10 key themes
M&A – optimizing growth strategies in the new world of antitrust
Tougher merger control enforcement across the globe has now taken center stage within deal planning and dealmaking, as pressure mounts on antitrust authorities to play an even more active role in protecting consumers while at the same time taking account of broader societal interests and industrial policy goals. Companies need to prepare for:
- an enhanced prospect of divergent outcomes across major jurisdictions (despite increasing cooperation between authorities);
- heightened scrutiny of a broad range of transactions driven by expansive (and more unpredictable) approaches to jurisdiction and a tougher stance in the competitive assessment — with more transactions at risk of being blocked and/or subjected to tougher remedies;
- the growing number of active merger control regimes globally, particularly in Asia Pacific where there are now more than 15 such regimes; and
- additional regulatory burdens brought about by the growing importance of foreign direct investment and/or subsidy control regimes (see theme 3).
To manage these risks effectively, parties need a flexible and global regulatory strategy and deal documentation that accurately reflects possible outcomes, risk allocation and respective obligations to navigate any hurdles that could be encountered along the road.
Merger control in mainstream political debate
Gone are the days of broad consensus that mergers are typically benign and merger control primarily a timing issue. Some academics and commentators have linked widening income distributional effects in key economies to increasing market concentration, and there is renewed agency focus on market structure and on the number and size of competitors (see theme 1). In key jurisdictions, like the US, EU and UK, antitrust authorities are under political pressure to tackle perceived concerns about overly concentrated markets and underenforcement. A wider range of factors — including geopolitical concerns (see theme 3), access to essential products in key sectors (such as tech and life sciences) (see theme 5), sustainability (see theme 8) and the effects of mergers on labor markets (see theme 10) — are now increasingly being considered in merger review.
Against this backdrop, companies can expect antitrust authorities (many of whom are benefiting from more public funding) to double down on their active approach to intervention in deals in 2022.
Everyone now seems to have an opinion on antitrust. Companies can expect greater political focus on important deals, translating into more active participation from external stakeholders — not just competitors but also politicians, unions and other interest groups. This adds a layer of complexity in an environment where regulators are already tightening the screws and requires advisors to closely consider the wider context when designing merger clearance strategies.
More deals within scope of merger control review
In 2022, companies will need to navigate the extended reach of antitrust authorities, which are able to use alternative and broader thresholds to claim jurisdiction over transactions that might pique their interest.
- In the US, parties entering into consent agreements with the FTC may be required to seek prior approval for any future transactions affecting a relevant market even if HSR thresholds are not met.
- In the EU, the EC has started making full use of its revised referral policy under Article 22 of the EU Merger Regulation (EUMR) to review deals even where national jurisdictional thresholds are not met (referral to the EC of transactions falling below the EC’s jurisdictional thresholds by EU Member States in whose jurisdiction the transaction was not notifiable was not explicitly foreseen under the original Article 22 EUMR referral policy). While “killer acquisitions” in innovation-focused industries are center stage (see theme 5), the EC has made clear that these tools can be used in any sector where it is warranted.
- In the UK, we can expect the CMA — emboldened by judgments of the Competition Appeal Tribunal (CAT) that have upheld the CMA’s expansive approach and wide discretion — to continue to intervene in deals, even where there is limited UK nexus.
- New national merger control regimes are being created and existing regimes are becoming more active, particularly in Asia Pacific (e.g., China, Australia, Singapore, Japan, South Korea); national legislators have developed new jurisdictional thresholds to catch deals in dynamic markets that previously escaped scrutiny (e.g., in Germany, Austria, Japan, South Korea) (see theme 4).
Companies involved in deals in sensitive or dynamic sectors — irrespective of small target revenues — will need to consider the alternative scenarios that may play out in terms of the various authorities now empowered to review the deal and the timetables inherent in those processes.
Stricter and more forward-looking substantive assessment by regulators
We also expect antitrust enforcers worldwide to apply more detailed and more skeptical scrutiny to transactions, particularly (but not only) to those involving innovation, data and digital markets.
- Nascent/potential competition is no longer a secondary consideration but a key focus of the substantive analysis (see theme 5).
- Attempts to reverse the burden of proof or amend the standard of proof for merger reviews are likely to mark a significant departure from past practice. For example, in the US, proposals include shifting the burden of proof for mergers leading to high market shares or increased concentration levels, acquisitions of start-ups by companies with significant share and acquisitions of potential or nascent competitors. Likewise, in the UK, there are proposals to lower the threshold for phase 2 review for deals involving digital companies designated with “strategic market status” from whether a substantial lessening of competition is “more likely than not” (i.e., based on the balance of probabilities) to whether there is a “realistic prospect” of that lessening of competition occurring.
In a world where regulators are more interventionist, companies need to get advisers on board who will not shy away from going beyond the already complex merger control approval process: experience in designing merger control litigation strategies on both sides of the Atlantic can be key in getting a deal done.
- We can expect agencies to be ready to invoke increasingly novel theories of harm outside of traditional antitrust analysis and to consider in their review broader topics such as data power, innovation, sustainability and effects on labor markets.
- Vertical theories of harm, traditionally a European concern, have now crossed the Atlantic and merger parties should expect close scrutiny of vertical concerns in the US.
- We are seeing some antitrust authorities take a novel approach to the likely prospects for competition absent the merger (known as the counterfactual), including second-guessing the outcome of a seller’s sales process and assessment of possible purchasers, which raises additional obstacles for the merging parties to address.
- While behavioral remedies will continue to be accepted by a number of antitrust authorities in particular cases (conglomerate or vertical effects), others have become more skeptical than in the past. The US, UK, Australian and German authorities have expressed their determination to block mergers outright if necessary to preserve effective competition where appropriate structural remedies are not available. This should be factored in when considering commercially acceptable remedies at the deal planning stage.
The expectation of stricter scrutiny in deals has inevitably led parties to think more deeply about the terms of their transaction agreements. While this will obviously be assessed on a case-by-case basis, businesses will have to give careful consideration to things like longer outside (or longstop) dates to take account of more protracted regulatory reviews. It also brings the operating covenants in a potentially longer sign-to-close timetable into focus in light of the gun-jumping rules in many jurisdictions that preclude the purchaser interfering with the commercial conduct of the target company pending regulatory clearances. Additionally, while transaction documents have historically contained terms around regulatory risk allocation through the level of ‘efforts’ or remedies the acquirer is willing to sign up to, parties have to think about those provisions very carefully in light of potential scenarios. Finally, parties need to have frank discussions about whether litigation is a necessary tool to try to get a deal done, and what the transaction agreement says about the parties signing up to a commitment to litigate.
Divergent outcomes despite increasing cooperation
Multilateralism is back, and we can expect cooperation between authorities to be a strong feature of merger control in 2022, with many authorities having recently signed up to enhanced cooperation frameworks. Merging parties should assume that information disclosed to one authority may be shared with other authorities around the world and that theories of harm developed in one jurisdiction will inspire others. Establishing a consistent, global advocacy strategy from the outset is therefore imperative for merging parties.
However, increasing cooperation will not always lead to more consistent outcomes. Ultimately, it only takes one authority to block a deal. With the increasing number of parallel reviews by agencies with different legal frameworks and different political priorities, divergent outcomes are likely to be a key trend that is set to continue into 2022.
Our experience of complex cross-border transactions from 2021, particularly now that we are dealing with parallel US, EU and CMA reviews, has illustrated that a strategy to manage the timing of reviews has become key. Navigating both the practical difficulties of parallel proceedings as well as effectively dealing with substantive concerns in large cross-border deals means merging parties need to think across jurisdictions. Merging parties should take any opportunities to use this more global approach to antitrust as a way to support rather than hinder their overall strategy.
With thanks to Bertrand Guerin and Megan Yeates for their contributions to this theme.
Looking ahead in 2022:
- Prepare for increasing uncertainty and longer timelines: kick the tires on your antitrust assessment early, comprehensively and globally to avoid unwanted surprises further down the line that could result in a longer deal timetable or even derail your transaction. This also means
- engaging in a thorough analysis of whether an antitrust authority could be interested in reviewing a deal before signing;
- considering approaching authorities early (even informally where permitted) to preempt disruption at a later stage, weighing the pros and cons in each case; and
- being mindful that longer timelines mean that M&A deal teams may be more eager to monitor target activities and enforce interim operating covenants (due to risk of deterioration of target value/attrition): brief your team early on risks of gun-jumping and involve your antitrust counsel early in deal planning.
- Merging parties must be prepared to overcome additional hurdles, requiring increasingly persuasive evidence and advocacy to displace the authorities’ growing mistrust of mergers (particularly in certain sectors), including:
- a pro-competitive transaction rationale and explanation of deal valuation, including evidence of any synergies and consumer benefits, which need to be clearly supported in internal transaction-related documents;
- consistent ordinary course internal documents to support merging parties’ submissions, considering the focus of authorities on internal documents (particularly when assessing nascent/potential competition concerns) and their increasingly broad document requests (which typically result in hundreds of thousands of documents to be reviewed and can extend to over a million);
- a strong understanding of the likely market and public reaction to the transaction to be able to proactively address any concerns that are likely to be raised; and
- strong economic evidence.
- Be ready for the increased practical coordination required in multiple parallel reviews: proactively considering different privilege rules and ensuring document production processes are run in an efficient manner for multiple jurisdictions can streamline reviews and mitigate the risk of non-compliance with authorities’ document requests (and associated fines).
- Look beyond merger control: coordination with foreign direct investment (and — in the future — EU foreign subsidy) reviews is becoming more and more important, particularly when certain key elements of such review for specific transactions (e.g., the state-owned character of certain acquirers/targets) can play a significant deal-disrupting role in both types of proceedings.