UK merger control: learnings from Meta’s prohibited acquisition of Giphy

August 2022  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2022 Issue

On 15 May 2020, Facebook, Inc (now Meta Platforms, Inc) a US company headquartered in California, completed its acquisition of Giphy, Inc.

Giphy, a US company headquartered in New York, provides an online database and search engine, enabling users to find and share GIFs and GIF stickers free of charge. Giphy’s offering is available via its own website and app, as well as via third-party apps (e.g., Facebook, Instagram), with Giphy allowing its database to be integrated within these apps.

At the time of the acquisition, Giphy had no UK turnover, assets, employees or any physical presence in the UK, and Meta did not consider Giphy to be a competitor. Nevertheless, the UK’s Competition and Markets Authority (CMA) proceeded to investigate the acquisition, which has resulted in: (i) the CMA imposing penalties upon Meta totalling £52m for procedural breaches arising during the course of the investigation; (ii) the CMA concluding that the acquisition gives rise to competition concerns; and (iii) subject to the outcome of any subsequent litigation, Meta being required to undo the acquisition by divesting Giphy to a purchaser approved by the CMA, with Meta also required to provide Giphy with at least $75m in cash, and to enter into a short term supply agreement with Giphy (under which Meta will continue to obtain GIFs and GIF stickers).

The case brings to the fore a number of significant trends in the context of UK merger control, including the CMA’s approach to enforcement action in relation to procedural breaches; and its assessment of dynamic competition between merger parties, both of which are considered below.

The CMA’s enforcement action in relation to procedural breaches

The UK merger control regime is ‘voluntary’, insofar as there is no legal requirement for parties to notify transactions to, and obtain clearance from, the CMA before completion. However, although the regime is ‘voluntary’, the CMA has a dedicated mergers intelligence unit, which proactively seeks to identify transactions that are potential candidates for investigation.

Where the CMA investigates a completed or anticipated transaction, the target business must compete independently with the acquiring business and must be maintained as a going concern. To achieve this, the CMA can impose interim measures to: (i) prevent any ‘pre-emptive action’ being taken that may prejudice the outcome of the investigation or impede the use of remedies; and (ii) require that any ‘pre-emptive action’ already taken is undone.

‘Pre-emptive action’ is a broad concept and includes activities that the merger parties might take in connection with, or as a result of, the transaction that have the potential to affect the competitive structure of the market during the CMA’s investigation. ‘Pre-emptive action’ could include changing key staff, discontinuing competing products or exchanging commercially sensitive information.

Where interim measures are imposed by the CMA in a phase 1 investigation, these will be in the form of an initial enforcement order (IEO), and the CMA will generally use its standard IEO template, which requires the target business to be ‘held separate’ from the acquiring business. The merger parties can subsequently request derogations from the IEO, seeking consent to take actions that would otherwise be prohibited.

The CMA will also typically require the chief executives of the acquiring and target businesses to provide regular compliance statements, confirming that the relevant businesses have complied with the IEO over the period. If an addressee fails to comply without reasonable excuse, the CMA can impose a penalty of up to 5 percent of the total worldwide turnover of the enterprises owned or controlled by the addressee.

Following the acquisition, the CMA decided to investigate and imposed an IEO on Meta and Giphy based upon the CMA’s standard template. Meta subsequently requested a number of derogations from the IEO, asserting that derogations were proportionate for certain requests, given that the merger parties were not competitors, and Giphy had no UK turnover. In order to consider these requests, the CMA sought to obtain additional information from Meta, which Meta chose not to provide.

Meta then proceeded to provide 27 qualified compliance statements (covering a period of just over one year), which failed to address all of its obligations under the IEO. Meta also failed to inform the CMA of actions falling within the scope of the IEO, including the departure and replacement of three key staff members, and separately Meta twice changed its chief compliance officer.

The CMA found that the compliance statement breach amounted to “a flagrant, intentional and conscious decision to choose non-compliance”, and imposed a penalty of £50m upon Meta for this breach, with separate penalties totalling £2m imposed for the breaches in relation to staff.

The penalties imposed in this case (as well as in other recent cases, including JD Sports/Footasylum, where penalties totalling £4.7m were imposed on the parties) emphasise the need for merger parties to carefully plan and take appropriate action to ensure continuing compliance with interim measures, with the onus being upon the parties to submit derogation requests to the CMA which are fully specified, reasoned and supported by relevant evidence, so as to enable the CMA to assess these requests.

Where parties fail to comply with interim measures without reasonable excuse, they can now expect the CMA to take enforcement action, and to impose penalties of a sufficient magnitude to deter future non-compliance (either by the party that is subject to the penalty, or by a third party).

The CMA’s assessment of dynamic competition

While Meta did not consider Giphy to be a competitor, the CMA concluded that the acquisition gave rise to competition concerns, as it resulted in the loss of Giphy as a potential competitor to Meta in relation to a particular type of online advertising.

In this context, the CMA viewed Giphy as an important potential competitor that was seeking to expand its activities. The CMA considered that if Giphy’s expansion efforts were successful, it may be in a position to win sales from Meta. Consequently, in response to the threat of dynamic competition from Giphy, Meta had an incentive to improve its own offering in the present, in order to seek to mitigate the risk of losing sales to Giphy in the future.

In view of the available evidence, and having regard to its own merger assessment guidelines, the CMA found that if Giphy had continued to develop its offering, Meta had a clear incentive to respond to the threat of dynamic competition from Giphy (even if Giphy’s expansion efforts were ultimately unsuccessful). Therefore, while the CMA could not be certain about how Giphy would have developed its offering in the absence of the acquisition, the CMA concluded that it was able to assess the impact of the acquisition upon dynamic competition.

In view of Meta’s significant presence upon the market in question, and the importance of GIPHY as a potential competitor, the CMA found that the acquisition has resulted in, or may be expected to result in, a substantial lessening of competition (SLC) in the UK, in the supply of display advertising services due to the loss of dynamic competition.

On appeal, the Competition Appeal Tribunal (CAT) confirmed that a loss of dynamic competition is sufficient to justify the CMA finding an SLC. In so doing, the CAT explained that competition, and impairments to competition, need to be understood as subsisting on a spectrum comprising: (i) “static competition which… involves the consideration of the market as it is”; (ii) “[p]otential competition [which] focuses on the potentialities that exist in or arise out of the static case”; and (iii) “dynamic competition [which] involves a much more fluid form of competition between innovating firms”.

In relation to dynamic competition, the CAT noted the difficultly in identifying relevant criteria for determining whether dynamic competition exists, and if so, whether a transaction weakens that competition. In the absence of an established framework for assessing a loss of dynamic competition, the CAT considered it helpful to outline the factors it considered the CMA should have in mind, so that the lawfulness of the CMA’s decision making can be tested by the CAT (e.g., on appeal by the merger parties in future cases).

One notable factor espoused by the CAT is the ‘cross-check’, whereby the CMA in future should consider the competitive disbenefits of intervention when a transaction is expected to result in a loss of dynamic competition. The CAT noted that while intervention may still be necessary, in certain cases it may not be, and unnecessary intervention could itself prove damaging (including, for example, by preventing smaller acquired businesses from flourishing, and having a chilling effect upon innovation more generally).

Given the importance that the CMA places upon identifying and assessing issues in relation to dynamic competition, the CAT’s confirmation that a loss of dynamic competition can result in an SLC is – for the CMA – a welcome affirmation of its approach.

Parties should therefore have this aspect in mind when assessing and planning transactions and ensure that they give due consideration to: (i) the risks arising from theories of harm based upon a loss of dynamic competition; and (ii) the evidence available to rebut the same.

However, it remains to be seen how the CMA engages with the CAT’s ‘cross-check’, and whether this factor will enable parties in future cases to successfully challenge the lawfulness of decisions to block transactions based upon dynamic competition concerns.

 

Samuel R Beighton is a partner at Gowling WLG. He can be contacted on +44 (0)20 3636 7972 or by email: samuel.beighton@gowlingwlg.com.

© Financier Worldwide

BY

Samuel R Beighton

Gowling WLG

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