Competition Regulator Clarifies Law On Joint Ventures
Joint venture & asset transfer transactions,listen up!CCI clears the law on notifiability
Corporates intending to enter into joint ventures involving transfer of assets will have to notify the Competition Commission of India (CCI), the competition regulator clarified in a frequently asked question (FAQ) document on its Combination Regulations.
The Competition Act, 2002 requires CCI approval if a combination i.e. an acquisition, merger or amalgamation crosses a certain asset and turnover threshold. However, it was unclear whether parties setting up a joint venture need to notify the regulator too. The CCI has answered this question in the affirmative for transactions where one or more parties to the joint venture transfers assets to the joint venture.
Lack of clarity aside, some combinations involving asset transfer to a joint venture have been filed with the regulator for approval. Last year, for instance, Johnson and Johnson-Ethicon-Google Inc filed for CCI’s approval as Ethicon and Google Inc. intended to transfer certain assets, including the intellectual property and related assets, to the joint venture between the parties.
So far, lawyers have taken a cue from such decisional practice of the CCI, Avaantika Kakkar, a partner at law firm Khaitan & Co. told Bloomberg Quint.
The clarification in the FAQ document confirms the position of the CCI on the notifiability of joint ventures. We have maintained that greenfield joint ventures need not be notified; however, a brownfield joint venture i.e. where the joint venture parent/s contribute assets to the joint venture entity is notifiable if it meets the thresholds.Avaantika Kakkar, Partner, Khaitan & Co.
The CCI document provides clarity in another area in relation to asset transfers.
In 2011, the government notified a de minimis exemption or target exemption for certain acquisitions, meaning a transaction meeting specified thresholds need not require CCI approval. Currently, this exemption can be availed for transactions where the target enterprise (whose shares, assets, voting rights or control are being acquired) either has Indian assets of less than Rs 350 crore or Indian turnover of less than Rs 1,000 crore.
Kakkar pointed out that several businesses took the view that the division being sold would be the target and hence it is this division’s assets and turnover that should be examined to apply the de minimis exemption. Consequently, such businesses did not file with the regulator.
For instance, in July this year, the CCI had levied a Rs 1 crore penalty on Eli Lilly for not making a filing before the regulator. The CCI had noted that Eli Lilly had entered into an agreement with Novartis AG to acquire Novartis’ global veterinary pharmaceuticals business i.e. Novartis Animal Health (NAH). Eli Lilly had argued before the CCI that the target business, NAH, had turnover and assets in India below the asset and turnover thresholds provided in the de minimis exemption and hence the transaction did not require CCI approval. The regulator rejected this argument.
The CCI has now stated its position with respect to asset transfers and clarified the fact that the de minimis threshold will only apply to the target enterprise and not the assets or division being transferred, Kakkar explained.