Background - traditional jurisdictional thresholds and perceived enforcement gap
Since the aim of merger review by a competition authority is to examine whether a transaction causes an adverse effect on the market, merger notification thresholds should screen out transactions that are unlikely to result in appreciable adverse effects in a market. Turnover and asset based jurisdictional thresholds have generally been considered by most competition agencies, including the Competition Commission of India (‘CCI’), as an effective tool to identify potential transactions which may have an effect on the competitive dynamics of a market.
However, with the advent of digital economy, there have been discussions across competition agencies as to whether these thresholds are indeed effective in capturing all categories of transactions and if not, whether there is a demonstrable ‘enforcement gap’. There has been concern expressed over some high-profile global transactions in the digital sector in the recent past (like Facebook’s acquisition of Whatsapp) which have escaped review by the competition agencies on account of the parties not generating substantial turnover or having a significant asset value. This is because companies in the digital sector mostly provide services for ‘free’ which has not given them the ability to scale their activities to such a level which translates into significant revenues or a large asset base. Further, these companies may have low turnover in the early stages but their valuation may be quite significant as a result of their degree of innovation, technical know-how and the perceived ability to disrupt the market for the incumbents. Given this, competition authorities may want to review such acquisitions since they may lead to an adverse impact on competition.
For example, consider an established online logistics services provider acquiring a new entrant in the online logistics services segment. Given the nature of the industry (characterized by low turnover), the transaction may not be notifiable, but in effect the purchase made by the large logistics company may be of an innovative business idea with great competitive market potential. Consequently, a competition authority may want to review the transaction to ensure that the market remains competitive. Other than digital markets described above, markets characterized by low turnover (but potentially high valuation) are pharmaceuticals, biotechnology as well as patent portfolio acquisitions.
Is there a need for alternative jurisdictional thresholds?
The perceived enforcement gap has led to an increased demand to find better means of capturing such transactions. These include considering new thresholds which can either replace the existing thresholds or complement them in a manner which would result in such transactions being potentially notifiable - for example, transaction value thresholds or market share thresholds.
The German and Austrian competition authorities have recently introduced alternative criteria i.e., transaction-size threshold to capture transactions where companies may have low turnover but due to the value of the transaction or ‘deal size’, the competition agency will have jurisdiction (the United States already has this rule). The European Union (‘EU’) considered introducing transaction value thresholds but ultimately decided against it. The Korean Fair Trade Commission has also recently proposed alternative jurisdictional thresholds to complement the traditional jurisdictional threshold. Finally, even the CCI has considered whether the current thresholds (based on assets and turnover of companies) might have a ‘blind spot’ when it comes to transactions where the target’s asset and turnover value are relatively low.
A critical question before introducing new thresholds is whether there is indeed an empirically tested enforcement gap, i.e. whether there are transactions that a competition authority should have reviewed but missed as a result of the traditional jurisdictional thresholds. In the absence of cogent evidence on enforcement gap, the introduction of additional thresholds may be disproportionate and create unnecessary administrative burden. For instance, the Facebook-WhatsApp transaction which is often used as an example in support of introduction of transaction value thresholds was examined by the European Commission and cleared without a detailed review or any remedies. Further, unlike the German and Austrian merger control regimes, acquisition of “control” or some form of competitively significant influence is not a prerequisite to notifiability in India. The introduction of a transaction value threshold in the absence of such a prerequisite could result in unintended consequences and exacerbate the risk of false positives.
This may also lead to a chilling effect on innovation and investments in the jurisdiction where such thresholds are introduced. In the context of India which has emerging digital markets, introducing alternative thresholds may lead to a prolonged wait for competition approval before a cash-strapped start-up company actually receives investments. The downside of this process may be the loss of competitive edge for the start-up company. Further, adding to the existing competition approval requirements may discourage investment in these companies. Moreover, the culture of start-up companies is at a nascent and developing stage in India compared to more developed economies like Germany and South Korea. Given their lack of expertise, these companies are often characterized by cash burn and more often than not require external investments from experienced, established players in the market for their survival. In a recent decision of the CCI, an information alleging abuse of dominance against e-commerce company Flipkart India Private Limited was dismissed with the CCI specifically noting that intervention in such nascent markets should be carefully crafted lest it stifles innovation.
In addition, even though a particular transaction is not notified to the competition authority, the authority is likely to still have the ability to review its conduct under abuse of dominance or vertical restraints provisions. For example, the Competition Act, 2002 (‘Act’) provides a prohibition on these conducts. Even in the past 9 years since the Act has been enforced, the CCI has already used its powers under these sections to conduct investigations against e-commerce companies, search engines, radio-taxi services, pharmaceutical companies, etc.
Points to consider regarding transaction-size and market share thresholds
The German and Austrian competition authorities have introduced ‘transaction-size’ thresholds to catch transactions with a high valuation. With respect to these thresholds, some points to bear in mind are: (i) the purchase price/ transaction value is subjective and does not give any indication of the possible competitive significance of a transaction; (ii) the valuation of transaction may pose a big challenge in itself and may vary significantly across sectors; and (iii) critically, the deal-size test may not account for local nexus (for example, whether a target has any geographic presence in a particular jurisdiction). This may mean that a USD 1 billion transaction may get notified in a country that has these thresholds even if the target company’s activities are outside that country.
Similarly, market share thresholds also introduce uncertainty into the notification process and is not consistent with internationally recognized best practices since consideration of the appropriate ‘market’ is inherently subjective. Further, using market shares as notification thresholds may impose costs on all transactions i.e. the parties to any merger would have to calculate their market shares regardless of whether the transaction ultimately needs to be notified. Also, parties are usually not in possession of robust data on market shares and may lack the ability to properly define markets in the first place. In the online logistics company example mentioned above - the company itself may consider brick-and-mortar logistics providers as competitors and the market to be for overall ‘logistics services’. However, the competition authority may consider the market to be only for ‘online logistics services’. Accordingly, given the likely differing views of the regulator and transaction parties on definition of the appropriate ‘market’, market shares may not constitute objectively quantifiable criteria.
Even the International Competition Network (‘ICN’) (a network of competition agencies and practitioners) in its set of recommended practices for merger notification and review procedures states that asset and turnover notification criteria are the preferred types of notification thresholds. While the specific level of assets and/or turnover required to trigger a notification requirement may vary among the various jurisdictions, the requirement for these is similar across competition agencies.
Competition authorities including the CCI should consider carefully whether there is cogent evidence that suggests an enforcement gap before introducing any new type of notification thresholds. Further, the ICN recommends that setting objectively quantifiable criteria as thresholds (that are clear and understandable) are a key requisite to bring legal certainty to both the competition authority and the merging parties. Ultimately, the competition agency should aim to minimize the number of transactions that must be notified i.e. the ones that are unlikely to raise competitive concerns, without allowing transactions that do raise concerns to fall outside the notification requirement. The 2008 ICN Recommended Practices for Merger Notification and Review Procedures.  In relation to the pharmaceutical industry, the concern appears to be that if a new drug is being developed but has not been approved for sale, it will have little or no turnover (and therefore may miss the scrutiny of agencies) but may be a critical and ‘high value’ asset for the acquirer.  Summary of replies to the Public Consultation on evaluation of procedural and jurisdictional aspects of EU merger control accessible at http://ec.europa.eu/competition/consultations/2016_merger_control/summary_of_replies_en.pdf.  Transaction size or value threshold means that mergers between parties exceeding certain size or value will be notified to a competition agency for its review.  Market share thresholds means that if the market shares of the parties to a combination exceed a pre-determined market share threshold, they will be subject to the jurisdiction of the particular competition authority.  German and Austrian competition authorities introduce alternative notification threshold to the existing thresholds, accessible at https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Leitfaden/Leitfaden_Transaktionsschwelle.pdf?__blob=publicationFile&v=2.  CCI chief D.K. Sikri seeks changes in uniform threshold norms for M&As, accessible at https://economictimes.indiatimes.com/news/economy/policy/competition-law-cci-chief-d-k-sikri-seeks-changes-in-uniform-threshold-norms-for-mas/articleshow/64125187.cms.  The rise and fall of TinyOwl: Lessons that start-up founder Saurabh Goyal learnt, accessible at https://economictimes.indiatimes.com/magazines/panache/the-rise-and-fall-of-tinyowl-lessons-that-start-up-founder-saurabh-goyal-learnt/articleshow/60069036.cms.  Case No. 20 of 2018.  Supra note 3.  The 2008 ICN Recommended Practices for Merger Notification and Review Procedures.