Recently, the CCI penalised Goldman Sachs (India) Alternative Investment Management Private Limited, the investment manager of Goldman Sachs AIF Scheme-1 (collectively ‘Goldman Sachs’) INR 4 million (~USD 46,000) for failing to notify its subscription of optionally convertible debentures (‘OCDs’) in Biocon Biologics Limited (‘Biocon’), a biopharmaceutical company. As on date of the transaction, the OCDs when converted would amount to not more than 3.81% of Biocon’s total shareholding.
In addition to the OCDs, Goldman Sachs also acquired a rights package which included the following:
1. Right to obtain minutes of board, committee and shareholder meetings;
2. Reserved matter rights; and
3. Right to access the premises and personnel of Biocon upon prior notice.
The acquisition was not notified to the CCI as the acquirer believed that the minority investment not amounting to control would fall under one of the exempted categories of transactions (‘Minority Acquisition Exemption’) of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulation, 2011 (‘erstwhile Combination Regulations’) as it was done solely as an investment and in the ordinary course of business. The Minority Acquisition Exemption exempts acquisition of less than 25% shareholding when such acquisition does not amount to control and is done either solely as an investment or in the ordinary course of business without conferment of any special rights.
The CCI rejected Goldman Sachs’s argument that it could avail the Minority Acquisition Exemption. It dismissed the claim that subscription to convertible securities should receive differential treatment from acquisition of shares. The CCI was also not persuaded by Goldman Sach’s argument that the rights package was available to all investors of Biocon, and should therefore, be considered ordinary shareholder rights.
The CCI found that the true essence of the impugned transaction was not limited to a passive minority investment. The rights available to Goldman Sachs entitled it to access information that could include strategic plans, financial data, proprietary technology, business forecasts, and other confidential matters crucial to the competitive advantage and market position of the entities involved. In form, such access is not allowed to the ‘ordinary shareholders’ and in substance, such access is indicative of the strategic relevance of the transaction to Goldman Sachs. Accordingly, the acquisition of OCDs did not qualify for the Minority Acquisition Exemption.
Additionally, the CCI also noted that while applying the Minority Acquisition Exemption test to determine whether the investment was in ordinary course of business the intended time period of investment was relevant. It held that as a norm, ordinary course of business transactions are short-term investments where the investor enjoys ordinary shareholder rights.
CCI concluded that Goldman Sachs’s long-term investment with strategic rights indicated ability to influence Biocon to serve business purposes of the acquirer, and therefore, required prior notification to and approval from the CCI.
Key takeaways:
1. Acquisition of convertible securities can trigger notification requirements for transactions.
2. Just because certain rights are granted to all, or a sub-set of investors does not render them ordinary shareholder rights. The nature of the rights will determine the impact on the transaction.
3. The amended exemption rules have codified access to commercially sensitive information as a criterion for applicability of the Minority Acquisition Exemption and going forward there will be stricter scrutiny of rights available to the acquirer in a transaction.
[The first author is a Partner while other two are Associates in Competition Law Team at Lakshmikumaran & Sridharan Attorneys, New Delhi]
