Introduction

On December 17, 2021, the Competition Commission of India (‘CCI’) imposed a penalty of Rs 200 crores (~US$ 26.88 million) on Amazon for its failure to explicitly identify its strategic interest in Future Retail Limited (‘FRL’) while seeking approval for its acquisition of 49% shareholding in Future Coupons Private Limited (‘FCPL’) (‘Transaction’). According to the terms agreed for in the Transaction, Amazon would acquire certain rights in FCPL which would require FCPL to obtain Amazon’s prior written consent to decide on or implement any matter under the shareholders’ agreement with FRL (‘FRL Rights’).

The CCI also imposed an additional penalty of Rs two crores (~US$263,000) for suppressing information and facts about the ‘scope and purpose’ of the Transaction. In addition, the CCI directed Amazon to file a detailed notification, in Form II of the Competition Act, 2002 (‘Competition Act’) to re-evaluate the Transaction and has suspended its earlier approval of the Transaction on November 28, 2019, under Section 31(1) of the Competition Act (‘Approval Order’).

While passing this order, the CCI evaluated several factors, including that Amazon had taken a contradictory stand with respect to its investments in FCPL in other judicial forums, and that these contradictions established Amazon’s false representation and suppression of material facts before the CCI, including: (i) failure to explicitly identify the FRL Shareholders Agreement (‘FRL SHA’) as a part of the Transaction; and (ii) concealment of its strategic interest over FRL.

Key Takeaways

CCI will review internal documentation: The objective of such an exercise can be twofold:

Establishing interconnection: Under the Indian merger control law, steps or transactions undertaken to achieve a common ultimate effect are considered to be ‘inter-connected’. ‘Inter-connected’ steps/transactions must be notified to the CCI in one single, consolidated notification. It is irrelevant whether such ‘interconnected’ steps/transactions may be individually exempt from an obligation to notify the CCI, in either case they must be notified to the CCI as part of the overall notifiable transaction.

In practice, while testing for ‘inter-connection’, the CCI typically considers the following factors: (i) the identity of the parties involved – whether the same set of parties are part of such steps/transactions; (ii) cross-references in transaction documents – whether the transaction documents for such steps/transactions refer to each other and the overall notifiable transaction; and (iii) simultaneity in negotiation/execution – whether negotiations and/or executions for such steps/transactions occur close in time to each other and the overall notifiable transaction.

Establishing the objective of a transaction: In the cases of Amazon and Canada Pension Plan Investment Board (‘CPPIB’), the CCI reviewed internal documents to assess the strategic rationale of the transaction, and whether the parties had suppressed or omitted disclosing material facts.

Given the above, while drafting internal documents/ reports, parties should exercise caution to accurately capture the ‘actual scope’ of the transaction and not refer to unconnected steps or make claims/overstate strategic advantage. In addition, parties should avoid cross-conditionalities and cross-references between transactions in relevant documents (directly or indirectly) related to the transaction. Relevant documents could include parties’ public announcements, press releases, and internal documents or communications shared with senior management, board of directors, bankers and lenders or the target company. Such relevant documents ideally should not show any kind of ‘link’ between two transactions, for example, they should not show that: (i) transaction A will be pursued only if transaction B closes (or vice versa), or (ii) the commercial terms of transaction A and transaction B impact each other in any manner, including by way of adjustment in fees/ consideration.

CCI will examine the ‘transaction rationale’: The CCI notification requirements mandate parties to submit a description of the transaction rationale. In Amazon’s notification to the CCI, it submitted that the purpose of its investment was to ‘strengthen […] distribution of loyalty cards, corporate gift cards, and reward cards to corporate customers, and unlock the value in the company’. However, its internal documents described the acquisition of the FRL Rights as a ‘foot in [the] door’ in the Indian retail market (i.e., to have strategic alignments with offline grocery retailers). The CCI appears to have assessed the ‘transaction rationale’ submitted to it while holding Amazon as having supressed the actual purpose and particulars of the Transaction.

Consistency in submissions across forums: The CCI initiated proceedings against Amazon basis an application filed by FCPL, stating that Amazon has taken a contradictory stand with respect to its investments in FCPL before arbitration proceedings and proceedings before constitutional courts. For example, before the CCI, it was stated that the rights granted to Amazon in relation to FRL are to protect its investment in FCPL while in other forums, that FRL Rights were claimed to be ‘special’ and ‘material’. Given this, a consistent explanation of the transaction rationale before all regulators/ forums is important.

Third parties may appear at proceedings: The Confederation of All India Traders (‘CAIT’), a trade body, filed a writ petition before the Delhi High Court, seeking expeditious disposal of the matter before the CCI. The CCI used its discretion to allow CAIT’s participation in the proceedings relating to the Transaction based on CAIT’s submissions in the Delhi High Court. This has lowered the threshold to be met for a third party to interfere in merger control proceedings.