[By Sanidhya Bajpai]
The author is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow.
Introduction
Companies with an extensive capital and dominant position in the market have mastered ways of staying at the helm of the competition, and one strategy which they frequently follow is killer acquisitions. When a company eliminates an innovative firm by acquiring it at a nascent stage to eliminate any future competition from that firm, it is seen as a killer acquisition. The acquiring company can either terminate its innovative efforts or its development of an innovative product to stay at the helm while avoiding competition. Competition law regimes worldwide are trying to solve this Gordian knot to prevent the transactions from having any “appreciable adverse effect on competition” (A.A.E.C.). This piece focuses on how the current regime cannot curb these acquisitions and will only increase the Competition Commission of India’s (from herein CCI) burden and hamper businesses and proposes a more rational approach considering all stakeholders.
Deal Value Threshold (DVT), De Minimis Exemption, and how killer acquisitions escape from scrutiny
The infamous killer acquisitions generally escape from scrutiny as they fall under De Minimis exemption or small target exemption, which makes way for absolute exemptions for transactions from notifying the Competition Commission of India in cases where the value in India does not exceed INR 3.5 billion or the revenue from India does not exceed INR 10 billion. In today’s digitized market, foreign companies have operational centers in India, which are the backbones of their foreign parent firms. However, their on-paper value is low, which makes them eligible for the De Minimis exemption. This allowed Facebook’s acquisition of Whatsapp, made at around US$ 19 billion in the U.S., to escape antitrust scrutiny in India as the deal was below the assets and turnover threshold.
Recently the parliament passed the Competition Amendment Bill, which, among other things, amended Section 5 of the Competition Act (from herein “the Act”) and provided that, if the enterprise being acquired, taken control of, merged, or amalgamated has “substantial business operations” in India, the CCI must approve any transaction involving the acquisition of control, shares, voting rights, or assets of an enterprise, as well as mergers or amalgamations with a value exceeding INR 20 billion.
The bill also states that the De Minimis exemption will not apply where DVT is surpassed.
However, killer acquisitions are, by their nature, acquisitions of small innovative firms or start-ups. It is not only possible but highly probable that these acquisitions will escape the DVT. The experience of the prominent antitrust regime of Europe shows that the introduction of DVT has not just increased the burden on the antitrust regulators but has not yet made a considerable dent in curbing these acquisitions.
The predicaments of DVT
The DVT of INR 20 billion is already seen as a threat to the ease of doing business in India as many transactions will be notified regarding the recent amendments, which will increase the burden on the CCI and affect business. Moreover, the evidence from countries that have introduced a lower DVT, like Austria and Germany, shows that it has increased the burden on antitrust regulators without any considerable dent in killer acquisitions.
The example of European countries is noteworthy in this regard. Germany and Austria introduced the DVT in their competition law regimes to include transactions not addressed by the previous threshold and prevent transactions from turning into killer acquisitions. The countries introducing new thresholds also issued a slew of guidelines, including that the threshold will be applicable on transactions where the target has significant activities in the said countries, among a few other local nexus requirements. However, both countries are still apprehensive about DVT’s assistance addressing anticompetitive transactions. The findings of Germany, which it submitted to the Organisation for economic cooperation and Development (O.E.C.D.), reveals two things (i) an insignificant number of increased notification since the introduction of DVT, and (ii) as of 2020, the complete absence of a critical case to be notified before Germany’s Federal cartel office based on DVT.
The European commission, understanding the shortcomings of the DVT approach, introduced a novel interpretation of E.U. merger control regulation which allows the E.U. member countries to refer to the commission to control acquisitions below the controllability of DVT.
It is discernible from the E.U. experience that a DVT has not solved the Gordian knot of killer acquisitions but has only increased the regulatory burden as the member states still heavily recommend transactions below the threshold for antitrust scrutiny after gaining discretionary powers. The European Court has also allowed the national authorities to review below-threshold mergers under the abuse of dominance rules. We need to learn from these approaches of European antitrust regulators and have a more balanced approach that will aid not only pro-competitive business but also curb anti-competitive transactions.
A more rational approach
India, a developing economy, needs an approach that will put less regulatory burden on the business while curbing killer acquisitions. A more rational approach would be “to increase the DVT and make it mandatory for the firms with a dominant position in the relevant market to notify their acquisitions.” This approach would reduce the burden on the CCI and help businesses as it will exempt most benign transactions from antitrust scrutiny, destined to come under CCI purview in the present context.
This approach of notifying the commission in cases of acquisition by a dominant firm is more rational as the dominant firms are the ones that mainly acquire these nascent firms preempting a future threat of competition to perpetuate their dominance. This is visible from the fact that Facebook, Google, Apple, and Amazon made more than 300 combined global acquisitions from 2009 to 2019. The pharma industry, which has a massive propensity of dominant firms acquiring small nascent firms, will also be strengthened by this development.
The mandatory notification of acquisition by dominant firms in the relevant market will ensure the implications of the antitrust scrutiny at the right places and reduce the burden on CCI and growing businesses.
Conclusion
The introduction of DVT in the recent amendments to eliminate killer acquisitions is not a panacea. It hardly instils any confidence, as is evident from the record of the countries that have gone that way. There is a need for a more rational instrument in the commissions’ arsenal to avert those transactions which have an appreciable adverse effect on the competition while ensuring ease of doing business in the country. The ‘increase of DVT and mandatory notification of acquisitions by dominant firms in relevant market’ will ensure that the big firms do not go around stifling competition in the country and will allow the benign transactions which do not have any A.A.E.C. to proceed burden free. This approach will ensure that nascent innovative firms will have a chance to develop their capacities rather than fearing acquisition by a dominant firm, like in the case of Facebook’s acquisition of WhatsApp and Instagram.
In a fast-driven economy where big firms with people’s data and a hefty capital are trying to eliminate their competition by copy, acquire, and kill strategy, it becomes essential to have a comprehensive approach to tackle this anti-competitive behaviour before it’s too late without burdening pro-competitive transactions.