Reconceptualising Arbitrability in Competition Law Disputes Arising from M&A
Introduction
The digital sector is rapidly evolving and is characterised by very complex contractual arrangements and rapidly evolving regulation. Most transactions (M&A in a digital market) have highly detailed transactional documentation regarding the significant terms of the transaction with respect to the data sharing, system integration, data transfer, clean team provisions, the market position, and behaviour of the parties post-close. As a result, arbitration is becoming the preferred method for resolving disputes that arise out of a digital marketplace transaction due to the fact that arbitration is private, efficient, and capable of being enforced in multiple jurisdictions.
However, while arbitration does provide the advantages of confidentiality, procedure efficiency, and enforceability of arbitration awards, it also has other limitations when M&A agreements having a competition law concern arise. In many situations, the line between the private contractual rights and the public regulatory obligation becomes blurred, such as when there are gun-jumping issues, excessive co-ordinating activities, restrictive contractual agreements, and/or post-merger market conduct. With respect to India, the Arbitration and Conciliation Act, 1996 provides for extensive party autonomy in determining the terms of their governing relationship; on the other hand, the Indian Competition Act provides the Competition Commission of India with the exclusive authority to regulate and enforce competition in the Indian market. The resulting overlap in the jurisdictional authority creates uncertainty with respect to the arbitrability of merger-related disputes that also touch on competition law.
Competitive dynamics in digital markets are limited by the dominance of platforms, the existence of network effects and other data-driven advantages. In digital markets, competition is determined by a range of factors which create complications regarding traditional merger evaluations and raise important questions regarding the categorical non-arbitrability of all competition-related dispute resolution processes. Given these changes in the digital marketplace, it would be timely and necessary to revisit India’s stance on the non-arbitrability of competition remedy disputes. Adopting a more sophisticated approach to Competition Remedy Arbitration through recognition of the CCI’s ability to regulate this type of law while allowing Arbitration of certain situations when appropriate will provide a better and more balanced regulatory framework.
Table of Contents
Understanding India’s doctrine of non-Arbitrability
The reason for India’s Non-Arbitrability is based on the distinction made between Personal and Real Property. In Booz Allen & Hamilton Inc. v SBI Home Finance Ltd.,1 the Supreme Court of India ruled that public rights (i.e., criminal matters; family law; or, bankruptcy) is not arbitrable as a result of the issues being outside Private Rights and as they affect both the individual and society at large. This view has been pivotal in causing the courts to be cautious in allowing arbitration of claims under competition law, which have traditionally been viewed as public law cases designed to preserve the integrity of the market and protect consumers.
Vidya Drolia v. Durga Trading Corp.,2 the Supreme Court established a four-part test to help arbiters distinguish which cases cannot be resolved by arbitration. As part of this test, if the subject matter of the dispute involves property ownership (i.e. “property rights”), requires a centralised agency for the determination of ownership, belongs to a category not to be arbitrated, or if the subject matter is expressly precluded from being arbitrated by statutes, then the dispute cannot be resolved through arbitration. Many forms of competition law disputes involve a competitive assessment of the market, not merely an assessment of a couple of entities. The Delhi High Court, in the case of Telefonaktiebolaget LM Ericsson v. Competition Commission of India,3 upheld the conclusion of the High Court of Delhi that inquiries relating to competition have a public-interest purpose and cannot be taken away from private entities and submitted for resolution. Most academic commentators agree that arbitration cannot replace the public and institutional nature of competition law enforcement.
Judicial Opinions continue to provide evidence of competition law as an area of regulation for the Government of India through its competition authority, the CCI (Competition Commission of India) has exclusive jurisdiction over regulating mergers and acquisitions and thereby has exclusive authority to carry out enforcement of competition law violations.
Disputes Regarding Merger Control at the Convergence of Contractual and Public Regulation
Merger and acquisition transactions frequently lead to conflicts whether they occur before or after the deal is completed. Typically, the documentation relating to the transaction contains specific contracted obligations regarding the transfer of information between the contracting parties, regulatory cooperation, the protection of sensitive data (i.e., confidential information), and compliance with competition legislation. Commonly, a party to the transaction may raise an allegation against the other party regarding issues arising from the leaking of sensitive business information, the lack of cooperative effort in obtaining necessary regulatory approvals, or, a misstatement regarding the respective market position of either of the contracting parties. For this reason, arbitration has historically been a common choice of dispute resolution between contracting parties for such instances, due to its frequent use in transaction documentation.
Conversely, the contractual conflicts between the parties to an M&A transaction may also contain issues that arise from competition legislation. For instance, while pre-merger communications may raise potential gun jumping situations, the contractual rights and obligations of the parties may not necessarily prevent enforcement action for violation of competition law. In addition, other instances of contractual obligation between the parties may lead to concerns with respect to the prohibition on entering into anti-competitive agreements. One such instance can occur when obligations set forth in the post-merger phase of an M&A transaction require either divestiture of a specific segment, or, if imposed as a remedy to an order of the Competition Commission of India (CCI).
Although it can be beneficial for parties to an arbitration agreement to use an arbitration process to enforce their contractual terms, this use of an informal dispute resolution technique also raises issues with the regulatory objectives in the merger process. Because of these uncertainties, there is increased demand for clarification on which disputes can legitimately be arbitrated in mergers.
Comparative Insights from the European Union and the United States
Comparative analysis reveals differing approaches to the interaction between arbitration and competition enforcement. The European Commission administers Europe’s Merger Regulation, which provides for merger control, and thus also is the only entity with the authority to determine if a proposed merger can be implemented or must be altered or prohibited. There is no legal means by which arbitration can replace or override the European Commission’s authority in this regard. In cases where an arbitral award violates Articles 101 and/or 102 of the Treaty on the Functioning of the European Union or public policy, it is null and void (assuming such violation is substantiated) due to the Eco Swiss decision. Even though neither the Eco Swiss decision nor the relevant articles are specifically about mergers, many commentators believe that competition law’s application to mergers has been bolstered by the Eco Swiss decision, because mergers have direct effects on the structure of the market. The European Commission’s dedication to maintaining strict public supervision over the merger review process is highlighted in Altice, in which it continued to impose substantial public oversight over mergers that involved gun-jumping or other pre-closing coordination.4
On the other hand, in the United States, there is a greater degree of flexibility regarding the approach to merger controls. The Mitsubishi Motors Corporation v. Soler Chrysler-Plymouth case demonstrates the permissibility of arbitration for antitrust claims; however, it also illustrates that the arbitration must comply with the relevant anti-competitive regulations. Therefore, under the Hart-Scott-Rodino Act, merger control remains a public enforcement process governed by the Federal Trade Commission and the Department of Justice. Although private parties may resolve contract disputes related to a merger through arbitration, they may not resolve questions of legality or appropriate remedies related to their merger through arbitration.
How does arbitrability factor into digital M&A?
Digital mergers involve unique complexities that add to their significance as it relates to arbitrability. M&A transactions involve sensitive data, complex algorithms, platform integration, and network effects. This can lead to disputes involving data access, confidentiality, interoperability, and post-merger adjustments, which are typically contractual in nature and shouldn’t raise issues regarding competition at the market level. The characteristics of arbitration (efficiency and confidentiality) lend themselves well to resolving these types of disputes.
Digital mergers are subject to a greater level of regulatory scrutiny due to the potential for entrenchment of monopoly power. Therefore, a greater focus has been placed on behavioural remedies around data sharing, algorithm transparency, and inter-operability by the CCI. The CCI has jurisdiction over the regulatory design and oversight of these remedies, but disputes over their contractual implementation may be resolvable through arbitration without infringing upon the public enforcement role of the CCI. Digital M&A transactions are often multi-jurisdictional and require concurrent regulatory review across jurisdictions. An arbitration agreement provides a neutral, uniform forum in which to resolve cross-border commercial disputes resulting from these transactions. Thus, if a blanket prohibition exists against arbitration in merger-related disputes, it would reduce the commercial stability of complex global transactions.
Rethinking Merger Dispute Non Arbitrability In India
As it now stands, the Indian approach considers all M&A related competition disputes as not arbitrable based upon the belief that all disputes which arise in connection with M&A impact the market as a whole. Most of the time, however, mergers will result in a dispute that is between two parties only; that is private and commercial in nature. By way of example, disputes relating to earnings-calculation, representations as to sales, allocation of liabilities, breaches of confidentiality or the parties’ respective obligations to comply with clean teams are examples of disputes that do not have a market impact, therefore enforcing such determinations as between the two contracting parties.
More specifically, a balanced approach will need to be adopted by the courts in determining whether or not the dispute affects the public policy surrounding the merger control regime or simply relates to a dispute arising out of the rights of the parties as determined in their contracts. If a dispute between the parties arises from a merger, is contractual in nature and does not contradict or undermine any findings or orders imposed by the Competition Commission of India (CCI) regarding otherwise valid mergers or devalue any remedy imposed by the CCI, arbitration will have to be available as a means of resolving the various issues. Additionally, arbitrators may need to be trained to understand that when making any decision in the context of merger disputes, they must respect the authority of the CCI.
This proposed framework reflects India’s strong pro-arbitration culture as well as the importance of respecting the principle of minimal judicial interference which has been consistently stressed in all Judicial Development steps taken after Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. The underlying justification identified in Vidya Drolia emphasises the principle of arbitrability, unless it is patently found to be otherwise. Limited arbitrability would enhance legal certainty, reduce procedural fragmentation, and align Indian practice with comparative best practices.
The Impact of the Competition (Amendment) Act, 2023
The Competition (Amendment) Act, 2023 has significantly reshaped merger control in India by introducing deal-value thresholds, expanding the concept of control, modifying penalties, and empowering the CCI to scrutinise a broader range of digital transactions. These reforms respond to the growing importance of digital markets and concerns surrounding acquisitions of nascent competitors.
Many more transactions will soon fall under the review capability of the Competition Commission of India (CCI), which will increase the volume of ancillary or related contract disputes between parties. By allowing contracts between businesses to resolve disputes through arbitration rather than litigation, the CCI would be able to concentrate on protecting competition as its primary responsibility, whilst allowing for the more efficient resolution of private disputes.
A mixed approach to merger regulation will result in greater institutional efficiency and a more logical delineation of each institution’s responsibility.
Conclusion
The CCI’s continued resistance to allowing the use of arbitration in resolving competition-related merger disputes stems from valid public policy concerns. Competition policy encompasses the structure of the market, which has direct implications for the welfare of consumers; therefore, the CCI must retain regulatory authority and oversight in most instances. At the same time, the emergence of new forms of digital M&A, the increase in multi-jurisdictional mergers, and the growing use of international arbitration in commercial settings suggest it is time to reconsider this rigid position.
Merger transactions create both public law-related disputes and many private sector-related contractual disputes that can be resolved by the use of arbitration without compromising the CCI’s ongoing mandate to protect and promote competition or infringing on its jurisdictional authority. By creating a limited-arbitrability framework that permits the use of arbitration in the resolution of private post-closing contractual disputes or covenant disputes; while reserving the ability to assess a merger’s competitive impact on markets and consumers and to impose remedies on those assessments on the CCI, this approach reflects the realities of the modern digital marketplace.
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