By Venkatesh
The CCI, via order dated 30.04.2020,1 authorized the acquisition by private equity company ChrysCapital and its associates of an additional 3 percent interest in Intas Pharmaceuticals Limited (Intas), according to which the shareholding of the Acquirers in Intas will be 6 percent, along with the following rights:
- The privilege to access details about the Intas affairs;
- The power to name a Director to the Intas Board; and
- The power to revoke company‟s conduct including alteration of contract papers, launch of new business lines and alterations of capital structure.
ChrysCap has already engaged in several pharmaceutical firms in India (Portfolio Entities), and contract terms have allowed it to control the business strategy and activities of portfolio entities. The company of Intas and the Portfolio Entities was considered to be comparable for more than 150 pharmaceutical goods and the parties‟ joint market share was higher than 30 per cent in more than 20 pharmaceutical goods.
Due to shared ownership two types of harm hypotheses can emerge. Firstly which involve unilateral consequences where collective ownership can promote quality reductions that may be unprofitable to a company but advantageous to its investors if they also own shareholdings in their competitor(s). Secondly is organized impact, where it may offer investors‟ additional opportunities to facilitate collusion and earn collusive profits.
In the context of competition law, “group” means two or more enterprises which, directly or indirectly, are in a position to control the management or affairs of the company.2 Further, the unity of the conduct outweighs the formal separation between those companies resulting from their separate legal personality.3
Also, „common ownership‟ creates overlapping interests in competing firms, reducing firms‟ incentive to compete thus giving rise to antitrust risks.4 Further, the ability to exercise material influence,5 due to the nature of its investment must be taken into consideration.
1 Although the order was published by the CCI earlier in July, it appears to have been subsequently removed.
2 Explanation (b) §5, Competition Act, 2002.
3 Hydrotherm Gerätebau v. Compact, Case 170/83 (1984) ECR 2999, (India).
4 Meru Cabs v. ANI Technologies; Uber BV, Case No. 25/2017, (India).
5 Supra
Mere minority shareholdings confine the economic freedom only in a sufficient manner6, but further indica showing exercise of control for the assumption of “decisive influence”7 and presence of legally binding instruction by the parent company8 must also be considered.
Material influence, the lowest in the hierarchy of controls, indicates the existence of variables which give an investor the power to influence the company‟s affairs and management. In comparison, de facto control refers to a situation where an organization has fewer than the majority of right to vote but in fact retains influence of more than half of the votes subsequently cast at a session.
However, a recent study doesn‟t always indicate with certainty that common ownership in any business scenario is likely to cause anti-competitive results. Therefore, given the theoretical ambiguities, it is important to define the impact of common ownership by market investigation to decide at what point common ownership can present a competitive concern.9
The allegations in the case of Meru Cabs v. ANI Technologies10 were levelled against two competing cab aggregators whose shares were acquired by common investors. In the absence of any detrimental effect, the commission found it legally tenable to decide that OPs can be influenced in their decisions on operations by the minority number of directors of parties having common shareholding in them, and that they could agree to such effect as envisaged under Section 3 of the Competition Act, 2002 (“Act”).11
Therefore, a consistent ambiguity remained in the books of law with regards to the anti- competitive effects of common ownership, and the rights of minority private equity investor under Indian jurisdiction.
The CCI raised specific concern regarding the stake of ChrysCap‟s in Mankind Pharma, which might have enabled them to follow anti-competitive targets such as geographical market, or customers; streamlining growth efforts; pricing arrangements; and/or bid-rigging throughout the clustered industries, through the common ownership in Pharma.
6 British American Tobacco Co. and Reynolds v. Commission, 1987 ECR 4487 (EU).
7 Stora Kopparbergs Bergslags AB v. Commission, (2000) 1 ECR 9925, (EU).
8 NADA INA PAUER, The Single Economic Entity Doctrine and Corporate Group Responsibility In European Antitrust Law, 38(1), 179-180.
9 Supra Note 4.
10 Id
11 Id.
The concern of CCI in the instant matter hovered around cartelisation and group dominance provided under Section 3 & 4 of the Act respectively as having common people in management may lead to uniformity in policy decisions, and this in turn leading to anti- competitive agreement and abuse of dominance in an unprecedented and dangerous manner.
This concern of CCI in the instant matter was valid as, ChrysCap had already invested in various Indian pharmaceutical companies and their contractual agreement pursuant to such share holding allowed them to influence strategy and operations of these entities.
In order to address the aforementioned concerns of the CCI, ChrysCap undertook (a) to exclude its director from the board of Mankind; (b) to guarantee that non-public details‟ pertaining to the Portfolio Companies is not exchanged; and (c) to curtail the practice of veto rights in Mankind. However the steps taken voluntarily by ChrysCap, also provides and safeguards the extent to which these steps shall apply.
This corroboration of such and assertion can be seen through various facts mentioned visible in the changes themselves. Firstly, ChrysCap would not dilute its percentage of share holding in mankind. Secondly, it has not precluded itself from merging or acquiring businesses not similar or ancillary to Mankind. Thirdly, with regards to making amends in memorandum of association and articles of association, it has protected its rights under the shareholders agreement. Lastly, ChrysCap has not precluded itself from commencing new businesses, provided that the business is not similar and ancillary to the business of Mankind.
The CCI concluded that the voluntary adjustment provided by the acquirers was adequate to insure that the operation of Mankind remained autonomous of ChrysCap, and refrained from further review of the solutions proposed between Mankind and Intas. The rationale behind CCI‟s approval is that the CCI was never willing intervene in the acquisition had it not been for the fact that ChrysCap having decision making power in Mankind is dangerous for pharmaceutical industries in India as this could lead to cartelisation in the industry.
The decision is significant in the current scenario as the CCI has finally thrown some light on emerging issues in control transaction even with regard to minority stake holding and have tried to answer a pertinent but unanswered question that whether common ownership of even a minority share holding in two competing entities can lead to common managerial behaviour that violates fiduciary obligations and harms competition.
Further an important observation came to fore in the instant matter wherein the company came out with a solution to the competitive concerns raised by CCI, an approach not so common in today‟s business scenario where CCI have been perceived as a regulator throttling growth in the market. Such a trend to take competitive concerns seriously and look at them in an approach which is solution driven is something which should be appreciated and recommended in order to enable a harmonious relationship between CCI as a regulator and businesses to strike a right balance between growth and regulation.