10 key themes
Is Merger Control Fit for Purpose – Evolution or Revolution?
Driven by concerns of underenforcement, antitrust authorities and governments globally are reassessing their merger control regimes. More or less evolutionary – or revolutionary – depending on the jurisdiction concerned, these changes generally represent a tightening of rules or thresholds or the adoption of more interventionist approaches to applying the rules, increasing the importance of early antitrust assessment and the development of an aligned, global merger control strategy.
Heightened global scrutiny, with divergence at the margins
Authorities are engaging with each other more than ever before against a backdrop of more stringent merger control enforcement in the leading jurisdictions. Despite some differences in approach, recent examples demonstrate heightened scrutiny and a greater willingness to challenge transactions. In this environment, a global merger control strategy that accounts for jurisdiction-specific considerations is crucial.
- United States: Under the current administration, the DOJ and FTC have signaled a skepticism of remedy packages that, in prior administrations, would have been deemed sufficient, with a preference for suing to block transactions they consider problematic. Merging parties have prevailed in defending against recent suits to block vertical transactions (e.g., the FTC’s suit to block Illumina/Grail and the DOJ’s challenge to UnitedHealth Group/Change Healthcare) and suits based on novel theories of harm (e.g., the DOJ’s challenge to Booz Allen/EverWatch), underscoring the importance of preserving the ability to litigate in your deal documents.
In the current enforcement environment, preserving the ability to litigate – including building in sufficient timing in merger agreements – can be critical.
Antitrust Partner, Washington, D.C.
- EU: The EC has secured a number of important wins in EU courts. In Illumina/Grail, the General Court upheld the EC’s new policy to accept merger referral requests under Article 22 of the EUMR even from member states where the transaction does not meet national merger control thresholds. The judgments in Tata Steel/Thyssenkrupp and Wieland/Aurubis confirmed the EC’s wide margin of discretion in the assessment of substantive concerns and proposed remedies. In Towercast, the Advocate General’s opinion embraces the view that Article 102 of the Treaty on the Functioning of the European Union enables competition authorities to review and prohibit mergers involving dominant companies – outside the scope of the normal merger control rules. Encouraged by these developments, EC officials are envisaging a “creative and rigorous” approach to the review of mergers, in particular in the digital and life sciences sectors.
- UK: The prohibition by the CMA of the Cargotec/Konecranes transaction demonstrates that authorities can take divergent views on remedies packages. Here, the CMA refused to accept the same remedies package the EC had separately approved, notwithstanding that the significant majority of the merging parties’ activities took place outside the UK. The CMA assesses remedies with greater skepticism than do many other agencies and is increasingly reluctant to accept risk in remedies assessments – whether it be composition risk of the divestment package or acquirer risk (for example, demonstrating a strong preference for industry buyers over financial investors and requiring upfront buyers).
- China: Against the background of geopolitical tension, in sectors considered sensitive or strategic to the Chinese economy and technology autonomy/self-sufficiency, SAMR will pay close attention to supply chain stability. SAMR remains skeptical of vertical and conglomerate mergers, and this can result in behavioral remedies being required for clearance (e.g., II-VI/Coherent). Most recently, the DuPont/Rogers transaction was abandoned due to a failure to receive clearance in China before the long stop date. Conversely, if SAMR is convinced that the transaction will not impact the Chinese market, it is also comfortable giving its consent instead of waiting for other jurisdictions (which tended to be the approach in the past).
Merging parties need to factor in sufficient time and prepare for bespoke strategy, including the advocacy and remedies in jurisdictions such as China. A global strategy should be informed by detailed jurisdiction-specific strategies, particularly in those jurisdictions where timing implications can be significant.
Antitrust Partner, RuiMin Law Firm, China*
Fear of missing out: more measures to capture ‘killer acquisitions’
Authorities in recent years have been concerned with so-called killer acquisitions – acquisitions of nascent targets that do not trigger existing thresholds – especially in the life sciences and technology sectors. In 2022, the EU General Court in its Illumina/Grail decision approved the EC’s approach to applying Article 22 of the EUMR, which allows an EU member state to refer any transaction to the EC for review.
There are indications that a series of court wins in 2022 have emboldened the EC in its enforcement policy. Going forward, we expect the EC to be more open to pursue untested theories of harm, making it more difficult to predict outcomes in particular in cases involving dynamic competition and service ecosystems.
Antitrust Partner, Brussels
US authorities continue to scrutinize acquisitions of nascent competitors. DOJ Assistant Attorney General Jonathan Kanter notes that “if we allow dominant firms to buy up or block these nascent competitors before they get to scale, we will lose out twice. First by losing potential innovations, and second by losing [a] potential source of new competition.” FTC Chair Lina M. Khan echoes this sentiment, emphasizing the importance for antitrust enforcers to remain “alert to instances in which emerging competitors are acquired before they can fully emerge to be a threat.” Both the DOJ and FTC remain focused on investigating and challenging acquisitions of emerging competitors.
China has codified in its amended Anti-Monopoly Law (AML) SAMR’s power to capture killer acquisitions on its own initiative, and new filing thresholds are proposed for transactions involving so-called mega corporates. Under the proposal, a filing would be triggered where (i) at least one party has turnover in China greater than RMB100b (approx. US$14b, €13.5b, £12b); (ii) the target has a market capitalization or valuation greater than RMB800m (approx. US$115m, €109m, £94m); and (iii) the target generated more than one third of its global turnover in China in the preceding financial year.
In the UK, as part of reforms to “rebalance” the merger control system expected to be legislated in 2023, there are plans to introduce a new test that would give the CMA jurisdiction where at least one of the merging businesses has (i) an existing share of supply of goods or services of 33 percent in the UK or a substantial part of the UK; and (ii) UK turnover of £350m. This new jurisdictional test would, therefore, capture transactions where there is no overlap with the target’s activities and in practice will amount to mandatory merger control for many well-established businesses, given the CMA’s expansive approach to its “share of supply” test.
Reforms implemented or in the pipeline
- United States: Potential reforms are under consideration before Congress, but even absent congressional action, the US agencies have implemented changes to enforcement policy that heighten scrutiny of potential transactions. Both the DOJ and FTC are skeptical of behavioral remedies and require structural fixes. More broadly, DOJ Assistant Attorney General Kanter has stated a preference for litigation over imperfect settlements, and the DOJ has been reluctant to agree to any remedies. In addition, the DOJ and FTC have jointly launched a process to review and revise the Merger Guidelines that the agencies follow, with an aim to “modernize” antitrust enforcement, including in relation to novel theories of antitrust harm (e.g., labor market and innovation issues).
It is imperative to consider whether the efforts covenant in the merger agreement accounts for remedies that go beyond simple divestitures or hold separate arrangements. Likewise, where deals are taking over one year to close due to antitrust review, sellers and target companies must also think carefully about the interim operating provisions they agree upon, and for transactions with debt financing, ensure that debt commitments do not expire before antitrust concerns can be resolved.
Global Transactions Partner, New York
- EU: The EC continues to adapt its competition law enforcement for the increasing digitalization of the economy. An updated Market Definition Notice is expected to be published in Q3 2023 and will reflect the EC’s views on defining multi-sided markets and markets with zero-price services. The DMA will impact the M&A risk assessment for gatekeeper platforms; effectively, all their acquisitions will become reportable and public, raising the chances of a referral to the EC under Article 22 of the EUMR. Although the EC has been looking for ways to capture below-threshold acquisitions in the digital sector, it has resisted proposals to introduce new merger review thresholds based on market shares or transaction value that some EU member states have adopted.
- Germany: New reforms are expected in 2023 that will substantially lower notification thresholds for transactions in specified markets (in sectors where the German Federal Cartel Office (FCO) has previously conducted a sector inquiry).
- UK: The reforms expected to be legislated this year will likely include measures to allow more targeted use of CMA resources; for example, raising the turnover threshold to remain in line with inflation (from £70m to £100m UK turnover) and introducing a small merger safe harbor where each party’s UK turnover is less than £10m.
- China: The new AML entered into force on August 1, 2022. It introduced: (i) a “stop the clock” mechanism, which is welcomed, as it removes the need for a “pull and refile,” but its broader impact on timelines is still unclear; (ii) new classification systems for mergers by “categories and levels” that have resulted in the introduction of more streamlined merger review processes (e.g., delegation to local authorities for certain cases) and specific filing thresholds (such as the proposed mega corporate thresholds mentioned above); (iii) priority sectors for merger review, mandating stronger scrutiny of deals relating to people’s livelihood (e.g., within industries such as finance, media, technology, health care, etc.); and (iv) much harsher penalties for failing to notify a reportable merger.
- Australia: In 2022, the new ACCC chair noted that the absence of a mandatory merger notification requirement meant that the ACCC is often approached comparatively late and warned businesses that they would be taking a risk by failing to prioritize Australia in their merger filing exercises. The Assistant Minister for Competition, Charities and Treasury recently indicated that he is open to considering reform of Australia’s merger laws, which could replace Australia’s voluntary merger control regime with a mandatory and suspensory regime, introduce a “call in” power for acquisitions that fall below the thresholds and/or change the test for establishing a substantial lessening of competition.
Looking ahead in 2023
- There is a need for greater coordination globally on all aspects of merger control, including substantive assessment and remedies planning, and how this will play out in each jurisdiction:
- to ensure transaction documents allow sufficient time for merger review processes and account for jurisdiction-specific risk, including the possibility of needing to go to court to overcome resistance from the agencies;
- where strategically appropriate, to engage early with authorities to use parties’ resources more efficiently; and
- to consider the cross-jurisdictional sufficiency of any proposed remedy package to minimize incremental demands.
- Use procedural approaches in different jurisdictions to align on timing where possible or to take advantage of fast-track options, which can limit burden on the parties and save time and resources.
- Factor in foreign investment and national security regimes, which are now the norm in most major jurisdictions, from the early stages and prepare for how these will interact with merger control processes.
With thanks to Konstantin Bondarenko, Laura Onken and Theo Souris for their contributions to this theme.
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*RuiMin is an independent PRC law firm that is part of our global StrongerTogether Network.