Brains for Sale: Protecting Startups from Acquihires

[Amal Shukla is a fourth year law student at Hidayatullah National Law University]

Introduction

Human capital is crucial for a thriving business enterprise, especially in the tech industry. As Big Tech firms foray into the Artificial Intelligence (AI) business, innovative engineers skilled in Large Language Models (LLMs) prove to be valuable in keeping an enterprise afloat amongst competitors. These innovative engineers have the potential to disrupt existing competition in the tech industry through their startups. In this context, Acquihires prove to be a tool with the potential to manipulate and even kill competition in the market.

Acquihire refers to the acquisition of an enterprise’s employees and their skills, often clubbed with licensing of their Intellectual Properties (IPs) rather than its assets, services or products. Acquihires in the tech industry have gained significant attention and scrutiny worldwide. Deals like Microsoft-inflection AI, Amazon-Adept AI, Meta-Scale AI and Google-Character AI have drawn attention from antitrust regulators. Similarly, the Competition Commission of India (CCI) has also expressed its intent to examine the labour market arrangement and its consequent impact on competition, especially in the AI market.

This article explores the implications of Acquihire deals on competition, assesses the adequacy of India’s current legal framework, reviews the approaches of foreign jurisdictions and proposes suggestions for effective regulation.

Implications of Acquihires

Acquihires can be both pro-competitive and anti-competitive, depending on factors such as the relationship between the parties and post-deal integration of employees. On the one hand, Acquihires enhance labour mobility, thus supporting allocative efficiency. They also help startup owners to scale up their operations using the resources available at the acquiring enterprise. However, the fact that Acquihires can be Killer Acquisitions in disguise cannot be overlooked. Killer Acquisitions refer to larger enterprises taking over budding startups to curb competition. Acquihire may be used to curb an innovative startup that may create market disruption by hiring all the employees at once and relocating them to a totally different sector or job. Further, Acquihires are usually clubbed with the acquisition of IPs, thus allowing Big Tech firms to enter into new markets. Given these developments, it becomes extremely important to regulate Acquihires. However, it is pertinent to note that overregulation may negatively affect labour mobility.

Regulation of Acquihires under the Competition Act, 2002

The Competition Act, 2002 (Competition Act) regulates mergers and acquisitions under Section 5. Section 5 provides two thresholds, namely the asset or turnover threshold and the newly added Deal Value Threshold (DVT). Asset or turnover thresholds are concerned with joint assets or turnover of the enterprises or groups involved. Whereas the DVT is concerned with the total consideration offered for the transaction. When an acquisition, merger or amalgamation of control, shares, voting rights or assets satisfies any of these thresholds, it is classified as a Combination and shall mandatorily be notified to the CCI. At this juncture, it becomes important to note that none of the above thresholds mentions the acquisition of employees. These thresholds can’t be directly applied to the case of Acquihires unless they are structured as a merger, acquisition or amalgamation affecting control, shares, voting rights or assets.

It may be argued that the definition of “Control” under Section 5 is wide enough to cover Acquihire transactions. Control has been defined under the Explanations to Section 5 as the ability of an enterprise to exercise material influence, in any manner whatsoever, over the management or affairs of, or strategic commercial decisions by, other enterprises or groups of enterprises. This line of interpretation was clarified in the Ultra Tech/ Jaiprakash Associates Limited combination, where CCI explained that “material influence” implies the presence of factors such as shareholding, special rights, status and expertise of an enterprise or person, board representation, structural or financial arrangements. However, Acquihires won’t fall under this interpretation, as they are structured only as a mass hiring of employees and because of the separation of the employees and the startup. Subsequent to the deal, new employment agreements will be signed, and concerned engineers will no longer be employees of the startup and thus will have no control over it. Further, in these structures, assets or shareholding may not be affected, and thus, would fall outside the scope of Section 5.

In any case, in the event the CCI expands the scope of Section 5 to cover the acquisition of employees, it is highly unlikely that an Acquihire transaction will meet the existing thresholds. Startups at the nascent stage may not have the required assets or turnover to satisfy the threshold under Section 5, despite being assessed jointly with the acquiring party. Moreover, in cases where the target startup has assets of value not more than 450 crores or turnover not more than 1250 crores, the deal may get exempted under the de minimis exemptions.

In Acquihires, the acquiring company is only interested in the employees and their skills; thus, the consideration for such a transaction covers only the employees and not the assets or shares, which are not part of the transaction. These Acquihires are valued less in comparison to the complete acquisition of the startups. Moreover, there can be cases where Acquihires target only the founding team of the startups, for example, in the case of Google-Windsurf Acquihire. In such cases, the rest of the team can be hired for subpar consideration, further reducing the deal value below the DVT. Thus, given the incapability of Section 5 to cover Acquihire transactions effectively, there is a need for an amendment or a separate regulation to govern the Acquihire transactions.

Lessons from beyond the seas

At present, India does not have any jurisprudence on Acquihires, and thus, a glance at the stance that foreign jurisdictions have taken with respect to this issue can be helpful.  The German Federal Cartel Office (FCO) sought to asses Microsoft-Inflection AI deal wherein Microsoft did not simply buy Inflection AI; it rather only took over its employees. The FCO had to decide whether or not the takeover of employees constitutes a “Concentration”. Concentration is the European equivalent of Combination. The FCO found the answer in affirmative. However, the deal fell out of FCO’s jurisdiction as Inflection did not have “substantial operations in Germany”. Consequently, the FCO failed to start a formal inquiry.

The Federal Trade Commission (FTC) and the Department of Justice (DOJ) adopt a very different approach. In the cases of Google-Character AI and Amazon-Adept AI, the DOJ and FTC, respectively, have started informal antitrust probes. The rationale behind these probes, as cited by the authorities, is the intention of the tech giants to structure the deals specifically to avoid formal antitrust scrutiny.

Way forward

India is a developing economy and requires skilled labour mobility. Given this backdrop, adopting foreign approaches blindly won’t have desirable consequences. In such cases, the CCI shall not over curtail Acquihires; rather, it shall seek to prevent Killer Acquisitions disguised as Acquihires. To identify whether an Acquihire is actually intended to kill competition, the regulators must focus on the following indicators.

Potential of the startup to disrupt the competition: Big tech firms often try to acquire startups with innovative technology at their budding stage, thus killing a potential competitor in the womb. For instance, Google’s acquisition of Waze, a unique navigation app which used user-submitted data for providing real-time information on traffic and an emerging competitor of Google Maps. Acquihires can be used to achieve similar ends as they are often clubbed with the acquisition startup’s IPs. In such transactions, regulators shall effectively assess the potential of the startup and its IPs to bring disruptive changes in the competition.

In doing so, regulators must assess two key factors, namely the demand trajectory of the startup’s product or service, and the startup’s potential to supply it at a consumer-favourable and competitive price. These assessments, however, will require the assistance of tech-industry experts. Thus, the CCI has to undergo significant capacity-building reforms in order to bring this into effect.

Dynamics between the parties to the deal: Another indicator that the CCI must analyse is the competitive relationship between the parties. On one hand, if the target startup is a competitor of the Acqui-hiring enterprise, then there are significant chances that the deal is a strategic move to kill competition. On the other hand, Acquihires can be pro-competitive, particularly when a large tech firm acquires employees from sinking startups to enter a new market. Resources of the Big Tech firms, when combined with the ingenuity of the Acqui-hired employees, can significantly increase competitive strength. For instance, Google’s acquisition saved the near-failing Android, which then grew into a tech giant. Similar deals can be more efficiently structured through Acquihires. However, existing competitors may raise antitrust concerns against such deals. Thus, it becomes important to regulate Acquihires without stifling labour mobility. For this purpose, the CCI may provide exemptions for Acquihires, where the target company’s financial reports show losses, falling market share or other indicators of financial stress, provided the Acquirer and target are not horizontal competitors.

Consideration offered and post-deal integration: Where Acquihiring is done for a disproportionately higher consideration than the prevailing market standard, it can be taken as an indicator of a Killer Acquisition. Big tech firms have significantly more capital and bargaining power; thus, they can offer high considerations for Acquihire deals, offering significantly high compensation to the employees being acquired. Such employees can then be reallocated to completely different sectors, thus stifling innovation in the relevant market.

To help resolve this issue, the CCI can impose a lock-in period during which the Acquihired employees cannot be reallocated to a different work area. To better regulate Acquihires, the CCI should adopt stricter financial thresholds inspired by the Australian merger control regime. Australia’s Competition and Consumer Act, 2010 (CCA) requires mandatory notification of acquisitions where the Acquiring entity has a revenue of not less than 500 million Australian Dollars (Au$) and the target entity has a revenue of not less than 10 million Au$. Unlike the Indian and European regimes, this model effectively captures acquisitions with significant size disparities between the parties. Implementing a similar framework, with adjusted financial values, would be a major step forward. However, this would first require an expanded interpretation of “combination” to include buyout of employees.

Conclusion

In conclusion, while Acquihires can promote innovation and labour mobility, they also pose a threat of being misused as tools to eliminate emerging competition, especially in the tech and AI sectors. The current legal framework under the Competition Act cannot effectively deal with Acquihires. Therefore, a separate set of regulations under the Competition Act is necessary, as regulating Acquihires requires a nuanced approach with an expanded definition of combination, lesser financial thresholds, a lock-in period for relocation of employees, assessment of inter-party relationship and potential of the target startup to affect competition. Ultimately, improving institutional capacity and refining regulatory tools are crucial to preserving the competitive integrity of the evolving digital economy.