Gun Jumping under the Indian Competition Law: An Analysis with Global Jurisdictions

I. Introduction

Under the Competition Law Framework in India, Section 5 and 6 of the Competition Act, 2002 provides for the Regulation of Combination. The provisions of the Act relating to the regulation of Combinations have been enforced with effect from June 1 2011³. Combination under the Act means the acquisition of control, shares, voting rights or assets; acquisition of control by a person over an enterprise where such person has direct or indirect control over another enterprise engaged in competing businesses and mergers and amalgamations between or amongst enterprises when the combining parties exceed the threshold set out in the Act. The thresholds are specified in the Act in terms of assets or turnover in India or abroad. Entering into a combination that causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India is prohibited, and

such Combination shall be void.

The review process for the Combination under the Act involves mandatory pre- combination notification to the Competition Commission of India (CCI). Any person or enterprise proposing to enter into a combination shall give notice to the Commission in the specified form disclosing the details of the proposed Combination within 30 days (This 30-day window has been done away with after the Amendment in 2017). Any combination for which a notice has been filed with the Commission would not take effect for a period of 210 days from the date of notification or till the CCI passes an Order, whichever is earlier. If the CCI does not pass an Order during the said period of 210 days, the Combination shall be deemed to have been approved.

Henceforth in simple terms, any party proposing to enter into a merger or acquisition must check initially if in terms of Section 5 of the Competition Act, 2002 whether the transaction is notifiable. If yes, then the proposed transaction shall not proceed without the blessings of the Competition Commission of India. Since the Indian combination regime is a suspensory one (i.e. the parties to a notifiable combination are not allowed to consummate the transaction in any manner before the Commission grants formal approval), any action in furtherance of the transaction, including sharing of commercially sensitive information before such approval is granted, is likely to be seen as an instance of ‘gun jumping’ and may attract penalties under the Act.

Section 42 of the Act is the general provision of penalty concerning any of the provisions of Combinations. The merger control regime in our country is mandatory and suspensory, i.e., parties are not to consummate any part of the proposed transaction before the approval of the CCI is received.

Section 43-A of the Act, which is the Gun Jumping provision, is reproduced below⁴:

“Power to impose a penalty for non-furnishing of information on combinations. —If any person or enterprise fails to give notice to the Commission under sub-section (2) of section 6, the Commission shall impose on such person or enterprise a penalty which may extend to one per cent. of the total turnover or the assets, whichever is higher, of such a combination”

The above provision essentially implies that:

A. The parties are required to give prior Notification of the Combination to the CCI

B. The Combination shall not come into effect before a period of 210 days or earlier approval by the CCI

And, if the parties do not adhere to either of the two acts as mentioned above, they shall be liable for the Act of ‘Gun Jumping.’

The term ‘Gun Jumping’ is nowhere to be found in the Competition Act, 2002; however, it is a concept that has primarily evolved through the precedents of the CCI and its inspiration from the EU and US Parts.

II. Types of Gun Jumping

Gun Jumping primarily happens on the following two grounds, or Gun Jumping can be further subdivided into Procedural and Substantial Gun Jumping.

(A.) Procedural Gun Jumping

As stated earlier, a statutory requirement as imposed by Section 6 (2) Competition Act, 2002 is the filing of a notice by Parties or Enterprise proposing to enter into a combination. The thirty days deadline has now been done away with (After passing of the 2017 Amendment). This notice is mandatory for those falling within the thresholds with regards to Assets and Turnover as mentioned in the Act to notify the CCI to enable the Anti-Trust watchdog to ex Ante screen the Combination for any possible Appreciable Adverse Effect on Competition.

Essentially, what falls within the ambit of Procedural Gun Jumping is the Voluntary or Involuntary failure to notify the Competition Commission of India (CCI) concerning the proposed Combination. Therefore, failure to file the transaction before the CCI is generally what we call procedural gun-jumping. In these instances, parties do not file a notice altogether under the pretext that the transaction is not notifiable.

It must be stated that penalty proceedings are attracted irrespective of the fact whether the action of the parties was deliberate or non-deliberate.

In SCM Solifert Ltd. v. Competition Commission of India⁵, the Supreme Court of India provided clarification on this point. It was held that:

“mens rea is not a requirement to be fulfilled to impose a penalty under Section 43A of the Act. Such a requirement is only applicable to disputes of criminal and quasi-criminal nature, whereas failure to notify is a violation of a civil statutory provision.”

(B.) Substantial Gun Jumping

Through its decisional practice, the CCI has clarified that the test for substantial gun-jumping is to determine whether the parties continue to compete as they did before the proposed Combination was formed or have ceased to compete, as well as whether they are acting independently in their ordinary business activities. Even with this established standard, there is some ambiguity as to what activities by the parties constitute “consummation” of the transaction. On the one hand, it has been more than a decade since the CCI has handled significant gun-jumping instances in which attempts were made to clarify the regulator's position on the subject.

In layman’s terms, Substantial Gun Jumping implies that the merging parties coordinate their competitive Conduct or consummate the transaction before the approval by CCI, resulting in contravention of the objective of the Competition Act. So, Parties consummate some part of the transaction before the approval of the CCI has come in

Business operations and restructuring, on the other hand, are complicated concepts, and the legal framework cannot encompass all types of transactions.

Some of the instances where the CCI has considered the Combination to have taken effect before the approval are mentioned as follows:

• An acquirer providing a corporate guarantee to the bank of the target party was held to be an integral part of the Combination rather than an independent transaction because the possible implications of such a payment could reduce incentives for the target company to compete or facilitate access to confidential information.

In five cases⁶, CCI imposed penalties for gun-jumping on parties who made pre-payment of consideration or advanced a loan, which had the effect of consummating a part of the Combination before CCI’s approval.

• Part-payment of consideration as “token money” was held to be a violation of substantive gun-jumping since the possible implications of such a payment could reduce incentives for the target company to compete or facilitate access to confidential information.
• The CCI adjudicated that inclusion of an anteriority clause that identified a notional date for operational control of a target asset before the date of CCI’s approval was likely to distort the competition as it disincentivized the target company from competing. A penalty was imposed even when the actual Act of taking over the operations was not performed before CCI’s combination approval.
• Any open market purchases
• Transfer of consideration to an escrow account

Previously Parties were at high risk of violating the Gun jumping provision because they only had a 30-day timeline window from the trigger event.

Henceforth considering the provision for Gun Jumping, it is highly 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.

III. Statutory framework in the European Union

The EU passed the Council Regulation (EC) No. 139/2004 on the control of concentrations between undertakings on January 20, 2004. This regulation laid down the laws regarding merger control in the EU.

Article 4 of the Regulation states that concentrations/combinations, which fall under the definition of the regulation, have to be notified to the EU Commission. Article 7(1) of the Regulation provides that the aforementioned concentration shall not be implemented either before its notification or until the Commission has approved it as being compatible with the market. Article 7(2) of the Regulation provides an exemption from Article 7(1) for implementation of a public bid or of a series of transactions in securities by which control is acquired from various sellers, provided that the notification is provided later without delay, and the acquirer does not exercise the voting rights attached with the shares.

Article 8(4) of the Regulation provides that, in the instance, a proposed combination has been implemented in contravention of the above provision, or in contravention of any conditions of modification laid down by the Commission for approving the Combination, the Commission has the power to

a) dissolve the merger

b) dispose of all the acquired assets and shares or take any other measure to restore the status quo present before the implementation of the Combination.

Article 8(5) of the Regulation also provides the power to the Commission to take interim measures to reverse the damage caused by the illegal Act of gun-jumping by the transacting parties. Additionally, the Commission has the power to conduct dawn raids under Article 13 of the Regulation. Such power is extremely important to extract evidence to prove any premerger coordination between the combining parties.

In addition to the above, the Commission has the power to impose penalties or fines upon the erring parties of the proposed Combination. Under Article 14(2) of the Regulation, the Commission may impose fines of up to 10% of the aggregate turnover of the undertaking concerned. These provisions are quite similar to their Indian counterpart.

IV. Case laws

EY-KPMG Case⁷

KPMG DK companies, to merge with EY companies, decided to terminate their cooperation agreement with KPMG International Cooperative. Therefore, KPMG DK gave notice of termination of the cooperation agreement as required. This termination and withdrawal of KPMG DK companies from KPMG International were important and essential for the merger to take place. Once the merger agreement was concluded and made public, KPMG DK and EY companies implemented the pre-notification procedure. The merger was approved by the decision of the Danish Competition Council.

However, the Danish Competition Council declared that the KPMG DK companies, by giving the notice to terminate the cooperation agreement in accordance with the merger agreement before the Competition Council approved the merger, had disregarded the prohibition, under the Danish Law on competition, of implementing a concentration prior to that approval.

Since there were disputes regarding the interpretation of Article 7(1) of EC Merger Regulation, the Maritime and Commercial Court of Denmark decided to stay the proceedings and refer the question to the European Court of Justice.

The ECJ observed that according to Article 3 of the Regulation, a combination causes a change of control from the target company to the buying company on a lasting basis. The ECJ observed that Article 7(1) of the Regulation limits the prohibition of implementation of a concentration only to that as defined in Article 3 of the Regulation, and thus excludes prohibition of any transaction which cannot be regarded as contributing to the implementation of a concentration. The ECJ noted that a concentration within the meaning of Article 7 arises as soon as the merging parties implement operations, contributing to a lasting change in the control of the target undertaking.

The ECJ observed that even if a concentration is made up of closely connected transactions, and where such transactions are not necessary to achieve a change of control of an undertaking concerned by that concentration, they do not fall within the scope of Article 7 of the Regulation, as they do not present a direct functional link with the implementation of the concentration, even if they are ancillary or preparatory to the concentration, and their implementation is not, in principle, likely to undermine the efficiency of the control of concentrations. The ECJ observed that the withdrawal termination, being ancillary and preparatory in nature, does not contribute to the change of control of the target undertaking.

Thus, the ECJ held that an act of gun-jumping is committed by the parties only when there is a transaction that contributes to the change of control on a lasting basis in the target undertaking before the Commission clears the concentration/combination. Thus, the ECJ held that all the steps are taken in pursuit of implementing or closing a transaction, which does not cause a change of control on a lasting basis in the target undertaking, fall out of the scope of the prohibition under Article 7(1) of the regulation, i.e., gun-jumping.

Altice-PT Portugal Case⁸

Altice N.V. was a multinational cable and telecommunications company based in the Netherlands. PT Portugal was a telecommunications and multimedia operator with activities extending across all telecommunications segments in Portugal.

The proposed Combination included the subsidiary of Altice acquiring sole control in PT Portugal. The Commission observed that Altice was set to exercise sole control over PT Portugal post the Combination takes effect, which is possible once the Commission gives its clearance. But the Commission noted that Altice and PT Portugal shared competitively and commercially sensitive information between them, and Altice exercised its control through its decisions upon PT Portugal in certain areas, including pricing policies business strategies, even before the clearance was given by the Commission.

The Act of sharing competitively sensitive information with competitors is frowned upon and held illegal under the competition law. In case two competitors are planning to enter into a combination, and under such a proposed transaction, they share company-related information with the other party under the due diligence process, the information strictly must not contain competitively sensitive information. Competitively sensitive information includes prices, customer details, business strategies, etc. Once the transaction passes the test and gets approved by the Commission, sharing competitively sensitive information is allowed under the law as both are covered under the principle of a single economic entity, but not before the approval. Therefore, sharing such information even before the Combination gets approved (premerger coordination) is an example of gun-jumping, along with the violation of substantive provisions.

Hence, the exchange of information and the subsequent exercise of control by Altice in the matters of PT Portugal was held as an implementation of the Combination by the Commission, and therefore, they violated the “standstill obligation” under Article 7(1) of the Regulation.

Mowi ASA v. European Commission⁹

The Appellant is a company governed by Norwegian law and listed on the Oslo (Norway) Stock Exchange and the New York (United States) Stock Exchange, which carries out salmon farming and primary processing activities in various countries. On December 14, 2012, the Appellant entered into a Share Purchase Agreement with Friendmall Ltd. and Bazmonta Holding Ltd. for the sale of the shares which those companies owned in Morpol ASA.

Through the SPA, the Appellant acquired an interest in Morpol amounting to approximately 48.5% of Morpol’s share capital. The closing of this acquisition (“the December 2012 Acquisition”) took place on December 18, 2012.

On December 17, 2012, the Appellant made a stock exchange announcement of its intention to submit a public offer for the remaining shares in Morpol. Thus, the Appellant submitted the mandatory public offer for the remaining shares in Morpol, representing 51.5% of the shares in the company. According to the provisions of Norwegian law, an acquirer of more than one-third of the shares in a listed company is obliged to make a mandatory bid for the remaining shares in the company.

On December 21, 2012, the Appellant sent a request to the Commission for the allocation of a case team regarding the acquisition of sole control over Morpol. In that request, the Appellant informed the Commission that the December 2012 Acquisition had been closed and that it would not exercise its voting rights pending the decision of the Commission. The Commission initiated proceedings for the violation of the provisions of the regulation.

The Appellant argued before the Commission that it did not exercise the voting rights that it acquired before the clearance was granted by the Commission and further that the December 2012 Acquisition and the following public offer formed a single concentration as per the regulation, and as the latter was exempted from the application of the provision under Article 7(1) due to Article 7(2), the entire concentration is exempted from the application of Article 7(1) of the Regulation. The Appellant further argued that it notified about the concentration without delay and without malafide on its part.

The Commission observed that the Appellant gained de facto control over the target company by the December 2012 Acquisition itself due to the wide dispersion of the remaining shares and the level of attendance of other shareholders at shareholders’ meetings. The Commission noted that the non-exercise of voting rights could be a mitigating factor, but the concentration had been closed without prior notification to the Commission, thus, committing the Act of gun-jumping.

The Commission also observed that the exemption under Article 7(2) of the regulation for public bids in securities is available only to the January to March acquisition and not to the December 2012 Acquisition. The Commission noted that the December 2012 Acquisition was from a single seller, and hence, it does not benefit from the exemption under Article 7(2) of the Regulation. The Commission rejected the submission of the Appellant that the entire acquisition of 87.1 per cent shares in the target company was a unitary transaction, and it enjoyed the exemption under Article 7(2).

The Commission held that the Appellant, though negligently, infringed Article 4(1) and Article 7(1) of the regulation, which was upheld by the General Court and the ECJ.

V. Statutory Framework in the United States of America

The Clayton Act under the US Anti-trust regime was amended by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which laid down the law for premerger notification, i.e., Section 7A of the Clayton Act. Section 7A requires that a notification has to be filed for a combination, which falls under the definition of the Act, and the Combination cannot be implemented before the waiting period of 30 days expires. Violating the above provisions under Section 7A would result in the offence of gun-jumping.

Even Section 1 of the Sherman Act holds the Act of gun-jumping as illegal. Section 1 of the Sherman Act prohibits agreements and coordination between competitors. When two parties, who are proposing a combination, indulge in premerger coordination before the expiry of the waiting period, they violate Section 1 of the Sherman Act. Premerger coordination may include setting prices, exchanging confidential and competitively sensitive information, sharing customer details, having common business strategies, etc.

Gun-jumping activity is penalized under Section 7A(g)(1) of the Clayton Act, which sets the maximum penalty per day upon an erring company as $43,280. Disgorgement of illegally obtained profits obtained out of the illegal premerger coordination may also be obtained from the erring parties.

CASE LAWS

United States of America v. Qualcomm Incorporated and Flarion Technologies¹⁰

The defendants entered into an Agreement and Plan of Reorganization (the “Merger Agreement”), pursuant to which QUALCOMM would acquire Flarion. Because it was valued well in excess of Section 7A's $212.3 million “size of transaction” threshold and did not qualify for any of the Clayton Act’s exemptions, this merger was subject to the premerger notification and waiting for period requirements of the Act.

The Merger Agreement contained provisions that prevented Flarion from engaging in certain basic business activities during the Section 7A waiting period without QUALCOMM's written consent. When the defendants entered into the Merger Agreement and continued throughout the Section 7A waiting period, Flarion ceded to QUALCOMM control of much of its management and operations, including customer proposals, price discounts, licensing strategies, and personnel decisions.

Thus, QUALCOMM effectively acquired Flarion's business before the expiration of the Section 7A waiting period through the Merger Agreement's requirements that Flarion obtains QUALCOMM's consent before undertaking numerous competitive activities and through the parties' Conduct, by which Flarion did not make even routine business decisions unless and until QUALCOMM consented. By obtaining operational control of Flarion's business, QUALCOMM acquired beneficial ownership of Flarion's assets and thus acquired and held those assets within the meaning of Section 7A prior to the expiration of the Section 7A waiting period.

Hence, the US District Court held that the defendants violated Section 7A of the Clayton Act and ordered them to pay a civil penalty. The Court said that the endeavour is always to protect the target company as an independent firm until the approval is granted, in case the proposed Combination is blocked or it does not cross the stage of consummation so that the competition is protected from being affected.

United States of America v. Input/Output Inc. and the Leitram Corporation¹¹

In this case, Input/Output proposed to acquire Digicourse and planned to reorganize the target company. This merger was subject to the premerger notification and waiting for period requirements of the Clayton Act.

During the waiting period, the acquirer reshuffled the staff in the target company and provided them with new business cards and email addresses. Such an action was held to be violating Section 7A of the Clayton Act.

Thus, the US District Court held that the defendants violated Section 7A of the Clayton Act and ordered them to pay a civil penalty.

United States of America v. Flakeboard America Ltd.¹²

Flakeboard and SierraPine compete in the sale of particleboard, an unfinished wood product that is widely used in countertops, shelving, and other finished products. In January 2014, Flakeboard agreed to acquire three competing mills from SierraPine. This transaction exceeded the thresholds established by Section 7A of the Clayton Act and therefore required the defendants to notify the federal anti-trust agencies of their proposed acquisition and observe a waiting period before Flakeboard could take control of SierraPine’s business.

However, according to the premerger agreement between the two parties, a Sierra Pine mill was closed, and its customers were diverted to Flakeboard along with the exchange of competitively sensitive information. This agreement allowed Flakeboard to exercise operational control over the plant/mill of Sierra Pine prior to the end of the waiting period.

Therefore, US District Court held that such an activity amounted to a violation of Section 7A of the Clayton Act. The two parties abandoned the proposed Combination and paid civil penalties to remedy the violation of Section 7A.

VI. Comparative analysis

The EU jurisdiction stressed the parties' "standstill obligation" during the premerger period, but the US regulator compelled the parties to follow the waiting time regulation before implementing the proposed Combination in any way. Both of the aforementioned principles are visible under Indian competition law. If the CCI determines that the Combination has the potential to have a significant detrimental effect on competition, the parties must wait until the investigation is completed and a final order is issued, which must be done within 210 days of the notice date.

As a case of gun-jumping, the EU jurisdiction did not consider the consummation of transactions that did not contribute to a long-term change of control under the Combination.¹³ However, the Indian jurisdiction has taken a broader approach, penalizing even transactions that are just preliminary or ancillary in character and do not result in a change of control in the target firm like in the Jet-Etihad Acquisition Case¹⁴. In this case, the CCI held the sale of three take-off and landing slots of Jet Airways to Etihad Airways, before receiving approval from the CCI, as a partial consummation of the Combination and penalized Etihad for the offence of gun-jumping.

From the US cases referred to before, similarities can be witnessed in the adjudication of gun-jumping cases in US and Indian jurisdictions. Finally, the penalty provisions of all three jurisdictions differ. In the EU, the penalty is up to 10 per cent of the aggregate turnover of the liable undertaking, and in the US, the penalty is up to $ 43,280 per day on the erring company, while in India, the penalty is up to 1 per cent of the total turnover or assets, whichever is higher, of the Combination.

VII. Conclusion

The Competition Act, 2002 follows the philosophy of modern Competition Laws and aims at fostering competition and Indian Markets against Anti-Competitive practices. An attempt has been made by the CCI to further streamline the merger control process. The Competition Commission of India has, for the sixth time since the introduction of the merger control regime in India, amended the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations).

The amendments to the Combination Regulations notified on October 9 2018 (Amendment Regulations), reiterate the CCI’s constant endeavour to bring greater clarity and transparency to the merger control process. More importantly, this set of amendments showcases the CCI’s pro-business approach.

Gun Jumping violation has been viewed by the CCI with an Iron fist, and a very stern approach has been taken so far. The comparative analysis with the EU and US Jurisdictions also shows that globally Gun Jumping is considered a serious violation of Anti-Trust.

The Competition Law in India nowhere uses the term ‘Gun Jumping’; however, it has evolved through precedents of the CCI and Global Jurisdictions. However, a Compliance Manual issued by the CCI mentions about ‘Gun Jumping’ concerns where it further mentions:

“Given that most transactions, especially mergers/amalgamations, require a pre-transaction due diligence as well as a certain level of post-signing integration planning, parties need to be extremely cautious that such actions are not seen as substantive ‘gun-jumping’. To mitigate such risks, it is recommended that while conducting due diligence/integration planning, parties constitute a limited team of individuals, comprising preferably members of the senior management, the internal legal team as well as external legal counsel (Clean Team). Commercially sensitive information of the other party should only be accessible to such Clean Teams. The Clean Teams should not include personnel who are involved in pricing, marketing, sales, etc. in order to ensure that such personnel are not (consciously or unconsciously) influenced by any competitively sensitive information in the course of the day-to-day operations of the business (such as determining to price, pricing strategy, sales quantity, marketing strategy, terms of consumer contracts, etc.).”

Provisions concerning Gun Jumping still remain a grey area, and thus it is suggested that a comprehensive set of guidelines and a Legislative Reform may be a positive change.

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Footnotes

1. Author is a student at KIIT School of Law, India.

2. Author is a student at KIIT School of Law, India.

3. Central Government notification S.O. 479(E), dt. 4-3-2011 ↩

4. Section 43-A, The Competition Act, 2002 ↩

5. (2018) 6 SCC 631 ↩

6. Chhatwal Group /Dilip Buildcon, C-2018/01/544; Adani Transmission / Reliance Infrastructure, C-2018/01/547; LT Foods / LT Foods Middle East, C-2016/04/387; UltraTech Cement / Jaiprakash Associates, C-2015/02/246; Hindustan Colas / Shell India Markets, C-2015/08/299 ↩

7. Case C-633/16 ↩

8. Case M.7993 ↩

9. Case C-10/18P ↩

10. Civil Action No. 1:06CV00672 (PLF). ↩

11. Civil Action No. 99 0912 ↩

12. Case No. 3:14-cv-4949 ↩

13. EY-KPMG Case, Case C-633/16. ↩

14. C-2013/05/122 ↩