[Anuja Chaudhury - A final year student at ILS Law College, Pune]
The last 10 years witnessed the 5 largest digital companies (Amazon, Apple, Microsoft, Google and Facebook) making approximately 400 acquisitions globally, with only a few of them being blocked or approved with behavioural or structural modifications. The antitrust regulators were criticised for ignoring the long-term impact of such mergers (especially in an evolving digital market). The data-driven transactions namely, Ola-Taxiforsure ($200 million in 2015), Snapdeal-Freecharge ($400 million in 2015), Facebook-Whatsapp (approximately $19 billion in 2014) amongst many others, escaped antitrust scrutiny in India, highlighting the ineptness of the current legislation to effectively capture what have been called ‘killer acquisitions'.
The traditional approach of merger control was to scrutinize acquisitions and mergers where the assets and turnover of the acquirer or the target company, or that of the amalgamated entity/s breached the set thresholds by the Ministry of Corporate Affairs (MCA). This authority has been accorded to the Competition Commission of India (CCI) under Section 5 and 6 of the Competition Act, 2002 (Act). With the advent of digitalisation and emergence of various start-up platforms and aggregators, along with global giant tech companies, competition authorities and policymakers started feeling the heat when the acquisition of start-ups (as target companies) were approved as they kept escaping the traditional thresholds radar.
Notably, the Competition Law Review Committee (CLRC) in their 2019 Report recommended the need to contemplate the introduction of deal value or transaction value thresholds (DVT) to capture such unique transactions. Accordingly, the Draft Competition Amendment Bill, 2020 proposed a version to be implemented in the future.
What are Deal Value Thresholds?
Conventionally, the assets and turnover thresholds ignore acquisitions of target companies that do not have a huge asset base or significant turnover as they may be building their consumer base by providing their goods and services at negligible or zero costs. In such scenarios, sales of such start-ups do not provide a clear picture of the impact on the competition in case of their acquisition (which are mostly data-driven). DVT generally focuses on whether the value of the transactions exceeds a certain pre-decided threshold, and if they have a considerable presence in the local territories of that country. For example, the German DVT model provides that if the consideration of an acquisition exceeds EUR 400 million, and has ‘substantial operations’ in Germany, then such a transaction would require pre-merger approval.
The Models adopted by Germany and Austria
In 2017, Germany, followed by Austria amended their antitrust legislation to introduce DVT in its merger control regime to catch concentrations exceeding EUR 400 and 200 million, respectively. In July 2018, they released a Guidance Note (Note) to clarify the potential challenges predicted from such thresholds, and laid down its action plan for its peer regulators.
The Note addressed two significant concerns raised by the stakeholders:
Determination of the consideration value: Consideration includes all the assets and monetary benefits (cash payments, transfer of voting right, securities, tangible and intangible assets). The Note clarified that in case of the consideration consisting of uncertain components (susceptible to fluctuation), an opportunity will be provided to the parties to illustrate the detailed calculation of such value. Even those transactions whose value is disagreed by either party could be notified on a precautionary basis.
Substantial Domestic Operations: The Note specified that the DVT will apply to only those transactions where a company (or assets/significant parts) that is being acquired has substantial operations in Germany or Austria. However, instead of ‘domestic turnover’, different criteria could be applied considering the varied sectors and activities as an indicator of ‘domestic activity.’ In the digital sector, the user numbers or the access frequency of the website have been used in the previous proceedings to establish the domestic presence.
Further, the Note also stated that in the determination of the ‘local nexus’, the target entity’s operation location and infrastructure would be considered, whereas the ‘market nexus’ would cover all instances of paid products or services, or remuneration earned through user data or future launch of the products.
Resistance from the European Union
The Competition Policy for the Digital Area Report, 2019 (Report) suggested that DVT is a low standard mechanism and will eventually lead to capturing too many transactions. Considering the difficulties accompanying the DVT, the Report recommended that the assessment of the performance of the German and Austrian models should be awaited before introducing it in the EU Merger Regulations (EUMR). The main concerns raised in the public consultation process were the threat of additional administrative burden on the European Commission (EC) leading to the chilling effect on innovation and investment in the future. However, the Report highlights that Article 4(5) of the EUMR already has a mechanism to investigate mergers escaping the European Community threshold if it requires pre-merger notification according to the national laws of 3 member states (as in the case of Whatsapp/Facebook). Considering the existing DVT systems in Germany and Austria, it is relatively easier for non-notifiable digital mergers to be scrutinized by the EC.
Since 2017, Germany witnessed 18 formal DVT notifications (7 withdrawn and 11 cleared), while Austria had 20 filings out of which none were dismissed. Hence, both the countries stated that it was too early to conclude on the ‘workability’ of the thresholds. In 2018, the EC while assessing a non-notifiable merger of Microsoft/Github, used the new German threshold to trigger Article 4(5) of EUMR. Section 43A of the German Act against Restraints of Competition states that the effectiveness of the thresholds shall be evaluated in 3 years after the provisions came to force (i.e. June 2020). Thus, it can be predicted that EC would take an active step in introducing a similar threshold after considering the clarity provided on the inner workings of the system after June 2020.
What Concerns should India be Prepared for?
What is the relevant date for notification: Since the consideration value is predisposed to fluctuation (when in the form of securities or cash held in foreign currencies), the value of consideration has to be calculated for a specific period of time. Usually, a notification is prompted before the closing date of the transaction. However, if at such a date, the future value of the consideration is unclear, a contingency plan should be contemplated to accommodate such adversary. The Note suggests that a self-evaluation should be conducted by the parties to relate when the notification requirement has been caused. Later, in case the value of the consideration falls short of the notification requirement, the parties have been provided with an option to withdraw their application. Similarly, if the value subsequently increased and crossed the threshold prior to closing, the transaction requires notification pre-closing.
Including non-price determinants: The majority of the transactions in the digital markets are data-motivated. While laying down a DVT in India, the competition regulator should be aware of not reducing the consideration value of the transaction only in monetary terms. As noted by Bourreau & De Streel, an additional transaction value threshold would ‘not necessarily increase the number of concentrations to be notified substantially, as the merger transaction value is aligned with the merging firms’ monetary turnover in the majority of cases.’ Therefore, it is equally important to include the concerns regarding privacy particularly in sectors that prides for the provision of free services, data sharing agreements, as well as non-compete clauses, should be considered while evaluating the transaction value.
Factoring unpredictable fluctuations: The CLRC has warned the policymakers to consider nuanced issues such as accounting the fluctuations in the value of listed shares while calculating the deal value, the computation of the earn-outs, deferred consideration and other payment structures as a part of the transaction value
Any Alternative Mechanism?
If the target company lacks sufficient turnover, the Swedish Competition Authority has the authority to order a notification resulting in a transaction after it has been closed, as null and void in the presence of particular grounds. Though such grounds have not yet been succinctly defined, the provision is used to track down any concentration capable of preventing, restricting or distorting competition in the market to an appreciable extent. This provision was used to prohibit the transaction a non-notifiable transaction involving an acquisition of a franchisor real estate competitor. However, the current system requires a joint turnover of the merging parties of Swedish Krona 1 billion for the application of the particular grounds threshold, making a case for the introduction of an additional non-turnover based threshold in the merger regime.
Additionally, the Organisation for Economic Co-operation and Development in its report Killer Acquisitions and Merger Control suggests a more flexible criteria as adopted by the United Kingdom (UK) in the form of a share of supply test, whereby a transaction is notifiable only if the merger enterprises supply or acquire goods or services of a particular description, and after the merger will supply or acquire 25% or more of those goods or services in the UK or a substantial part of it. However, UK follows a voluntary filing system, thus providing its competition regulator ample power to investigate transactions pre- and post-closing of the deal.
As noted by the CLRC, CCI does not possess any residuary power to access non-notifiable mergers even if the potential competitive harm is evident. It also clarified that Section 20(1) of the Act only enables the CCI to assess those transactions which qualify to be combinations under Section 5. Thus, it can be concluded that the current merger control regime has an evident legislative gap, and it requires the implementation of the DVT, rather than the ‘flexible’ systems of Sweden or UK which have their in-built mechanism to peruse non-notifiable mergers.
The Way Ahead
Undoubtedly, the DVT comes with its own challenges, and the MCA has to carefully devise a robust strategy addressing those concerns. The controversial Zomato/Uber Eats transaction being under probe by CCI after the transaction was closed, advocates the need for DVT in the current competition regime. However, it cannot be missed that the introduction of such a modern system of merger control requires the authorities to assess the digital sector with a finer look to take in all the upcoming challenges (such as data protection and data accumulation). The authorities also may need to contemplate providing more residuary powers to the antitrust regulator to carry out an impassive investigation in transactions not meeting the thresholds, but likely to have an impact on competition in India. While considering the need to have an antitrust regime that promotes innovation, dearth of adequate regulations of digital market transactions that are often used as a strategy to consolidate market power and eliminate potential competitors, inherently goes against the spirit of the legislation hence necessitating dire attention of the lawmakers.