya Birla Telecom Limited (ABTL), by P5, with intention to nominate a Director on the board of Indus triggered notification.17 In TPG Manta/Foundation Technology Worldwide (FTW) case also, in regard to an interconnected transaction of Thoma Bravo’s acquisition of shareholding in TPG Manta, the CCI held that the investment by Thoma Bravo would fall outside the purview of Schedule I since Thoma Bravo obtained certain investor protection rights and a board seat in FTW.18

In its recently published remedy order, involving Potash Corp of Saskatchewan (PotashCorp) combining in a merger of equal with Agrium Inc, with new name Nutrien (to be the largest crop nutrient company in the world post-merger),19 the

CCI approved the combination subject to divestment of PotashCorp’s minority equity interest in Arab Potash Company (APC), SociedadQuimica y Minera (SQM) and Israel Chemicals Limited (ICL), so as to eliminate the AAEC concern resulting from the proposed merger.20 What is important to note that the CCI in its assessment took into consideration involvement of PotashCorp in sale of potash in India through APC, SQM and ICL in which it had only the minority shareholding and viewed that post combination, APC and SQM would come under joint control of new entity (instead of PotashCorp), whereas in ICL, the combination would lead to extension of material influence of PotashCorp to the new entity on the management and affairs of ICL. The CCI opined that the proposed merger strengthens the coordinated effect due to their control/material influence of the merging parties over APC, SQM and ICL.