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in association with

STAR PARTNER

PARTNER

EXCLUSIVE KNOWLEDGE PARTNER

24 - 26 FEBRUARY, 2023

CASE STUDY
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CASE STUDY
1. The Sovereign Republic of Krakoa is an Asian country, whose laws are in pari-
materia with the laws of India, subject to exceptions specifically stated below. The
Competition Act, 2002 of Krakoa (hereinafter referred as “the Act”) is the primary
statute governing competition law in Krakoa, and the Competition Commission of
Krakoa (“CCK”) is the statutory authority charged with enforcement of the Act. CCK is
empowered to, and has issued, several regulations, like the Krakoa Combination
Regulations, 2011 (“Combination Regulations”) which regulate mergers and acquisitions
in Krakoa.

2. Krakoa, with the world’s largest population of individuals under the age of 30, is seen
as a goldmine for the growing market for Edu-Business, not just for providing tutoring
to students and preparatory coaching for entrance examinations, but also for teaching
aids like notes and reading material, smart-learning technologies, etc. Consequently,
many start-up businesses have emerged in this sector in the country since 2015 and
have grown in scale and size as a result of substantial funding from venture capitalists
who saw great potential in this emerging market.

3. One such entity was Vision Private Limited (“Vision”), incorporated in 2011 as a private
limited company that provides educational services for primary and secondary school
curriculum, overseas and domestic test preparatory coaching services for competitive
exams for Engineerings, Medical, Law etc. Over the years, Vision became one of the
leading institutes in Krakoa, and established its branches in cities all across the
country. It was also renowned for providing the best teaching supplements like reading
materials, recorded lectures, question banks, test series, notes etc.

4. Vision became so popular that in December 2020, a multinational technology

conglomerate Ultron Inc.[1] (“Ultron”) headquartered in Washingdon, United States of
Aralia (USA) decided to invest in it. The founder and CEO of Ultron, Mr. Bruce Banner
decided to flush huge amounts of funds in Vision in consideration for Ultron acquiring a
majority stake in the company and 3/4th representation on the board of directors of
Vision. As a result of its newly acquired funds, Vision was able to expand and diversify

1 Ultron Inc. is a public listed company, traded on NASDAK. It is a market leader in web search engine, online advertising, cloud computing,
and operating system software. (For the purpose of this case study you can assume that the position of Ultron is analogous to Google.)
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its operations and enter into a new line of business, supplying ed-tech software
solutions. Vision also internally started working on developing a new Learning
[2]
Management System (LMS) and its own mobile learning app to bring its education
platform online.

5. Stark Tech Inc. (“Stark Tech”) is a public listed company, engaged in the business of
providing advanced technology and software solutions. It is headquartered in
Melaware, USA and is listed on NASDAK. In 2019, Tony Stark, the founder and Chief
Operating Officer of Stark Tech, decided to enter the Krakoan markets, and
incorporated a wholly owned subsidiary of Stark Tech, named Stark Ed Krakoa Pvt. Ltd.
(“Stark Ed”) in Krakoa. Stark Ed is mainly engaged in the business of developing
software and digital online teaching tools for educational institutes, and soon became
popular in Krakoan market for its innovative and technologically advanced Ed-tech
solutions.

6. Tony Stark has been an inspiration and role model for many young engineers and
inventors across the world. He dropped out of an Ivy league college to freelance as a
software developer and video game designer, and soon turned his backyard business
into a multi-billion-dollar company through his software patents. Tony Stark believes
himself to be a scientist before a businessman, and thus Stark Tech often invests in
various tech start-ups and projects that not just have promising business prospects but
also disruptive innovations.

7. In January 2021, National Institute of Technology (NIT), the most prestigious

technology institute in Krakoa, organized a Technology Incubation & Innovation Fair, to
provide a platform to tech-based businesses and start-ups to showcase their
inventions/ideas to international venture capitalists and investors. The fair was
attended by the likes of Melon Musk, Bruce Banner and Tony Stark.

2. A learning management system (LMS) is a software application or web-based technology used to plan, implement and assess a specific
learning process. It is used for virtual-learning practices and, in its most common form, consists of two elements: a server that performs
the base functionality and a user interface that is operated by instructors, students and administrators.
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8. One of the presenters in this fair was Reed Richards, the owner of DOOM Pvt. Ltd.
(“DOOM”), a private limited company, incorporated in Krakoa, that engages in the
business of providing video transmission and streaming services to support various
activities like broadcasting, OTT platforms, videotelephony, online conferences, etc.
DOOM showcased its next-generation video transcoding technology “Flash” that de-
compresses raw files and converts them into different compressed formats to provide
fast and efficient video streaming over the internet.

9. Unlike traditional transcoding technology, that require many processors, a lot of

memory, and a lot of storage, Flash allows transcoding such videos in real-time, even
to users with slower data speeds, through tablets, mobile phones, and smart TVs,
allowing high quality video playback on almost any screen on the planet. Once
commercialized, Flash had the potential of revolutionizing industries revolving around
video transmission and/or live streaming, like broadcasting, OTT platforms, online
education, etc.

10. DOOM’s video transmission service was such a success that just within 2 years of its
launch, it has established its name in the video transmission industry and was now
seeking more funds to expand its operations. Both Bruce Banner and Tony Stark were
really impressed by this technology and DOOM’s performance over the years, and
respectively proposed to invest in the company for 26% equity interest.

11. In contrast to Tony Stark’s policy of investing in businesses for promoting

innovation, Ultron was infamous for absorbing businesses with innovative technologies
at their nascent stage, to either prevent them from becoming its competitors or for
foreclosing its competitors from accessing these technologies. Reed Richards was not
willing to give control over his company, especially to Ultron. Finally, DOOM’s board
approved acquisition of a 15% stake by Stark Ed and only an 11% stake by Ultron (via
Vision).

12. The said investment in DOOM was notified by Stark Ed to the CCK as it was not able

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to avail the de minimis exemption and crossed the jurisdictional thresholds set out in
Section 5 of the Act. [3] CCK did a comprehensive analysis of the transaction and
observed that, there was no horizontal overlap and only a potential vertical overlap in
the business activities of Stark Ed and DOOM. Accordingly, the transaction was not
likely to have any appreciable adverse effect on competition. Thus, the said transaction
was approved by the CCK, via its order dated 16 April 2021.

13. While assessing the combination application submitted by Stark Ed, CCK also
observed that at the same time there was another investment in DOOM, by Vision.
However, Vision did not notify the acquisition to the CCK and consummated the
acquisition on 19 February 2021.

14. On 11 March 2021, the CCK issued a Show Cause Notice (SCN) to Vision, seeking
their response within thirty days of the receipt of the notice, as to why the transaction
was not notified and why investigation in respect of such combination should not be
conducted. Vision in its response stated that there were no horizontal or vertical
overlaps between the business activities of Vision and DOOM and therefore benefitted
from exemption under Schedule I to the Combination Regulations. The CCK decided to
not interfere with the said transaction.

15. Later in September 2021, there was an outbreak of a deadly virus, that created a
pandemic and there was a nation-wide lockdown for several months. As a result,
educational institutions across all levels were forced to rapidly adapt to virtual
platforms. While online and distance learning platforms were being used earlier, they
were considered a supplementary teaching aid to offline education. However, post the
pandemic the perspective on online education changed and many new online
education platforms entered the market.

16. Due to lack of experience in online teaching and unavailability of adequate

resources for the same, most of the teaching institutes outsourced their Learning
Management Systems and procured virtual teaching aids for online classes.

3. The value of assets of DOOM Inc. for the FY ending 31 March 2021, was Krakoan Rupee (‘KNR’) 600 crores and the turnover was KNR
5270 crores. Whereas, the value of Assets of Stark Ed. for the FY ending 31 March 2021, was KNR 540 crores and the turnover was KNR 790
crores.
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As a result of growing competition among online education platforms, all the market
players paid high emphasis on technology and innovation, that was the key to success
in this market.

17. By this time, thanks to its decade old goodwill, Vision that started its online
operations in May 2021 was also able to establish itself in the market for online
education platforms, with a market share of around 20%.

18. On 11 October 2021, Stark Tech launched a new product, Jarvis; an AI-based
personalization technology (running on Stark Tech’s patented software) that leverages
real-time data to deliver relevant content and adaptive learning to the user. This
software helps students by creating personalized learning bites tailored to individual
needs, enables script extraction from media, auto-translation, and many other advance
features. One of the most innovative features of Jarvis was the “personal tutor” wherein
the AI analysed the learning pattern of the student, and determined their strength and
weaknesses, thereby providing precise feedback and tailoring the course content to
adapt to the student’s learning needs.

19. Jarvis turned out to be a disruptive innovation in the market that many experts
claimed to have the potential to permanently change how education is delivered. It has
also been rumored that many international ed-tech companies like Osborn Inc. have
come up with similar software but those were not as advanced to compete with Jarvis
yet. As a result, all the education platforms are approaching Stark Tech to integrate
Jarvis software on their platform. Even Ultron’s in-house R&D was trying to develop an
AI comparable to Jarvis, for Vision’s online education platform, but with no success.

20. On 4 April 2022, Ultron started the process of hostile takeover of ‘Stark Tech’ in
USA. As a first step, Ultron acquired 27% shareholding in Stark Tech from its existing
shareholder Rhodes (“Rhodes Block Transaction”) and, (ii) subsequently, made a public
offer for the remaining shares.

21.Tony Stark, in order to prevent Ultron from taking over Stark Tech, adopted a poison
pill whereby it offered significant quantities of Stark Tech’s share stock for purchase to
all other shareholders at a reduced price. However,
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Ultron raised the purchase price of shares so much so, that Stark Tech’s poison pill
strategy failed drastically. Making this the largest public M&A transaction of the year in
USA with the transaction value being USD 50 billion.

22.As a consequence of acquisition of shareholding in Stark Tech in the USA, there was
an indirect effect in Krakoa, however, the transaction was not notified to CCK for its
approval. The transaction was in the headlines for the next few days, with market
experts commenting on how Ultron by way of this “killer acquisition” will eliminate
future competition from the market, and also get hold of a technology that would have
revolutionized online education and therefore this move may slow down market
innovation.

23. On 2 May 2022, the CCK received an application from Stark Ed alleging that, based
on the audited consolidated value of assets and turnover of Stark Ed for the F.Y.
ending 31 March 2022, the Rhodes Block Transaction was notifiable in Krakoa. In this
application it was highlighted that Stark Ed held 76% equity shareholding in “PepperPot
Pvt. Ltd.”, a company incorporated in Krakoa engaged in the business of providing
[4]
marketing and advertising services. Stark Ed also raised concerns regarding market
concentration and substantial lessening of competitive constraints via the proposed
takeover.

24. In this regard, the CCK sought information from Vision and Ultron on 10 May 2022.
At this time, Vision had a market share of 30% in the market for online education
platforms (downstream market) and 8% in the market for ed-tech software and
solutions (upstream market). Further, Stark Ed had a market share of 30% in the
upstream market, with Vision being its largest customer. The upstream market was
fragmented and Stark Ed’s next biggest competitor, Parker Ed, had a market share of
15%. In the downstream market, Vision’s largest competitor, Marvel, had a market share
of 10%. However, a few recent entrants have gained market share in this market since
the outbreak of the pandemic.

4. As per the financial statements produced by Stark Ed to the CCK the value of assets Stark Ed (including PepperPots) for the FY ending
31 March 2022, was KNR 620 crores and the turnover was KNR 1008 crores.

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25. The CCK considered the various submissions and the material placed on record by
Stark Ed and Ultron and, upon due consideration of the same, was of the opinion that
the de minimis exemption was not applicable to the proposed takeover. Further, the
asset and turnover threshold criteria for the purpose of Section 5 of the Act was also
satisfied. Therefore, the Proposed Takeover was squarely covered as a combination
under Section 5 of the Act, and Ultron/Vision was required to seek approval from the
CCK under Section 6(2) of the Act before completing the purchase of Stark Tech’s
shares from Rhodes.

26. While making its preliminary assessment of the Rhodes Block transaction, CCK
went through the financial documents of the parties and came across Vision’s
acquisition of 11% shares of DOOM Inc. in 2021. CCK observed that the said transaction
could not have been solely for investment purpose, since there was a vertical overlap
between Vision’s online education platform and DOOM’s video transmission and
streaming services.In fact, DOOM has been providing video transmission services to
Vision and its competitors since the outbreak of the pandemic. Thus, there was a
failure on part of Vision to provide full, whole, fair, forthright, and frank disclosure of
relevant information in its response to the CCK’s SCN dated 11 March 2021.

27. Thus, the CCK took the prima facie view that the acquisition in DOOM is a
combination, and that no exemption was available to Vision/Ultron. Consequently, the
notification of the said acquisition was mandatory. Thus, Vision/Ultron ought to have
given a notice to the CCK in terms of Section 6(2) of the Act read with Regulation 5 of
the Combination Regulations, 2011. However, Vision/Ultron failed to comply with such
requirement.

28. In view of the above, the CCK decided to issue a show cause notice (Show Cause
Notice 1) vide its letter dated 12 June 2022 to Vision/Ultron under Section 20(1),
Section 43A of the Act read with Regulation 8(2) of the Combination Regulations, 2011
and Regulation 48 of the Competition Commission of Krakoa (General) Regulations,
2009 (General Regulations, 2009) to explain, in writing, why Vision/Ultron should not
be found in contravention of the obligation contained in Section 6(2) of the Act and why
no penalty in terms of Section 43A, 44 & 45 of the Act shall be imposed.

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29. Further, CCK decided to initiate an inquiry in terms of Section 20(1) of the Act read
with Regulation 8 of the Combination Regulations and directed Vision/Ultron to file a
notice in Form I within 30 days from the date of receipt of communication.

30. Separately, the CCK in a notice (Show Cause Notice 2) addressed to Vision and
Ultron sought response on transaction related to acquisition of 27% shares of Stark
Tech from its existing shareholder Rhodes, stating that CCK was of the opinion that the
said transaction was not eligible to avail the Target exemptions and thus notifiable. By
partially consummating the same before notifying CCK, Vision and Ultron had
contravened the provisions of Section 6(2) and 6(2A) of the Act. CCK seeks response
from the parties as to why it shall not initiate proceedings under Section 43A of the Act
read with Regulation 48 of General Regulations.

31. Further, CCK decided to initiate an inquiry in terms of Section 20(1) of the Act, read
with Regulation 8 of the Combinations Regulations and directed parties to file a notice
in Form II within 30 days from the date of receipt of communication.

32.The parties in their response to Show Cause Notice-1 stated that the transaction was
solely for investment purpose and thus not notifiable, as at the time of making the
transaction there existed no actual vertical and/or complementary relationship
between Vision and DOOM. As DOOM provided a range of services falling within the
video streaming and transmission sector as a logistics service provider and the
business of Vision was limited to providing offline education and related study
materials. The acquirer further submitted that its online education platform services,
that could be said to have a potential vertical and/or complementary relationship,
started only from May 2021, that was three months after the transaction. Moreover,
Vision also argued that the CCK was in violation of Section 20 (1) of the Act.

33. Separately, Ultron while responding to Show Cause Notice-2 stated that, due to the
adversarial, unsolicited, and hostile nature of the acquisition and the consequent lack
of Stark Tech’s co-operation, it had no other option but to rely upon publicly available
financial statements and information in respect of Stark Tech and its subsidiaries. Thus,

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applying reasonable assumptions based on its knowledge and experience it concluded

that the revenue generated in Krakoa by Stark Tech would be less than de minimis
exemption threshold.

34. CCK after carefully analysing the submissions made by the parties and substance
brought on record, directed the parties to appear before it for final arguments on the
issues of penalty for gun-jumping for the two impugned transactions and whether or
not approval shall be granted to these combinations.

35. After hearing the parties at length, the CCK was of the opinion that:
·With regards to Vision/DOOM transaction, considering the significance and
features of video transmission and streaming services for online-education
platforms, the transaction cannot be considered to be undertaken solely as an
investment. Further, the internal correspondence obtained during the inquiry
revealed that Vision already had plans to launch its online education platform and
therefore even at the time of making the investment there were potential vertical
overlaps present.
·With regards to Ultron/Stark Tech transaction, none of the factors listed out by the
parties absolve them of their obligation to file a notice prior to the consummation of
the Rhodes Block Transaction.
·The takeover would lead to combination of two significant competitors, resulting in
heavy market concentration and substantial lessening of competitive constraints in
the markets where Vision and Stark Ed operate in Krakoa.
·Given the significance of Stark Tech’s AI based software, Ultron would have both
the ability and incentive to engage in vertical foreclosure strategies leading to
hampering technical advancement and innovation, reducing choice of
product/services available in the market, and increase barriers to entry for
competitors in both the market of delivering Online Education as well as market for
Ed tech software solution.

36. CCK passed an order dated 15 November 2022, holding that the combination of
Ultron and Stark Tech would reduce competition in the market for “provision of
software and solutions for online education (ed-tech) platforms” in Krakoa and confer

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the combined entity the ability and incentive to distort competition in the related
market of “provision of online education” in Krakoa. Hence, CCK directed that Stark Ed
and the ed-tech business of Vision shall continue to operate as separate, independent,
and competitive entities and on an arm’s length basis. Ultron also suggested
alternative behavioural remedies that might eliminate the competition concerns arising
out of such combination, however these were rejected by the CCK.

37. CCK also found the parties to be guilty of gun jumping for its failure of notifying
CCK before consummating both these transactions and thus imposed the maximum
penalty under Section 43A, amounting to KNR Seventy Five Crores and penalty of KNR
One Crore each under the provisions of Section 44 and Section 45 of Act, on Ultron.

38. Aggrieved by the said order Ultron and Vision preferred an appeal before the
NCLAT which is listed for final hearing.

39. The parties will be presenting their arguments inter alia on the following issues:

I. Whether CCK has the power to initiate an inquiry in relation to Vision/DOOM

combination after expiry of one year from the date on which the combination was
consummated?

II. Whether the unavailability of accurate data due to hostile nature of takeover, be a
defence against non-furnishing of information under Section 43-A of the Act, in relation
to Ultron/Stark Tech transaction?

III. Whether CCK was correct in defining the relevant market for assessment as
"market for provision of software and solutions for online education platforms"?

IV. Whether the CCK’s prima facie view that impugned combination is likely to distort
competition due to the vertical overlaps, correct?

V. Whether the modifications as suggested by CCI, were necessary to alleviate the

competitive concerns arising out of such combination or can the concerns be
alleviated by way of behavioural remedies?
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ANNEXURE-I

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NOTE BENE:

1. The laws of Krakoa are pari materia with the laws of India. Krakoa passed its
competition law statute, the Competition Act of Krakoa, 2002, or the Act (as defined
above) in 2002, which was enforced in a phased manner, with its enforcement
provisions enforced in 2009 and its last provisions came into force in 2011.
2. Counsels for both sides are required to address the issues and arguments
specifically mentioned in the Proposition. However, they are free to frame sub-
issues and make other arguments. Further, the counsels are at liberty to place
reliance on the relevant provisions of under the Act and regulations framed
thereunder, for their arguments.
3. Appeals from the CCK lie to the National Company Law Appellate Tribunal under
the Act. The CCK regards the decisions of the Competition Commission of India, as
well as appellate tribunals and courts to have high persuasive value. Further, the
CCK also regards the decisions of foreign competition regulators highly, and
regularly places reliance on established precedents and principles from other anti-
trust jurisdictions.
4. The participants are requested to make reasonable inferences from the various
pieces of evidence provided in the case study.
5. The case study is a hypothetical, and holds no correlation to any ongoing matter
before any court/tribunal/authority in the Republic of India.

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