Part IV: CCI’s Recent Penalty Order Against Goldman Sachs: Are Any Minority Protection Rights Filing Immune?

In a marked departure from its earlier decisional practice, the Competition Commission of India (CCI) recently imposed a penalty of INR 40 lakhs on a financial investor for gun-jumping, signaling a significant shift in its interpretation of the “solely as an investment” exemption under the erstwhile Combination Regulations, 2011 (Regulations).

Traditionally, CCI has focused on factors such as board representation, observer rights, and veto powers as grounds for denying this filing exemption. However, in a noteworthy move, the regulator has now extended its scrutiny to information rights.

It levied a penalty on Goldman Sachs AIF Scheme-1 and its investment manager (GS) for failing to notify the acquisition of optionally convertible debentures (OCDs) in Biocon Biologics Limited. The OCDs, if converted, would have given Goldman Sachs AIF a 3.81% equity stake in Biocon. Although this shareholding was well below the 10% threshold and gave GS no control/management participation rights, CCI held the Information and Access Rights as the basis for disqualifying the investment from the filing exemption.

To be clear, this CCI order was under the erstwhile Regulations. Let’s take a closer look at the rights that the filing vs. non-filing hinged on.

GS AIF’s rights under the SHA included:

Reserved Matter Rights: Certain matters under the shareholders agreement (SHA) required prior written consent of the Investor Majority or all investors collectively. Goldman Sachs did not have the ability to unilaterally exercise these rights.

Information Rights: Certified true copies of minutes of board/committee/shareholder meetings with related records after such a meeting has occurred (“Minutes Right”), and (b) information relating to any direct change in certain shareholdings, access to certified true copies of the latest capitalization table of Biocon, etc..

Access Rights: Allowed GS AIF to access the premises and personnel of Biocon during normal business hours, upon providing a reasonable prior written notice.

The Legal Framework

Under the erstwhile Combination Regulations, 2011, Item 1 of Schedule I provided an exemption for minority acquisitions made ‘solely as an investment’ or in the ‘ordinary course of business,’ provided the acquisition was less than 25% conferring no control. For acquisitions under 10%, a further Explanation to Item 1 created a rebuttable presumption in favor of the exemption, so long as the acquirer does not gain board representation, does not intend to participate in management and possesses only such rights as are exercisable by ordinary shareholders. (Annexure 1).

CCI’s FAQs have clarified that intent of the board representation condition is to ensure that an acquirer with minority shareholding does not become privy to competitively sensitive information, access or awareness of which may be sufficient to lead to coordinated outcomes.

CCI’s Analysis

The crux of CCI’s decision lies in the information and access rights. The key question is not whether all investors have the same rights, but whether those rights are truly “ordinary” by the standards of shareholders in any enterprise.

To elaborate, Item 1’s Explanation reads:

“(A) the Acquirer has ability to exercise only such rights that are exercisable by the ordinary shareholders of the enterprise whose shares or voting rights are being acquired to the extent of their respective shareholding...”

Given the intent of the exemption, in our view, “ordinary shareholders of the enterprise” should be looked at in the broader market context - ordinary shareholders do not typically possess rights that provide board minutes information or access to an enterprise’s premises.

However, GS had argued that Biocon Biologics had no ‘ordinary shareholders’ as in a public listed company and that “ordinary shareholders of the enterprise” must be interpreted contextually. Rather, the investor base comprised of promoters, institutional investors, and key individuals, all of whom were previously granted similar rights.

CCI categorically rejected the argument that the absence of retail shareholders or the uniformity of rights among sophisticated investors could lower the bar for exemption.

It found GS’ interpretation to be untenable saying it effectively suggested that if a company grants control-conferring or strategic rights to all investors or a subset of investors, those rights should automatically be considered “ordinary” regardless of their actual nature. It emphasized that this view ignores the substance and potential impact of such rights.

CCI held that Item 1 Provision is premised on ensuring assessment of transactions where an investor acquires rights which can potentially have an impact on competition or operational dynamics of the target and therefore the only relevant aspect is the nature or substance of the underlying ‘right’. Notably, this is one of the first cases where the regulator has spelled out its interpretation of “rights that are exercisable by the ordinary shareholders of the enterprise...”. [Note: This language no longer exists in the amended Regulations].

The regulator further emphasized that the Minutes Right and Access Right significantly exceeded the rights available to an ordinary shareholder “both in terms of form and substance”. The ability to receive certified minutes of board meetings granted GS privileged access to all commercially sensitive information (CSI) during board meetings (strategic plans, financial data, proprietary technology, business forecasts). “In form, such access is not allowed to the ‘ordinary shareholders’ and in substance, such access is indicative of GS considering the Transaction as strategic”, CCI noted.

Similarly, the Access Rights allowed GS to physically access Biocon’s operational premises and personnel. It rejected GS’s argument that the rights in question were standard commercial protections granted to all investors in Biocon, were aligned with established market practice and CCI’s previous decisions where similar rights, absent board representation or control, were not penalized.

Implications for Future Transactions

CCI’s penalty against Goldman Sachs signals a notable evolution in its interpretation of the “solely as an investment” exemption. Traditionally, the regulator’s enforcement in minority acquisitions has centered on whether the investor had a right to nominate a board member or otherwise participate in management – as seen in cases like Trian Partners/Invesco and PI Opportunities/Future Retail.

What sets the Goldman Sachs/Biocon order apart is that it appears to be the first instance where CCI found that information rights alone – in the absence of any board seat or observer status – could breach the exemption threshold. This sets a clear precedent that minority protection rights, if violative in form or substance, are not filing-immune.

This position is also now reflected in the amended Combination Regulations (effective September 2024), which explicitly list access to CSI as a disqualifying factor for the exemption. We’ve analysed the amended standards for ‘solely as an investment’ exemption in detail here.

Conclusion

Traditionally, CCI’s enforcement of the “solely as an investment” exemption has historically focused on factors like board representation, observer status, and veto rights. However, the application of the CSI standard – articulated in the FAQs but only a relatively recent introduction to the Combination Regulations, extends the scrutiny to information rights, even in the absence of board representation.

The implications of this shift are profound. Transactions previously structured to comply with the “solely as an investment” exemption may now face regulatory scrutiny if the investor gains access to CSI, regardless of board/observer rights.

Any rights that enable board minutes access or visibility into confidential business matters will likely trigger merger notification requirements, regardless of shareholding size or market convention.

Annexure 1

Schedule I, Combination Regulations, 2011.

1. “An acquisition of shares or voting rights, referred to in sub-clause (i) or sub-clause (ii) of clause (a) of section 5 of the Act, solely as an investment or in the ordinary course of business in so far as the total shares or voting rights held by the acquirer directly or indirectly, does not entitle the acquirer to hold twenty five per cent (25%) or more of the total shares or voting rights of the company, of which shares or voting rights are being acquired, directly or indirectly or in accordance with the execution of any document including a share holders’ agreement or articles of association, not leading to acquisition of control of the enterprise whose shares or voting rights are being acquired.

[Explanation: – The acquisition of less than ten per cent of the total shares or voting rights of an enterprise shall be treated as solely as an investment:

Provided that in relation to the said acquisition, –

(A) the Acquirer has ability to exercise only such rights that are exercisable by the ordinary shareholders of the enterprise whose shares or voting rights are being acquired to the extent of their respective shareholding; and

(B) the Acquirer is not a member of the board of directors of the enterprise whose shares or voting rights are being acquired and does not have a right or intention to nominate a director on the board of directors of the enterprise whose shares or voting rights are being acquired and does not intend to participate in the affairs or management of the enterprise whose shares or voting rights are being acquired.]”