On 21 December 2012, the Competition Commission of India (CCI) approved a combination for which the notice was jointly filed by Aditya Birla Nuvo Limited (ABNL), Peter England Fashion & Retail Limited (PEFRL), Indigold Trade and Services Limited and Pantaloon (Retail) India Limited (PRIL) pursuant to a scheme of arrangement entered into by the parties. The combination related to the acquisition of the undertakings, business, activities and operations of PRIL pertaining to the Pantaloons Format Business by ABNL through its wholly owned subsidiary PEFRL by way of a demerger in consideration of which equity shares of PEFRL were to be issued to shareholders of PRIL.

However, the CCI had declared invalid the previous filing jointly made by these parties for the same proposed acquisition by an order dated 14 August 2012 (Order). The invalid filing was made by the parties on 16 July 2012.

The initial, invalid, filing in respect of the acquisition of the Pantaloon Format Business of PRIL by ABNL was made by the parties to the combination subsequent to the execution of a Memorandum of Understanding (MoU) for giving effect to a series of related transactions, which primarily included the demerger of the Pantaloons Format Business from PRIL and its merger with a wholly owned subsidiary of ABNL under a Scheme of Amalgamation (Scheme) before the relevant High Court(s). However, on the date of making the filing, the parties’ respective board of directors had not finally approved the Scheme.

The parties had believed that their MoU bound them to the proposed arrangement. Therefore, the signing of the MoU, triggered the pre-merger filing with the CCI in accordance with the provisions of the Competition Act, 2002 (as amended) (Competition Act).

The CCI however, found that first, the MoU was not in fact a binding document, and that second, the board approvals were the real triggers to filing in this case.

The Order, contrary to common perception, is not an exposition on when parties should consider themselves bound by the terms of MoUs that they sign, nor does it suggest that any form of conditionality would affect the binding nature of the arrangement between parties. Conditions precedent and conditions subsequent to the completion of a transaction are routine in transaction documentation.

The Order, in fact, focuses, on a rather mundane aspect of the interpretation of Section 6(2) of the Competition Act. The Section 6(2) states that parties to the combination have 30 days from either of two triggering events to make the filing with the CCI. The two triggering events could be either the execution of an agreement or binding document, or,  the date of the board approval in case of mergers and amalgamations.

Section 6(2) is quite clear: parties must file within 30 days of triggering one or the other of the two events i.e., the execution of an agreement or other binding document or, the board approval, depending on the method of giving effect to the acquisition.

An agreement is usually executed for transactions involving the acquisition of shares, assets, voting rights or control. The board approval trigger pertains to acquisitions effected through a court approval process involving a scheme for merger or amalgamation. This distinction between the methods of acquisition for the purposes of merger regulation is arguably irrelevant because an acquisition is after all, an acquisition, irrespective of whether it was pursuant to a scheme for merger or amalgamation or by an agreement, written or oral! However, this is a distinction that the Competition Act expressly makes and it must therefore be adhered to.

To be fair to the draftspersons of the Competition Act, the distinction may not be completely without reason because the finalisation of the actual scheme of arrangement would include details and minutiae that one may not cover in an agreement (whether binding or not) to agree to a scheme of merger or amalgamation.

Another relevant aspect of the initial, invalid, filing made before the CCI is that there was also a Subscription and Investor Rights Agreement (Subscription Agreement) between the parties. From the Order, it appears that this agreement pertained to the INR 800 crore interim investment into PRIL that ABNL would make by subscribing to optionally convertible debentures (Debentures). These Debentures, would convert to 13.15% of PRIL’s equity share capital unless they were

cancelled or redeemed pursuant to the Scheme. It seems that this investment was purely a financial transaction with few or no significant investor’s rights in the management and affairs of PRIL. This Subscription Agreement also only provided for the acquisition of less than 25% of the target’s equity and was therefore exempt from scrutiny of the CCI (under the Schedule I of the CCI’s Combinations Regulations).

Now, the CCI has in the past held that even the acquisition of convertible instruments (such as the Debentures) could trigger a filing with the CCI if such an acquisition amounted to the acquisition of “decisive influence” in spite of there being no acquisition of voting rights.

Had this Subscription Agreement pursuant to which ABNL was acquiring the Debentures in PRIL, involved an acquisition of control or of decisive influence over the affairs of PRIL, there may have been some merit to filing the notice with the CCI upon its execution and in including the Scheme as part of a composite filing triggered by the Subscription Agreement. Even then, one would only have addressed the matter of making the filing after the statutorily correct triggering event. The CCI may still have sought final details of the business proposed to be transferred pursuant to the demerger contemplated under the Scheme.

One could also question the necessity of the statutory requirement that a filing be made with the CCI within 30 days of the triggering events especially when it is quite clear that the regime in India is suspensory, which means that a transaction cannot be completed prior to securing CCI approval. As the initial, invalid, filing in the ABNL case suggests, the parties to a combination are usually quite keen to make a timely filing with regulators.

In any case, the CCI has set a clear precedent, not unreasonably, insisting upon factual finality (or as near finality as possible!) when parties approach it for its approval.

Merger regulation under the Competition Act continues to promise interesting times!

Avaantika Kakkar
Anshuman Sakle