The De Minimis Exemption: NCLAT provides further clarity

The De Minimis Exemption

The term ‘De Minimis’ refers to a latin term which means “the law does not concern itself with trifles”. In 2011, the central government under Section 54 of the Competition Act, 2002 (“Act”) issued a notification which excluded certain combinations from the purview of Section 5, which is called the small target exemption or the De Minimis Exemption. This notification stated that on acquisition of a target enterprise, whose “shares, assets, voting rights or control were being acquired”, which had assets less than 250 crore or turnover of less than 750 crore in India were excluded from the purview of Section 5.1 The 2011 notification which was valid for a period of five years. Subsequently, in 2016, the government extended the validity of the notification and increased the prescribed threshold such that the target with not more 350 crore in assets or 1000 crore in turnover, in India, were exempt from CCI scrutiny.2 The objective of this exemption was to minimise the number of filings before the CCI where, the target was small or a part of an enterprise but were subject to CCI by virtue of combined sales or assets due to the acquisition.

There was confusion as to the scope and applicability of the De Minimis Exemption. The notification was interpreted such that it only applied to acquisition and excluded mergers and amalgamations. Further, there was confusion surrounding the manner in which the turnover and assets of the target were to be calculated. In case of acquisitions of a division of a business, the assets or turnover of the entire selling enterprise was considered. This resulted in acquisitions of small targets being filed for approval before the CCI due to the nature and size of the selling enterprise, which defeated the purpose of the De Minimis Exemption. In 2016, this uncertainty came to the forefront in the acquisition of Novartis Animal Health (“NAH India”) by Eli Lilly and Company (“Eli Lilly”), where the CCI held that the acquisition was within the scope of Section 5 and triggered mandatory filing under Section 6(2).3 While Eli Lilly had agreed to acquire the global animal health business of Novartis AG, the international transaction was covered by a stock and asset purchase agreement and the acquisition of the NAH India was handled separately, through a slump sale agreement in India. NAH India has sales of INR 93 crore and assets of INR 36 crore, falling within the prescribed threshold, and therefore, Eli Lilly did not file for approval before the CCI. The CCI, in its order, stated that a segment or division of a business is not a ‘enterprise’ as per Section 2(h) or a ‘person’ as per Section 2(l). A business division, like NAH India, does not have a separate legal personality. The CCI considered Novartis AG, the incorporated entity, to be a ‘person’ and as the assets and turnover of Novartis exceeded the prescribed threshold, the exemption could not be granted and Eli Lilly was imposed with a penalty of 1 crore.4

The CCI order adopted a narrow interpretation of the term ‘enterprise’, which is inconsistent with previous case law and creates an environment of uncertainty. The Supreme Court has held that the term ‘enterprise’ is a functional concept and includes any entity involved in economic activity, irrespective of whether they are profit making or not.5 The wording of the definition of ‘enterprise’ and ‘person’ is intentionally broad such that all market players are able to easily identify if the regulations are applicable to them.

NCLAT Order on Eli Lilly acquisition of Novartis Animal Health

The National Company Law Appellate Tribunal (“NCLAT”) held, through its order dated 12 March 6 2020, that the combination does not fall within the scope of Section 5. The central government through a notification in 2017 (“2017 Notification”) has clarified that the exemption applies to mergers and amalgamations and is not limited to acquisitions.7 Further, it stated that only the portion of the assets and turnover attributable to the business division that is being acquired and not the entire selling enterprise is relevant for the purpose of the exemption. Therefore, only that part of the assets and turnover that are attributable to NAH India must be considered. The turnover or assets of the incorporated enterprise is of no concern for the purpose of the De Minimis Exemption, 8 which is in line with the 2017 Notification. In addition, the NCLAT order noted that the CCI has to examine the applicability of the De Minimis Exemption at a preliminary stage before commencing proceedings under Section 43A. The De Minimis Exemption clearly intends to minimise regulation in cases of certain combinations and the government and NCLAT have now clarified that the threshold limitation should apply to the “true” target.

Position in the European Union

In the European Union (“EU”) context, applicability of the De Minimis Notice (“Notice”) is based on two criteria, the market share and the object of the agreements.9 Agreements are subject to the safe harbour provisions in the Notice if an agreement between competitors does not exceed 10% of the market share or if an agreement between non-competitors does not exceed 15% of the market share in the relevant market. Further, the market share threshold is reduced to 5% if competition is harmed by the effect of agreements between different suppliers and distributors i.e., a network of agreements, regardless of whether the agreement is between competitors or non-competitors. The intention of the Notice is that, “minor agreements” should not be individually examined as they do not “appreciably restrict competition”. The Notice intends to guide the application of Article 101 of the Treaty on the Functioning of the European Union (“TFEU”). The Notice makes no distinction between acquisitions, mergers or amalgamations and focuses on ‘agreements’.

The market share restriction does not apply if the objects of the agreement is to fix prices, limit output or sales or divide markets or customers. Further, safe harbour provision does not apply if the agreement consists of any restrictions mentioned in the EC Block exemption regulation. For an agreement to restrict competition by its object, its provisions, objectives, economic and legal context must be scrutinised.10 The nature of goods and services, the conditions and structure of the 11 relevant market are vital factors. In Expedia Inc. v. Autorité de la concurrence and Others, the European Court of Justice held that Article 101(1) does not exclude agreements which affect competition between Member States but are within the threshold limits prescribed in the Notice.12 What this means is that agreements which ‘by object’ affect trade and competition cannot take advantage of the safe harbour provisions and avoid scrutiny under Article 101 TFEU. The EU safe harbour provisions consist of a subjective and objective element in determination of the applicability of the safe harbour provisions. Further, it uses the term ‘and’ which indicate that both criteria have to be satisfied. In addition, the Notice is not binding on national agencies.

Conclusion

In contrast to the EU, the De Minimis Exemption in India uses the term ‘or’ which indicates that if either the turnover or assets in India of the target are within the threshold, the exemption is granted. Further, the EU approach is more principle based as opposed to India’s rule based approach. The NCLAT Order and the 2017 Notification are a step in the right direction as they provide clarity of the elements of the target that are relevant, rather than focusing on the entire selling enterprise. Further, the removal of the distinction between acquisitions and mergers/amalgamations means a greater number of combinations can be granted the De Minimis Exemption and are outside the purview of CCI scrutiny, reducing regulatory concerns and improving the ease of doing business in India. However, the CCI must approach the situation with caution and avoid inconsistent interpretations such as the CCI order with regard to the term ‘enterprise’, in order to create an environment of predictability.