View
213
Download
0
Category
Preview:
Citation preview
7/28/2019 8834icai p
1/60
1
Mergers quaCompetition Regime
H.S. Chandhoke
Partner, Luthra & Luthra Law Offices
7/28/2019 8834icai p
2/60
L&LAugust 30, 2005 2
Contents
1. Coverage
2. Mergers: Basic Concepts
3. Rationale for Merger Regulation
4. Types of Mergers
5. Motivation for Mergers
6. Adverse Effects of Mergers
7. Facts and Figures
8.Cross Border Mergers
7/28/2019 8834icai p
3/60
L&LAugust 30, 2005 3
Contents
9. Mergers in India
10. Merger Control Provisions in India
11. A Balancing Act12. The Legal Framework
13. The Competition Act 2002
14. Decided Cases
7/28/2019 8834icai p
4/60
L&LAugust 30, 2005 4
Coverage
The three core areas covered in theCompetition Law across the globe are:-
1. Anti-competitive agreements;
2. Abuse of Dominant Position; and3. Regulation of Combinations includingmergers.
The first two areas are prohibited ex post whilethe regulation of merger is generally ex-ante.
7/28/2019 8834icai p
5/60
L&LAugust 30, 2005 5
Mergers: Basic Concepts
Merger - combination of two or moreenterprises whereby the assets and liabilities of
one are vested in the other, with the effect that
the former enterprise loses its identity.
Amalgamation combination of twocorporate entities where the assets and liabilities
of both are vested in a third entity, with theeffect that both former entities lose their
identities to form a new entity.
7/28/2019 8834icai p
6/60
L&LAugust 30, 2005 6
Mergers: Basic Concepts
Competition Act 2002Section 2(a)
Acquisition the acquiring, directly or
indirectly of shares, voting rights, assets orcontrol over management or assets, of another
enterprise.
7/28/2019 8834icai p
7/60
L&LAugust 30, 2005 7
Mergers: Basic Concepts
Section 2(h)
Enterprisemeans a person who is engaged in
any activity relating to production, storage,
supply, distribution, acquisition or control ofany goods, or the provision of services, or in
investment or securities, either directly or
indirectly, but does not include sovereignfunctions of the government.
7/28/2019 8834icai p
8/60
L&LAugust 30, 2005 8
Basic concepts
Combinationincludes: Acquisition of control, shares, voting rights or
assets by an acquirer of an enterprise; [section5(a)]
Acquiring of control by a person of an enterprisewhere the person already has control over anotherenterprise engaged in production, distribution andtrading of similar or identical or substitutablegoods/services;
Merger or amalgamation between or amongstenterprises
7/28/2019 8834icai p
9/60
L&LAugust 30, 2005 9
Rationale
The rationale for merger regulation is simple It is far better to prevent firms from gainingmarket power than to attempt to control market
power once it exists.
Effective merger policy requires a judgmentconcerning the impact of merger oncompetition before the merger has occurred.
7/28/2019 8834icai p
10/60
L&LAugust 30, 2005 10
Rationale
The whole philosophy is based on an ancientEnglish Maxim: Prevention in better than cure.
It is better to prevent and prepare rather than to
repent andrepairNavjot Singh Sidhu
7/28/2019 8834icai p
11/60
L&LAugust 30, 2005 11
Types of Mergers
Horizontal : between enterprises in the sameproduct market and at the same level of theproduction or distribution cycle.
Vertical: between enterprises that operate atdifferent levels of the production or distributioncycle.
Conglomerate: between enterprises operatingin different markets.
7/28/2019 8834icai p
12/60
L&L
August 30, 2005 12
Horizontal and Vertical Mergers
Raw MaterialProducer/Supplier
Raw MaterialProducer/Supplier
Raw MaterialProducer/Supplier
Manufacturer Manufacturer Manufacturer
Wholesaler Wholesaler Wholesaler
Retailer Retailer Retailer
Consumer Consumer Consumer
7/28/2019 8834icai p
13/60
L&L
August 30, 2005 13
Motivation for Mergers
To diversify the areas of activity and thereby toreduce business risks;
To achieve optimum size so as to reap thebenefits of economy of scale;
To reduce the duplicate expenses and thereby toimprove the profitability;
To serve the customer better;
7/28/2019 8834icai p
14/60
L&L
August 30, 2005 14
Motivation for Mergers
To have cohesiveness in control of the
organisation;
To grow without any gestation period;
Inorganic growth is believed to be much faster
compared to organic growth.
7/28/2019 8834icai p
15/60
L&L
August 30, 2005 15
Adverse Effects of Mergers
Mergers especially horizontal reduces thenumber of players and consequently thecompetition in the market;
Mergers amongst rivals is invariably unfriendlyto consumers;
Mergers often results in increased market shareand thereby leads to dominance which makes
the resultant enterprise complacent
7/28/2019 8834icai p
16/60
L&L
August 30, 2005 16
Adverse Effects of Mergers
and thereby brings inefficiency in theorganisation;
Mergers between healthy and unhealthy
enterprises reduces the tax liability and therebymakes the States exchequer poor;
Mergers often fail to create harmonisation inhuman relation.
7/28/2019 8834icai p
17/60
L&L
August 30, 2005 17
Facts & Figures on Mergers1
Worldwide mergers and acquisitions in thefirst quarter of 2005 exceeded $589 billion.
Combined with $670 billion in Q4 2004 thatamounts to over $1.2 trillion over 6 months.
1Source: Thomson Financial Services
7/28/2019 8834icai p
18/60
L&L
August 30, 2005 18
Facts & Figures on Mergers
Asian M&A in Q1 2005 amounted to $36billion (rise of 32.9% over Q1 2004) consistingof a total of 1,355 transactions (a decline of12.9% from Q1 2004).
South Korea ranked first in terms of transaction
value while China ranked first in terms ofnumber of transactions.
7/28/2019 8834icai p
19/60
L&L
August 30, 2005 19
Facts & Figures on Mergers
7/28/2019 8834icai p
20/60
L&L
August 30, 2005 20
Facts & Figures on Mergers - India
Late 1980s35 mergers. 1997 552 mergers.
2002 - $ 6.5 billion.
2003 - $ 3.7 billion. (Business & Economy Magazine) The value of mergers in India more than
doubled to $9.32 billion in 2004, from $4.4
billion in 2003. (Bloomberg Feb 2005)
7/28/2019 8834icai p
21/60
L&L
August 30, 2005 21
Facts & Figures on Mergers - India
The first quarter of 2005 itself has seen M&Asto the tune of over $3 billion. (Thomson Financial)
According to PWC study which appeared in
Financial Express of August 17, 2005, Indiarecorded second highest growth rate in M&Aactivities in the first half of 2005, second only to
Japan.
7/28/2019 8834icai p
22/60
L&L
August 30, 2005 22
Facts & Figures on Mergers Asia(ex Japan)
Q1 2005 Figures
7/28/2019 8834icai p
23/60
L&L
August 30, 2005 23
Cross Border Mergers1
Worldwide Cross Border M&As represent alarge portion of the total M&As amounting
to $296 billion in 2003, of which Indiasparticipation amounted to $949 million (83out of 4562 deals).
World Investment Report 2004
7/28/2019 8834icai p
24/60
L&L
August 30, 2005 24
Cross Border Mergers
The motivating factors for cross borderM&As are:
Quickest way to grow
Acquire tangible and intangible assets
Restructure existing operations
Exploit synergies Obtain strategic advantages
7/28/2019 8834icai p
25/60
L&L
August 30, 2005 25
Cross Border Mergers
However, the overwhelming majority of the crossborder M&As involve foreign firms acquiring Indiancompanies. In cases where such acquisitions involveno increase in economic efficiencies or production
capacities, it raises the concern that such M&Assimply shift ownership from domestic to foreignhands.
Domestic consolidation of enterprises would helpIndian enterprises achieve a better bargaining positionand reverse the trend.
7/28/2019 8834icai p
26/60
L&L
August 30, 2005 26
Mergers in India
From 1991 to date, mergers are not regulatedfrom a competition perspective. The AsianDevelopment Outlook 2005 mentions theimpact of M&As in India. It indicates forexample Coca Cola re-entered the Indianmarket in 1993 by acquiring Parle. Today it has50% market share of the soda industry. Pepsi
gained a major market presence by acquiringDuke in 1988, and now has 48% market shareof the soda industry.
7/28/2019 8834icai p
27/60
L&L
August 30, 2005 27
Mergers in India
HLL has succeeded in enhancing its market sharethrough a process of Mergers /Acquisitions
Product 1992-93 1997-98
Ice Cream 0.00 74.06
Sauces,ketchups,jams 0.00 63.54
Dental hygiene products 11.20 41.56
Soaps 19.66 26.01
Synthetic detergents 33.12 46.72Vanaspati 0.85 13.90
7/28/2019 8834icai p
28/60
L&L
August 30, 2005 28
Merger Control Provisions in India
Pre 1991: Only the MRTP Act, 1969 and theCompanies Act, 1956 had merger controlprovisions.
Post 1991: The Companies Act, 1956; SEBI(Takeover) Guidelines, 1997; and the
Competition Act, 2002 now form the backboneof merger control provisions in India.
7/28/2019 8834icai p
29/60
L&L
August 30, 2005 29
A Balancing Act
Despite foreseeable advantages, mergers canhave an adverse impact on public and consumerinterest in terms of higher costs, increasedpolitical influence of merged entity and reduced
efficiency owing to diversification into unrelatedbusinesses.
In dealing with mergers, Competition Law has
to balance between encouraging competitionand at the same time promoting economicefficiency.
7/28/2019 8834icai p
30/60
L&L
August 30, 2005 30
The Legal Framework
1.The Companies Act, 1956Sections 390 - 396A, 108A, 17, 319 and 42.
2. SEBI (Substantial Acquisition of Shares andTakeovers) Regulation, 1997
3. The Competition Act, 2002
Sections 5 and 6 deal with Combination andRegulation ofCombination respectively.
7/28/2019 8834icai p
31/60
L&L
August 30, 2005 31
Threshold Limits
Where a merger proposal comes within thepurview of the threshold limits stated underSection 5, notification thereof may be made
to the CCI.
The Act encompasses a voluntary pre-
notification requirement for mergers above acertain threshold limit.
7/28/2019 8834icai p
32/60
L&L
August 30, 2005 32
Acquisition, Acquisition of Controlor Merger or Amalgamation
By a PersonThe Resultant Entity musthave:
(i) in India, assets valued at
more than Rs.1000 crores orturnover of more that Rs.3000 crores; or
(ii) in India or outside India,assets valued at more than
US$ 500 million or turnoverof more than US$ 1.5 billion.
By a GroupThe Resultant Entity musthave:
(i) in India, assets valued at
more than Rs.4000 crores orturnover of more than Rs.12,000 crores; or
(ii) in India or outside India,assets valued at more than
US$ 2 billion or turnover ofmore that US$ 6 billion.
7/28/2019 8834icai p
33/60
L&L
August 30, 2005 33
Group
Group means two or more enterprises which,directly or indirectly, are in a position to:
(i) exercise twenty-six per cent, or more ofthe voting right in the other enterprise;
or(ii) appoint more than fifty percent, of the
members of the board of directors in theother enterprise; or
(iii) control the management or affairs of theother enterprise.
7/28/2019 8834icai p
34/60
L&L
August 30, 2005 34
Control
Control includes controlling the affairs or
management by
One or more enterprises, either jointly orsingly, over another enterprise or group;
One or more groups, either jointly or singly,
over another group or enterprise.
7/28/2019 8834icai p
35/60
L&L
August 30, 2005 35
Section 6
Any combination entered into which causesor is likely to cause an appreciable adverseeffect on competition within the relevant
market[section 2(t)] in India shall be void. A person entering into a combination may
give notice to the CCI disclosing details of
the combination within 7 days of (a) approvalof the merger by the boards of
7/28/2019 8834icai p
36/60
L&L
August 30, 2005 36
Section 6
the enterprises, or (b) execution of anyagreement for acquisition referred to in 5(a)or acquiring of control.
Exception Section 6 does not apply toshare subscription or financing facility or anyacquisition by a PFI, FII, bank or venture
capital fund pursuant to any covenant of aloan agreement or investment agreement.
7/28/2019 8834icai p
37/60
L&L
August 30, 2005 37
Notification Requirements
Pre-notification is compulsory in US and EU. In India, pre-notification is only voluntary.
Considering the current phase of growth andconsolidation of industry, it was decided againstincorporating a compulsory notificationrequirement.
Post- merger notification runs the risk of having
to unscramble the merger which usually entailshigh social cost.
7/28/2019 8834icai p
38/60
L&L
August 30, 2005 38
Inquiry: Section 20
The CCI may inquire into whether a combinationis likely to cause an appreciable adverse effect oncompetition based on its own knowledge or on
information provided to it. However, the CCI cannot initiate an inquiry into
any combination after the expiry of one year since
that combination has taken effect. CCI shall inquire in cases where notice is given
under section 6(2).
7/28/2019 8834icai p
39/60
L&L
August 30, 2005 39
Factors to be examined: Section 20
In order to determine whether a combination wouldhave the effect of or is likely to have an appreciableadverse effect on competition, the CCI shall havedue regard to the following factors:
a) actual and potential level of competitionthrough imports in the market;
b) extent of barriers to entry in the market;
c) level of combination in the market;
d) degree of countervailing power in the market;
7/28/2019 8834icai p
40/60
L&L
August 30, 2005 40
Factors (cont.)
e) likelihood that the combination would resultin the parties to the combination being ableto significantly and sustainably increase
prices or profit margins;f) extent of effective competition likely to
sustain in a market;
g) extent to which substitutes are available orare likely to be available in the market;
7/28/2019 8834icai p
41/60
L&L
August 30, 2005 41
Factors (cont.)
h) market share, in the relevant market, of thepersons or enterprises in a combination,individually and as a combination;
i) likelihood that the combination would resultin the removal of a vigorous and effectivecompetitor in the market;
j) nature and extent of vertical integration in the
market;
k) possibility of falling business;
7/28/2019 8834icai p
42/60
L&L
August 30, 2005 42
Factors(cont.)
l) nature and extent of innovation;m) relative advantage, by way of the
contribution to the economic development
by any combination having or likely to haveappreciable adverse effect on competition;
n) whether the benefits of the combination
outweigh the adverse impact of thecombination, if any.
Procedure for Investigation:
7/28/2019 8834icai p
43/60
L&L
August 30, 2005 43
Procedure for Investigation:Section 29
Where the CCI opines that a combination islikely to have an appreciable adverse effect
on competition, it shall call upon the partiesto respond within 30 days showing cause asto why an investigation should not be
conducted;
7/28/2019 8834icai p
44/60
L&L
August 30, 2005 44
Procedure (cont.)
After receiving the responses, if the CCI is ofthe prima facie opinion that the combinationis likely to have an appreciable adverse effect
on competition it shall direct within 7 daysthat the details of such combination bepublished within 10 working days of such
direction, in the manner prescribed;
7/28/2019 8834icai p
45/60
L&L
August 30, 2005 45
Procedure (cont.)
Objections to the combination are invitedfrom the public within 15 days from the dateof publication;
Within 15 days of receiving comments, theCCI may call for additional information fromthe parties to the combination, which is to befurnished within 15 days.
After the receipt of all information, the CCImust come to a decision within a period of 45days.
7/28/2019 8834icai p
46/60
L&L
August 30, 2005 46
Orders: Section 31
The Commission has to pass final order within90 working days (subject to certain exception)from the date of publication, failing which the
Merger is deemed to have been approved;
The Commission is vested with a power to
approve the Merger, or approve withmodifications, or to reject the merger;
7/28/2019 8834icai p
47/60
L&L
August 30, 2005 47
Orders
In case the modification suggested is agreedto by the parties, the merger is approved and
in case modifications are not agreed to, theMerger is refused and the agreement will bedeclared void;
7/28/2019 8834icai p
48/60
L&L
August 30, 2005 48
Orders modifying the Merger
Divestment
Requiring access to essential inputs/facilities
Dismantling exclusive distribution agreements
Removing no-competition clauses
Imposing price caps or other restraints onprices
Refrain from conduct inhibiting entry
7/28/2019 8834icai p
49/60
L&L
August 30, 2005 49
Penalty: Section 44
If any party to a combination makes a falsestatement or omits to state any material
particular, such person is liable for a penaltybetween Rs. 50 lakhs and one crore.
7/28/2019 8834icai p
50/60
L&L
August 30, 2005 50
Usage
Even though the factors and procedurecontained in Competition law seemcomprehensive, experience has shownauthorities very rarely block proposed mergers.
The European Commission has prohibited 19proposed mergers out of a total of 2827 notified
(0.65%) between 1990 and July 2005.
7/28/2019 8834icai p
51/60
L&L
August 30, 2005 51
Usage
The Competition Commission of the UK sincebeing set up in 2003 has found adversecompetition effects in only 5 cases and
prohibited only 3. The US Federal Trade Commission and
Department of Justice combined challengedonly 36 out of 1014 mergers notified in 2003leading to 12 consent orders and 16 abandonedtransactions.
7/28/2019 8834icai p
52/60
L&L
August 30, 2005 52
Decided Cases
FTC v. Staples Inc.[970 F.Supp. 1066 (DDC 1997)]
In 1997, the two largest office superstore chains in
US, Office Depot and Staples Inc. announced their
agreement to merge. The Federal TradeCommission (FTC) opposed the merger on the
grounds that it was likely to harm competition and
lead to higher prices in the market for the sale of
consumable office supplies sold through office
superstores.
7/28/2019 8834icai p
53/60
L&L
August 30, 2005 53
FTC v Staples Inc.(cont.) The FTC argued that voluminous evidence
structural, documentary and statistical supported the conclusion that the proposedmerger would raise prices for office supplies.
The relevant market in this case was held to beofficesuperstores and that the merged entities
would have a dominant market share between45% - 100% in many geographic markets.
7/28/2019 8834icai p
54/60
L&L
August 30, 2005 54
FTC v Staples Inc. (cont.)
Office superstores were held to be different fromother office supply retailers in terms of appearance,size, format, the number and variety of itemsoffered, and the type of customers targeted.
In the absence of a merger, the separate entitieswere competitors and would have targeted eachothers market and kept prices low.
The efficiencies argued for were held not to besufficient to offset price increase.
7/28/2019 8834icai p
55/60
L&L
August 30, 2005 55
Cases
GE-Honeywell[Case No. COMP/M.2220] On October 22, 2000 a merger was announced
between two American based companiesGeneral Electric and Honeywell.
GE makes, sells, and services large aircraftengines. Honeywell makes small aircraft engines,avionics components, and non-avionics
components, such as environmental controlsystems, wheels and brakes, and auxiliary powerunits.
7/28/2019 8834icai p
56/60
L&L
August 30, 2005 56
GE-Honeywell
This was case of a conglomerate merger, where theonly substantial horizontal overlap occurred in thesupply of military helicopter engines and in repairand overhaul services for certain Honeywell aircraft
engines.
However each party was a leader in its
respective market. At $42 billion it was thelargest industrial merger in history.
7/28/2019 8834icai p
57/60
L&L
August 30, 2005 57
GE-Honeywell
The USDOJ cleared the proposed merger onthe condition that GE divest Honeywellshelicopter engine business and to license a newcompetitor to maintain and repair certainHoneywell engines.
Due to the size of GE and HoneywellsEuropean sales, the merger had to be approved
by the European Commission (EC) as well.
7/28/2019 8834icai p
58/60
L&L
August 30, 2005 58
GE-Honeywell
The EC found that GE had a dominant positionin the aircrafts engine market while Honeywellhad a dominant position in the avionics andnon-avionics sectors.
These products being complementary to eachother, the EC held that the merger would allow
the new entity to bundle their products, giving itan advantage over competitors.
7/28/2019 8834icai p
59/60
L&L
August 30, 2005 59
GE-Honeywell
This advantage would lead to the exit of rivalsand ultimately the elimination of competition
altogether. The EC thus blocked the merger.
7/28/2019 8834icai p
60/60
L&L
Selected Reading
Antitrust Law Developments, American Bar Association(ABA), 5th ed., ABA Section of Antitrust Law.
Gellhorn, Ernest, Kovacic, William E., and Calkins,Stephen, Antitrust Law and Economics in a nut shell,
2004, West Publishing Co., MN. Goetz, Charles J., McChesney, Fred S., Antitrust
Law: Interpretation and Implementation, 2002, MathewBender & Co, Lexis Nexis, NJ.
Whish, Richard, Competition Law, 5th ed, 2003,Butterworths.
Recommended