Deal Value Thresholds: Lessons from Foreign Jurisdictions

The author is Aryan Naagar, a fourth year student at National Law School of India University, Bangalore.

Introduction

The Competition (Amendment) Act, 2023 recently received presidential assent and it brings in a spate of changes to the competition law regime in India. The act is admittedly influenced by the recommendations of the Competition Law Review Committee (“CLRC”). The Committee was tasked with suggesting new regulations that must be incorporated into the Competition Act in order to ensure that competition law in India keeps pace with evolving market developments. One such development has been the emergence of digital markets in the past few decades. These digital platforms differed from their non-digital counterparts as unlike the non-digital market participants, digital market participants do not require the same amount of assets in terms of land, machinery and employees to sustain their business operations. Additionally, most digital market participants are not fixated on profit maximisation as their immediate short-term objective. For instance, Amazon was launched in 1994 and it only started making profits in 2003.

Traditionally, merging entities were subject to antitrust scrutiny if they breached certain assets and turnover thresholds. However, it is evident from a competition law perspective, that assets and turnovers are not the best metrics for examining these digital market participants. This is particularly concerning, especially from a mergers and acquisitions viewpoint and their potential to cause anti-competitive effects. It is due to this inadequacy of assets and turnover threshold that the WhatsApp-Facebook deal was not scrutinised by the Competition Commission of India (“CCI”) as the assets and turnover thresholds specified under section 5 of the Competition Act (“Act”) were not breached. In order to overcome this lacuna and bring the hitherto combinations, that would have been exempt from CCI’s scrutiny on the likelihood of the said combination causing anti-competitive effects, under the antitrust regulator’s scrutiny, the Amendment Act introduces a deal value or a transaction value threshold that was recommended by the CLRC. Combination, here refers to the mergers and acquisitions that are subject to antitrust scrutiny by the CCI.

The subsequent sections of this paper will analyse the new transaction threshold test and the constitutive elements thereof, i.e., the value of the transactions and substantial business operations in India, by taking a leaf from foreign jurisdictions where similar transaction thresholds have been introduced. The paper concludes by providing an objective metric for ascertaining substantial business operations.

Analysis

Clause 6(B) of the Amendment Act stipulates that an acquisition shall be a combination for the purposes of section 5 of the Act if the value of the transaction exceeds 2,000 Crore Rupees (20 Billion INR). Moreover, the proviso to the said clause stipulates that the target entity, that is the entity being acquired must have substantial business operations in India. Therefore, when examining whether an acquisition is a combination as per the newly introduced transaction thresholds, one would have to undertake a two-step analysis. Firstly, one would have to ascertain whether the value of the transaction exceeds 2000 Crore Rupees. Secondly, one would have to ascertain whether the target entity, that is the entity being acquired has “substantial business operations in India”. The aforementioned limbs of the transaction thresholds are analysed in the following sub-sections.

Value of Transaction

The explanation to the said clause provides that the value of the transaction includes any valuable consideration or deferred consideration whether direct or indirect. Interestingly, the explanation also uses the term ‘consideration’. It appears that the Indian legislature is adopting Germany’s version of the ‘size of transaction’ test which also uses consideration as a tool for determining transaction thresholds. The legislature could have adopted fair market value as a tool for determining the transaction threshold that is employed in the United States as per the Hart–Scott–Rodino Antitrust Improvements Act A consideration test is more objective than a fair market value test as the consideration for a merger is apparent from the direct and indirect monetary considerations that an acquiring entity is willing to pay for the target entity and these considerations are provided for in the definitive agreements that the parties enter into. Whereas, fair market value is often subject to speculation and is more art than science. To better appreciate the distinction between consideration and fair market value, let us consider a hypothetical situation wherein a target entity is being acquired for 1000 Crore Rs, however, the operating personnel of the target entity feel that the fair market value of the company is more than 1000 Crore Rs. Here, the initial amount of 1000 Crore Rs is the objective consideration, whereas the latter amount is the subjective estimate of the value of the company according to its personnel.

The legislature’s refusal to prefer the fair market value test over the consideration test suggests that the legislature wants to incorporate an objective test under the transaction thresholds. An objective test is preferable over a subjective test as it provides certainty to the parties pursuing a merger, thus reducing their transaction costs, and also aids in reducing the possibility of unnecessarily increasing CCI’s workload.

Substantial Business Operations

No guidance is provided in the amendment act concerning the indicators that should be employed when determining whether the target entity has substantial business operations in India. The burden now falls on the CCI to provide shape to this limb of the transaction threshold test through regulations. Having established the legislature’s intent to incorporate an objective test under the transaction thresholds in the previous section, it is only logical that the same considerations of objectivity must apply when determining whether the target entity has substantial business operations in India.

The German guidelines on substantial domestic operations may be helpful in determining the test for ascertaining whether the target entity has substantial business operations in India. As per the German guidelines, different indicators must be applied to different sectors to ascertain whether an entity has substantial domestic operations. The guidelines suggest that in digital markets, for instance, the number of active monthly users in Germany should be used as an assessment indicator. Other indicators like the location of assets of the target company and utilisation of these assets by the target company for business operations oriented towards the domestic market and consumers are also other assessment indicators. It is pertinent to note that under the German guidelines, business operations refer to current business operations and not anticipated business operations. Furthermore, gaining entry into a market is also considered to be a current business operation.

Despite the aforementioned guidelines, it remains unclear as to what is the precise objective test for ascertaining whether an entity has substantial domestic operations. However, the researcher believes that the recent judicial pronouncement in the Meta/Kustomer merger deal by the Higher General Court of Düsseldorf, provides some clarity on how to ascertain whether an entity has substantial domestic operations.

Kustomer is essentially a software company that develops consumer service software and then licenses it to other companies who then integrate the same into their ecosystem. Kustomer also provides data-processing services to its clients. In the aforementioned case, the German antitrust regulator asserted that Kustomer had substantial domestic operations as even though it did not have a direct substantial consumer base in Germany, it indirectly processed data of consumers that were situated in Germany through their clients and the same thus constituted a substantial domestic activity. The Higher General court negated the contentions raised by the regulator and reasoned that to determine substantial domestic activity, only direct consumers must be looked at. By the aforesaid metric, it could not be said that Kustomer had substantial domestic operations.

From the perusal of the aforementioned case, it is apparent the court brings in an element of proximity by only considering the direct consumers when determining whether Kustomer had substantial business operations or not. The benefit of bringing the aforesaid element of proximity is that only entities directly catering to customers are brought within the realm of antitrust scrutiny, whereas third-party operators are excluded. Thus, as a result, the caseload of the antitrust regulator is aptly reduced, enabling better utilisation of resources for those cases which fulfil the aforesaid test. Having said that, the test for ascertaining substantial business operations, seems to be direct domestic consumer engagement through domestically situated assets.

Bringing the same test to the Indian competition law regime will serve twin purposes. Firstly, it will bring in combinations that were hitherto excluded from the purview of the CCI within CCI’s scrutiny. Thus, combinations like the Whatsapp-Facebook deal or the Instagram-Facebook merger deal will now be subject to antitrust scrutiny even if they do not meet the asset/turnover thresholds. Secondly, some commentators believe that the transaction threshold of Rs. 2000 Crore is too less and would essentially overburden CCI with cases which may not actually result in anti-competitive outcomes. Adopting the aforesaid test will ensure that the CCI is not overburdened by cases at the same time.

Conclusion

The responsibility for drafting the regulation that will give the skeletal structure to the newly introduced transaction thresholds and their constitutive elements lies with the CCI. The researcher argues that the legislature’s intent of making these thresholds objective is apparent from the text of the Amendment Act. The researcher believes that the aforesaid objective metric can serve as a starting point for the CCI to build on and develop the new transaction threshold test further.