GUN JUMPING AND CLEAN TEAM AGREEMENTS – THE ADANI GREEN-SOFTBANK CASE BY: SUDHANVA BHARADWAJ
GUN
JUMPING AND CLEAN TEAM AGREEMENTS – THE ADANI GREEN-SOFTBANK CASE
AUTHORED BY: SUDHANVA
BHARADWAJ
4th
year law student at OP Jindal Global Law School, Jindal Global Law School
I.
Introduction
No
effective merger control regime is complete without a system of regulation and
penalization of gun jumping. There are numerous ways that a firm may engage in gun
jumping, and one such way is through the exchange of information which could potentially
be competitively sensitive. However, due to the nature of many transactions, it
is almost inevitable that some competitively sensitive information must be
exchanged between the parties to effectively plan and undergo such transactions.
Therefore, to balance the objectives of businesses as well as the regulator, the
parties must find ways to facilitate this exchange of information while
simultaneously ensuring that the same does not amount to gun jumping. To
resolve this issue, many parties enter into clean team agreements, but due to
the lack of jurisprudence on how clean team agreements are to be dealt with by
the CCI, parties often have a certain lack of clarity. However, the order
passed by the CCI pertaining to the Adani Green – Softbank merger (hereinafter
“the Order”) has shed immense light on this.
This article will look to explore the impact and potential utility of using clean
team agreements in transactions in light of the Order.
II.
Legal
Background
While
many will likely know the key provisions pertaining to gun jumping (ie. S.6(2),
6(2A),
and 43A
) one may not be as familiar with clean team agreements. A clean-team agreement
is a form of agreement which is meant to facilitate the exchange of potentially
competitively sensitive information between the parties to a transaction
without raising any competition concerns. This is done by creating a “clean
team,” which is a group of individuals who are to receive the sensitive
information from one of the parties and create a summary report to reflect the
given information. This summary report must summarize the sensitive information
in a manner which will provide the receiving party with the information they
require while also ensuring that the actual sensitive information is not revealed.
Therefore, an effective clean-team agreement must impose numerous safeguards
and/or obligations to ensure that the clean team does not reveal any sensitive
information. While the Act has remained silent on their potential usage and/or
the repercussions of the same, the CCI has recognized clean-team agreements and
their potential utility in their Compliance Manual for Enterprises
and their FAQs from September, 2022.
In the aforementioned, the CCI has encouraged parties to implement clean-team
agreements when conducting due diligence and/or integration planning so that
they can exchange any required sensitive information without raising
competition concerns. As it pertains to the composition of clean teams, the CCI
has specified that clean teams “should not include personnel who are involved
in pricing, marketing, sales, etc.,”
nor should they include any other individuals who may be influenced,
consciously or unconsciously, by the competitively sensitive information that
they receive while in the clean team, as this information must not be used to
affect the day-to-day operations of the business.
III.
The
Order
A.
Facts of the Case
Adani
Green Energy Limited (hereinafter “the Acquirer”), wanted to acquire the entire
shareholding of S.B. Energy Holdings Limited (hereinafter “the Target”). In
pursuance of this, the Acquirer executed Share Purchase Agreements (hereinafter
“SPA”) with Softbank Group Capital Limited and Bharti Global Limited on May 18th,
2021. On May 20th, 2021, the Acquirer gave a notice to the CCI of the
proposed acquisition. Upon receiving the notice, the CCI had some concerns, so
they directed the Acquirer to provide them with details regarding the steps
that were taken, or would be taken, in pursuance of the transaction. They also
requested documents relating to certain deliberations made, information
exchanged, and decisions taken. The Acquirer duly provided them with the
information they requested, and upon reviewing it, the CCI approved the
combination on June 30th, 2021. However, during a meeting on August
9th, 2021, the CCI realized there was a possibility that the
Acquirer had violated its standstill obligations, as it felt that one of the
clauses in the Softbank SPA may have had the effect of consummating the
combination, at least in part, before it had been approved by the Commission.
Therefore, the Commission issued a show cause notice on August 14th,
2021.
The
CCI expressed multiple concerns about the clause. To begin with, the CCI
pointed out that the clause, and the action contained therein, came into effect
on May 18th, 2021 (the date of execution of the SPA in question), and this
preceded the CCI granting their approval of the combination. The CCI also found
cause for concern in the fact that the clause allowed the parties to discuss
ongoing business. The Acquirer could provide inputs on the business of the
Target, and the Target could make use of such inputs to act in its best
interests, as well as the best interests of its subsidiaries. The CCI also
noted that, although the parties had implemented some safeguards into the SPA
such as clean team protocols and non-binding inputs, these measures were not
sufficient to offset the effects that the clause would, or could, have on
competition, given that the terms of the clause and the resulting exchange of
info and provision of inputs would be sufficient to constitute tacit collusion. Further, the clean team protocols appeared
contradictory and did not actually prevent anti-competitive effects. On the one
hand, the clean teams were said to be ring fenced from management, but on the
other, the inputs that the Acquirer was providing were being considered in the
best interest of the Target. The CCI felt that this element of “taking into
account” naturally implied that the information would be made available to the
management, as only then can the inputs be acted upon.
B.
Ratio and Holding
In the order in question, the CCI identified
four tests and took them into consideration when determining whether the
Acquirer was liable for gun jumping or not. These tests were derived largely
from the Airtel-Tata order
and the Hindustan Colas order:
1. Reduction in competition intensity test
2. Infringement with ordinary course of
activities test
3. Likelihood of causing potential competition
distortions test
4. Inherence-proportionality test
Generally, the satisfaction of any of these
tests may be sufficient to constitute a gun jumping concern, but in this case
the CCI mainly implemented the 4th test. This was combined with an
assessment of the safeguards that were put in place to avoid any adverse
effects on competition and seeing how effective they would be. With these tests
in mind, while also taking into consideration the precedents such set in cases
such as the Airtel-Tata case
and Hindustan Colas case,
the CCI found the Acquirer liable for gun jumping.
As
it pertains to the clause from the Softbank SPA, which was the central cause
for concern, the CCI held that the clause could neither be considered inherent
nor proportionate to the legitimate objective. The CCI noted that the Acquirer
had not made any substantive submissions as to why the discussions, especially
those pertaining to ongoing business, were required, nor did they furnish
documents to support their submissions pertaining to their discussions,
deliberations, and exchanges of information under the clause. In this light,
the CCI referred to the Airtel-Tata order,
noting that the CCI’s only guide to the parties’ incentives is the agreement
between the parties and any information provided to the regulator. With this in
mind, the CCI felt that even if they agreed that the intent of the Acquirer was
simply to monitor and preserve the economic value of the Target, because the broad
phrasing of the clause which would provide wide powers to the Acquirer, and because
no explanation was given by the Acquirer to justify such a clause, there was
immense potential for the exchange and exploitation of competitively sensitive
information, which would amount to gun jumping.
As
it pertains to the clean team agreement, while the CCI did recognize the
potential use of clean team arrangements to mitigate competition concerns, they
found that the Acquirer had only referenced the fact that a clean team did
indeed exist but had not made sufficient submissions, or provided enough
clarity, on the composition of the clean team or the terms of clean team
agreement itself. With this in mind, the CCI held that the mere existence of a
clean team was not sufficient to absolve the liability of the parties, and that
the clean team agreement must be shown to have sufficient safeguards to address
any competition concerns which may arise. Furthermore, the CCI also pointed out
that the Acquirer failed to address the inherent contradiction in the SPA
discussed earlier. Based on this, the CCI found the clean-team arrangement in
this case could not be considered a sufficient safeguard to mitigate the gun
jumping concerns.
With
all this in mind, the CCI felt that it would only be appropriate to impose a
penalty on the Acquirer. However, they also took note that this case was the
first of its kind and felt that this was an opportunity to spread awareness and
expand the jurisprudence in this area. Therefore, the CCI decided not to impose
a heavy penalty on the Acquirer and only imposed a total of Rs. 5 lakhs on the
Acquirer. Instead, they used this order to encourage any entities engaging in such
transactions to ensure that the agreements through which they would pursue
their transactions are precise and objective to avoid any potential concerns of
anti-competitive conduct arising. The CCI also clarified that any exchanges of
information, as well as any other conduct arising from such transactions,
should be inherent and proportional to the legitimate objective of such
transactions, and that entities should ensure that they implement any/all
necessary safeguards to mitigate any competition concerns.
IV.
Analysis
In
its decisional practice, such as in cases like the Trian – Invesco Case
and the SABIC – Clariant Case,
the CCI has reiterated that competitive dynamics are not affected or influenced
solely by active decisions. Even a broad awareness or understanding of
sensitive information may cause competition concerns. Therefore, it is crucial
for business entities entering into combinations to ensure that they avoid any
exchanges of sensitive information which could potentially create competition
concerns, and if an exchange of such information is integral to the completion
of the transaction, they find an effective means of mitigating such concerns.
If executed properly, clean team agreements can prove to be this means of
mitigation.
Although
the CCI did not find the clean team agreement executed in the Adani Green –
Softbank merger sufficient to mitigate the concerns of the CCI, the Order
indicates that they are not against the use. In fact, the CCI actually
encourages it. In the Order, the CCI acknowledges that “the Commission
agrees that clean team protocols do have the potential to safeguard the
exchange of competitively sensitive information,”
so long as the terms and rules of engagement are explicitly laid down and
strictly followed. The CCI has also clearly shown that they are open to the use
of clean team agreements in their Compliance Manual for Enterprises
and FAQs.
Therefore, it is quite evident that the openness of the CCI to clean team
agreements as a way to potentially avoid any gun-jumping concerns was not the
problem here. Yet, in the Adani Green - Softbank case, the CCI still ruled
against the Acquirer. It seems the main reason for this was because the
Acquirer did not provide enough information about the clean-team agreement to
the CCI, and the same was reiterated in the Order. With this said, if it
is assumed that the clean team agreement had sufficient safeguards and utmost
confidentiality was maintained, had the Acquirer provided more information to
the CCI about the composition of the clean team and the specific terms of the
agreement, one could say that the CCI would likely have ruled in favor of the
Acquirer. After all, the Acquirer submitted that they had a clean team
agreement, and the CCI clearly seems open to considering clean team
arrangements as a mitigating factor for competition concerns. Therefore, so
long as the terms, conditions, and safeguards within the clean team agreement
are sufficient to mitigate any potential competition concerns and the CCI is
provided enough information to prove the same, it seems that that the CCI is
willing to allow the exchange of information between the parties.
Overall,
the Order will likely prove immensely useful from both a competition and
corporate perspective. As already established, it is clear to see that the CCI
is very much in favor of the use of clean teams as a method of mitigating
competition concerns. Therefore, if properly implemented, the use clean team
agreements can prove beneficial for all parties involved. Clean team agreements
are a great way for companies to be able to exercise effective and efficient
integration planning without having to worry about competition concerns.
These agreements also benefit lawyers, as they will not have to worry about the
possibility of backlash from the CCI which saves them immense time and effort.
They will even benefit the CCI, as the number of gun jumping cases will likely
reduce. At the same time, however, the mere existence of a clean team agreement
between two parties does not mean that they may exchange any information they
desire, and the Order makes this very clear. In both the Order as well as its
decisional practice, the CCI has made it evident that it will only stand for an
exchange of information if the same is found to be inherent and proportional to
protecting the interests of the business and achieving their legitimate
interests, such as preservation of value, effective planning, etc. Further, any
information that is exchanged must remain strictly confidential, and there must
be sufficient safeguards to ensure the same. Therefore, the parties still must
ensure to exercise caution when providing one another with any sort of
information which may be considered sensitive. Therefore, like any other
agreement, lawyers must ensure to craft the clean team agreements based on the
given circumstances and ensuring that they are extremely carefully and create
sufficient safeguards within the agreement to ensure that no competition
concerns arise.
V.
Conclusion
To
conclude, gun jumping is a serious violation which can lead to heavy penalties
on the offender, and it would be wise for any and all parties engaging in
combinations to exercise caution when planning and executing the transaction.
There are many ways to help avoid raising any concerns of gun jumping, and it
is clear that executing robust clean team agreements can be immensely helpful
in mitigating any competition concerns. Therefore, it would be immensely
beneficial for lawyers and corporations to implement this tool more often in
their transactions so as to allow them to go about their business without
having to worry about any backlash from the CCI.
