This article is written by Abhimanyu Pathania and Mansi Subramaniam, 3rd Year Students, Gujarat National Law University, Gandhinagar.
Consolidation is the way forward for any business in any industry. However, at times because of this goal, some companies become extremely dominant, depleting the consumers’ choice at the end of the day. One method of achieving this market dominance is acquiring or merging with one’s competitor. It is a common tactic used by the well-resourced incumbent firm to acquire and develop smaller, innovative businesses to gain monopolistic control over their initiatives.
Killer acquisitions occur when a well-established firm buys out a creative target company to end the target’s creative endeavours to eliminate potential competition. These emerging rivals threaten the incumbent firm’s future profitability since they would offer consumers reduced prices, more variety, and possibly higher quality. In many emerging industrial economies, particularly in India, the number of new businesses has increased exponentially. However, many of these start-up businesses may still need to be known for their consumer base or technological advancements in the potential market; as a result, their acquisitions go unnoticed and unreported.
Killer acquisitions have also occurred in the purchase of Uber Eats by Zomato in the food delivery sector, comparable to the acquisition binge by BYJU’S, a behemoth in Indian ed-tech. These circumvented the antitrust radar as none of these transactions violated the current statutory standards for “combination” under Section 5 of the Competition Act, 2002 (“the Act”) and was further not notified to the Competition Commission of India (“CCI”).
The given article aims to decode the rise of killer acquisitions in India and propose solutions to keep a check on the increasing number of such acquisitions. It proceeds to do so by first explaining why killer acquisitions escape the anti-trust radar. It then studies the merger control regulations in other jurisdictions for plausible solutions and finally proceeds to analyse the viability of these merger controls in India while proposing a novel model to address the issue.
The De Minimis Exemption
Due to the competitor’s nascent stage in killer acquisitions, the combined entity’s threshold attracts the de minimis exemption. The de minimis exemption or the target-based exemption is the exemption given against notification to the competent authority for transactions falling under a certain threshold. Section 5 of the Act lays down the assets or turnover thresholds beyond which a merger or amalgamation will be termed a combination and, further, after which the CCI needs to be notified of such a combination. The de minimis exemption has come under much scrutiny due to its failure to address emerging anti-competitive practices such as killer acquisitions.
The current legal framework consists of ex-ante regulations, i.e., which stipulate certain pre-determined thresholds where the competent regulatory authority is authorised to examine a merger or acquisition before the union is commenced. The limitation of this framework is twofold – firstly, several upcoming mergers and acquisitions are excluded from the competition authority’s purview, even though they may affect free competition in the relevant market; secondly, the framework fails to envision the Appreciable Adverse Effect on Competition (“AAEC”) caused post the merger due to the elimination of the competitor.
European Union – The New Merger Control Policy, 2021
In March 2021, the European Commission published a guidance paper on Article 22 of the European Union’s Merger Regulations. Article 22 empowers the European Commission to review transactions that either affect trade between the European Union member states or significantly affect the competition, irrespective of whether the transaction meets the threshold. The merit of the guidance paper lies in its recommendation that member states refer such transactions for review, regardless of the transaction threshold. This is a marked shift from the previous approach, wherein, Article 22 of the regulations was primarily ignored, and member states were discouraged from referring to mergers not meeting the thresholds.
US Antitrust Regime
In the US antitrust regime, there are thresholds for merger control, such as the size of the transaction and the size of the entity on which combinations are notified to the Federal Trade Commission and the Antitrust division of the Department of Justice. However, mergers are mainly governed by Section 7 of the Clayton Antitrust Act of 1914, which prohibits transactions and acquisitions that substantially lessen competition or create monopolies. Hence, the competition enforcement authorities are empowered to probe into a potential merger even if it does not meet the threshold.
Organisation for Economic Co-operation and Development
The Organization for Economic Co-operation and Development (OECD) report on Start-ups, Killer Acquisitions, and Merger Control discusses specific ex-ante merger control regulations prevalent across various antitrust jurisdictions. One such practice is the usage of transaction value thresholds. Recently, in German and Austrian antitrust regimes, the ‘size of the transaction’ of the resultant merger or acquisition was considered as a threshold criterion additional to that of turnover thresholds, i.e., apart from the standard turnover thresholds, the value of the transaction of the resultant merger is used for referring it to the competition authority.
Another prevalent practice in some antitrust jurisdictions is the Target approach. Under this, specific entities are legally obligated to notify all their mergers of the antitrust authority. This system currently exists in Norway and has been further proposed in other jurisdictions such as France, Italy, and the Netherlands. In the United Kingdom (UK) and Australia, such a practice has been proposed to be adopted for large and prominent digital platforms.
Need for Reform
Implementing the proposed Ex-ante Reforms
The current ex-ante merger control regulations are insufficient and do not achieve their intended purpose. While the transaction value threshold can be implemented in India, it has to be complemented with other reforms, as the transaction value is not a necessary indicator of a killer acquisition. Further, in Germany and Austria, studies have shown that the value threshold resulted only in a few more merger notifications than what was notified earlier.
The targeted approach can be helpful, especially for monitoring those entities making several periodic acquisitions with the ultimate objective of establishing a monopoly in the market. Firms can be enlisted for the target approach by making inferences based on the firm’s acquisition trajectory. For example, in Byjus, the tech company’s acquisition spree started in 2017 with the acquisition of TutorVista and Edurite from Pearson. This was followed by the acquisition of Osmo, a US-based tech company specialising in educational games for children, in 2019 and WhiteHat Jr. in 2020. These horizontal mergers indicate the usurpation of competition by Byjus and would have necessitated scrutiny of the entity’s future acquisitions. However, a limitation of the target approach is that a trend in acquisitions must be observed before mandating an entity to notify the relevant authority. By then, the entity may already be in a dominant position in the market.
Another ex-ante reform proposed is the analysis of mergers based on inferences about the merger’s underlying intention. For instance, the acquisition of Blinkit by Zomato can be seen as an attempt by Zomato to diversify into the quick commerce market rather than eliminate competition after its previous attempts to venture into this market had failed. On the other hand, the acquisition of Uber Eats by Zomato is, in high probability, an attempt to eliminate competition, as both companies operate as online food delivery companies.
Need for ex-post Reform
Globally in merger control, ex-post assessments are subject to different time constraints depending on the jurisdiction. For example, in Canada and Mexico, the review or request for notification must be made within a year of the merger, whereas in the UK, the intervention must be made within four months.
In India, a one-year time limit is outlined in Section 20(1) of the Act. The prevalent practice is that any AAEC caused due to the merger takes place after this limitation period. It is proposed that there should be no such time-period limitation on the jurisdiction of the antitrust authority. This is because its removal would ensure businesses are cautious of engaging in anti-competitive acquisitions as they risk scrutiny immediately following the merger.
Further, this must be supplemented with a comprehensive framework by antitrust authorities that outlines the conditions that will necessitate ex-post assessment and the appropriate steps to be carried out. Businesses could consider this framework while making decisions, which will eliminate confusion. Therefore, extending the one-year time limit would be advantageous, as it develops a helpful framework for an ex-post evaluation.
Hence, the priority for the CCI must be to ensure that acquisitions removing prospective rather than actual competition restraints are not excluded by the rules, thresholds, or screens to prioritize their work. Where agencies are worried that anti-competitive mergers would be missed, it is worth looking into increased flexibility and additional transaction value screening.
Potential loss of competition can occur from the acquisition of a start-up company. Anti-competitive fledgling acquisitions lead to losing both a competitive constraint and a product. The plan is an expensive exclusionary tactic when acquisitions have not been scrutinised through merger control. It should be probed as such through ex-post assessment and ex-ante analysis based on inferences about the merger’s underlying intention.
Among ex-ante assessments, the target approach, as implemented in other jurisdictions, can be implemented by the CCI with the targets being arrived at by studying the acquisition trajectories of the companies. Another ex-ante method of assessing mergers, proposed by the authors, is an inference-based analysis. In this, the underlying intention behind the merger is gauged which forms a basis for accepting or rejecting the merger.
However, it is also crucial to understand that mergers that loosen restrictions on enterprises can cause the most harm to consumers, even after these mergers mature. This brings us to the ex-post-merger assessment. A reform proposed in this regard is the removal of the one-year limitation period, which must be supplemented with an efficient ex-post-merger assessment.
While an anti-competitive nascent acquisition need not always result in the death of a product, consumers may also suffer from losing a prospective new rival simply because the merged company internalises the consequences of its choices on innovation, price, and quality. Therefore, a top priority for agencies should be to ensure that acquisitions of start-up companies are thoroughly scrutinised and prevented when appropriate to safeguard the interests of all against monopolies.