Merger control, in simple words, is the process pursuant to which a specified transaction is required to be notified to one or more competition authorities, for approval. From a competition law perspective, a merger transaction, if unregulated, can have a devastating effect on the equilibrium of competition, especially in today's modern business environment where, invariably a transaction impacts multiple jurisdictions. The rationale for entering into a merger transaction can be so multifaceted that it may be virtually impossible to list out all the possible justifications. Invariably the same may include increase in efficiencies, economies of scale, increase in the range of products, reduction in costs, growth opportunities for the combined entity, increase in revenues, etc.
More than a hundred jurisdictions across the world have some form of merger control regulations. The basic purpose behind the merger control regulations, or for that matter, the competition legislations as a whole, is to ensure a level playing field for all concerned so that no party can enter into a transaction that will adversely impact competition beyond acceptable levels. Accordingly, competition regulators, across the world, are entrusted with various powers to regulate transactions that may seem to cause substantial lessening of competition in the relevant market by either outright prohibiting such mergers or by making such mergers conditional upon the parties implementing a variety of remedies to offset the adverse impact on competition.
Merger remedies, basically constitute a tool in the hands of competition authorities, aimed at ''fixing'' a competition problem generated by a merger while at the same time preserving its economic rationale i.e. its efficiencies. Merger remedies are primarily of two kinds: structural remedies and behavioural remedies. Structural remedies are usually one-off remedies that are intended to restore the competitive structure of the market. Divestitures are the most common form of structural remedies. Behavioural remedies are normally ongoing remedies that are designed to modify or constrain the future behaviour of merging parties. These comprise of a wide range of transactions including licensing of intellectual property rights, enabling measures to facilitate competition, etc. The powers entrusted to various competition regulators also include the power to reverse a consummated merger, popularly known as the power to "unscramble the eggs". Although used sparingly, this power to order reversal of a completed merger transaction has been exercised by various competition authorities all over the world.
The effective birthplace of the modern merger control regulations is the US. It was only in 1976, pursuant to the passage of the Hart-Scott-Rodino Antitrust Improvement Act, 1976 (HSR Act), that pre-merger notification of a proposed transaction, now adopted by so many jurisdictions, was introduced in the US.
Prior to the pre-merger notification requirements, merging parties often completed mergers surreptitiously and speedily, leaving the competition authorities with no option but to challenge the merger transaction only after its closing, that too with inadequate evidence. Naturally, without the opportunity to gather evidence in the early stages of a transaction, that would enable them to prove that the merger raised competitive concerns, the competition authorities' ability to successfully block such a transaction was very restricted.
The maximum number of cases where the competition authorities have ordered "unscrambling of the eggs" appear to have taken place in the US, although there have been such instances in the UK, EU and Canada as well. Further, representatives of governments as well as competition authorities of various jurisdictions have reiterated time and again that they would not hesitate to look into completed merger transactions and reverse the same, if deemed necessary.
No discussion in relation to "unscrambling of the eggs" can be complete without discussing the landmark judgment delivered by the US Supreme Court in the case of United States v. E.I. du Pont de Nemours & Co. Between 1917 and 1919, DuPont purchased various shares of General Motors (GM). Although DuPont claimed that it had purchased GM shares solely for the purpose of investment, and not to take an active role in its management, pursuant to the said share acquisition, DuPont and GM maintained a close relationship. DuPont regularly won the contracts to supply GM with certain automotive products and members of the DuPont family even maintained managerial and board positions in GM. As a relevant shareholder and director, DuPont acquired confidential and sensitive information pertaining to GM's operations ranging from business dealings, product plans and component needs, as well as the status of bids from other GM suppliers. DuPont abused its position to procure continued business from GM, leveraging its stock ownership, ultimately providing nearly seventy percent of GM's automotive finishes and forty percent of GM's automotive fabrics.
In 1949 i.e. almost thirty years after the stock acquisition, the US Department of Justice challenged the said stock acquisition and business relationship. At the time of suit, DuPont owned approximately twenty-three percent of GM's outstanding voting securities. The District Court granted summary judgment in favour of DuPont on all claims. The Supreme Court reversed the judgment of the District Court wherein the court ruled, almost forty years after Du Pont acquired shares in GM, that the transaction was violative of the US antitrust laws [Section 7 of the Clayton Act].
The Supreme Court ruled that the relevant authorities may proceed with such a suit seeking reversal of a completed transaction any time they feel that a transaction may threaten to cause a substantial lessening of competition. It was categorically laid down that the test of a violation is whether, at the time of the suit, rather than at the time of the transaction itself, there is a reasonable probability that there could be an adverse effect upon the competition. Although delivered almost fifty five years ago, this judgment, which has to be considered as the foundation stone for any discussion on reversal of a merger transaction post completion, to date remains significant and good law.
There have been numerous other instances of "unscrambling of the eggs" in the last decade and a half including SRCL - Ecowaste, Evanston - Highland Park, Sony – BMG, El Paso Natural Gas – Pacific Northwest and more recently the Eurotunnel – Seafrance as well as Ryanair - Aer Lingus matters to name a few.
As for India, whilst the Competition Commission of India is empowered to initiate inquiry into a transaction within one year of it coming into effect, the exact scope of circumstances in which and to what extent such power could be exercised, is not clear. As the merger control regime in India is still at a nascent stage, there is bound to be more jurisprudence and legislation on this front.
From the merging parties' perspective, despite diligent planning and sound legal and financial advice, it may be possible that a party to a proposed merger transaction may not insure itself against all deal related risks. However, from a competition law perspective, it is prudent to at least consider "unscrambling of the eggs", particularly in case of transactions that are likely to raise competition concerns. The level of attention that should be allocated to this aspect would depend on the complexities, facts and circumstances of each transaction and would certainly vary from party to party. Since it is possible that the time and money spent in defending a small transaction may exceed the value of the transaction itself, appropriate strategy must be worked out in the early stages of structuring the deal to obviate a heart burn later.
Whilst one may argue that the exercise of this power would be more relevant for cases where the transaction has not been notified to the competition regulators, there have been instances where the authorities have re-looked into transactions that had been approved earlier. The adverse impact on the merging parties in unwinding a completed merger transaction is enormous and absolutely avoidable. Although not rampant, as noted above, there have been sufficient cases across jurisdictions to make this issue serious enough to be taken into consideration by the parties right from the preliminary stage of planning a merger transaction to ensure that they do not have to subsequently "unscramble the eggs". The issue is real and must be factored in by the parties to a proposed transaction.
Kunal Mehra, Partner (kunal@duaassociates.com)
*The views expressed are personal and may not necessarily reflect the views of the Firm.
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