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This post, a part of the RFMLR-CAM Blog Series Competition on Emerging Trends and Developments in the Competition Law Regime, is authored by Siddh Sanghavi , second-year student of National Law University Odisha (NLUO).
Introduction
“It is better to buy than to compete.” This statement made by Mark Zuckerberg, the Chief Executive Officer of Meta (previously Facebook) is reflective of the strategy of large tech companies to eliminate any future competition by acquiring companies at a nascent stage.
A killer acquisition occurs when a dominant company (the acquirer) purchases a smaller, innovative company (the target) with the primary intention of shutting down the target's promising product or service, eliminating potential future competition. Killer Acquisition is essentially an acquisition of a potential competitor by an established corporation.
This article attempts to dive into the practice of "killer acquisitions" in the digital industry. It analyses whether the current competition law regime in India is strong enough to tackle this practice, and suggests various alternative approaches and suggestions to tackle killer acquisitions in the digital industry.
Why Killer Acquisitions in the Digital Industry Warrant Special Scrutiny
This practice of killer acquisitions in the digital industry has become the norm. A few dominant market players have followed the policy of acquire and kill towards smaller start-ups to nullify any future competition. The most famous examples would be those of the tech giants Google, Amazon, Facebook, and Apple (GAFA). According to a United States House Judiciary Committee report, these four companies have made more than 300 global acquisitions worldwide just between 2009 and 2019. The report further states that most of these acquisitions were killer acquisitions of nascent potential competitors.
While the issue of decreased competition, increased prices, and stifling innovation due to killer acquisitions is obvious. Such acquisitions in the digital industry demand specific attention since tech companies, rather than charging a fee for services provided, take into consideration in the form of data of the consumer. Thus, it poses a unique threat to consumers' privacy and data security in the case of any anti-competitive amalgamations of data.
For instance, the acquisition of Fitbit by Google has sparked much debate. A combination of Google’s extensive database with that of Fitbit’s containing its users' sensitive health data may potentially have a severe privacy impact on consumers' privacy. The severity of this issue was even highlighted by the European Data Protection Board in its statement warning that such mergers that result in the accumulation of personal data would be a high-level risk towards the privacy of the consumers. However, this killer acquisition by Google went unscrutinised and unchecked by the European Commission (the regulating body for competition law in the EU), showing how the law as it currently stands is inadequate to deal with the issue of killer acquisitions in the digital industry.
Current Scrutiny Standards: Can They Combat Killer Acquisitions in the Digital Industry?
Traditionally, merging entities were subject to scrutiny by the CCI based on the value of their assets and turnover. However, this was found to be inadequate, and therefore the Competition (Amendment) Act 2023 introduced Deal Value Thresholds (DVT). This means subjecting those mergers to scrutiny whose deal value or transaction value crosses a certain limit. Section 5 of the Amendment Act sets the transaction value at Rs 2000 Crore.
However, even DVTs have fallen short in addressing killer acquisitions. Since these acquisitions usually involve start-ups and smaller firms, the transaction value is less and these acquisitions fly under the threshold of DVT’s.
Further, simply having a low DVT is not an effective solution. This approach would overburden the Competition Commission of India (CCI) by reviewing a large number of irrelevant mergers, adversely affecting the ease of doing business in India. Additionally, it would disproportionately impact smaller mergers and acquisitions, hindering their growth, and potentially missing the intended target of capturing killer acquisitions. Therefore, it is crucial to develop alternative criteria for selecting which acquisitions require scrutiny by the CCI.
Suggestions to Combat Killer Acquisitions in the Digital Industry
Working out a New Criteria for Scrutinising Acquisitions in the Digital Industry.
The newly passed Competition (Amendment) Act 2023 also specifies that a transaction will be subject to merger control if the enterprise has “substantial business operations in India.” However, what would constitute “substantial business operations” has not been clarified in the act.
For the same, the CCI can rely on certain suggestions put forward by a joint guidance paper that was published by Austrian and German Authorities to address the gap. The guidance paper argues that to determine whether a business has substantial business operations authorities, rely upon the measurement of the domestic activity of the company and the significance of such domestic activity. The guidance paper relies upon different parameters to determine the significance of domestic activity.
One such criterion is based on the “monthly active users” or “daily active users” of the targeted company. The primary objective of CCI while deciding which acquisitions should be scrutinised is to determine whether such acquisitions could potentially harm consumer interests and equitable competition in the market. One of the issues resulting from killer acquisitions in the digital industry is the data monopoly and concentration of user data in the hands of a few companies. The issue of monopolization of data not only poses serious privacy concerns but also gives larger tech companies an unfair advantage over their competitors.
By scrutinising acquisitions based on the number of “active users”, CCI can identify companies with significant control over user data. This will allow the CCI to intervene if such an acquisition may potentially result in the monopolization of user data.
Further, to prevent such monopolization of data, the Director General of CCI can also be empowered to do an impact data assessment test of the companies in the acquisition based on the number of active users. This data assessment test can be done with the help of experts in the field of data analytics to help determine any potential adverse effects that may stem from the accumulation of data in the hands of the acquiring company.
The existing method based on the assets and turnover of the companies is not a viable solution due to the dynamic nature of the digital markets, wherein there is usually a high volatility in the price of market shares and turnover of the company. The number of active users of a company would be a more definitive way to assess the market penetration or dominance of a company.
Creation of a Separate Digital Regulatory Authority.
Creating a separate sectoral agency specifically for regulating competition law in the digital industry is the need of the hour. This separate sectoral agency would be tasked with the merger review of the dominant tech industries in the market. If a separate sectoral agency is created, it will be able to review all acquisitions made by market players with substantial business operations rather than relying on DVT.
This recommendation for creating a separate digital authority will allow such an agency to review even the smallest of transactions made by companies having “substantial business operations”. Further, due to the special circumstances in the digital market, the separate sectoral agency can also be empowered to apply different legal standards and use different procedural tools to curb killer acquisitions in the digital industry.
This concept of having a separate sectoral agency is also currently being discussed in India. The Ministry of Corporate Affairs (MCA) has set up a Committee on Digital Competition Law (CDCL) to review whether the law as it currently stands is sufficient to deal with challenges in the Digital industry. CDCL has been asked to submit a report on the need for a Digital Competition Act, a separate legislation specifically dealing with anti-trust regulation in the Digital industry.
The CCI in a commendable step did set up a Digital Market and Data Units to specifically deal with challenges in the Digital industry. However, this unit lacks any enforcement power and has been set up to lead studies in matters related to the Digital Markets.
On similar lines, a separate Digital Markets Unit has been set up in the United Kingdom (UK). The framework in the UK has empowered the unit to specifically keep a check on Strategic Market Status Firms (SMS). These SMS firms are essentially those having substantial business operations in the digital industry.
Shifting the Burden of Proof.
The author has above argued for the creation of a separate sectoral agency for the digital industry. Due to the special circumstances in the digital market, like the issue of data monopolies, separate agencies must be empowered to apply different legal standards as compared to traditional acquisitions.
Currently, there does not exist any presumption of the legality or illegality of mergers made by the CCI. However, not only in India but in various jurisdictions around the world there is a question of whether the burden of proof should be reversed in cases of killer acquisitions of nascent firms. This suggestion has also been made by the OECD which argues that instead of imposing obligations on competition authorities to prove that an acquisition would have a negative impact on the market, the burden of proof should be reversed to impose an obligation on the acquirer to demonstrate a lack of competitive harm.
A European Commission Chief Competition economist’s report has suggested that shifting the burden of proof onto acquirers will deter killer acquisitions. This is because identifying the killer intent is not possible at the time of acquisition, therefore, shifting the burden of proof will allow the CCI to challenge acquisitions by tech giants more easily.
A similar law has already been proposed in the French parliament. The new draft law imposes merger notification obligations on the “dominant digital companies” whereby the companies will be required to prove that any acquisition made by them is not likely to harm competition in the industry.
Expanding the scope of Ex Poste Assessment Framework.
An Ex Poste Assessment framework means an examination of the effects of an acquisition after its consummation. This framework is of special use in killer acquisitions since the effects of these acquisitions in the market are only visible after a certain period.
CCI currently does have the power for an Ex Poste assessment under Section 20(1) of the Competition Act, 2002. This section allows for the scrutiny of agreements within 1 year of its execution, however the effect of killer acquisitions on the markets may be difficult to gauge within a year.
The use of an ex- post assessment framework after a year would gain importance, especially when seen from a data monopoly perspective. The Adverse effects of monopolization of data resulting from the killer acquisition may be visible only after a year, depending on how the acquiring company decides use the data of the consumers.
To address the issue, it is important that CCI’s Ex Poste Assessment powers be expanded specifically to combat Killer Acquisitions. While merely enhancing and extending the time period may not be a feasible solution as it may create uncertainties for businesses. However, CCI can come up with a comprehensive framework and guidelines under which an Ex Poste Assessment can be done even after a year. This framework could explain circumstances in which an Ex Poste Assessment can be triggered even after the time limit. Therefore, through this CCI can be given a flexible timeframe for an Ex Poste Assessment while ensuring there isn’t any arbitrariness or abuse of power.
Further, expanding the Ex Poste Assessment power of the CCI will also act as a deterrent for the acquiring company to not misuse the data of its consumers.
Conclusion
Killer Acquisitions pose a significant threat to competition and consumer welfare in the Digital Industry, leading to new and unfamiliar threats of anti-competitive amalgamations of data. The current legal framework in India is inadequate to address the issue of killer acquisitions in the Digital Industry.
India has taken a step forward in establishing the CDCL (Committee on Digital Competition Law) and the Digital Markets and Data Unit, recognising the need for a separate regulatory authority specifically dealing with anti-competitive practices in the digital industry. But, there is still a need for a more comprehensive and specialised approach in regulating competition in the digital industry.
As the digital industry continues to evolve, regulatory frameworks must also evolve to safeguard against anti- competitive practices. Jurisdictions around the world have advanced to specifically deal with this issue, and it is important that India take lessons from them and evolve to keep up with the challenges of the fast growing digital industry.