BELGIAN UPDATE – New Procedure on Mergers and Demergers
Highlights:
- On 28 January 2012 a new law came into force relating to the merger and demerger procedure under Belgian law. The new law simplifies the existing procedure by reducing the administrative reporting and documentation requirements to an absolute minimum while safeguarding the interests of shareholders and other parties.
- This simplification implements the European Directive 2009/109/EG of the European Parliament and of the Council dated 16 September 2009, amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC as regards reporting and documentation requirements in the case of mergers and divisions.
- A company that wishes to absorb another company in which it holds at least 90% of the votes, may squeeze out the minority shareholders.
Introduction
The Act of 8 January 2012 modifying the Belgian Companies’ Code (the “BCC”) concerning reporting and documentation requirements in mergers and demergers (the “Act”) came into force on 28 January 2012 and applies to mergers and demergers for which the proposals are filed with the Clerk’s office of the Commercial Court from that date. The Act implements the European Directive 2009/109/EG of the European Parliament and of the Council dated 16 September 2009 (the “Directive”), whose implementation deadline was 30 June 2011.
The main purpose of the Act is to reduce the administrative burden of Belgian companies involved in merger and demerger procedures by limiting paperwork to the minimum required to safeguard the interests of the shareholders and other parties. To this end, shareholders can, among other things, unanimously waive certain documentation and reporting requirements and/or consent to more flexible information requirements.
The new rules apply mutatis mutandis to mergers and demergers (splits or scissions). Our comments summarize the most important modifications to the merger procedure by way of an absorption (the most commonly used in reorganization or restructuring processes in Belgium).
Regrettably, the Act did not change the procedure for cross border mergers (regulated on the European level in the Directive 2005/56/EG and implemented into Belgian law by the Act of 8 June 2008), save for the filing and publication requirements. Therefore, the following overview only relates to Belgian domestic mergers.
New reporting, documentation, publication and information requirements
- New filing and publication requirements (Article 693 BCC)
- Before the Act: the merger proposal had to be filed at least six weeks (mandatory waiting period) before the date of the extra-ordinary shareholders’ meeting convened to decide on the merger and a notice of such filing had to be published in the Belgian Official Gazette.
- After the Act: the merger proposal has to be filed and published at least six weeks (mandatory waiting period) before the date of the extra-ordinary general meeting of shareholders convened to decide on the merger. Instead of a mere notice of filing, an extract from the merger proposal or a hyperlink to the company’s website on which the merger proposal has been made available has to be published.
- Comment: according to a strict interpretation of the current wording of this provision, the mandatory waiting period of six weeks has in practice been extended to at least eight weeks as the commencement date of the waiting period is deferred to the publication date instead of the filing date and there is a delay between filing and effective publication. This could not have been the intention as the six week period already included a safety margin of two weeks for the publication and therefore extended the four week period required by the Directive. However, until the Act is clarified on this point, this eight week period will have to be taken into account. The Act does not specify the content of the extract. It is assumed that the entire merger proposal or at least an extensive summary of it must be published.
- Possible waiver of certain reporting requirements (Article 694 and 695 BCC)
- Before the Act: the management bodies of the merging companies were required to draw up a special report in relation to the merger setting out, among other things, the status of the assets and liabilities, the rationale and implications of the merger, the valuation method and the proposed share exchange ratio. Moreover, the statutory auditor of each of the companies involved was required to draw up an audit report concerning the merger, setting out, among other things, an assessment of the proposed valuation method and the resulting share exchange ratio. Only the requirement for the statutory auditors’ reports could be unanimously waived by the shareholders of the respective merging companies.
- After the Act: the special management reports on the proposed merger are no longer required if all shareholders of the respective merging companies (and holders of other securities with voting rights) unanimously waive the requirement. If the shareholders of the merging companies (and holders of other securities with voting rights) unanimously decide to waive the requirement of the statutory auditors’ special reports on the merger, the absorbing company must comply with the particular reporting requirements concerning contributions in kind (i.e. a special report by the management body on the contribution and a valuation report by the statutory auditor).
- Comment: at least one report drawn up by an independent auditor will be required. This also applies to the special management report.
- Possible waiver of other requirements (Article 696 and 697 §2 BCC)
- Before the Act: the management body was required to: (i) inform both the shareholders’ meeting of its company and the management bod(y)(ies) of the other merging company(y)(ies) about any significant changes in the assets and liabilities after the date of the merger proposal, and (ii) draw up interim financial statements as per a date not earlier than three months before the date of the merger proposal, if the most recent annual accounts were closed more than six months before the date of the merger proposal.
- After the Act: these requirements no longer apply if they are unanimously waived by all holders of voting rights. An additional exemption to the obligation to draw up interim financial statements exists for companies who have published semi-annual financial reports pursuant to article 13 of the Royal Decree of 14 November 2007 (only for listed companies).
- Alternative method of informing shareholders (Article 697 BCC)
- Before the Act: the management body was required to (i) provide the shareholders with the merger proposal, management report and report of the statutory auditor, (ii) draw up a merger file at the merging company’s statutory office (containing among other things the annual accounts and related reports over the last three financial years, the merger reports and interim financial statements, if any, (iii) give the shareholders the opportunity to obtain copies of such documents free of charge.
- After the Act: the shareholders can agree to rece copies of the documents sub (i) and (ii) by e-mail. The management body may also make the documents sub (ii) available on the company’s website, without charge, for a period of one month before and after the extra-ordinary meeting of shareholders convened to decide on the merger.
- Exception to the exclusive authority of the general meeting of shareholders (Article 699 BCC)
- Before the Act: a merger had to be approved by an extra-ordinary shareholders’ meeting, taking into account the quorum and majority requirements as for a modification of the articles of association or the corporate purpose (if applicable).
- After the Act: if a limited liability company (“naamloze vennootschap” / “société anonyme”) holds at least 90% of the voting rights in another limited liability company, approval by an extra-ordinary shareholders’ meeting of the absorbing company is no longer required if prior information requirements have been fulfilled. Nevertheless, one or more shareholders of the absorbing company who jointly hold at least 5% of the shares have the right to request an extra-ordinary shareholders’ meeting to reach a resolution on the merger.
- Comment: the Act does not specify what procedure is to be followed if no shareholders’ meeting is convened. One should assume that the board of directors will be authorised to take a decision on the merger instead of the shareholders’ meeting. However, as the approval of a merger by acquisition also entails a capital increase with issuance of new shares, we believe that this exception can only apply if the acquiring company’s articles of association confer authority on the board of directors to increase the company’ share capital within the limits of the authorised capital. This is the only circumstance under which the BCC provides an exception to the exclusive authority of the shareholders’ meeting to increase the share capital and to issue new shares.
The new rules apply mutatis mutandis to demergers (scissions). The former demerger procedure already permitted waiver of the reporting requirements. The Act adds a new exemption for demergers by way of an incorporation of new companies, whereby the shares issued in the newly incorporated companies are allocated proportionally to the shareholdings in the demerging company. The following requirements no longer apply in such case: the special report of the management body, the special report of the statutory auditor, the obligation to provide information about important changes to the demerging company and the drawing-up of interim financial statements. Furthermore, the exception to the exclusive authority of the shareholders’ meeting will also apply in the case of demergers if the acquiring companies hold 100% of the voting rights in the company that will be split.
Squeeze-out procedure in the case of merger by absorption
Finally, in case of a merger by absorption intended by a limited liability company that holds at least 90% of the voting rights in a limited liability company to be absorbed, the Act provides the possibility for the majority shareholder (i.e., the prospective absorbing company) to squeeze-out the minority shareholder(s).
Conclusion
Belgian companies and legal practitioners have welcomed the Act as it simplifies the merger and demerger procedure under Belgian law and limits the paperwork involved. However, as some of the new provisions lack clarity and detail interpretation problems may arise. The expectation is, therefore, that the legislation will be clarified on particular points.
CHINESE UPDATE – Simpler Rules for Domestic Investment Procedures for Foreign-funded Investment Companies
Highlights:
In the past, when a foreign-funded investment company (“FIC”)[1] established in China[2] intends to invest its RMB income into another Chinese company, it would increase the registered capital by using such RMB income[3], and then use such newly converted registered capital to invest in other companies. In contrast, the new measures have simplified the procedures so that a FIC can make investment in other Chinese companies directly without having to convert the RMB income to its registered capital first.
MAIN ARTICLE
Pursuant to the Supplementary Regulations on Establishment of Foreign-funded Investment Company (Decree No. 3 [2006]) issued by the Ministry of Commerce of the PRC (the “MofCom”) and the Notice on Operational Guidelines for Issues Concerning Capital Verification Inquiry on FICs’ Reinvestment (Decree No. 7 [2011] of the SAFE) issued by the State Administration of Foreign Exchange (“SAFE”), where a FIC makes investment into Chinese companies with its lawful RMB income such as its operational profits and investment proceeds derived from capital decrease, liquidation, and transfer of equity interests, of its subsidiaries, it shall obtain an approval from the local counterpart of SAFE and MofCom to increase its registered capital by converting such RMB income into its registered capital (“Capital Increase Approval”). Subsequent to obtaining the Capital Increase Approval, the FIC is allowed to use the increased capital to make investments. In other words, a FIC must convert its lawful RMB income into its registered capital first and then use such increased capital to invest in other Chinese companies.
However, in accordance with the Notice on Further Improving the Administrative Measures for FICs (Decree No. 1078 [2011]) jointly issued by MofCom and SAFE on December 8, 2011, the above described procedures have been simplified. A FIC may directly use its legitimate RMB income to invest in other Chinese companies upon an approval from local SAFE. The FIC does not have to convert its RMB income into its registered capital to increase its registered capital first.
Capital increase of a FIC requires approvals from both local SAFE and MofCom, as well as registration with the company registration authority, which may take at least one month. The new measures certainly have saved operational cost and shortened the time for FICs to make investment in China by trimming the capital increase step.
[1] A FIC means a foreign-invested company whose main business is to make direct investment in other Chinese companies. FIC may be able to provide value-added services to the companies it has invested, such as to purchase equipment, materials, parts and components and distribute products for, to balance the foreign exchange among, and to provide financing for, such invested companies. The foreign investor to a FIC must satisfy rather stringent requirements. For example, its total assets shall no less than USD 400 million and it has contributed more than USD 10 million to enterprises established in China; or it has set up more than 10 manufacturing or infrastructure companies in China with actually contributed capital being more than USD 30 million.
UK UPDATE – UK Government Confirms Creation of Single UK Competition Authority: Merged Authority to Retain Voluntary Merger Regime
Executive summary:
The U.K .government confirms the anticipated merger of the Competition Commission and the competition functions of the OFT into a single Competition and Markets Authority (“CMA”) to be effective by April 2014. The U.K. government has decided to retain the current voluntary regime of merger notifications, albeit with a tightening of administrative measures.
Click here to read the Memorandum
SWEDISH UPDATE – Proposed Revised Swedish Takeover Rules
Highlights:
- A review of the Swedish Takeover Rules has resulted in a proposal to amend and update the Rules in a number of respects including, deal protection, top ups, and the put up or shut up regime.
- The revision has also resulted in the codification of a number of Securities Council statements including disclosure of holdings of long equity derivatives.
MAIN ARTICLE
The Swedish Corporate Governance Board has published a proposal for revised takeover rules. It is expected that the revised rules will be adopted by the two stock exchanges, NASDAQ OMX Stockholm AB and Nordic Growth Market NGM AB, and enter into force on 1 July 2012. This article summarizes certain proposed key changes.
DEAL PROTECTION MEASURES
Under the revised rules the target board may not enter into any deal protection arrangements, such as no-shop provisions and inducement fees, unless the target board determines in each case that there are “special reasons” that justify such arrangements. This modification is intended to express a restrictive approach to deal protection measures.
TOP-UPS
The revised rules clarify that pre-offer acquisitions where the bidder agrees to compensate a seller of target shares for any difference between the sale price and the ultimate bid price are permitted.
THE ACCEPTANCE PERIOD
The revised rules clarify that the bidder is not required to extend the acceptance period if the bid becomes subject to a “Phase II” investigation by a competition authority.
THE “PUT UP OR SHUT UP” REGIME
The current rules provide that if the bidder has made a leak announcement of a possible offer, the Securities Council may impose a deadline by which an offer must be made and, unless a bid is made by that deadline, impose restrictions to prevent the bidder from making an offer for the relevant target during a certain period. The revised rules clarify that the Securities Council has the authority to impose a deadline by which a bid must be made also where no leak announcement by the bidder has been made, if the target would otherwise be hindered in the conduct of its affairs for longer than is reasonable.
EXEMPTION IN RESPECT OF WARRANTS AND CONVERTIBLE DEBT INSTRUMENTS ISSUED UNDER EMPLOYEE INCENTIVE SCHEMES
A public offer must generally be made for all warrants and convertible debt instruments in the target at a “fair“ price. It has become common practice for bidders to ask the Securities Council for a dispensation not to make an offer for such securities if they have been issued under an employee incentive scheme. Such dispensations are normally subject to a condition that the holders of such securities receive “fair” treatment by the bidder outside the offer. The revised rules codify this practice by introducing a blanket exemption from the requirement to make a public offer for securities that have been issued under an employee incentive scheme, provided that the bidder ensures that the holders of such securities are treated fairly outside the offer.
RESTRICTIONS FOLLOWING AN UNSUCCESSFUL BID
The current rules provide that if a bid is withdrawn, the bidder and its concert parties cannot (except in accordance with a waiver from the Securities Council), within 12 months of the expiry of the acceptance period, make another bid for the same target or acquire a stake in the target that would require the bidder to make a mandatory bid. The revised rules clarify that this requirement does not apply where the bidder announces a recommended bid during the 12-month period.
OFFER CONDITIONS
The revised rules provide that if the bid has been made subject to the approval of the general meeting of the bidder or the target, reliance on such condition requires that the non-satisfaction of the condition is of material importance to the bidder’s acquisition of the target. The practical impact of this modification should be limited since this type of condition is normally only relevant in exchange offers and the non-satisfaction of such condition in exchange offers would generally satisfy the materiality test.
PUBLIC STATEMENTS OF INTENTION
Under the current rules a bidder may not generally set aside a “no-extension statement”. The revised rules clarify that the Securities Council has the authority to determine also in other cases whether parties involved in a takeover may set aside firm statements of intention, such as statements by a bidder that the bid will not be “increased” or “revised”.
RESTRICTIONS CONCERNING THE DISCLOSURE OF NEW INFORMATION
Under the revised rules the target board should generally not announce new information of “importance to the assessment of the bid” later than two weeks prior to the expiry of the acceptance period, other than in accordance with its continuing disclosure obligations.
CODIFICATION OF SECURITIES COUNCIL STATEMENTS
The revised rules include a number of modifications intended to codify certain Securities Council statements, including the following.
- Any incentive scheme offered by the bidder to target employees will need to be approved by the target board and be disclosed in the offer documentation.
- A bidder is required to disclose its holdings of long equity derivatives in the offer documentation, even if such derivatives are cash-settled.
- A bidder is not required to make a “fair” offer for warrants issued by the target if the value of the warrants (generally including their time value) is negligible, whereas such offer is generally required to be made for convertible debt instruments even if the value of the conversion right is negligible.
INDIAN UPDATE – Trends in Merger Control (2012 Edition)
Executive summary:
The following article Trends in Merger Control analyses the principles and trends enunciated by the Competition Commission of India (“CCI”) in the merger control orders passed to date.
Introduction: Legal Framework
The merger control regime in India is governed by the provisions of the Competition Act, 2002 (“Act”) along with the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (“Combination Regulations”), which came into effect on 1 June 2011. Further, the Competition Commission of India (“CCI”), on 23 February 2012, introduced the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2012 (“Amendment Regulations”), bringing about significant substantive and procedural changes to the merger control regime in India.
Sections 5 and 6 of the Act are the operative provisions dealing with combinations. Section 5 prescribes asset and turnover thresholds for transactions requiring mandatory prior notification to, and approval of the CCI. Section 6 prohibits transactions which cause or are likely to cause an appreciable adverse effect on competition (“AAEC”) within the relevant market in India and treats such transactions as void. The three types of transactions that require prior approval of the CCI (“Combinations”) are:
- transactions relating to an acquisition of control, shares, voting rights or assets;
- transactions between two competitors where one is acquiring ‘control’ over another enterprise; and
- merger or amalgamation of enterprises.
Jurisdictional Thresholds
The Act mandates notification of Combinations which meet the prescribed assets and turnover thresholds, determined by reference to the audited financial statements of the enterprises immediately preceding the year in which the Combination takes place:
- Target Test – The Government of India, by way of a notification[1], introduced a de minimis target based threshold, whereby if the target enterprise (including its divisions, units and subsidiaries) has either assets of the value of not more than Rs. 250 crores (approximately USD 50 million) in India or turnover of not more than Rs. 750 crores (approximately USD 150 million) in India, it is exempt from merger notification for a period of five years (“Target Exemption”).
If the target enterprise cannot avail of the Target Exemption, then the jurisdictional thresholds based on the parties and the group test, (provided below) need to be evaluated.
A new sub-regulation has been introduced to the Combination Regulations, which provides that if, as part of a series of steps in a proposed transaction, particular assets of an enterprise (i.e. a business or a division) are moved to another enterprise (i.e. a separate legal entity), which is then acquired by a third party, the entire assets and turnover of the selling enterprise (from which these assets and turnover were hived off) will also be considered when calculating thresholds for the purposes of Section 5 of the Act. This effectively narrows the scope of the de minimis target based threshold under the Target Exemption, and is not in consonance with international best practices. The CCI adopted this view prior to introducing the Amendment Regulations in two recent merger control orders, i.e. Mitsui/Sanyo/Mahindra Ugine/Navyug (C-2011/12/14) and Saint Gobain/Shri Ram Electro Cast/Electrotherm India (C-2012/01/19), whereby the assets and turnover of the entity transferring assets to its subsidiary i.e. the target enterprise for the proposed acquisitions was aggregated with the assets and turnover of the target enterprise for the purposes of computing the jurisdictional thresholds. While the amendment ensures that transacting parties do not structure around the Target Exemption by transferring assets to a newly incorporated special purpose vehicle, an unintended consequence of the amendment is that transactions involving greenfield joint ventures (previously exempt as the prescribed turnover threshold under the Target Exemption would not be met) could require a merger control filing.
- Parties test – The thresholds prescribed under the Parties test apply to:
(a) Acquisitions – combined value of the acquirer (on a stand-alone basis) and target enterprise (including its subsidiaries, units, or divisions) in case of an acquisition;
(b) Merger – enterprise remaining after the merger; and
(c) Amalgamation – enterprise created as a result of the amalgamation.
Where the parties to the Combination derive turnover in India only – Combinations must be notified if: (1) the value of the assets of the enterprises involved in the transaction exceed Rs. 1,500 crores (approximately USD 300 million); or (2) the turnover of the enterprises involved in the transaction exceed Rs. 4,500 crores (approximately USD 900 million).
Where the parties to the Combination derive turnover in India and outside India – Combinations must be notified if: (1) the value of the assets of the enterprises involved in the transaction exceed USD 750 million, including at least Rs. 750 crores (approximately USD 150 million) in India; or (2) the turnover of the enterprises involved in the transaction exceed USD 2,250 million, including at least Rs. 2,250 crores (approximately USD 450 million) in India.
- Group Test: the Group[2] test applies to the group to which the target or the resultant entity will belong post acquisition or merger or amalgamation:
Where the group derives its turnover from India only – Combinations must be notified if: (1) the value of the assets of the “group” to which the acquired enterprise will belong post-acquisition exceed Rs. 6,000 crores (approximately USD 1,200 million); or (2) the turnover of the group to which the acquired enterprise will belong post-acquisition exceed Rs.18,000 crores (approximately USD 3,600 million).
Where the group derives its turnover from India and outside India – Combinations must be notified if: (1) the value of the assets of the “group” to which the acquired enterprise will belong post-acquisition exceed USD 3 billion, including at least Rs. 750 crores (approximately USD 150 million) in India; or (2) the turnover of the group to which the acquired enterprise will belong post-acquisition exceed USD 9 billion, including at least Rs. 2,250 crores (approximately USD 450 million) in India.
Given that India follows a threshold based regime, it is critical that the CCI issue guidance on computation of assets and turnover as there currently exist a number of grey areas.
Therefore, for a Combination to be notifiable under the provisions of the Act, it has to be unable to avail of the Target Exemption and has to fulfil either the Parties test or the Group test. The parties are required to file a notification with the CCI within 30 days of final board approval (in the case of a merger or amalgamation) or the execution of any binding document/agreement (in the case of an acquisition).[3]
The CCI has jurisdiction over Combinations outside India if they cause or are likely to cause an AAEC in India. The CCI has clarified that for Combinations occurring outside India if any of the transacting parties has a presence in India and the jurisdictional thresholds under the Act are met, a notification would be required.
Exemptions
Exemptions from the obligation to notify the CCI have been provided in Schedule I to the Combination Regulations for Combinations which are “ordinarily” not likely to cause an AAEC in India:
- 25% Threshold Acquisitions– The Combination Regulations (as amended) provide an exemption from notification where an acquirer acquires shares or voting rights that do not entitle it to more than 25% of the total shares or voting rights in a target, and the acquisition is made solely for the purpose of investment or in the ordinary course of business and does not result in acquisition of control of the target. The threshold for acquisition was increased from 15% to 25% so as to bring the merger control regime in line with the takeover regulations in India.[4] Further, the use of the word ‘entitle’ in the exemption could encompass options and convertibles within the 25% threshold, which is contrary to the position under the takeover regulations However, this could potentially affect private equity transactions if a less than 25% controlling interest were to be acquired and the transaction meets the prescribed thresholds for notification under the Act. Moreover, the CCI has failed to provide any clarity as to what constitutes “control” under the provisions of the Act. “Control” has been defined under the Act to include controlling the affairs or management of one or more enterprises or group, either jointly or singly. This definition of control is ambiguous and is an inclusive circular definition. However, very limited guidance can be obtained from CCI’s sole precedent in Alok Industries/Grabal Alok Impex (C-2011/01/28) wherein it was held that the existence of common promoters and management between two companies would indicate common control. However, the CCI in informal consultation has stated that it will determine control on a case-by-case basis. Given that the Act is largely based on the EU competition law, there may be a possibility that the CCI interprets control to include positive and negative control as EU competition law considers both positive and negative control, for the purposes of competition law analysis;Acquisitions above 50% – Where the acquirer holds more than 50% of the equity shares of a target, further acquisitions, which do not result in a change from joint to sole control are exempt. This would potentially affect impact exits in joint ventures and pre-emption rights, which meet the prescribed thresholds under the Act. Further, acquisition of shares or voting rights between 25.01% and 49.99% is not addressed by the Combination Regulations and would require notification to the CCI, even if not leading to acquisition of control. This could affect all the private equity transactions and creeping acquisitions, where thresholds are met, irrespective of whether control is being acquired or not;
- Asset Acquisitions – Acquisitions of assets which do not constitute substantial business operations: (i) in a particular location; or (ii) in relation to a particular product or service of the target, which are made solely as an investment or in the ordinary course of business, not leading to control of the target, irrespective of whether such assets are organized as a separate legal entity;
- Amended/renewed tender offers where notice has already been filed by the offeror;
- Routine business acquisitions – acquisitions of stock-in-trade, raw materials stores and spares in the ordinary course of business. This does not have any impact on the competitive landscape;
- Changes to share capital – acquisitions of shares or voting rights, not leading to control, by way of buybacks, bonus issues, stock splits, consolidation of face value of shares and rights issues even beyond the entitlement of the acquirer. However, a renunciation of rights issue which results in control would require a filing;
- Underwriting/stock broking – acquisitions of shares or voting rights in the ordinary course of business not leading to control by a securities underwriter or a stock broker;
- Intra-group acquisitions – acquisition of control, shares, voting rights or assets by a person or enterprise, of another person or enterprise within the same group;
- Intra-group mergers and amalgamations – a partial exemption for mergers or amalgamations between a holding company and a subsidiary wholly owned by enterprises within the same group and between subsidiaries wholly owned by enterprises belonging to the same group, would not require notification to the CCI. As such, there is a distinction made between acquisitions and mergers for intra-group re-organisations, given that for an intra-group exemption by way of a merger, the enterprises involved should be wholly owned within the same group, which is not case in case of intra-group acquisitions, although there is no competitive impact in either case, to raise any competition concerns.
- Acquisition of current assets in the ordinary course of business; and
- Purely offshore transactions – Combinations taking place outside India having insignificant local nexus and effect on markets in India. Thus, cross border transactions are not completely exempt from the provisions of the Act. The Act gives the CCI the jurisdiction to investigate transactions which have local nexus with India (which essentially would entail the Target Exemption) and which have an effect on the markets in India (which could necessitate an economic analysis).
Forms for Pre-Merger Notification
The Combination Regulations provide for three types of forms to be filed by the parties, depending on the nature of the Combination:
- Form I: This is the default option, requiring basic details of the Combination and transacting parties. All the Combinations thus far notified have been Form I filings. The Combination Regulations previously listed transactions for which Form I would “ordinarily” be filed, and permitted the filing of only Part I of Form I (i.e. truncated form) for certain transactions which did not have a real competition impact (for e.g., acquisitions through gifts or inheritances, acquisitions by export oriented units, etc.). However, Form I is now required to be filed in its entirety in all Combinations, with the option of filing only a part of Form I (for transactions with no real competition impact) being dispensed with by way of the Amendment Regulations. The filing fee has been significantly increased from Rs. 50,000 (USD 1,000) to Rs. 10,00,000 (USD 20,000).
- Form II: Parties may also file Form II which is fairly extensive and requires minute details regarding the proposed Combination, the parties to the Combination, their group, all products manufactured by the group, the relevant market, pricing, distribution networks, etc. The Amendment Regulations recommend that Form II should “preferably” be filed for transactions where:
(a) parties are competing enterprises and have a combined market share in the same relevant market of more than 15%; or
(b) parties are operating in vertically linked markets and the individual or combined market share in any of those relevant markets is greater than 25%.
The Form II filing fee has been substantially increased from Rs. 10,00,000 (USD 20,000) to Rs. 40,00,000 (USD 80,000).
- Form III: This post-facto intimation form is required to be filed in case of any acquisition of shares or voting rights by public financial institutions, foreign institutional investors, banks and venture capital funds, pursuant to a loan agreement or investment agreement.[5] There is no filing fee.
Even though the Amendment Regulations have provided some clarity by indicating the CCI’s “preference” as to when Form II is required to be filed, ultimately the transacting parties are required to self-assess and opt for Form I or Form II. Given that the CCI’s pre-merger consultation process is non-binding and informal and limited to procedural issues, transacting parties would have to await precedent in the form of CCI orders for greater clarity on this issue. The risk of filing the incorrect form (i.e. Form I when Form II should have been filed) is that no time credit is given for filing the incorrect Form and the clock re-starts from the date of filing Form II. This would result in an increase in transaction time and financing costs.
Timelines
The Act requires mandatory notification to the CCI providing for a 210-day suspensory regime. Notifying parties cannot complete the transaction prior to receiving approval from the CCI or until the 210 day period lapses.
However, the CCI is required to form a prima facie opinion on whether a Combination is likely to cause an AAEC within the relevant market in India, within a period of 30 days from receipt of the notification. If the CCI forms a prima facie opinion that a combination is likely to cause an AAEC, a detailed investigation will follow and the standstill obligation shall continue until a final decision is reached by the CCI or 210 days lapse from the date of filing the notification.
Further, the CCI can ‘stop the clock’ during its review period seeking additional information until such time as any information requested from the parties remain outstanding. This effectively means that the review periods provided under the Act are not absolute.
As discussed earlier, in cases where Form I is filed and the CCI requires a Form II filing, the preliminary 30-day review period would re-start from the date of filing Form II. This increased time period effectively pushes back the timelines for completion of transaction by parties in cases where incorrect notifications have been made.
Penalties
If a notifiable Combination has not been notified, the CCI can impose a penalty of up to 1% of the combined assets or turnover of the parties to the Combination, whichever is higher. Further, the Act empowers the CCI to “look back” and inquire into a Combination that has not been notified (suo motu or on the basis of information received by it) for up to one year from the date of consummation of such Combination and if the Combination causes an AAEC, it can be held to be void. A penalty of between Rs. 50,00,000 (USD 100,000) to Rs. 1,00,00,000 (USD 200,000) can also be levied for making false statements or omitting material information in the merger control filing.
The CCI may also impose penalties of up to Rs. 1,00,000 per day (USD 2,000), up to a maximum of Rs 1,00,00,000 (USD 200,000) on parties for contraventions of its orders, as well as order imprisonment for up to three years, or a fine of up to Rs. 250,00,00,000 (USD 150 million) or both. Officers in charge of a company’s business would attract liability for contraventions by companies of provisions of the Act, unless they can demonstrate lack of knowledge despite due diligence.
Even in the case of belated merger control filings (i.e. made beyond the statutory time period of 30 days after the trigger event), the CCI has initiated parallel proceedings to determine penalty, despite granting approval to the Combination. There have been five instances of belated filings, to date. However, it is notable that the CCI has chosen not to impose any penalty in its first order on penalty proceedings in the EAPL/BBTCL order (C-2012/12/16) on account of the fact that the transaction was an intra-group re-organization by way of an amalgamation, and the fact that the merger control regime is in its first year of implementation.[6] It remains to be seen as to how the CCI would treat belated filings in more complex cases with horizontal/vertical overlaps, change in control, etc.
Recent Trends in Merger Control
The CCI has reviewed 36 filings to date, and approved all the Combinations, within the initial review period of 30 days. However, in more than half of the cases, the clock has been stopped, and the total time for review has effectively exceeded the 30-day statutory period.
Given the importance of time and costs involved in concluding transactions as soon as possible, an economist’s report defining and analysing the relevant market and the impact of the proposed transaction on competition would be useful to incorporate as an additional submission along with the merger notification, even though it is not a mandatory requirement. Further, the Amendment Regulations now mandatorily require the submission of the documents that trigger a merger filing (i.e. a binding agreement or final board approval) along with the merger notification. Given that confidentiality over documents submitted to the CCI needs to be specifically claimed along with the requisite justification, parties should submit confidential and non-confidential versions of such documents, in order to protect information relating to proprietary business, trade secrets and price sensitive information.
Further, the CCI’s initial literal interpretation of the intra-group exemption (being only available to acquisitions and not to mergers or amalgamations) led to 22 notifications being filed relating to intra-group re-organizations through mergers or amalgamations. While the Combination Regulations provide for an exemption from notification of intra-group re-organizations by way of acquisitions, the CCI held in Alstom Holdings/Alstom Projects (C-2011/10/06) that intra-group re-organizations through mergers or amalgamations cannot avail of the exemption, despite the fact that intra-group re-organizations of any kind do not cause any change in control or affect the market structure and existing competition in any manner. In response to the widespread criticism of this pedantic position, the Amendment Regulations have now introduced a partial exemption to intra-group re-organizations by way of mergers or amalgamations of a parent and its subsidiary wholly-owned within the same group or subsidiaries wholly owned by enterprises within the same group. This essentially still necessitates a filing for intra-group mergers and amalgamations where entities are not wholly owned within the same group.
Nevertheless, ambiguity persists in several other areas such as the treatment of joint ventures under Section 5 (given that there is no distinction between full function joint ventures and non-full function joint ventures), the insignificant local nexus exemption and the treatment of routine asset acquisitions. In regard to acquisitions through slump sales, the CCI has taken the view, in Wockhardt/Danone (C-2011/08/03), and subsequently in Aica/BBTCL (C-2011/09/04) and NHK Automotive/BBTCL (C-2011/10/05) (all of which were advised by Amarchand Mangaldas Suresh A. Shroff&Co.) that the target for the purpose of the Target Exemption and the jurisdictional thresholds under the Act would be the vendor enterprise (in its entirety), and not merely the assets and turnover of the division/business unit being sold. As a result of this interpretation, given that the CCI is effectively taking into account the size of the parties and not the thresholds of the actual target (i.e. the business division), a merger notification would be required if a conglomerate transfers a business division or unit of insignificant value to another enterprise, as the assets and turnover of the vendor would be considered the “target enterprise” for the purpose of the Act.
An area of concern is possible jurisdictional overlaps between the CCI and other sectoral regulators. For instance, the Ministry of Corporate Affairs is currently formulating regulations for the pharmaceutical sector as it is proposed that the CCI mandatorily review all foreign direct investment into the sector even if the jurisdictional thresholds have not been crossed and operate as a check on foreign investment through brownfield joint ventures in the pharmaceutical sector in public interest. Other sectoral regulators (such as the Reserve Bank of India) are trying to exclude mergers and acquisitions in the banking sector from the purview of the CCI. Similarly, the Department of Telecommunications has reportedly sought an exemption for the telecommunications sector in India, in order to facilitate consolidation in that sector.[7] It is vital that the CCI co-ordinate with other sectoral regulators to ensure that M&A activity in India is not hampered.
Amendments to the Act have been proposed and will hopefully address some of the ambiguities to facilitate a more efficient and effective merger control regime.
Conclusion
The merger control regime in India is relatively nascent and has been in force since 1 June 2012. During this 10 month period, the CCI has been successful in sending positive signals to the business community by approving all the 36 notifications filed to date (much before the stipulated 30 day review period, if clock stops are excluded) and by introducing Amendment Regulations which clarified some of the prevailing ambiguities and inconsistencies in the merger control regime.
Whilst the CCI has addressed some of the concerns of industry, its approach towards the implementation of the provisions of the Act has been quite literal and pedantic. Nevertheless, the CCI has been receptive and has shown its willingness to be more industry friendly. It remains to be seen how the CCI develops a body of jurisprudence in line with the international best practices, addressing prevailing ambiguities and lingering interpretational issues.
[1] The Government of India through the Ministry of Corporate Affairs issued a series of notifications dated 4 March 2011 (“Notifications”). The Notifications also exempt enterprises exercising less than 50% of voting rights in another enterprise from being treated as the part of same “group” under Section 5.
[2] The Act defines “Group” to mean two or more enterprises which, directly or indirectly, are in a position to:
(i) exercise [50]% or more of the voting rights in the other enterprise (amended by the Notifications for the purposes of calculation of thresholds); or
(ii) appoint more than 50% of the members of the board of directors in the other enterprise; or
(iii) control the management or affairs of the other enterprise.
[3] The Combination Regulations clarify that “other document” refers to “any binding document, by whatever name called, conveying an agreement or decision to acquire control, shares, voting rights or assets.” Further, in the case of hostile acquisitions, any document executed by the acquiring enterprise reflecting an intention to acquire control, shares or voting rights would be considered an “other document”. Additionally, even where documents have not been executed, if the intention to acquire is communicated to a government or a statutory authority, the date of such communication would be deemed to be the date of execution of such document.
[4] The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
[5] The Amendment Regulations allow the CCI to accept late Form III filings (i.e. beyond the prescribed 7 day period) and require the submission of a copy of the loan or investment agreement along with Form III.
[6] C-2012/12/16. Order of the CCI on penalty proceedings, available at http://cci.gov.in/May2011/OrderOfCommission/CombinationOrders/C-2011-12-16%2043A.pdf (last visited on 19 March 2012). Order of the CCI approving the Combination, available at http://cci.gov.in/May2011/OrderOfCommission/CombinationOrders/EAPLJan2012.pdf (last visited on 19 March 2012).
[7] “Telecom Department seeks exemption from Competition Act”, Economic Times, 19 March 2012, available at http://economictimes.indiatimes.com/news/news-by-industry/telecom/telecom-department-seeks-exemption-from-competition-act/articleshow/12323238.cms (last visited on 19 March 2012).