Supreme Court upholds Penalty for Gun Jumping in Thomas Cook and SCM Soilfert Cases
The Supreme Court of India, vide two separate judgements passed on 17.08.20181, upheld the order of the Competition Commission of India (“CCI”) imposing a penalty of INR 10 Million in Thomas Case and INR 20 Million in SCM Soilfert case upon the respective acquirers.
The appeal before the Supreme Court (“S.C.”) in the Thomas Cook case was preferred by the CCI against the order the Competition Appellate Tribunal (“COMPAT”), which had set aside the aforesaid penalty order. Pertinently, the CCI had imposed the said penalty due to non-compliance of the provisions of section 6 (2) of the Competition Act, 2002 (“Act”) as market purchases transaction, which constituted a part of interconnected and interdependent transactions, stood consummated at the time of notification to the CCI. In SCM Soilfert case, the acquirers had preferred the appeal before the S.C., as they were aggrieved with the order of COMPAT affirming the penalty order of the CCI on the acquirers due to non-compliance of the provisions of section 6(2) of the Act.
To give a brief background, premerger notification in this case was filed on 14.02.2014 by Thomas Cook (India) Limited (“TCIL”), Thomas Cook Insurance Services (India) Limited (“TCISIL”) and Sterling Holiday Resorts (India) Limited (“SHRIL”) regarding a composite scheme of arrangement and amalgamation (“Scheme”) whereby the resorts and time share business of SHRIL were proposed to be transferred by way of a demerger from SHRIL to TCISIL (a subsidiary of TCIL) and SHRIL with its residual business was proposed to be amalgamated into TCIL. Additionally, the details of certain acquisitions were also disclosed in the notification, which were claimed to be exempt pursuant to the Government of India (“GoI”) Notification dated 04.03.2011 (regarding de minimis target exemption), namely;
In both these cases, the Apex Court has ruled that imposition of penalty under section 43A of the Act is on account of a civil obligation and there is no requirement of mala fide or intentional breach as the proceedings are neither criminal nor quasi criminal.
period 10th to 12th February, 2014 by TCISIL of equity shares representing 9.93 percent of the equity share capital of SHRIL.
In the course of its assessment, having considered the Scheme and the aforesaid acquisitions as parts of one composite combination only, the CCI noticed that ‘market purchases’, constituting a part of the said composite combination, had already been consummated prior to filing of the notification and accordingly imposed the said penalty on the ground of noncompliance of the provisions of section 6(2) of the Act.
As per the extant provisions of section 6(2) as applicable at the relevant point of time, any person or enterprise proposing to enter into a combination was required to give notice to the CCI within 30 days from the date of approval of the board of enterprises in respect of merger or amalgamation referred to in section 5 (c) or executing an agreement or ‘other document’ for acquisition or acquiring of control referred under section 5 (a) or 5 (b). Thus, if any person or enterprise failed to give notice under section 6 (2), the CCI could impose on such person or enterprise a penalty up to one per cent of the total turnover or the assets, whichever is higher, of such a combination, in terms of section 43A since the Act provides for a mandatory and suspensory merger regime. It may be relevant to state herein that the GoI, vide Notification dated 29.06.2017, has done away with the requirement of premerger notification within the 30-days deadline. Further, vide GoI Notification dated 04.03.2011, the parties were exempt from the filing requirement in cases where the enterprise being acquired had either assets of the value of not more than INR 250 crore (1 crore =10 million) in India or turnover of not more than INR 750 crore in India. In terms of the same, as also the decisional practice of the CCI, such exemption was applicable only to cases of acquisitions but not to mergers or amalgamations. Pertinently, vide GoI Notification dated 04.03.2016, de minimis target exemption has been enhanced to INR 350 crore for the value of assets and to INR 1000 crore for the turnover. Further, vide GoI Notification dated 27.03.2017, the same has also been extended to mergers and amalgamations, thereby exempting small value mergers from the requirement of notification to the CCI.
In this context, it is also relevant to state that Regulation 9 (4) of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations (“Combination Regulations”), notified on 11.05.2011, provided 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 interconnected or inter-dependent on each other3, one or more of which may amount to a combination, a single notice covering all these transactions may be filed4 by the parties to the combination.
As the said combination was notified to the CCI to seek approval to proposed demerger from SHRIL to TCISIL and amalgamation of SHRIL, with its residual business, into TCIL and the parties claimed exemption in respect to other steps of the transactions relating to acquisition of shares of SHRIL, pursuant to shares subscription, shares purchase, open offer and market purchases, under then prevailing de minimis target exemption, the CCI reasoned that all the steps of acquisitions, as aforesaid, were inter-related and interdependent with the transaction of demerger and amalgamation and out of all the steps of the acquisitions, ‘market purchases’ was consummated at the time of giving the notification, thus amounted to gun jumping.
In the appeal5 directed against the aforesaid order of the CCI, the COMPAT observed that the CCI declined to give benefit of de minimis target exemption mainly on the ground that the market purchases were intrinsically connected with other transactions, however, in doing so, the CCI
While upholding the CCI order,7 the COMPAT noted that the term ‘other document’ as used in section 6 (2)(b) of the Act and explained in Regulation 5(8) of the Combination Regulations8, covers any document executed to acquire the shares and even the order placed with the broker for purchasing shares is ‘other document’, which becomes a trigger for notice under section 6(2).
failed to take cognizance of the fact that the implementation of scheme for demerger/amalgamation was not dependent on the market purchase of equity shares of SHRIL by TCISIL and vice versa.
In the second statutory appeal, vide its judgement dated 17.04.2018, the Apex Court ruled on the aforesaid controversy as follows:
“26. It is apparent that in the notification made under section 6(2) on 14.2.2014 notifiable transactions were shown regarding merger and amalgamation. It was also mentioned that parties have also contemplated certain other transactions in view of the notifiable transactions, they were the substitution of equity shares, SPA, open offer and market purchase. It is crystal clear from the aforesaid application itself that all these transactions were part of the same transactions and even before notifying the transactions of purchase from the market on 14.2.2014, it was consummated between 10.2.2014 to 12.2.2014. It is crystal clear that market purchases being a part of the composite combination was consummated before giving notice to the Commission. Joint Press Release dated 7.2.2014 clearly indicated SPA as an open offer. The Board of Directors of the respective parties authorized market purchases on the same day. All the said transactions are intrinsically connected and interdependent with each other and form part of one viable business transaction.
27. Though market purchases have no references in MCA, SA, SPA and the scheme, the facts, and circumstances of the case, as the scheme was prepared on the same day and the three companies passed the resolution on the same day. All other acquisitions were made on the same day. Market purchases having been consummated between 10.2.2014 to12.2.2014, which is almost after finalizing the composite combination clearly suggested that market purchases would not have taken place in the absence of scheme and the other acquisitions. In case they were not part of the same scheme that would not have been referred to in the notice filed by them with the Commission on 14.2.2014. Thus, in our considered opinion market purchases were not independent and were intrinsically related to the scheme and other acquisitions.”
“28.….While it is open for the parties to structure their transactions in a particular way the substance of the transactions would be more relevant to assess the effect on competition irrespective of whether such transactions are pursued through one or more step/transactions. Structuring of transactions cannot be permitted in such a manner so as to avoid compliance with the mandatory provisions of the Act. For ensuring the compliance with the requirements of the Act it is open to considering whether the particular step was an individual transaction or part of the whole of the transaction. It was evident in the facts and circumstances of the case as
TCISIL would not have made market purchase in the absence of any one transaction. Thus, market purchases could not have been termed to be independent transaction.”
It is pertinent to mention herein that the requirement to comply with the merger regulations in India is not limited to transactions that involve acquisition of or change in control, as is the case in European Union. The Indian merger regime, like the HSR Act, is a procedural law and does not differentiate between acquisitions that may raise anti-competitive concerns and those that do not. Accordingly, it is necessary to comply with the pre-merger filing requirements even in respect of cases which may not lead to control or an AAEC (appreciable adverse effect on competition), failing which it is liable to be treated as gun jumping attracting penalty provisions.
Notification in this case was made to the CCI on 22.05.2014 by SCM Soilfert Limited, a wholly owned subsidiary of Deepak Fertilizers and Petrochemicals Corporation Limited (“DFPCL”), for acquisition of 0.8 per cent equity share capital of Mangalore Fertilizers and Chemicals Limited (“MCFL”) through open market transactions (“Second Acquisition”) and acquisition of up to 26 per cent of the equity share capital of MCFL through an open offer as per the relevant provisions of the Takeover Regulations pursuant to a public announcement made on 23.04 2014. However, in this regard, the CCI observed that the acquirers also held 24.46 per cent equity share capital of MCFL, prior to filing notification under section 6 (2), which was acquired by them on a single day on 03.07.2013, through a number of block and bulk deals on the Bombay Stock Exchange (“First
Acquisition”). The CCI observed that DFPCL in its press release dated 03.07.2013 filed with the stock exchanges, had stated that “given DFPCL’s considerable strengths in the fertilizer business”, the purchase of equity shares amounting to 24.46 per cent of the share capital of MCFL was a “very strategic and a good fit with the company’s [i.e. DFPCL’s] business” and that, “DFPCL looks forward to working closely with MCFL to enhance long term value for the shareholders of both companies.”
In this regard, the acquirers took the plea that the First Acquisition was not made with any intent to acquire control of MFCL, but was made ‘solely for investment purposes’ and, thus was not notifiable being exempt from notification under Item 1 of Schedule I of the Combination Regulations.” (Statutory provisions in this context explained later in this article). In this regard, the CCI also noted that as per the media reports, the acquirers and the Zuari group had been in a takeover bid for MCFL, as in April 2013, Zuari group had purchased shares amounting to 16.43 per cent of MCFL’s share capital and immediately thereafter, DFPCL had made the First Acquisition. The CCI noted that the acquirers and MCFL were engaged in similar businesses and that the acquirers had not provided any evidence to support their claim that there was no intention on their part to gain control over MCFL. Accordingly, the CCI concluded that the First Acquisition was not made solely as investment or in ordinary course of business and should have been notified in terms of section 6 (2) of the Act. The CCI, accordingly held the acquirers liable for penalty under section 43A of the Act. Further, as regards the Second Acquisition, the acquirers took plea that the same was duly notified to the CCI and had not been consummated since the shares acquired, representing 0.8 per cent stake in MCFL, were kept in an escrow account with the escrow agent in respect of which the acquirers did not exercise any beneficial interest including the voting rights. In this regard, the CCI noted that since the Act or the Combination Regulations did not exempt a situation wherein a buyer acquired shares but decided not to exercise legal/beneficial rights in them, the acquirers’ plea that the Second Acquisition was not consummated was not tenable under the law. The CCI also noted in this regard that non- exercise of voting rights for a limited period of time with respect to the Second Acquisition was a self-imposed contractual obligation taken upon by the acquirers, and, therefore, the acquirers had consummated the Second Acquisition prior to giving notice in terms of section 6 (2) of the Act.
Appeal in Soilfert case before the Supreme Court of India: In the statutory appeal, vide its judgement dated 17.04.2018, the Apex Court ruled that:
“8. Per contra, the Commission has rightly imposed the penalty. There was a breach of provisions contained in section 6(2). The penalty imposed is meagre. The first acquisition of shares was notifiable. It could not have been termed solely as an investment. Reliance has been placed on Press Release issued on 3.7.2013, which referred investment being “very strategic”, and the appellant also notified to the public that they “look forward to working closely with MCFL in the future”. The knowledge of acquisition by the Zuari group of 9.72% shares in MCFL on 2.4.2013 was admitted in the reply filed by the appellants. There was the acquisition of a large number of shares on the same day through the block and bulk deals. MCFL was not very profitable. Therefore, purchase of shares could not be said to be a sound investment by a prudent investor.
With reference to the S.C. order passed in the Thomas Cook case, it is evident, rather obligatory, on the part of the acquirer to file a single notice for a composite transaction covering all the inter-connected transactions including the market purchases, if any. In this regard, the CCI vide its order passed on 02.05.2016 in combination notice no. C-2015/02/249 (Piramal Enterprises), while quoting from the European Commission’s Consolidated Jurisdictional Notice, had also observed that ‘if two or more transactions (each of them bringing about an acquisition of control) take place within a two-year period between the same persons or undertakings, they shall be qualified as a single concentration, irrespective of whether or not those transactions relate to parts of the same business or concern the same…. It is sufficient if the transactions, although not carried out between the same companies, are carried out between companies belonging to the same respective groups.”
The CCI lists certain categories of combinations mentioned in Schedule I to the Combination Regulations which are normally not required to be notified. A significant exemption provided under Item I of Schedule I pertains to acquisition, directly or indirectly, of less than 25% of shares or voting rights, if made ‘solely as an investment’ or in the ‘ordinary course of business’, not resulting in control. An acquisition is considered ‘solely as an investment’ if the acquirer is not engaged in the same line of business and / or the investment does not lead to control. Further, the acquisition of shares by a public financial institution or mutual fund companies is considered as in the ‘ordinary course of business’, if made without control. In combination notification no. C- 2015/08/301, the acquisition by Alibaba.com Singapore E-Commerce of 4.14 per cent of non-controlling minority stake in Jasper Infotech was not exempt from notification since the acquirer and the target were both competitors. In combination notice no. C-2014/08/202 (New Moon/Mylan case), the CCI noted that acquisition of less than 25 per cent shares or voting rights may raise competition concerns if the acquirer and the target are either engaged in business of substitutable products/services or are engaged in activities at different stages or levels of the production chain.
Vide Amendment Regulations 2016, whereby Explanation to Item I of Schedule I was inserted, the CCI earmarked another threshold providing that an acquisition of less than 10% of the total shares or voting rights shall be treated as ‘solely as an investment’ provided the acquisition is carried out without (i) Rights which are not exercisable by ordinary shareholders; (ii) Right/intention to nominate a director; and (iii) Intention to participate in the affairs or management of the target company. However, it is noticed that acquisition of non-controlling stake below 10% threshold, if in a horizontal or vertically linked business, is still required to be notified. For example, in the combination case no. C- 2017/12/538, filing was made for acquisition of non-controlling minority stake of 5 per cent in Shoppers Stop by the investment arm (a category III foreign portfolio investor) of online retailer Amazon.com Inc.
With reference to the S.C. order passed in the SCM Soilfert case, it was held that since the acquirers and the target were engaged in similar businesses, the market purchase of equity share capital of MCFL made on a single day by DFPCL through a number of block and bulk deals, not being solely as an investment or in ordinary course of business, ought to have been notified. It is also pertinent to mention herein that in the combination case no. C-2014/06/181, involving acquisition of 16.43 per cent equity interest in MFCL by Zuari Fertilisers and Chemicals (“ZFCL”) in separate tranches of open market purchases, the CCI observed that the exempt categories under Item I of Schedule I does not include combinations that are likely to cause a change in control or are in nature of strategic combinations and rejected the plea to treat market purchases as solely for investment.
It may be insightful to mention herein that under the provisions of Article 7 (1) of EUMR, a concentration cannot be completed or implemented either before its notification to the competition authority or until it has been declared compatible with the common market. However, an exception under Article 7(2) has been provided in case of a public bid or a series of transactions in securities in a stock exchange, provided that the concentration has been notified to the Commission without delay and the acquirer does not exercise voting rights attached to the securities or does so only to maintain the full value of its investments based on a derogation granted by the Commission under Article 7(3). As regards the U.S., in cases involving tender offers and other acquisitions of voting securities from third parties, the waiting period under the HSR Act begins as soon as the acquiring person has made the requisite filing. However, the parties may request the antitrust agencies for early termination of the waiting period, which the agencies may grant at their discretion.
As discussed above in the SCM Soilfert case, the CCI had noted that non-exercise of voting rights voluntarily for a limited period of time by way of keeping the shares in an escrow account will be treated as consummation due to absence of any provision in this regard under the Act or the Combination Regulations. The Supreme court, in its order on the appeal in the SCM Soilfert case, has endorsed the aforesaid view of the CCI. As regards the transaction of market purchases, the Apex court has also ruled that notice under section 6(2) is to be given prior to the consummation of the acquisition and provisions made in Regulation 5(8) buttresses the said conclusion. In light of the above, the apex court observed that ex post facto notice is not contemplated under the provisions of section 6(2) as the same would be in violation of the provisions of the Act.
In view of the foregoing, it is extremely important for the parties to make a proper assessment at the time of the pre-merger notification to determine as to whether the proposed combination is in the nature of composite transaction or whether it is exempt from notification, being solely for an investment purpose. However, till such time the CCI comes out with a guidance note, market purchases also, if not exemptbeing solely for an investment or in the ordinary course of business, must be notified under the provisions of section 6 (2) of the Act to rule out gun jumping or any violation under the Act.
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