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 M&A structures and regulation in India

Gun Jumping In Mergers And Acquisitions
October, 03rd 2019

Competition is regarded as the one of the most useful means recognized globally to ensure that consumers are provided access to a wide range of goods and services at competitive prices and the producers have an incentive to innovate and reduce costs for meeting the demands of consumers. It would be correct to mention that competition promotes efficiency. Recognizing its importance, governments across the world promote and sustain competition in the markets through appropriate regulations.

As per the provisions of the Competition Act 2002 there is a requirement for the implementation of a systematic approach for carrying on business in compliance with the fair rules of competition for the purpose of minimizing the risk of contravention of the applicable provisions of the legislation.

The Competition Act apart from prohibiting anti-competitive agreements and the abuse of dominant position, also mandates the Competition Commission of India ("CCI") to regulate combinations (mergers and acquisitions) with a view to ensure that there is no adverse effect on the competition in India.

The merger control regime in India is suspensory in nature which means that the parties to a combination are not allowed to complete a transaction until and unless the CCI grants the formal approval for the same or before the passing of 210 days from the date of filing the notice with the CCI as prescribed under Section 43A of the Competition Act and no order is passed by the CCI during such period. Apart from the failure to notify such a proposed combination within the prescribed time frame, any act in furtherance of such a transaction, including sharing commercially critical data before such approval is granted, is likely to be seen as an instance of 'gun jumping' and may attract penalties under the Competition Act.

What is Gun-Jumping?
The Competition Act, 2002 does not render any specific definition to the term "gunjumping" and the same has evolved as a concept through instances of violations of legal obligations by merging parties. The instances of gun-jumping occur when the merging parties violate legal obligations and thresholds as enumerated under the Act for regulation of combinations.

Gun jumping, can occur in two distinct contexts i.e. procedural gun-jumping and substantive gun jumping. The former implies that the merging parties fail to comply with the waiting period (prescribed under Section 6(2A) of Competition Act) under the merger control regulations. The latter implies that the merging parties coordinate their competitive conduct or consummate the transaction prior to the approval by CCI resulting in contravention of the objective of the Competition Act.

Therefore, the interlude between parties signing the deal and closing it is crucial, especially if the deal requires obtaining essential approvals/permissions. It is recommended that parties must remain competitors until closing the deal and cannot lessen the competition between parties to facilitate a merger that has not been consummated.

Most transactions, especially mergers/amalgamations, require a thorough due-diligence being undertaken as well as a certain level of post-signing integration planning. The parties need to be vigilant that such actions are not seen as substantive 'gun-jumping'. There have been several instances of gun-jumping in the Indian regime where the CCI has imposed penalties on the parties to a combination on account for failure to comply with the applicable provisions of the Competition Act.

The Compliance Manual for Enterprises issued by the Competition Commission of India dated 02 May 2017 mentioned that to moderate the risks, it is recommended while conducting a due diligence, the parties constitute a limited team of individuals, including members of the senior management as well as an external legal counsel ("Clean Team"). All commercially sensitive data and of the other party should only be accessible to the Clean Team. It is essential that the Clean Team should not include people who are involved in valuation, sales etc., for the purpose of ensuring that such people are not in any manner influenced by the competitively sensitive information in the regular routine processes of the business such as determination of pricing, strategizing action plans and for sales, marketing etc.

Taking everything into account, it is prescribed that any exchange of commercial and critical information between parties to a combination (especially when the parties are competitors) ought to be handled cautiously by the Clean Team to alleviate the anti - competitive spirit. If the constitution or appointment of a Clean Team is not feasible for the parties, the parties would be required to consider other tools/mechanism such as executing confidentiality agreements. The parties will also be required to evaluate whether constitution of a Clean Team will outweigh the potential anti-competitive factor.

The extensive reference to the Competition Compliance Manual will grow the culture of compliance across the industry and boost competition, improve reputation of businesses, and help in the avoidance of unnecessary, long drawn litigation as well as the intervention by a regulatory authority.

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