NCLAT affirms that the de minimis exemption should have always applied to the true target

The National Company Law Appellate Tribunal (NCLAT), in its judgment dated 12 March 2020, has set aside the order of the Competition Commission of India (CCI) imposing a penalty of INR 10,000,000 (Indian Rupees Ten million) on Eli Lilly and Company (Eli Lilly) for not notifying the acquisition of Novartis Animal Health business in India (NAH) (a business division of Novartis India Limited) to the CCI or what is popularly known as ‘gun jumping’.

The CCI had earlier concluded that Eli Lilly was in contravention of Section 6(2) of the Competition Act, 2002 (Competition Act) for not notifying its acquisition of NAH. As a background, the Central Government had issued a notification dated 4 March 2011 whereby it exempted from merger control notification obligations an “enterprise” that was being acquired and whose value of assets and turnover in India fell below a certain defined threshold (De Minimis Exemption). The CCI held that whether De Minimis Exemption is applicable would not be assessed on the basis of the assets/turnover of the business being acquired i.e., NAH, but on the basis of the assets/turnover of the incorporated entity, i.e., Novartis India Limited.

Eli Lilly contended that the CCI has erroneously applied thresholds of the De Minimis Exemption to the incorporated entity (Novartis India Limited) and not NAH. The Competition Act applies the test of threshold to the “person” or “enterprise” being acquired, and expressly defines “enterprise” broadly to include both incorporated and non-incorporated businesses. Further, the subsequent notification (discussed below) along with the press release issued by the Government of India clarified that the De Minimis Exemption would apply to the business being acquired or the “true” target.

Based on the arguments of Eli Lilly and the CCI, the NCLAT concluded that the CCI had failed to appreciate that the De Minimis Exemption was available to the acquisition of NAH by Eli Lilly. The NCLAT relied on the subsequent de minimis exemption notification of the Central Government dated 27 March 2017 and the press release of Government of India dated 30 March 2017 which clarified the intent of the Government that the exemption should be available to the business being acquired and not merely to incorporated entities.

Agreeing with Eli Lilly’s arguments, the NCLAT concurred that for the purpose of the calculation of assets and turnover what is being acquired is relevant as the assets/turnover of what is left over with the sellers after the acquisition will have no role to play in the context of the business conducted by the purchaser post-acquisition.

Interestingly, the NCLAT also made an important observation with regard to the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011. The NCLAT held that Section 6(2) of the Competition Act states that “….any person or enterprise, who or which proposes to enter into a combination, shall give notice to the Commission…”. Thus, the proposer is obligated to notify to the CCI. However, the delegated legislation states that in case of an acquisition, the obligation to file the notice is with the acquirer, which is contrary to the express statutory provisions and its intent.

Comment

KCO represented Eli Lilly before the NCLAT.  KCO has been in the forefront in arguing that in cases of asset acquisitions, the De Minimis Exemption was always intended to apply to the “true” target and not to the seller incorporated entity. Unfortunately, many filings were made to the CCI without any competitive significance in the period until the subsequent Government of India notification of March 2017 clarified the position. This NCLAT decision puts to rest any doubt about De Minimis Exemptions (as it existed then) being applicable to the actual target in cases of assets acquisition. The CCI’s narrow interpretation of the term “enterprise” has also faced challenges elsewhere. The Hon’ble Supreme Court of India in the decision of CCI v Coordination Committee of Artistes and Technicians of West Bengal Film and Television and Others, (2017) 5 SCC 17 provided clarity about the term “enterprise” under the Competition Act. The Hon’ble Supreme Court ruled that a functional approach should be adopted to interpret “enterprise” where carrying out of an economic activity is central to its definition, regardless of any legal form. It is welcoming that the recently proposed Competition (Amendment) Bill, 2020 has also suggested a broad definition of the term “enterprise” on these lines.

-      Manas Kumar Chaudhuri (Partner); Pranjal Prateek (Principal Associate); Aman Singh Baroka (Associate)

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