Introduction

It is a common practice for parties entering into a merger and acquisition (‘M&A’) transaction to include standstill obligations in the transaction documents to preserve the value of investment and to ensure some degree of status quo. However, having a curated list of standstill obligations becomes extremely important in M&A transactions requiring approvals from competition regulators. This is because competition authorities typically impose obligations on the parties to maintain status quo to ensure that the parties do not: (i) implement all/part of the transaction; or (ii) coordinate/integrate their activities. Violations of this standstill obligation is typically referred to as gun jumping.

In the Indian context, the Competition Commission of India (‘CCI’) has the power to penalise parties for gun jumping under Section 43A of the Competition Act, 2002 (‘Act’). Although the CCI’s jurisprudence is replete with instances of gun jumping, its decision^[1] penalising Adani Green Energy Limited (‘Acquirer’) for gun jumping, brings out an interesting perspective on the CCI’s approach on gun jumping. We analyse below this decision and certain other noteworthy precedents and their impact on the Indian merger control regime.

Pre-transaction Coordination /Acquisition of Control

In one of the earliest decisions on pre-merger coordination, the CCI penalised LT Foods^[2] for pre-merger coordination of parties. Amongst other things, the transaction documents allowed the acquirer to interact with the target’s suppliers; mandated the target to transfer its trademark registration, marketing materials, packaging labels etc.to the acquirer; and restricted the target from promotional spending, entering/exiting businesses, before receiving the CCI’s approval. Despite the acquirer’s assertions that these clauses were customary protections necessary to protect the value of the target and consequently, the acquirer’s investment till closing, the CCI held that these clauses resulted in a pre-merger coordination of parties activities before closing, which violated the standstill obligation under the Act.

Subsequently, the Bharti Airtel^[3] case dealt with a locked-box mechanism in the transaction contract, which specifically allowed the acquirer to assume the ‘economic responsibility’ of the target’s assets and liabilities before a notional date preceding the CCI’s approval. The CCI held that since this notional date preceded the CCI’s approval, it lessened the target’s incentive to compete with the acquirer before the CCI’s approval and could allow the acquirer to influence the target in the interim period, thereby interfering in the target’s ordinary business activities in the interim period. Therefore, the CCI held that this clause amounted to gun jumping, regardless of the fact that the transaction’s closing itself could only occur post the CCI approval. The CCI recognised that parties could impose customary obligations to preserve the value of their investment. However, these obligations would have to be inherent and proportionate to ensuring certainty in business valuation.

Adani Decision

This principle was tested and expanded upon in the CCI’s recent decision. In that case, the transaction documents allowed the parties to discuss ongoing operations, for the Acquirer to provide non-binding inputs to the target’s business, and for the target to take these inputs into account during the interim period. It was contended by the Acquirer that such rights were necessary to monitor and preserve the economic value of the target on material developments between signing and closing.

The CCI noted that an assessment on gun-jumping required balancing between the likelihood of: (i)  any action/agreement to infringe with parties’ ordinary activities of the parties; or (ii) reduction in the competition intensity or causing competition distortions, vis-à-vis: (a) the inherence and proportionality of the measures to the parties’ intent; and (b)  reviewing the efficacy of safeguards adopted.

With respect to the transaction, the CCI held that these measures were neither inherent nor proportionate to the objective, as these clauses were in addition to the other specific clauses in the transaction documents dealing with preserving the economic value of the target.

The CCI further observed that as the clauses in the transaction documents were widely worded, it could potentially be used for discussions beyond those relating to the material developments affecting the target i.e., the clauses could be used for exchanging commercially sensitive information (‘CSI’) and as a conduit of collusion as acquirer and target were competitors. Therefore, in line with its reliance on the inherence and proportionality principle propounded in its earlier gun jumping cases, the CCI held that these clauses amounted to gun jumping. This reasoning is reminiscent of the CCI’s stand on information exchange and also reflects the CCI’s stricter approach to information exchange with respect to merger control.

Exchange of CSI

As a focal part of its analysis, the CCI also considered whether the information exchanged between the Acquirer and the target amounted to gun jumping. While analysing the discussions around ongoing operations, the Acquirer contented that since CSI was exchanged pursuant to clean team protocols, there would be no competition concerns.

The CCI acknowledged that exchange of information could be necessary and legitimate in transactions for certain purposes like integration planning, due diligence etc. Relying on its competition compliance manual, the CCI also acknowledged that clean team protocols could provide adequate safeguards. However, it held that for the protocols to be effective, the constitution and rules of engagement of the clean team would need to be expressly laid down and complied with in letter and spirit. Therefore, it was not enough for parties to claim that a clean team protocol was in place.

The Acquirer had not provided any evidence of the working of the clean team protocols. Further, as the transaction document explicitly allowed for Acquirer’s inputs to be taken into account by the target, the CCI opined that these inputs could only be taken into account by the target’s non-clean team members, since by definition, a clean team member would not have been involved in the target’s day-to-day operations. Therefore, the CCI held that the clean team protocol was insufficient to address the potential collusion that could come about as a result of the CSI exchanged.

Potential Effects

One of the Acquirer’s key arguments was that the CCI’s theory of harm regarding collusion between the parties was merely hypothetical i.e., that the CCI had only analysed the potential effect of the transaction documents, without considering the actual effects. Rebutting this argument, the CCI relied on the Hindustan Colas^[4] decision in observing that gun jumping (i.e., an assessment of when the transaction came into effect) included within it an assessment of the ‘potential competition distortions’ due to the parties’ conduct in the interim period, such as whether the target’s will and incentive to compete was reduced, whether there was a reason to access confidential information or whether a situation was created similar to tacit collusion.

Conclusion

This decision marked the first instance where the exchange of CSI was explicitly categorised as gun jumping by the CCI. While the CCI’s analysis of whether the parties engaged in pre-merger coordination in sync with its earlier decisions, the CCI’s focus on assessing the potential competition effects of gun jumping appears to be much stricter than earlier.

This case highlights that parties must now be able to demonstrate with evidence, that the safeguards to avoid gun jumping were not only in place but were effective/ operational. For clean teams in particular, it will no longer be enough to just make references to clean team protocols in transaction documents. Parties must put in place documents, policies etc. to visibly demonstrate to the CCI that the clean teams were duly constituted, and that CSI was exchanged only between clean team members.

[1] Adani Green Energy Limited, Combination Registration No. C-2021/05/837, Order under Section 43A of the Act.

[2] LT Foods Limited and LT Foods Middle East DMCC, Combination Registration No. C-2016/04/387, Order under Section 43A of the Act.

[3] Bharti Airtel Limited, Combination Registration No. C-2017/10/531, Order under Section 43A of the Act.

[4] Hindustan Colas Private Limited, Combination Registration No. C-2015/08/299, Order under Section 43A of the Act.