By Priyashi Chhajer, fourth-year student at NLU, Jodhpur
The concept of control has been laid down in various statutes and defined differently as per their requirements. Competition Act, 2002 (‘Act’), Companies Act, 2013, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, Foreign Direct Investment policy are a few examples. ‘Control’ is defined in explanation of section 5 of Act, which reads as “Controlling the affairs or management by one or more ‘enterprises’ or ‘groups’, either jointly or singly, over another enterprise or group.” Acquiring control of enterprise may lead to appreciable adverse effect on competition and is therefore required to be notified to the Competition Commission of India (‘CCI’).
An uncertain and wide definition was adopted in the Act as the legislature intended to determine acquisition of control on factual basis. However, because of an absence of clear and specific guidelines the scheme of control continues to be ambiguous. The uncertain boundaries of control have also led to inconsistency in interpretation resulting in improper imposition of penalties.
Recently Ministry of Corporate Affairs introduced Draft Competition (Amendment) Bill, 2020 in February wherein; material influence over the affairs of business and management has been proposed as a standard to determine control. This test on one hand will put large number of transactions under scrutiny and help in monitoring competition in market; but at the same time it will give excessive power to CCI thereby hampering the ease of doing business.
Ambit of Control – Asymmetrical Interpretation Leading to Confusion
As a matter of practise, CCI has attempted to assess control by the yardstick of “decisive influence” over the affairs of another enterprise or group by way majority shareholding, veto rights or contractual agreements. However, these boundaries have diluted over the period of time.
In Multi Screen Media Private Limited Case, veto rights over strategic commercial decisions were exercised. CCI in this order extended the ambit of control to not only proactive rights but also negative and affirmative rights. In subsequent RB Mediasoft/ IMT order, mere right to convert zero coupon optionally convertible debentures into equity share, was considered as control. Threshold was further lowered in case of Jet- Eithad, where Eithad acquired 24% stake without any veto or quorum rights, along with the right to appoint 2 out of 12 directors. CCI took into account Eithad’s ability to control the managerial affairs of business and considered the transaction as acquisition of control.
Later on, CCI started shifting the threshold towards material influence for determining ability to exercise control. In Argium Inc. and Potash Corporation of Saskatchewan, Inc., it was observed that although Potash Corp. held 14% interest, it still had the capacity to control the affairs as it was leading in production in global market and thus might exercise influence.
In the recent Ultratech/Jaiprakash Order , CCI defined material influence as “the lowest level of control, implies presence of factors which give an enterprise ability to influence affairs and management of the other enterprise including factors such as shareholding, special rights, status and expertise of an enterprise or person, Board representation, structural/financial arrangements etc.” CCI expanded the ambit of control to include material influence and not just de facto and de jure control (acquiring more than 50% of voting rights by way of shareholding).
Later in 2018, this expansive threshold was reiterated in Meru Travel Solutions vs. ANI Technologies and Ors, where CCI ruled that Softbank has ability to exercise material influence even though it is a minority shareholder in Ola and Uber. Therefore, even the acquisition of minority shareholding, for investment purposes may attract section 5 and section 6 under competition Act.
The scope of policies is left wide and inclusive, so as for the CCI to interpret it in a manner favouring competition law objectives. The strict definition may impede promotion of social and economic cause. However, inconsistent factual determination of control by regulatory body has clearly lead to dysfunctionality, as it has breed vagueness for business entities and lack of clear legislative guidance has vested excessive discretionary power with CCI.
Complexities that are Propagated by “Material Influence” Test
Firstly, unavailability of codified guidelines and the open-ended interpretation of ‘control’ adopted by CCI will empower them with unrestricted power to take up suo-moto cognizance of any transaction. For instance, in Jet – Eithad Case where there was acquisition of mere 24% stake without any significant rights; CCI still took the matter into its hands and reviewed the deal. Not only this, disparity amongst different regulators makes compliance unmanageable for the businesses . As was seen in abovementioned case where affected by the CCI’s orders, SEBI reopened the case and ordered to investigate the matter again.
Secondly, even when there is likeliness of appreciable adverse effect on competition, the transaction needs to be notified in accordance with section 6(2) of Act. Sporadic definition and lack of precedential clarity will result in ambiguity pertaining to determination of transactions that needs to be notified. There have been instances wherein the CCI took 60-90 days to conclude prima facie inquiry, which in turn should be completed in 30 days. Open ended test of control will bring more transactions under review which will lead to delay in execution of transactions and deterrence in ease of doing business.
Thirdly, expansion of definition of control has also led to expansion of the meaning of ‘group’ under explanation (b) of section 5. In this explanation group is considered to be formed when “two or more enterprises are directly or indirectly in position to control the management or affairs of another business”. The new threshold will affect the applicability of numerous exemptions available to intra group dealings. Also, it will be difficult to determine horizontal and vertical overlaps during merger filings.
Fourthly, many financial investments and private equity transactions will now come under the review of competition commission as because of the expansive definition the pure minority protection rights can also now be seen as negative control triggering mandatory notifying obligation under section 6 of the Act.
Position of Law in other Jurisdictions
Indian regime is similar to that of the EU. However unlike in India, EU provides detailed guidelines for interpretation of control. Article 3(2) of ‘Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings’ defines control as the ‘possibility of exercising decisive influence on an undertaking’. It implies that one may or may not actually exercise decisive influence but even a slightest possibility of exercising effective decisive influence is ample enough to bring it under the ambit of control. There are no particular thresholds specified to assess when there is change of control. However, European Commission issued a Consolidated Jurisdictional Notice, which acts as a guide and tool for interpretation. It anticipates and provides for all possible instances when merger regulations can be triggered. Possibility of exercising decisive influence can be on the basis of right, assets or contracts, or any other means, either separately or jointly.
In the US, the concept of control is defined in Hart-Scott-Rodino Regulation (‘HSR’). Section 7 of Clyton Act provides for three tests – the commerce test, the size of transaction test and the size of person test. For the transaction to fall under HSR filing obligation, above tests must be fulfilled. Generally, acquisition of voting rights and assets is looked into to determine change in control.
CCI has failed to remedy the indefiniteness surrounding the concept of control. International organisations such as OECD endorse global uniformity for the definition of control. Unfortunately, the domestic inconsistency has resulted into cross-border disparities for the understanding of control.
A transaction can be reviewed under section 5 of Act only if there is change in control. Earlier it was decided by way of decisive influence over management or affairs of business by way of majority shareholdings, veto rights and contractual agreements. By virtue of this threshold those transactions comprising acquisition of non-controlling powers, however having appreciable adverse effect on competition were left unchecked. To alter the situation Competition Law Review Committee, 2019 proposed to lower the threshold of control so as to include those minority shareholdings that can affect competition.
Material Influence test is the lowest threshold of control. As a consequence of this, majority of combination transactions will come under review process. It will increase the load of the CCI with insignificant notifications and will also be onerous for the parties involved in transactions. Moreover, lack of guidance and inconsistency in precedential trail adds to the existing confusion on kinds of transactions that are eligible for notification.
Therefore, there is pressing need to make the market investor friendly for economic growth. Sizable problems posed by the proposed amendment weighs down the benefits that it purports. Cues must be taken from other jurisdictions so as to promote certainty in domestic regime. CCI must tread with caution so that ease of doing business is not affected and market entities do not get caught in clutches of cumbersome notifying process, unforeseen penalties and vagueness.