BY BIANCA BHARDWAJ, A THIRD-YEAR STUDENT AT NLU, JODHPUR
[Note: The following post is Part-II in a two-part series]
Having expounded upon the merger control regime in India along with the dilemma of open market purchases as well as compliances in the previous part, the following part details the impact of the draft combination regulations along with the global position and suggestive solutions.
V. Impact of the Draft Combination Regulations, 2023
The CCI Draft Combination Regulations, 2023 further clarify the rights that can be safely acquired in such transactions. Under Regulation 6, the acquirer would be allowed to avail certain rights such as dividend, subscription to rights issue, bonus shares, etc. The acquirer can also dispose the shares or securities acquired and exercise voting rights only to the extent of liquidation and/or insolvency proceedings.
These regulations are crucial because they adequately address the problem of acquiring de facto control through such transactions. By specifying that the voting rights of the acquirer would only be allowed in limited circumstances, it does away with the problem of acquisition of control in public bids. The European Commission, for example, recognised this issue in the case of Marine Harvest ASA, whereby it was held that exemption to a public bid would not be provided if the seller acquires a significant block of shares amounting to de facto control. The element of de facto control is adjudged based on the votes cast at previous ordinary and extraordinary general meetings. Lastly, even the proviso to Regulation 6 also states that exemption would not apply where the acquirer directly or indirectly, influences the target enterprise.
VI. Global Position
A quick sojourn of international antitrust laws would also reveal that similar dispensations have been made worldwide.Article 7(2) of the European Union Merger Regulation (‘EUMR’) provides that standstill obligations shall not prevent the implementation of a public bid or of a series of transactions in securities including those traded on a stock exchange and Article 7(3) gives the Commission the power to grant derogations. However, statistics reveal that the EU has rarely granted such exemptions. These derogations are subject to a twofold-criteria: (1) high degree of urgency in the transaction and (2) the lack of any plausible competition issues raised by the proposed transaction. Moreover, the EU has repeatedly held that while acquiring voting rights is not prohibited on securities purchases, the exercise of these rights is actively discouraged to prevent gun jumping.
Similarly, in Brazil, the transactions made through stock markets or organized over the counter market do not need the approval of the antitrust authority for their consummation. On the other hand, certain sophisticated merger regimes of UK and Italy do not impose any standstill obligations and parties are free to implement transactions without approval
by undertaking a self-assessment of the potential competition concerns.
In comparison, the Indian regime reflects a balanced approach as the regime retains its suspensory character without any absolute derogations. At the same time, there is no absolute ban on exercise of voting rights attached to shares bought in such transactions like in the EU. Moreover, there is sufficient scope for the parties to provisionally implement their transaction and subsequently wait for clearance while retaining certain rights.
However, a suggestion must be noted in this regard. It is not clear why the amendment did not adopt the CLRC report’s recommendation to mandate an escrow account. If the transaction is later disapproved by the CCI, the reversal of the transaction could be eased by selling the shares in the escrow account and undo any competitive harm.
VII. Way Ahead
The rationale behind merger control in antitrust is to promote economic efficiency and enhance the process of corporate restructuring in the country. In this context, the amendment is welcome as it aligns with international best practices and will boost transactional efficiency in India. However, there is still uncertainty regarding how the Takeover Code would complement the amendment, given the requirement of obtaining a statutory approval for open offer still stands. In the meantime, as fertile jurisdictional ground develops and the Draft Regulations are adopted, it is crucial that parties tread with caution and avoid acquiring beneficial rights before securing the watchdog’s approval and attract potential scrutiny.
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