CCI Suspends Approval for Amazon-Future Deal

CCI SUSPENDS APPROVAL FOR AMAZON-FUTURE DEAL

In November 2019, the Competition Commission of India (the "CCI") granted approval to Amazon.com NV Investment Holdings LLC's ("Amazon") proposed acquisition of 49% of the shares of Future Coupons Private Limited ("FCPL"), together with "certain other constituent steps" (the "Amazon Acquisition" and such order, the "Approval Order").

By way of an order dated December 17, 2021 (the "CCI Fining Order"), the CCI has now:

(i) fined Amazon an amount of INR 200 crore for suppression of facts in its application to the CCI for approval of the Amazon Acquisition, and misrepresentation of the "purpose" of the transaction;

(ii) directed Amazon to file a fresh application for approval of the Amazon Acquisition; and

(iii) stated that until disposal of the fresh application to be filed by Amazon, the Approval Order shall "remain in abeyance".

Set out below are certain points to note from the Fining Order:

INITIATION OF PROCEEDINGS

The proceedings that resulted in the CCI Fining Order were initiated by an application by FCPL dated March 25, 2021, stating that "Amazon has initiated arbitration proceedings in relation to transfer of assets of FRL [Future Retail Limited ("FRL")]", and has taken "completely contradictory stands in the arbitration proceedings and constitutional courts with respect to its investments in FCPL as compared to the representations and submissions made before the Commission", indicating "false

representation and suppression of material facts before the Commission."

The CCI considered the application referred to above and arrived at a prima facie view that Amazon had made false and incorrect representations in contravention of the provisions of the Competition Act, 2002 ("Competition Act"), and issued a show cause notice to Amazon.

THE CCI'S ANALYSIS OF "MISREPRESENTATION" AND "SUPPRESSION"

Disclosures in Amazon's Application for Approval

Amazon's application to the CCI for approval of the Amazon Acquisition ("Amazon's Application") disclosed (in a footnote) that (i) prior to the Amazon Acquisition, FCPL had acquired equity warrants of FRL, convertible into equity shares representing 7.30% of the share capital of FRL (the "Warrants Transaction"), and (ii) pursuant to the Warrants Transaction, FCPL, FRL and certain promoters belonging to the Future Group had entered into a shareholders' agreement with respect to FRL (the "FRL SHA").

Amazon's Application also disclosed that the rights acquired by Amazon pursuant to the Amazon Acquisition included the requirement of prior written consent of Amazon for FCPL to decide on or implement any matter under the FRL SHA.

Further, Amazon's Application also referred to certain existing and contemplated business arrangements between FRL and Amazon, including relating to the listing of the products of FRL on the Amazon India Marketplace ("Commercial Arrangements"). Amazon's Application stated that these Commercial Arrangements were not 'interconnected' with the Amazon Acquisition, however, given the proximity of the execution of such transactions to the Amazon Acquisition, these would be given effect to only after the receipt of the approval from the CCI in respect of the Amazon Acquisition.

In Amazon's Application, the section on 'Economic and Strategic Purpose' of the transaction focused on FCPL's business and did not refer to FRL. Subsequently, the CCI requested certain clarifications from Amazon, including the 'strategic or economic rationale' of the rights acquired with respect to the FRL SHA; Amazon's response included a statement that one of the factors driving Amazon's investment in FCPL was that FCPL "has invested in, and proposes to invest in FRL, which is a publicly traded company with strong financials and futuristic outlook". Further, Amazon stated that FCPL's rights in FRL were in the nature of "investor protection rights" and did not encroach "upon the commercial and operation decision making process" of FRL.

CCI's Review of Internal Documents

In its analysis, the CCI primarily relied on internal documents of the Amazon Group to understand the objectives of the Amazon Acquisition. These internal documents were submitted to the CCI by FCPL, and are stated to be "contemporaneous and prior to the Combination, disclosed in the arbitration proceedings"

.

These documents include an email sent to Mr. Jeff Bezos for approval of the Amazon Acquisition dated July 18, 2019 (the "Internal Approval Email"). The Internal Approval Email is quoted extensively in the CCI Fining Order, and includes details of FRL's business, as well as statements that (a) the structure of the transaction leaves Amazon well positioned to become the single largest shareholder of FRL if and when the relevant foreign direct investment rules are liberalised, and (b) the price of the stake acquired by Amazon in FCPL was calculated to equal the value of the indirect shareholding of Amazon in FRL (through FCPL) at a 25% premium.

Other internal communications relating to the negotiation between Amazon and the Future group (dated May 24 and July 10, 2018, i.e., more than 12 months before the Amazon Acquisition was effected) reflecting similar strategies as the Internal Approval Email are also quoted in the Fining Order. Further, such internal documents also indicate that the "Founder" of the target, i.e., Future group "believes a close alignment via a strategic investment with an online player is important."

The CCI's Conclusion

The CCI noted the contradiction between the statements in Amazon's Application and the internal documents referred to above, and concluded that "Amazon was all along focussed/ interested in FRL", and that the business potential of FCPL was not the driving factor for the Amazon Acquisition, as claimed in Amazon's Application and in Amazon's responses to the CCI's queries.

In respect of the rights acquired by Amazon through the FRL SHA, the CCI held that while "the object and purport of mere investor protection rights are limited to protect the investment made, the object and purport of strategic rights, such as those reflected in the Internal Correspondence, are much different. Such difference is of significance in establishing a proper understanding of a combination and its purpose, and accordingly, deciding the appropriate line of inquiry to assess the effects of the combination on competition."

The CCI also noted that Amazon had omitted to provide appropriate internal documents that clearly documented the objective of the Amazon Acquisition in

response to the relevant question in the application form (such as the internal documents referred to by the CCI in the Fining Order).

Accordingly, the CCI concluded that Amazon's conduct amount to "suppression and misrepresentation of the purpose of the Combination, which is a material particular", and that Amazon had suppressed "relevant and material documents against the disclosure requirement[s]" in Amazon's Application. Further, the CCI held that "the rights over FRL that were considered as strategic in the Internal Correspondence of Amazon, were represented as mere investor protection rights."

THE CCI'S ANALYSIS OF INTER-CONNECTED TRANSACTIONS

The CCI Fining Order acknowledges that (i) the FRL SHA was disclosed to the CCI in the course of its consideration of Amazon's Application, (ii) FRL was identified as a "target" in Amazon's Application, and (iii) details of overlaps between FRL and Amazon were provided by way of "abundant caution".

However, the CCI refers to an email from Amazon to the Future Group stating that exercise of FCPL's rights in FRL should be a "veto" matter under the SHA, and states that this, together with other internal correspondence, demonstrates that the rights under the FRL SHA were "strategic" to Amazon. Further, the CCI found that the Commercial Arrangements were essential parts of the Amazon Acquisition, and were the trigger for the acquisition.

On this basis, the CCI has taken a view that the FRL SHA and the Commercial Arrangements were negotiated as part of the Amazon Acquisition and were "interconnected" parts of the Amazon Acquisition, but not disclosed as such.

AMAZON'S ARGUMENTS

Amazon based its arguments before the CCI on the fact that it had made appropriate disclosures in the course of obtaining approval for the Amazon Acquisition, including disclosing the FRL SHA. It also contended that:

(i) FCPL had approached the CCI with unclean hands, that that the complaint was a "mala fide attempt to violate the rights of Amazon" in the context of the transaction between the Future Group and the Mukesh Dhirubhai Ambani Group;

(ii) the CCI does not have the power to "revoke" an approval under the Competition Act;

(iii) all information that was "material" to the assessment of the Amazon Application was disclosed in Amazon's Application;

(iv) the FRL SHA is not a "combination" involving Amazon; and

(v) the internal communications considered by the CCI reflected evolving discussions as these took place over a period of several months.

ANALYSIS

Prior to the Fining Order, the highest fine imposed by the CCI in respect of combinations (including for false representations and gun-jumping, i.e., completing transactions without seeking the approval of the CCI at all) was INR 5 crore.

The quantum of the fine imposed upon Amazon indicates that the CCI has interpreted its conduct as a serious violation of the Competition Act, despite noting that disclosures were made by Amazon in respect of the FRL SHA as well as the Commercial Arrangements which the CCI has concluded to be "inter-connected" with Amazon's Application. The CCI's key issue appears to be the variance between the description of, and emphasis on, the FRL SHA and related rights in Amazon's Application, with the language in the internal documentation that was provided to the CCI by FCPL.

In the event that Amazon challenges this order, aspects of the CCI's analysis including its view on the significance of the "intention" of parties to transactions reflected in internal documents and emails will be interesting to watch for.