10 key themes
Where new laws and policies will bite
Companies planning deals in 2021 should plan for higher levels of regulatory intervention in many of the major jurisdictions, including:
- in Europe, where policy shifts and the post-Brexit landscape will see more transactions subject to the jurisdiction of the EC and/or the UK’s CMA;
- in the US, where the Biden administration is expected to scrutinise transactions more closely and increase co-ordination with authorities globally; and
- in Japan, where in December 2019 the JFTC clarified in its merger control policies the circumstances in which it would review non-notifiable cases and has in fact conducted six such reviews.
We also expect authorities worldwide to apply more detailed, and probably more sceptical, scrutiny to transactions, particularly those involving innovation-led, data and digital markets. These changes reinforce the need for deal planning to feature a co-ordinated global merger control strategy.
Casting a wider net
As a result, some transactions which might not have otherwise been reviewed (or reviewed only in a light touch way) will be more likely to be subject to an in-depth investigation by authorities, including the EC, the CMA and/or US agencies.
The EC has announced a new policy on referrals under Article 22 EU Merger Regulation (EUMR). It will encourage EU member states to refer certain transactions to the EC, even where the transaction does not meet the national merger control thresholds of the referring member states. Further guidance is due to be published in mid-2021. The policy change is largely directed at facilitating the review of so-called ‘killer acquisitions’, including in the digital and pharmaceutical industries, which might otherwise not trigger the (often revenue-based) jurisdictional thresholds of the EC and member states. This policy shift will increase uncertainty across all industries as to:
- whether a transaction may ultimately be subject to an EC merger investigation;
- whether parallel EC and member state reviews will occur; and
- overall transaction timetables (eg when the timeline commences for such an Article 22 referral and when parties would be able to close their transactions) – the standstill obligation kicks in under Article 22 when the EC has informed the merging parties of a member state’s referral request. If a transaction has not closed at this point, the parties are no longer permitted to close until EC clearance has been secured. Avoiding gun-jumping risk must therefore be factored into timetables and integration planning, as merging parties may have to navigate a longer than expected pre-closing period during which there can be no integration.
Our experience of working with both the EC and national competition authorities will help us anticipate the increased risk of Article 22 referrals going forward. Merger parties should prepare for more detailed assessments at the individual EU member state level and the possibility of seemingly smaller, localised transactions requiring EU merger clearance.
Following the end of the Brexit transition period, the CMA can now investigate transactions in parallel to the EC. No longer restricted by the EU’s ‘one stop shop’ principle, we can expect the CMA to claim jurisdiction over more transactions by taking advantage of its very flexible ‘share of supply’ jurisdictional test. Proactive engagement and co-ordination will be needed to manage the CMA process alongside merger control processes in other jurisdictions. Updated guidance by the CMA suggests that it may decide not to investigate transactions where remedies imposed or agreed in other jurisdictions would likely address any UK competition concerns, for example where all relevant markets are broader than national in scope.
The CMA has taken an increasingly expansive approach in its interpretation of the share of supply test, including in some of our recent matters, to capture transactions with a limited or tangential UK nexus. We expect this approach to continue post-Brexit, with the CMA having announced late last year that it aspires 'very much to be at the top table discussing international mergers'.
In the US, the Biden administration is widely expected to usher in a re-energised era of merger enforcement. Amid calls by some that there has been under-enforcement in several industries, including tech and pharma, we anticipate the agencies will use new tools or reinvigorate existing tools to catch acquisitions of nascent competitors, vertical transactions or minority acquisitions. These tools include use of the Federal Trade Commission Act’s Section 6(b) powers to conduct industry studies, breaking up past acquisitions deemed to have anti-competitive effects, rulemaking authority to regulate conduct ex ante and bringing (and potentially losing) more cases challenging deals.
For large digital or tech deals we may see the following (often controversial) proposals materialise in 2021:
- In the US, the most eye-catching proposals include:
- codifying bright-line rules, including structural presumptions, that would presumptively prohibit transactions resulting in high market shares or increased concentration. This would shift the burden of proof to the merging parties to show that the transaction would not reduce competition;
- introducing a presumption against acquisitions of start-ups by dominant firms; and/or
- prohibiting acquisitions of potential rivals and nascent competitors. In order to establish harm on potential/nascent competition grounds, the agency would not need to show that the potential/nascent competitor would have been a successful entrant absent the deal.
With Democrats in control of the House and Senate, some of the more sweeping proposals from Congress and progressive critics have a chance of materialising, if not through legislation then through agency appointments. However, this area will continue to be the source of considerable debate and one that we are monitoring closely. One area that has received bipartisan support in Congress is increased funding for the antitrust agencies, which will likely lead to more investigations and potentially more merger challenges in court.
- In the Asia-Pacific region, the Australian Competition and Consumer Commission (ACCC) has recommended that large digital platforms in Australia should provide the ACCC with advance notice of any acquisitions. Australian merger laws are also being reviewed to determine whether express reference should be made to considering the effect of the removal of a potential competitor and the nature/significance of assets being acquired (either directly or as part of a business acquisition). Japan has already revised its merger guidelines to consider the effect of data and R&D on competition. In South Korea, the Korea Fair Trade Commission announced plans to introduce a transaction value-based notification requirement, first proposed in 2018, which would trigger filings in acquisitions of start-ups which might not meet current turnover-based thresholds.
- In the EU, discussions continue around reversing the burden of proof in big tech acquisitions of small start-ups to show that adverse effects on competition are ‘offset by merger-specific efficiencies’. A similar idea was mentioned in the 2020 paper on Start-ups, Killer Acquisitions and Merger Control from the Organisation for Economic Co-operation and Development (OECD). In Germany, draft amendments to the merger control rules are intended to impose obligations on certain companies active in specific and highly concentrated sectors to notify transactions that would not have been subject to notification obligations. In France, a proposed law would require digital platforms designated by the French Competition Authority to notify all mergers and the French Competition Authority itself has suggested that certain companies be required to notify all mergers to the EU and/or national competition authorities.
- In the UK, a separate mandatory merger regime and reporting obligations for acquisitions by companies with ‘strategic market status’ could be introduced. This would involve the CMA deciding cases on a lower standard of proof (compared with the current balance of probabilities standard).
Common ownership concerns also continue to occupy the minds of policy-makers, coming to the forefront a few years ago in the EU during the Dow/DuPont merger. Research suggests that common ownership has become more common and the 2020 Common Shareholding in Europe report (commissioned by the EC’s Directorate-General for Competition) suggests the topic continues to be on agencies’ minds and is here to stay, particularly in transactions involving innovation.
We also expect a greater focus on behavioural remedies in transactions involving big data, with the EC likely to take a more interventionist approach when considering data-related concerns. A wide spectrum of behavioural remedies relating to data – including data use/data silos, data access and interoperability standards – may become more common in the future.
Reflection and reform
2021 is expected to be a year of reflection on the effectiveness of merger control regimes globally. For example, the EC plans to review some of its recent decisions and their effects on prices, choice, quality and innovation. It will evaluate the performance of the merger rules in the light of digitisation, growing concentration levels and growing profits. The EC also plans to increase the use of simplified procedures and more streamlined processes, allowing more resources to be focused on transactions raising complex issues or novel concerns. In Germany, proposed reforms include increasing some of the turnover thresholds and some simplifications to the merger control procedures. In France, the introduction of an ex post merger control regime will continue to be explored.
In the US, the FTC will continue its Section 6(b) study on past acquisitions in the tech space and is likely to initiate other industry studies to evaluate the efficacy of prior enforcement and develop reforms.
The Chinese authority, the State Administration for Market Regulation (SAMR), has been consulting on proposed amendments to China’s Anti-Monopoly Law (AML). In the merger control sphere, the proposed changes include defining ‘control’ in the AML itself for the first time, higher penalties for gun-jumping, and provisions to allow the clock to be stopped during merger reviews.
Standstill obligations preventing closing and integration should not prevent merger parties from protecting their data and systems. With longer pre-closing periods, we are finding that it is all the more important to plan well in advance for cyber security, while still complying with laws against gun-jumping.
Looking ahead in 2021:
- Prepare for a more complicated merger review, requiring greater co-ordination across multiple jurisdictions including:
- a more sophisticated competition risk assessment, including consideration of transaction value, likely complainants, issues around the loss of potential competition and innovation and concerns at the individual EU member state level;
- accounting for and allocating risk in transaction documents, including the likely longer merger review timeframes;
- co-ordinating timelines and remedy discussions across authorities in the light of the longer review periods in certain jurisdictions; and
- careful planning for closing and integration, especially given increasing gun-jumping sanctions in some jurisdictions.
- Expect a more thorough scrutiny by authorities. Parties will need to gather more evidence and prepare for detailed examination of the following (particularly in mergers involving potential competition, innovation and data and in vertical transactions):
- internal documents, including materials covering synergies, deal valuation and transaction rationale;
- the competitive effectiveness of potential competitors;
- the impact of common shareholders; and
- divestment and behavioural remedies, which need to be considered from the early stages of deal planning.
- Look out for opportunities to contribute feedback to help shape the merger control laws when reviews commence.