In a period of economic, political and regulatory change, how can companies plot the right course for M&A success?
Merger control in a changing world
Global economic growth is back on the agenda and companies are once again looking to position themselves for success by pursuing mergers and acquisitions. But what are the prerequisites for success in an increasingly disrupted world?
Welcome to the second White & Case merger control publication, the first edition of which was warmly received. Earlier this year, it became apparent that an update was required, not so much driven by regulatory change, but rather to take into account policy shifts.
For example, we have seen the US catch up with Europe in relation to vertical mergers, the AT&T/Time Warner review being the most prominent recent example. At the same time, the European Commission has forged ahead again with a focus on conglomerate mergers and innovation markets. Perhaps the Dow/DuPont merger has attracted the most attention, as authorities now get out their telescopes and look far into the horizon to identify anti-competitive harm. There is a sense among the Commission’s hard-liners that in the past too many mergers wriggled through without proper analysis. Our own view is that it may be legitimate to look ahead to try and identify harm (after all, that is what merger control is all about), but this long lens should not be forgotten when it comes to reviewing the synergies that a merger may create. However, Europe has set the tone, and we expect other authorities to follow.
Europe also seems to be taking the lead (and others will follow due to the prospect of publicity-garnering fines) in relation to procedural infringements. The argument for pursuing companies for inaccurate filings, for example, is that such violations call into question the very system of merger control. Be that as it may, due process needs to be followed in such cases, and this may divert valuable resources to past cases as opposed to dealing with the current case load. In other words, pursuing a few flagrant cases may be necessary to set a precedent, but they should not become regular items on the authorities’ agendas (bringing with them attendant increases in filing times, and costs). Our view is that the authorities should confine their focus to statements that would have yielded a very different outcome, not mere technical infringements.
This leads us to the subject of gun-jumping. Again, viewed from afar, this should not be a problem in no-issues filings, and authorities typically have the tools to unwind a completed merger. The maxim ‘no harm, no foul’ ought to be applied to these cases to ensure that valuable resources are not frittered away on them.
In sum, our assessment is that the global system of merger control continues to limp along. However, the costs associated with a system containing myriad controls are increasingly high. Looking ahead, we wonder whether a fundamental overhaul is needed to ensure that transactions that pose no problems are not saddled with the costs imposed by the global system. (Yes, this will mean some authorities will have to relinquish jurisdiction in certain instances, safe in the knowledge that a transaction will be reviewed elsewhere.)
But more importantly, we continue to believe that the system of mandatory pre-merger review is fundamentally flawed and that instead we should shift to a system of voluntary merger control in which only mergers that present genuine issues need to be notified. Ironically, when commentators question whether the UK system of merger control needs to change in light of Brexit, one of the things that we would not change is the voluntary nature of the system.
The European Commission is increasingly concerned that market consolidation will harm innovation and has changed dramatically the way it examines the impact of mergers on innovation. Merging parties should be prepared for it.
When it comes to mergers within the digital landscape, the greatest challenge for regulation is to strike the right balance as regards enforcement. How are EU authorities taking action and what does this mean for the innovation economy?
The European Commission is paying greater attention to investors who hold stakes in multiple companies in the same industry and considering how this concentration of influence might have an anti-competitive effect.
In May 2017, the European Commission fined Facebook €110 million for providing incorrect information during the merger control process of its acquisition of WhatsApp. As per the Commission's statement, the magnitude of the fine was meant to send 'a clear signal to companies that they must comply with all aspects of EU merger rules, including the obligation to provide correct information'.
Then, in July 2017, the Commission opened two new investigations in relation to provision of incorrect or misleading information in the merger control context, and a number of national competition authorities fined companies for similar infringements. In short, this is a trend of which undertakings considering transactions should be mindful.
The obligation to provide accurate and complete information has been part of the European merger control rules since 1989. Between 1989 and 2004, however, the Commission brought only a handful of procedural infringement cases, and the fines were capped at just €50,000 per infringement.
In 2004, this threshold was significantly stepped up with the introduction of new merger control rules. Companies providing incorrect, misleading or incomplete information could be fined up to 1 per cent of their group's global turnover (the Commission also has the power to revoke a merger clearance decision).
Whereas procedural infringements in relation to antitrust investigations (which are also fined up to 1 per cent of a company's turnover) have been on the Commission's radar for some years now (in 2012, the Commission fined E.on €38 million for obstructing a dawn raid by tampering with the Commission's seal at E.on's premises), no procedural infringement cases under the new merger control rules had been brought for 13 years. Stakeholders were, thus, caught by surprise when a fine of €110 million was imposed on Facebook.
Facebook in focus
Facebook notified the Commission of its proposed acquisition of WhatsApp in August 2014 and received clearance two months later. At the time, Facebook had stated in its notification form that it would be unable to establish reliable automated matching between Facebook users' accounts and WhatsApp users' accounts. It repeated such information in a reply to a request for information from the Commission.
Facebook acknowledged these facts and cooperated with the Commission by waiving a number of its procedural rights in order to close the matter swiftly. In exchange, its fine was reduced and it received a commitment that the final decision would mention that Facebook's conduct had only been 'at least negligent' (and not intentional) and the incorrect or misleading information provided by Facebook did not have any impact on the assessment carried out by the Commission in 2014. The Commission concluded that such acknowledgments were consistent with its own findings: The Commission had conducted an 'even if' assessment that assumed user matching as a possibility and had cleared the transaction nonetheless, and on balance, the evidence in the file supported a finding of 'at least negligence' rather than a positive finding of intent.
The Commission fined Facebook €55 million for the provision of false information in the notification form and a further €55 million for the provision of false information in the reply to the request for information.
The fact that the incorrect or misleading information had no impact on the outcome of the clearance decision and that Facebook had cooperated with the Commission were taken into account when assessing the gravity of Facebook's infringement. Ultimately, Facebook was fined on the basis of 0.2 per cent (as opposed to 1 per cent) of its global turnover (€28 billion). The Commission characterised the fine as 'proportionate and deterrent'.
Cases in the pipeline
Two months after the Facebook decision, on 6 July 2017, the Commission announced that it had opened investigations in relation to potential procedural infringements against Merck KGaA and General Electric.
The first case concerns a merger between two life-sciences companies, Merck and Sigma-Aldrich, which was approved upon the condition of divestiture of part of Sigma-Aldrich's laboratory business. The allegation concerns provision of incorrect or misleading information, but no final decision has been reached.
The second case concerns LM Wind's acquisition by GE and centres on an alleged failure to provide information in relation to a company's innovation and R&D plans. The Commission argued that the omitted information had consequences not only for the Commission's assessment in the GE/ LM Wind transaction, but also for a separate transaction in the wind turbine market (Siemens/Gamesa) that was being investigated at the same time. The information was allegedly necessary to assess GE's future position and the competitive landscape on the market in both cases.
GE withdrew its initial merger notification and re-notified the transaction, including the information on the R&D project that had not been included in the original notification. The re-notified transaction was cleared without commitments and no final decision in the infringement case has been reached.
In addition to these cases––which potentially expose businesses involved to fines of up to 1 per cent of turnover–– the Commission opened two cases on gun-jumping (i.e., early implementation and integration of two merging companies in advance of obtaining Commission approval), Canon/Toshiba Medical Systems and Altice/PT Portugal. In such cases, companies can be fined up to 10 per cent of their turnover. On 24 April 2018, Altice was fined €125 million.
A number of European authorities have also initiated investigations at the national level on procedural infringements in the merger control context. On 2 May 2017, the Hungarian competition authority, after concluding, following an exchange with the US authorities, that data provided by Infineon were incorrect, revoked the Infineon/Wolfspeed merger clearance decision and imposed a fine of €242,000 on Infineon. Similarly, the Danish, UK and Polish authorities have imposed fines of between €6,000 and €23,000 on companies that allegedly failed to provide information during the merger control process.
Implications for companies
The Facebook fine sent a strong signal to the business and legal community that the Commission will not shy away from imposing fines of tens of millions of euros if its procedural rules are infringed. To avoid hefty fines, companies will need to ensure that they provide accurate and complete information in the notification and divestiture process, including in the area of R&D and innovation, which can prove challenging. Indeed, in line with the Commission's current focus on the innovation effects of transactions (Dow/ DuPont), the cases on misleading information concerned alleged omissions in relation to the companies' R&D projects.
In the future, when asked to provide all relevant information in the context of R&D, companies may face difficulties in identifying projects which are potentially relevant to the transaction.
A pipeline and R&D project that is not relevant for one market segment at the time of the notification can become relevant for that market in the future. Equally, a project that is immaterial at the time of the investigation can gain prominence later on. This means that counsel in merger control proceedings will need to have a full understanding of the potential relevance of R&D projects for the transaction and engage in discussions with the business teams (and, potentially the Commission early on in the process).This could result in an extension of the already lengthy pre-notification discussions.
Another difficulty is that if the R&D project lies with the target, the notifying party––which is responsible for the notification––will not be able to assess the relevance of the project, given gun-jumping rules that are in place and which primarily apply to competitively sensitive information such as R&D. This could result in companies amending the merger agreements by raising the disclosure standard.
Overall, there is a risk that, out of an abundance of caution, parties will submit relevant and non-relevant information to the Commission (and an enormous number of internal documents) in order to ensure that their notifications are complete and correct. This will increase the time and resources necessary on both sides. It could also make the conclusion of merger control proceedings difficult within the prescribed timeframes without repeatedly stopping the clock and thus, effectively, extending the time required to obtain EU merger control clearance. The right balance therefore needs to be struck between respecting the parties' procedural obligations and ensuring efficient merger control review.