At times, parties knowingly or inadvertently overlook requirements and proceed to closing without obtaining regulatory approval/clearance; such actions are described as acts of gun-jumping
What Constitutes Gun-Jumping?
The Competition Act 2002 (“Act”) follows a suspensory model, i.e., once a transaction meets the prescribed asset/ turnover thresholds, it must necessarily be notified to the Competition Commission of India (“Commission”) and parties cannot close such transaction, unless it has been cleared by the Commission as unlikely to have an appreciable adverse effect on competition in the relevant market. However, at times, parties knowingly or inadvertently overlook such requirements and proceed to closing without obtaining the regulatory approval/clearance. Such actions are described by practitioners and regulators as acts of “gun-jumping”.
This article studies the law governing “gun-jumping” under the Act and the three prominent orders of the Commission, in the context of a share acquisition, scheme of arrangement and joint venture agreement, wherein penalties were imposed on parties for “gun-jumping”.
Consequences Of Gun-Jumping Under The Act
Section 6(2) of the Act requires that every person or enterprise who or which proposes to enter into a combination, that meets the criteria for making a notification to the Commission, must notify to the Commission disclosing the details of such combination within 30 days of:
Either approval of the proposal relating to merger or amalgamation, by the board of directors of the enterprises concerned; or
On execution of any agreement or other document for acquisition.
Following the notification, the Commission has a period of 210 days to evaluate the proposed transaction and its impact on competition in the relevant market. The parties are prohibited from giving effect to the transaction before lapse of the 210 days period or the Commission’s order clearing the transaction, whichever is earlier in time.
In case the parties fail to notify the Commission or consummate the transaction without the lapse of the duration prescribed, then the parties are guilty of gunjumping under Section 43A of the Act. The Section empowers the Commission to impose a penalty which may extend to the higher of one percent, of the total turnover or the assets of the combination. Since the insertion of Section 43-A, there have been 18 instances of gun-jumping and the Commission has imposed penalties in 8 instances.
Etihad’s Acquisition Of 24% Stake In Jet Airways
The transaction involving acquisition of 24% stake in Jet Airways (India) Limited (“Jet”) by Etihad Airways PJSC (“Etihad”) (the “Etihad Acquisition”) was the first prominent order, wherein the Commission imposed a significant penalty on the parties for gun-jumping.
On 1 May 2013, Etihad and Jet had notified the Commission about the proposed acquisition pursuant to an investment agreement, a shareholder’s agreement and a commercial co-operation agreement, each dated 24 April 2013. The Commission approved of the acquisition on 12 November 2013.
However, while evaluating the parties’ notification, the Commission noticed that the parties had entered into agreements on 26 February 2013 with respect to selling of Jet’s three landing and take-off slots at London Heathrow Airport to Etihad and lease of the same slots back to Jet (“LHR Transaction”).
This was treated as an instance of gun-jumping by the Commission. However, the parties contended that LHR Transaction was an independent stand-alone transaction which did not form part of the Etihad Acquisition. The Commission did not accept such contention and held that even if LHR Transaction was treated as an independent transaction, the parties ought to have filed a separate notice with the Commission under Section 6(2) of the Act as the LHR Transaction was an independent transaction and was not covered within the exemptions under Item 3 and Item 10 of Schedule I to the Combination Regulations.
Whilst based on the facts, the Commission could have imposed a penalty of up to INR 7 crores, it viewed the parties’ voluntary disclosure of the LHR Transaction favourably and considered it to be a mitigating factor and imposed a relatively small penalty of INR 1 crore on Etihad.
Scheme Of Arrangement Involving Thomas Cook And Sterling Holiday
The Commission encountered another instance of gunjumping in the scheme of arrangement between Sterling Holiday Resorts (India) Limited ("SHRIL") and Thomas Cook India Limited ("TCIL")
On 14 February 2014, the Commission received a notice from TCIL, Thomas Cook Insurance Services India Limited ("TCISIL"), a subsidiary of TCIL and SHRIL for a composite scheme of arrangement and amalgamation ("Scheme"). Under the Scheme, the resorts and time share business of SHRIL were proposed to be transferred by way of a demerger from SHRIL to TCISIL, in lieu whereof, certain equity shares of TCIL were issued to the shareholders of SHRIL, as per the ratio set out in the Scheme.
The shares were to be acquired pursuant to a share subscription and share purchase agreement, which triggered the open offer obligation under the SEBI Takeover Code. However, while evaluating the Scheme, the Commission noticed that certain market purchases had already been consummated between the parties, during the period from 10 February 2014 to 12 February 2014, which formed part of the Scheme. In this regard, the parties submitted that the market purchases and the notified transaction (i.e. Scheme) were not inter-connected or inter-dependent and were undertaken without any certainty of consummation of the Scheme and thus, the parties were not required to notify market purchases to the Commission.
The Commission, however, found that the Scheme and all market acquisitions were authorised in the same board meeting of TCISIL held on 7 February 2014 and all these transactions were related to acquisition of the business and shares of SHRIL.
Consequently, the Commission concluded that the transactions were inherently connected and inter-dependent on each other and formed a part of one wider transaction and imposed a penalty of INR 1 crore on all parties to the transaction.
Tesco’s Joint Venture With Trent
So far, the highest penalty imposed for gun-jumping is INR 3 crores. The Commission imposed this in the case of joint venture and the share purchase agreement between Tesco Overseas Investments Ltd. ("TOIL"), Trent Hypermarket Limited ("THL") and Trent Limited ("Trent").
In this case, the Commission received a notice on 31 March, 2014 relating to the proposed acquisition of 50% of the issued and paid-up equity share capital of THL by TOIL, pursuant to the execution of joint venture agreement and share purchase agreement between TOIL, THL and Trent on 21 March 2014.
On 17 December 2013, TOIL had sought the approval of the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry ("DIPP") and Foreign Investment and Promotion Board, Ministry of Ministry of Finance ("FIPB") for the proposed acquisition. By virtue of the relevant provisions of the Act and the regulations passed thereunder, TOIL was required to give notice to the Commission within 30 days of its application to the DIPP and the FIPB i.e., by 16 January 2014.
However, TOIL notified the Commission on 31 March 2014, with a delay of 73 days. In reply to the show-cause notice issued by the Commission, TOIL stated that in their bona fide assessment, such requirement for notification had not been triggered under the Act at the time of submitting the proposal to the DIPP and the FIPB. TOIL further contended that, no intention of acquisition existed when the application was made to DIPP and a notice at such stage would have been premature and incomplete as the inprinciple approval to the proposal and the execution of such definitive agreements were obtained at the respective board meetings of Trent and THL on 21 March, 2014.
However, the Commission found that the application submitted to DIPP and FIPB had sufficient details of the proposed combination and that the parties were aware about the type, nature and purpose of the combination at the time of making the application. Due to delay in filing the notice, the Commission imposed a penalty of INR 3 crores on TOIL under Section 43A of the Act.
These instances are reflective of a market regulator that is pro-actively evaluating notifications to identify instances of gun-jumping and penalise the parties for such behaviour. Therefore, it is incumbent upon the parties to be vigilant and assess all notification requirements and possible triggers at an early stage in the transaction and ensure that they are in strict compliance with the Act.
In addition to complying with the Act, the parties must also consider whether or not the terms of their transaction documents are such, as may lead the Commission to conclude that the parties have progressed towards closing or closed the transaction without securing the mandatory clearance. For instance, in case of an acquisition with split signing and closing it is customary for a potential buyer to put certain standstill obligations on the seller. These include conditions to ensure that the target company and its promoter do not indulge in certain practices, between signing and closing, without prior consultation or consent of the buyer. The buyer should ensure that the restrictions are reasonable and not perceived as instances of control exercised by the buyer prior to approval and therefore being labelled as "gun-jumping" by the Commission.
Footnote: 1 The views expressed are personal. The author is grateful for helpful contributions made by Risa Das and Sanjeev Kumar Sriram.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.