Merger control and the increase in deal uncertainty

March 2023 | SPECIAL REPORT: MANAGING RISK

Financier Worldwide Magazine

March 2023 Issue

Competition authorities around the world are extending their jurisdiction to allow them to review transactions that do not meet traditional thresholds. More than 50 countries now have the discretion to conduct competition reviews of mergers below mandatory notification thresholds, with these powers being used more frequently. In addition, new notification and approval requirements for transactions are being introduced under separate legislation, and also need to be considered when assessing what notifications may be required.

Companies whose transactions may not have been subject to a competition review in the past need to provide for the possibility that their deal activity may now draw the attention of regulators and be subjected to review.

Risks need to be allocated between merging parties, and adjustments may need to be made to long-stop dates and parties’ obligations to help secure regulatory clearances. Understanding the areas of particular concern to individual competition authorities is key to a smooth process to closing. Transactions in innovative industries, such as pharma and tech, where large, established players acquire emerging targets with little or no revenue are most likely to attract authorities’ scrutiny.

The perceived enforcement gap for ‘killer acquisitions’

In many jurisdictions, concerns exist that traditional turnover (revenue)-based thresholds for merger reviews do not capture certain acquisitions by large incumbents of nascent competitors (which, for example, may be developing a promising alternative technology) that could play a significant competitive role in the future – so-called ‘killer acquisitions’.

Below-threshold reviews are becoming more common in the EU

Guidance was issued in early 2021, whereby the European Commission (EC) encourages national competition authorities to refer certain transactions to the EC that do not meet the European Union (EU) thresholds for investigation, and may not even meet national member state thresholds. The EC guidance is based on article 22 of the EU Merger Regulation, which allows member state competition authorities to refer transactions to the EC under certain circumstances.

This is creating uncertainty and can even result in investigations of deals that have already closed.

A recent example is Illumina’s acquisition of GRAIL, which did not meet the EU’s or any member states’ notification thresholds. The transaction was announced in September 2020, and in March 2021 several national competition authorities requested a referral to the EC. The EC accepted the referral (a decision upheld on appeal), and, in September 2022, following an in-depth review, it prohibited the transaction. As Illumina/GRAIL had already closed, the EC is now conducting an investigation into the early implementation of the deal prior to receiving clearance in breach of the EU Merger Regulation that could result in a substantial fine, and is considering the appropriate measures to unwind the acquisition.

Other transactions have also been assessed by the EC under this provision recently, including Meta’s acquisition of Kustomer and Mastercard’s acquisition of Nets’ account-to-account payment business, both of which were cleared only after the EC accepted remedies.

Stretching jurisdiction in the UK

In the UK, the Competition and Markets Authority (CMA) is construing its thresholds for review more and more broadly, taking jurisdiction over transactions where targets appear to have limited (if any) revenues or direct activity in the UK. In some cases, regulators in other jurisdictions had already approved them. Exacerbating this, Brexit has created the possibility of parallel reviews in the EU and the UK.

For example, the CMA ordered Meta (Facebook) to unwind its completed acquisition of the GIF-sharing social media company Giphy. Although Giphy did not generate any revenue in the UK in its last financial year before the deal, the CMA asserted jurisdiction after finding that the company’s small presence in the country overlapped with Facebook’s activities. Meta appealed the decision, but the CMA’s overall findings were upheld.

In addition, the CMA fined Facebook a total of £52m for failing to comply with an order requiring it to hold the Giphy business separate from its own. Even though notifications are voluntary in the UK, the CMA routinely imposes hold-separate orders, especially when reviewing completed acquisitions.

Other jurisdictions also scrutinise ‘killer acquisitions’

Germany and Austria both adopted alternative transaction-value thresholds in 2017, requiring the notification of certain transactions, even if the targets generate no local revenue. For Germany, the review powers extend to deals with a global value over €400m, and for Austria, those with a global value over €200m. These thresholds are actively enforced. For example, Facebook was also fined €9.6m for failing to notify the Austrian competition authority of its acquisition of Giphy.

In 2021, South Korea adopted a similar alternative transaction-value threshold, capturing deals with a global value of at least KRW600bn. More jurisdictions are considering this approach, including China and India, which are both planning to introduce alternative transaction-value thresholds.

Also, last year Turkey adopted new thresholds designed to catch the acquisition of ‘technology’ companies (including not only tech but also pharma companies), even if there is no overlap in Turkey.

Separately, over 50 competition regulators around the world have the discretion to review transactions that do not meet notification thresholds. Italy is the latest jurisdiction to add such a power to its merger toolkit, and more will follow.

It is important not to overlook jurisdictions without a mandatory filing regime; for example, in Australia, where the merger control regime, like the UK, is voluntary. Also like the UK, the Australian Competition & Consumer Commission is likely to intervene in transactions involving ‘big tech’ companies, especially the acquisition of fast-growing competitors.

New notification requirements being introduced under separate legislation

New tools are being adopted that introduce additional filing requirements.

The EU’s new Foreign Subsidies Regulation is designed to review and regulate public subsidies granted to businesses by non-EU countries that may have an effect in the EU’s single market. It will introduce, from October 2023, a new approval requirement for M&A transactions where a party (this must be the target in an acquisition) is established in the EU and has annual turnover in the EU of €500m or more, and where all parties together have received foreign subsidies in the last three years totalling €50m or more.

Separately, once the EU’s Digital Markets Act’s obligations start to apply early next year, designated ‘gatekeeper’ platforms will be required to notify the EC of all acquisitions that they intend to make. The UK has proposed a similar regime, with draft legislation expected to be presented to parliament later this year.

Discretion creates uncertainty for deals

There is some good news: competition authorities have been trying to ease the burden of merger control for transactions that clearly do not raise competition concerns. For example, a growing number of authorities are introducing or expanding simplified procedures, with shorter review times or shorter notification forms for less problematic mergers.

But the trend toward alternative notification thresholds and more regulatory discretion to review transactions that do not meet thresholds has led to uncertainty, delays and increased costs for dealmakers. Competition authorities also can, and on occasion do, order retrospective divestments to address competition concerns, or may even order a completed transaction to be unwound.

In addition, while competition authorities globally are taking steps to coordinate with each other (and share information and theories of harm), this does not necessarily prevent divergent outcomes, with each authority having a unique legal framework, process and priorities.

These risks can be mitigated with an effective, coordinated and early competition analysis, including considering possible remedies if competition concerns are likely. Early consideration of possible remedies will provide more time to design a package that can deal with all possible competition concerns while preserving the synergies of the transaction.

How should dealmakers navigate this new landscape?

Conducting an early analysis of potential competition issues, alongside the usual assessment of required filings, will help identify jurisdictions where competition authorities may seek to investigate a transaction that falls below the notification thresholds (e.g., if a party holds a degree of market power or is the only credible supplier of an essential input, or the transaction involves the acquisition of an innovative start-up or potential entrant).

Parties may want to factor in the possibility of extended regulatory reviews and conditional clearances into transaction timetables, and add appropriate conditions precedent in deal documents.

The risk of divergent regulatory outcomes is also a challenge, especially if there is the risk that offering a global remedy may not be successful. In these cases, considering possible remedies as early as possible provides more time to design a flexible package that addresses potential competition concerns in all relevant jurisdictions.

Frederic Depoortere, Giorgio Motta and Aurora Luoma are partners at Skadden, Arps, Slate, Meagher & Flom LLP. Mr Depoortere can be contacted on +32 (2) 639 0334 or by email: frederic.depoortere@skadden.com. Mr Motta can be contacted on +32 (2) 639 0314 or by email: giorgio.motta@skadden.com. Ms Luoma can be contacted on +44 (0)20 7519 7255 or by email: aurora.luoma@skadden.com. The authors would like to thank Simon Dodd, a professional support lawyer, for his contribution to this article.

Frederic Depoortere, Giorgio Motta and Aurora Luoma

Skadden, Arps, Slate, Meagher & Flom LLP