Fourth Instance of Gun Jumping in Indian Competition Law: Zuari Group and MCFL

Fourth Instance of Gun Jumping in Indian Competition Law: Zuari Group and MCFL

This is a leading case with reference to interpretation and scope of strategic investment in securities of a company. Interestingly in this case, CCI took action on basis of TV interview.   

CCI levy heavy fines on both the architects of the hostile bid of Mangalore Fertilizers and Chemicals Limited ("MFCL").

The Adventz Group acquired approximately 16% stake in MFCL through various open market purchases.

In July, 2013 Deepak Fertilizer acquired 24.46% in MCFL through a combination of bulk and block deals.

Thereafter almost after a year in April, 2014 Deepak Fertilizers acquired another 0.8% triggering a mandatory open offer under the takeover code for the acquisition of another 26% of the voting capital MFCL from the public shareholders.

In defense of the hostile bid by Deepak Fertilizers, the promoters of MFCL (Vijay Mallya and UB Group) entered to an agreement with the Adventz Group to jointly launch an open offer to acquire 26% of MFCL from the public shareholders.

While, CCI approved both the offers of Deepak Fertilizers and the UB/Adventz Group without an adverse finding, it levied a heavy penalty on both the groups for consummating parts of the transaction i.e. the open market purchases without the prior approval of the CCI ( gun jumping).

The CCI held that the 16% acquisition made by the Adventz Group through open market purchases in four tranches was in violation of the Act since such acquisitions were strategic in nature and with intent to acquire control over the MFCL.

In arriving at this conclusion, the CCI relied on a televised interview of Saroj Poddar where he had said that the open market purchases were made after consulting Vijay Mallya and with intent to enter into a joint venture with the UB Group at a future date.

The CCI further held that the acquisition of 24.46% and 0.8% shares of MFCL by Deepak Fertilizers through open market purchases was in violation of Act and was an act of gun jumping.

The CCI relied on the filings made by Deepak Fertilizers with the stock exchanges wherein it had said that the acquisition was made because MFCL was a very strategic and good fit with company for Deepak Fertilizers.

In both the cases CCI discarded the contention of the Adventz Group and Deepak Fertilizers that the respective acquisitions were exempt under the Regulations.

The Regulations exempts a combination (which meets the financial asset and turnover thresholds prescribed under the Act) involving an acquisition of shares from the prior approval of CCI if

(a) solely made as an investment or

(b) is in the ordinary course of business and

(i) does not result in an acquisition of more than 25% of the shares or voting rights of the target company and

(ii) does not give the acquirer control over the target company.

In this case, CCI found based on the evidences discussed above that the open market purchases of 16% and 24% (and subsequent 0.8%) by the Adventz Group and Deepak Fertilizers respectively were strategic in nature and were not acquisitions solely as investment.

The Exemption is commonly availed by private equity players and other acquirers acquiring minority positions.

While the CCI has in its decisions analysed one of the limbs of the Exemption i.e. control, in this instance for the first time CCI has examined the scope of the word 'solely made as an investment' in the Exemption.

The CCI has observed that the phrase 'solely made as an investment' indicates 'passive investment' and any investment in a target enterprise which is done with a strategic intent cannot be treated as 'solely made as an investment'.

Since an investment that is not made 'solely an investment' or in the 'ordinary course of business' does not qualify for the Exemption even if no control or less than 25% of the shares or voting rights are being acquired, interpreting these terms is critical for examining when the acquirers can rely on the Exemption.

Given that the Exemption permits for acquisition of shares up to 25% of the shares or voting rights of the target company, it is questionable whether such a large threshold can ever be acquired without a plausible 'strategic intent'.

However it appears that the conduct of the acquirer will play a decisive role in the determination of the nature of investment with the CCI even possibly relying on TV interviews as evidence.

While the finding of the CCI may seem excessive in the Indian context, in fact it appears to be in line with the global position on the issue.

US Approach on Solely for Investment

Strategic investment include  any acquisition which gives the acquirer the right to:

(a) nominate a director on the board or

(b) propose any corporate action which requires shareholder approval is considered prima facie strategic under the US anti-trust law.

It is likely to have a significant impact are activist shareholders/hedge funds and private equity investors.

Hedge funds who intend to acquire shares and solicit proxies may be viewed as 'activist shareholders' not being able to avail the Exemption prescribed unless they are registered as FPIs.

Similarly private equity investors who typically have exhaustive rights in the target company may not be able to avail the Exemption.

There are a number of fundamental questions that CCI will have to provide greater clarity on such as:

(1) what if the intent is solely for investment when the acquisition is made and thereafter the intent changes, will the initial investment be deemed strategic?

(2) how will open market purchases for strategic reasons be made without disclosing the same to the market prior to the purchase given that will almost always be the case if all such open market purchases require prior CCI approval?