Vertical Overlaps in Merger Control

Introduction

Indian Competition Law permits the Competition Commission (CCI) to consider the nature and extent of Vertical Integration in the market, in order to determine whether a combination will (or would be likely to) cause an Appreciable Adverse Effect on Competition (AAEC).[1]In this article, we discuss the compliance and reporting requirements applicable to parties to a combination,involved in different stages of the supply chain for a product or service, above a certain threshold, and compare the same with the disclosures to be made in case they do not surpass the threshold.

In India, in cases where a vertical overlap of more than 25% exists, the Acquirer (in case of an acquisition) or both parties jointly (in the case of a Merger) are required to file Form II,[2] which requires more detailed submissions and is used essentially in schemes of a large scale that would have a greater impact on the market. The fee payable along with the form is Rs. 50 Lakh.[3]

The parties must also give information, in requisite detail about all market segments involved in the transaction. When there are one or more markets where the overlaps are in excess of the thresholds, even if there are other markets where the thresholds aren’t met, information with respect to them must be filed in Form II.[4]

Summary of the Content of Forms I and II:

Form 1:

1. Basic Info

2. Proof of Payment of Fee

3. Authorisation regarding communication

4. Meeting the Thresholds (Assets + Turnover)

5. Summary in accordance with regulations 13 (1A & 1B)

6. Description of combination:

           a. Name of parties

           b. Structure

             i. Steps + Timelines

             ii. Structure ownership control

             iii. Value of transaction

          c. Purpose of combination

          d. Other jurisdictions

          e. Approval by board of directors

          f. Details and justification for Non-compete (if any)

7. Details about parties

          i. List of regd. entities in India

          ii. Name of group

          iii. Trading/Brand names in India

          iv. Activities worldwide

          v. Activities in India

             a. List of Products and Services

             b. Identical/Substitutable Products (Y/N) (Details if Y)

             c. Vertical Linkage (Y/N) (Details if Y)

             d. Horizontal/Vertical Linkage with another enterprise, which a party to the combination Has shareholding in.

             e. Brief overview of the sector

8. Relevant market (RM)

          a. Relevant Product + Geographic Market

          b. Whether the parties are engaged in business in the same RM

          c. Estimated size of RM

          d. Value of sales and the market share of each party in the RM

          e. Names of 5 Largest Competitors

f. If there is a vertical linkage:

             i. Market size of upstream & downstream market

             ii. Market share of each party in both

             iii. Market share of 5 largest competitors in the Upstream/Downstream market

             iv. Existing supply arrangements between the parties and its share in the relevant market

Form 2 Summary:

1. Summary

          a. rationale, objectives, strategy, and likely impact.

          b. Parties, Nature, Area of Activities, Market impacted, info relevant for 20(4), timeframe of combination.

2. Purpose

          a. Business Objectives – What & How

          b. Economic Rationale and Impact

3. Details of Payment

4. Personal (Contact) Details

5. Details about Combination

          a. Which clause u/s 5 of the Act

          b. Details about nature of comb.:

             i. Number + Percentage of Shares/Voting rights Acquired; whether the same would lead to control.

             ii. Value of Assets; whether leading to control

             iii. Details of constituent transactions in the comb.

6. Supporting docs.

          a. Docs supporting board approval of the scheme

          b. Docs analysing impact of acquisition on the market, competitors etc. after the comb.

          c. MoA, AoA of parties

          d. Annual Reports of parties (if section 5(b) is applicable, also of competing enterprises already controlled by acquirer)

          e. List of holders of 5% or more shares/voting rights in each party.

          f. Organisational chart and details of KMP

7. Size of Combination

          a. How are the criteria for filing notice for the combination met.

          b. Audited accounts of the immediately preceding two, as well as the currentfinancial year, separately for all parties (includes value of assets and aggregate turnover, in India and Worldwide)

          c. Aggregate audited and unaudited accounts for the proposed combination (in a similar way as above)

          d. Accounts of the Group to which the post combination entity would belong (in the same way as above)

8. Ownership & Control

          a. List of all enterprises in the group to which the parties belong; details of all enterprises controlling the parties.

          b. Whether a party to the combination controls another entity/group (Details if Yes)

          c. Details of Horizontal Linkages, if any.

          d. Details of Vertical Linkages, if any.

          e. Details of intended structure of ownership and control of parties and combined enterprise post completion.

9. Details about Products/Services

          a. Details of:

             i. List Products and Services

             ii. Characteristics; End use

             iii. Are the Parties Competitors in same RM?

             iv. Market Shares of parties and their competitors  (within RM)

             v. In-house consumption, if any

             vi. Existence/availability of other specialised producers

             vii. Industrial Classification of Products/Services

          b. Any Law/Regulation/Specification that:

             i. Restricts the operation of like products/services as the parties, in the RM.

             ii. Local specification applicable to the like products.

             iii. Licensing Requirements to set up production facilities; special technical knowledge

             iv. Govt. Procurement policies that offer special dispensation

          c. Importance and details of distribution channels

          d. Details of transportation (modes, cost etc.)

          e. Define limits of Product and Geographical RM and demarcate competitive products not included in the same.

          f. Manner in which the parties produce, price and sell their product; all documents related to the pricing for the previous two years and price forecasts post-combination.

          g. Pricing details for major competitors and imports

          h. Details about the minimum viable scale, minimum and optimum plant size, utilisation rate, available cost savings etc.

10. Information on Market Structure

          a. Market Sizein terms of value and volume, 5 Largest Competitors, Costumers, Suppliers.

          b. Market share of parties in the product RM.

          c. List of main competitors in RM

          d. List of all competitors having market share > 5% in the RM.

          e. Description of the state of competition in the RM

          f. Level of Concentration in RM before and after combination (HHI)

          g. List of enterprises which attempted entering or exiting (last 5 years) or are likely to enter (next 2 years) RM.

          h. If either party entered the RM in last 5 years, faced any barrier to entry?

   Factors influencing entry in the market:

             i. Total cost of entry

             ii. Non-recoverable investment on entry

             iii. Legal/regulatory barriers

             iv. IPR restrictions

             v. Details of IPRs developed by parties

             vi. Importance of economies of scale in RM

             vii. Access to sources of supply

          j. Information regarding volume and market share etc. of imports; details of potential imports to start in next 2 years; cost difference in domestic and imported products.

          k. Details of exports and their proportion in the RM for last 3 years; top 5 exporters.

          l. Details of largest suppliers to parties.

          m. Details of products/services in the pipeline for parties and competitors and its impact on market share.

          n. Details of Large buyers

          o. Demand structure in the RM; roles of product differentiation and switching costs.

          p. Language compliance requirements.

          q. Importance and details of R&D activities carried out by parties (present)

          r. Intended R&D activities subsequent to combination

          s. Details of ground-breaking technology or business models used by parties/competitors in RM

11. Compliance and filing in other jurisdictions

          a. Any order passed by any Competition/ State Authority involving the parties, in the last 5 years.

          b. Any bankruptcy/winding up petition filed by any party in last 5 years.

          c. Details and copies of the documents filed before other tribunals/ regulators with respect to the combination and the orders passed.

          d. If filing has to be done in jurisdictions other than India, details and copies of relevant documents including order/decision.

12. Any other information that could help the commission in this assessment.

Case Studies

In Alok Industries and Grabal Alok Impex[5], the commission found that “The Parties to the Combination are engaged in activities which are at different stages or levels of the production chain in the textile business and, in addition to providing products/services to other customers, sometimes provide products/ services to others also. It is however, observed that the sales and purchase of products/services of parties to the combination to/from each other is very small and out of the total sales and purchase of products and services of each of the parties to the combination, the sales and purchase of each to/from each other is also insignificant.” The Commission observed that the combination was not likely to have any “adverse competition concern.”

In Bayer’s acquisition of Monsanto, the commission passed an order under Section 31(7), accepting the proposed amendments to the Proposal for Modification issued by the CCI and approving the acquisition.[6] A quick look through some of the important observations in the order, would be worthwhile. It was noted that the Proposed Combination would create one of the largest vertically integrated player in the agricultural market globally.[7]

Resultantly, the commission observed that the acquisition could lead to AAEC in 8 Relevant Markets. Most importantly, Monsanto held a 95-100% of the upstream market for Bt. Cotton Trails in India and had a presence in the Downstream market too. Bayer was one of the very few competitors for Monsanto in the said upstream market and the acquisition would allow the combined entity to substantially foreclose access for other downstream seed companies.[8]The CCI approved the acquisition subject to a series of divestments to be made by both Bayer and Monsanto. They also required the licensing of certain products on FRAND terms. They were required not to bundle their products and commit to maintain non-exclusive distribution channels.[9]

Conclusion

The Competition Commission of India has set up a robust mechanism to differentiate combinations that would have or be likely to have an appreciable adverse effect on competition, from the ones which wouldn’t. When talking about restructuring schemes which involve significant (>25%) vertical overlaps, the process becomes much more onerous, and the regulator requires a multitude of disclosures and analyses, for the past present and future of the companies.

While it is critical to prevent certain Mergers & Acquisitions from impairing the competition between enterprises, the regulator, like many other instrumentalities of the state could make its process more conducive to business. Ample powers have been given to this statutory body, including carrying out an assessment of the anti-competitive agreements or abuse of dominant position, at any point, even on its own motion and impose penalties, in case the enterprises manage to get away with a devious combination.It should replace the existing system of approval with something much less burdensome, and make the process quicker, to not end up causing an appreciable adverse effect on the free market.

Author: Mr. Anant Joshi, Associate – Corporate & Commercial Law Practice at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at anant@khuranaandkhurana.com. 

References:

[1]Section 2(4) (j) of the Competition Act, 2002.

[2].

[3].

[4]GE Company, GE Industrial France SAS, Alstom, Alstom Holdings (C-2015/01/241).

[5] No. C-2012/01/28.

[6]No. C-2017/08/523.

[7] Id, para 19. 

[8] Id, para 82.

[9] Id, paras 210,211.