Introduction

The aim of “combination regulation” is to inquire whether a transaction can cause an adverse effect on competition, and to prevent or modify such anti-competitive combination before consummation of the transaction. The jurisdictional threshold of turnover and asset has been considered globally as an effective tool for merger regulation. However, the escape of a few high-profile cases from the review – such as Microsoft-LinkedIn, Facebook-WhatsApp, and Flipkart-Myntra – has raised concerns for authorities regarding an apparent enforcement gap, which has been attributed to the advent of digitalization. 

Digital platforms, marked by network effects and high economies of scale, operate with a business strategy that focuses on increasing their user-base by offering free or low-cost services. It does not translate into significant revenue or asset base. However, due to the degree of innovation, technical know-how, and access to data, these platforms are valued significantly. The transactions that escaped the merger review, on account of the target not generating requisite turnover or holding a sufficient asset base, showcased the obvious enforcement gap necessitating the introduction of a new threshold. The Competition Law Review Committee (CLRC) suggested in its report, inter alia, inclusion of a deal-value threshold, in addition to the current turnover and asset threshold, as a prerequisite for notifiability. Accordingly, the draft Competition Amendment Bill, 2020 introduced an enabling provision under Section 5 of the Competition Act, 2002 (the Act) that empowers the central government to introduce necessary thresholds. Since the government is most likely to introduce a transaction value-based threshold, let us analyse the challenges that surround it and which of these are, if at all, addressed by the current enforcement toolbox.

1. Challenges with the Deal-Value Threshold 

A growing number of jurisdictions, such as Germany, Austria, Sweden, and the EU, have considered or adopted a transaction-size threshold, either in replacement of or as a complement to traditional thresholds. However, the implementation of deal-value criteria comes with a set of its own issues, given the dynamics of the digital market that it aims to monitor.

First, the deal-value threshold is subjective in a sense that the valuation of a target firm varies from one acquirer to the other. Also, it cannot accurately gauge the competitive significance of a transaction. It is not inconceivable that a potential start-up can be bought out for a low value, and the resultant merged entity can subsequently disrupt the market. Moreover, determining the actual value of a transaction is challenging and involves several factors, such as variation of the purchase price across sectors; fluctuation of the share prices between the announcement and completion of the transaction; different valuation methods; and deferred consideration. Take, for example, the Facebook-WhatsApp deal, where the initial offer in February 2014 was 19 billion USD. By completion of the deal in October 2014, however, the price had risen to 22 billion USD as a result of the rise in the value of Facebook’s shares (tendered as part consideration).

Second, the recommended practices of the International Competition Network (ICN) requires merger notification thresholds to be clear, understandable, and based on objectively quantifiable criteria. The deal-value threshold attaches with itself a certain vagueness (as illustrated above), thus reducing efficiency and legal certainty of the merger review. Lack of clarity in the procedural aspect of the threshold would result in unnecessary reviewing of multiple false- positive cases, ultimately burdening the docket of the authorities. Although the CLRC’s report ratifies the ICN recommendations, it does not say anything about how to inculcate these criteria in the new threshold’s framework. 

Third, the digital market is at its budding stage in India, where the cash-strapped start-ups usually need investment from the established market players to flourish. Inclusion of the deal-value threshold can expose the start-ups to prolonged procedures for competitive approval where the start-ups, as a result, lose their competitive edge. Complicating the process can further disincentivize the investors. Competition Commission of India (CCI), in the Flipkart case, explicitly observed that the digital marketplaces in India are at a relatively nascent stage and that “any intervention in such markets needs to be carefully crafted lest it stifles innovation.” Hence, over-legislating at this stage can lead to a chilling effect on both innovation and competition. The CLRC, in its report, had completely overlooked this aspect of the Indian start-up industry, whilst taking into account the competition jurisprudence of developed countries such as Germany, the UK, and the US.

2. Current Enforcement Toolbox

The CLRC’s report predominantly factors in the observations made by the other competition jurisdictions with regards to the deal-value threshold. However, it does not explore India’s competition jurisprudence. Section 20 of the Act confers power on CCI to take suo moto cognisance of a combination which causes or threatens to cause an appreciable adverse effect on competition. Moreover, under section 6 of the Act, CCI has the power to subsequently render the transaction void if it causes an adverse effect on competition. Given that the Act confers wide powers on CCI, allowing it to take suo moto cognisance of the data-driven combinations, there is scarcely the need to introduce a new threshold. 

Conclusion

With the growing digital market, Indian competition jurisprudence needs to strike balance between both incentives to innovate and stricter scrutiny to not allow it to threaten the competition and consumer welfare. However, inclusion of the obscure deal-value threshold to fill an enforcement gap, without any further proper guidance, shall hinder the objectives of competition law. CLRC’s advice, without any empirical study in the Indian context, also raises multiple questions on the need for additional jurisdictional thresholds. Ultimately, the competition authorities should aim at minimizing the administrative burden by reducing the transactions that are notified to the authorities without allowing the potential transactions, which raise concern, to fall outside the merger review.

Surbhi Lahoti is a fourth-year law student at Government Law College, Mumbai. Her interest in antitrust laws has allowed her to explore and analyze its varied nuances.

Suggested citation: Surbhi Lahoti, Deal-Value Threshold: Filling an Enforcement Gap or Overburdening the Enforcers?, JURIST – Student Commentary, May 7, 2020, https://www.jurist.org/commentary/2020/05/surbhi-lahoti-deal-value-threshold/.

This article was prepared for publication by Cassandra Maas, Assistant Editor for JURIST Commentary. Please direct any questions or comments to her at commentary@jurist.org