(This is a continuation of a post contributed by Avirup Bose)
In an earlier post I discussed the importance of understanding the concept of ‘control’ while analyzing the probable anti-competitive effects of a merger especially in a partial stock ownership context. The discussion was in the background of an order of the CCI dated May 17, 2012, which basically held that if a company has a convertible security holder who can convert its convertible securities into almost 100 per cent of the firm’s share capital anytime, it cannot but be deferential to such security holders views about the affairs and management of the company and this amounts to control by such security holder for the purposes of the Act. Let us examine below how certain other jurisdictions deal with such situations.
The aforesaid position was the basis of the conclusion of an order of the erstwhile U.K. Monopolies and Mergers Commission (the “MMC”) (the predecessor to the U.K. Competition Commission) relating to the leveraged buy-out of the consumer products division of Stora (which included the Wilkinson Sword wet shaving business) by a number of Swedish investors, banks and financial houses along with the Gillette Company (“Gillette”, the world’s leading supplier of wet shaving products)[i]. The MMC had to decide if the holding by Gillette of a number of rights and interests in Swedish Match NV, the buyout vehicle for the Wilkinson Sword division (“Wilkinson”), including 22 per cent of non voting convertible loan stock amounted to control or material influence[ii] over the affairs of Wilkinson. The MMC in its analysis of the main components of the possible influence of Gillette on Wilkinson included the facts that the non-voting loan stock could convert to ordinary shares in the event of a stock exchange listing, a sale of equity in certain circumstances, possible winding up of the company, certain pre-emption rights over the sale of equity or assets of the company[iii]. Although the MMC accepted Gillette’s arguments that it had no voting rights or board representation and no right to attend shareholders meetings or receive internal information it concluded that a “prudent Wilkinson board would be bound constantly to take into account the fact that Gillette was a major shareholder of its parent, the Swedish Match NV (holding 22 percent non-voting convertible loan stock), was its largest creditor and had important rights in relation to significant decisions affecting the future of the company, notwithstanding the limits to Gillette’s rights.”[iv] Given the abovementioned perceived influence Gillette had over the business of its leading competitor, Wilkinson, the MMC concluded that the transaction would be anti-competitive and against public interest. The MMC’s conclusion that the mere existence of certain non-voting rights of an investor can give rise to the ability to influence corporate policy and decisions resonates with the conclusion of the CCI in the order referred above.
Other jurisdictions may disagree. Under U.S. antitrust law the HSR Regulations requires that only parties to acquisitions of any voting securities or assets would be required to file appropriate notification under the U.S. pre-merger notification program and it exempts from such notification process any acquisitions of convertible securities, but requires reporting in advance of their conversion.[v] The Statement of Basis and Purpose of the HSR Regulations discusses the antitrust significance of convertible securities:
“From an antitrust standpoint, reporting at conversion is more useful. It is true that before conversion, convertible voting securities may confer upon their holder the power to influence, either directly or indirectly, the management of the issuer. But the conversion price attached to convertibles may make conversion economically unattractive. And the measurement of the potential voting power conferred by convertibles is highly speculative, since conversions by other holders may dilute the potential voting power of the person holding the convertibles. So although a substantial holding of convertible voting securities may give the holder some power to influence management, this power is far less significant than the ability actually to vote securities. At conversion a more accurate picture of voting power in the hands of the owner or holder of those securities can be calculated.[vi]” (Emphasis added)
However, under Indian competition law an analysis of what amounts to control in the merger analysis context is perhaps of less significance than in other jurisdictions. As Prof. Umakanth had rightly pointed out that the CCI’s analysis as to what amounts to ‘control’ under the facts of the transaction between the Reliance Industries and the TV18 Group of companies seemed unnecessary since the CCI ultimately derived jurisdiction through section 5(a) of the Act which applies when there is an acquisition of control, shares, voting rights or assets of an enterprise by another. Hence, the mere acquisition of shares (which includes in its definition convertible securities) or assets (which may or may not vest control upon the acquirer) could trigger a merger analysis under section 5 of the Act. However an instance where an analysis to what amounts to control over the acquired entity is important is where control over the acquired entity is being derived without any share or asset acquisition, such as through a contract. Some of such instances have been summarized by the U.K. Office of Fair Trading (OFT) in its Substantive Assessment Guidance:
“The OFT may also consider whether any additional agreements with the company enable the holder to influence policy. These might include the provision of consultancy services to the target or might, in certain circumstances, include agreements between firms that one will cease production and source all its requirements from the other. Financial arrangements may confer material influence where the conditions are such that one party becomes so dependent on the other that it gains material influence over the company’s commercial policy (for example, where a lender could threaten to withdraw loan facilities if a particular policy is not pursued, or where the loan conditions confer on the lender an ability to exercise rights over and above those necessary to protect its investment, say, by options to take control of the company or veto rights over certain strategic decisions).” (para 2.10)
Finally, the CCI’s interpretation of what amounts to ‘control’ under the Act has been described to be at odds to the interpretation of the term ‘control’ under the [Indian] Takeover Code[vii]. As per the CCI the mere acquisition of convertible instruments would trigger a merger analysis under section 5 of the Act while obligations under the Takeover Code arises only when such convertible instruments are actually converted to voting rights beyond the prescribed thresholds. In my opinion the purpose of the Takeover Code and the Act are different and that may be a key in understanding the conceptual differences in the acquisition of shares and control under the Act on one hand and the Takeover Code on the other. The primary aim of the Takeover Code is fair and equal treatment to all shareholders in an acquisition or merger scenario[viii]. The triggering of the obligations under the Takeover Code is dependent on the acquisition of voting rights because the basis of these obligations is to provide the minority shareholder with a quantifiable exit option. This exit price can be more precisely calculated at the time of conversion of the convertible instruments into shares carrying voting rights. On the other, as explained above, completion law has to account for the imprecise ways in which an acquirer can influence and control the management decisions of its rival and cause appreciable anti-competitive effect on the markets to the detriment of the common public. What matters under the Takeover Code is if the acquirer has actual control over the company and hence the stress on voting rights so that a quantifiable exit price can be determined for the minority shareholders while what matters under competition law is the acquirer’s mere ability to control rather than the actual exercise (or the intended exercise) of control.- Avirup Bose
[i] Stora/Swedish Match/Gillette, CM. 1473 (March 1991)
[ii] Section 26(2) to (4) of the U.K. Enterprise Act, 2002 (the “Enterprise Act”) recognizes three degrees of control, acquisition of each of which can give rise to a merger analysis. These three degrees are: (a) de-jure or legal control (that is a controlling interest), (b) de-facto control (that is, control over commercial policy) and (c) material influence (that is, ability to materially influence commercial policy). Although such degrees of control are not provide under the Act yet the analysis of the CCI of the term control in the order discussed above comes closest to the concept of what is referred as ‘material influence’ under the Enterprise Act.
[iii] These investor rights can be typically found under any investment agreement in India and can be reasonably expected to be present in an agreement relating to a transaction of the nature between the Reliance Industries and the TV18 group of companies.
[iv] Ibid, at para 1.6
[v] 16 C.F.R. §§ 801.32 & 802.31
[vi] Rules, Regulations, Statements and Interpretations under the Hart-Scott Rodino Antitrust Improvements Act, 1976, Chapter I, Sub-Chapter H, p. 30.
[vii] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
[viii] Justice P.N. Bhagwati Committee Report on Takeovers 1997, Preface, para ix