New regulatory hurdles for M&A transactions in 2023

June 2023 | SPOTLIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

June 2023 Issue

Pent-up demand during 2020 and low interest rates contributed to making 2021 a record year for the global M&A market, with more than 63,000 transactions totalling $5.9 trillion. However, this did not last. The Russian invasion of Ukraine caused severe disruptions in global supply chains and contributed to rising inflation and increasing interest rates which significantly affected transactional activity throughout 2022. 2023 has produced a lot of economic turmoil, from the continued massive layoffs in the tech sector to the failure and Chapter 11 bankruptcy filing of SVB Financial Group and Crédit Suisse’s turmoil and subsequent sale to UBS Group.

But dealmakers are also facing additional headwinds due to regulatory developments in the European Union (EU), notably recent and significant expansions in the scope of existing antitrust tools, increased scrutiny over state support, and the expansion of foreign investment control regimes.

Expanding the scope of EU merger control

Globally, most jurisdictions now operate a merger control regime, and subject M&A transactions meeting certain conditions to scrutiny to ensure that they do not adversely affect competition.

In the EU, national and EU-wide merger control regimes coexist. When the thresholds set by the EU Merger Regulation are met, the deal is subject to review by the European Commission (EC). When the EU thresholds are not met, one or more national competition authorities (NCAs) may have jurisdiction over the deal if national thresholds are met. Merger control filings are generally mandatory and suspensory, meaning that a deal cannot close before clearance has been granted.

EU law also provides for referral mechanisms to ensure transactions are reviewed by the best-placed authority – cases falling within the jurisdictions of the EC may be referred to NCAs and vice versa. In particular, this includes the so-called ‘Article 22 referral’, whereby one or more member states may request the EC examine a merger that does not meet the EU thresholds but affects trade between member states and threatens to significantly affect competition within the territory of the member states making the request.

So far, the EC’s informal policy had been to discourage NCAs from requesting referrals in relation to transactions that did not meet the national merger control thresholds.

This position was officially reversed by the EC in guidance published in March 2021, which indicated that it intends to encourage and accept referrals by NCAs even in respect of transactions for which they lack jurisdiction, including post-closing. This new approach is aimed at bridging the perceived ‘enforcement gap’ which allowed potentially problematic transactions that did not meet the thresholds to escape scrutiny as the parties’ turnover would not accurately reflect their market power, especially in innovation-driven sectors such as digital or pharma.

It is based on this new interpretation that the EC requested several NCAs to refer to it the merger of Illumina and Grail, which did not meet the EU or any national thresholds in the EU, a merger the EC eventually prohibited. The referral by the NCAs was unsuccessfully challenged before the General Court of the EU; an appeal before the Court of Justice (ECJ) is pending.

Falling below the EU and national merger control thresholds therefore no longer suffices to exclude merger control risks, and parties to certain deals will thus need to assess whether the transaction is nonetheless likely to be deemed to ‘significantly affect competition’ to gain comfort, bearing in mind that market players who feel they are being negatively affected by a transaction may have an incentive to draw authorities’ attention to it. The possibility of post-closing referrals also brings in significant legal uncertainty for businesses.

M&A activity as an abuse of dominance

In addition, the ECJ recently reiterated in its Towercast judgement that concentrations falling below the thresholds for merger control may still be caught under the prohibition of abuse of dominance, reopening a path it had opened in the early 1970s and which had been assumed to be closed since merger control regimes entered into force.

The judgement was issued in the context of proceedings in France, where the French competition authority had rejected Towercast’s complaint that its competitor, TDF, had abused its dominant position by acquiring its rival, Itas. Towercast appealed the decision, and the French Court of Appeal sought guidance from the ECJ.

The ECJ clarifies that the test for finding an abuse will be more stringent than that under merger control rules. While a merger may be prohibited where it leads to the strengthening of a dominant position, according to the ECJ, to find an abuse the degree of dominance thus reached would substantially impede competition, which is to say that only undertakings whose behaviour depends on the dominant undertaking would remain in the market. This is in line with the principle that the mere holding of a dominant position is not anticompetitive per se. However, it remains vague, and further clarifications are warranted to provide comfort to dominant undertakings engaging in M&A activities.

This will likely be of interest to NCAs. As a matter of fact, days after the ECJ judgement, the Belgian competition authority opened an investigation into a potential abuse of dominance by Proximus through its acquisition of its competitor, Edpnet. And as illustrated by the facts of the Towercast judgement, competitors as well as customers or suppliers may play a key role in encouraging NCAs to make effective use of this tool.

The proliferation and expansion of foreign direct investment (FDI) control

Transactions are also increasingly subject to FDI control regimes, based on public interest grounds, which includes national security and public health. As for merger control, FDI filings are generally mandatory and suspensory.

The number of FDI control regimes across the world has dramatically increased in recent years. Over the past decade, the number of Organisation for Economic Co-operation and Development (OECD) countries operating an FDI regime increased from 60 percent to 87 percent. In the EU alone, Slovakia and Denmark’s FDI regimes entered into force in 2021 while the Czech regime entered into force in 2022. At least three more are imminently entering into force in the coming months, in Belgium, Sweden and the Netherlands. Other EU member states are also contemplating further FDI regulations.

In addition to new regimes, existing regimes are seeing their scopes significantly broadened through amendments to triggering events, and expanding lists of ‘sensitive’ sectors. In France, for instance, the thresholds in voting rights were lowered from 33 percent to 25 percent (10 percent where the investor is non-EU/EEA and the target is a publicly listed company). In Italy, the FDI control expands to transactions in which the acquirer or ultimate beneficial owner is an Italian or EU person. In short, ever more transactions are subject to reviews, and thus exposed to risks of potential remedies or prohibitions on the basis of often widely defined public interest grounds.

The new EU Foreign Subsidies Regulation (FSR)

The long awaited FSR, aimed at addressing distortions in the internal market caused by foreign subsidies, entered into force earlier this year and will apply from 12 July 2023, targeting foreign subsidies granted within the five preceding years. As of this date, the EC will be able to launch ex-officio investigations. The notification obligation for companies will be effective as of 12 October 2023.

Under the FSR, companies will be under an obligation to notify to the EC, in parallel with any merger control and FDI filings, transactions involving a financial contribution by a non-EU government where the acquired company generates an EU turnover of at least €500m and the parties to the transaction have received financial contributions from non-EU countries in excess of €50m over the three preceding years.

This new regime effectively imposes on all companies operating in the EU an obligation to keep detailed records of all foreign financial contributions received by any entity of the group, taken as a whole. This includes all financial contributions conferring a benefit on its recipient, including direct subsidies, and the foregoing by the state of revenues through tax exemptions or the granting of exclusive rights without ‘adequate remuneration’, and the provision or purchase of goods or services – making the tracking exercise a particularly burdensome one, at least pending further guidance from the EC on this.

Key takeaways

The regulatory landscape has become much more complex in the last few years. The growing number of parallel regimes under which transactions may be reviewed makes it not uncommon for seemingly straightforward or modest deals to give rise to several filing requirements, which are most often mandatory and suspensory. With regimes entering into force at such a pace, assessments need to be updated on a regular basis and obligations may arise between signing and closing.

This impacts the timeline, certainty and cost of the transactions.

It must also be considered that remedies imposed by one authority may also have knock-on effects on the parallel review by other authorities, focusing on different grounds. Finally, adding to this uncertainty is the fact that transactions falling below the merger control thresholds may still attract scrutiny from antitrust agencies in the EU, under the merger control rules or as potential abuses of dominance.

More than ever, anticipation and coordination of these filings will become key to ensure a streamlined and efficient approach. This means close monitoring of the practice and guidance provided, sometimes off the record, by all relevant authorities will be essential.

Emily Xueref-Poviac and Amélie Lavenir are counsels and Charley Bailliard is an associate at Clifford Chance Europe LLP. Ms Xueref-Poviac can be contacted on +33 (0)1 44 05 53 43 or by email: emily.xuerefpoviac@cliffordchance.com. Ms Lavenir can be contacted on +33 (0)1 44 05 59 17 or by email: amelie.lavenir@cliffordchance.com. Mr Bailliard can be contacted on +33 (1) 44 05 82 88 or by email: charley.bailliard@cliffordchance.com.

Emily Xueref-Poviac, Amélie Lavenir and Charley Bailliard

Clifford Chance Europe LLP