Is Planet Merger Control becoming uninhabitable? - Observations on the increasingly shaky statics of international merger control
20 min read
Merger and acquisition (M&A) transactions are facing ever longer regulatory reviews and an increasingly uncertain outcome. Less than a decade ago, it seemed we were on a clear path to substantial international convergence, and the "community" understood that it is difficult to hold transactions together over long periods of regulatory uncertainty, so various initiatives to speed up global deal reviews were considered. In global transactions, parties could rely on the global lead antitrust agencies coordinating with each other (including based on waivers from the parties) to come up with global solutions for difficult transactions.
But at the same time, new antitrust authorities started to appear on the map, which logically were facing a steep learning curve (colleagues have recently called this the "decentralization of antitrust enforcement"). Moreover, especially the European Commission ("EC") started to introduce additional elements from the US review system, notably an increased focus on internal documents - despite keeping the tedious front- loaded written process with mandatory pre-notification and an extensive, descriptive notification form (Form CO) and often massive requests for information. And rather than the EC then cutting back on its traditional tools, unfortunately it looks like we are currently seeing the opposite trend - with the US agencies adding time on the front-end by exploring new ways to make the Hart-Scott-Rodino Antitrust Improvements Act form more like a Form CO. The EC was also the first major agency which increasingly delved into untested novel theories of harm, and generally ramped up intervention (starting in around 2015, its intervention rate jumped from less than 20% to around 30% today).
More recently post-Brexit, the UK Competition and Market Authority ("CMA") has started asserting itself as one of the most, if not the most aggressive merger regulator in the world, the Chinese authority ("SAMR") remains much of a black box, the EC continues its interventionist trend in a myriad of ways (unfortunately increasingly endorsed by deferential EU courts). And the US agencies have overtaken the EC in pursuing novel and aggressive theories of harm (and seem willing to revive theories based on decades-old cases), delving into new spheres such as a transaction's impact on labor markets, and rejecting consensual resolutions over a preference for litigation. Interestingly, even though the UK Competition Appeal Tribunal dismissed the Facebook/GIPHY appeal, it still commented that the CMA should be careful about interfering in global mergers (Case No. 1429/4/12/12, para. 127 (2)).
For parties considering M&A transactions, these merger control trends, the global proliferation of foreign direct investment (FDI) regimes, the introduction of the Foreign Subsidies Regulation, and the advent of outbound investment control are creating a perfect regulatory storm. Many clients, especially in tech and pharma/life sciences industries, report that a substantial portion of transactions initially considered do not move to actual deal negotiations primarily due to the uncertainty about regulatory outcomes and timing. In jurisdictions like the EU, basic principles of good administration such as equality of arms and impartial reviews without prosecutorial/confirmation bias, as well as effective legal redress have long been strongly underdeveloped, and prospects are not great. Overall, there seems to be an emerging global consensus among the antitrust agencies to discourage M&A, especially in certain industries. By contrast, massive subsidy programs are trying to strengthen domestic or regional industries, attract foreign investment, and build resilient supply chains. This strongly disincentivizes companies to consider transformative M&A deals in the first place, including transactions that are the best, or even the only option, to accelerate market adoption of novel technologies and/or to ensure the survival of start-ups, all of which may well have a detrimental impact on innovation in the long run.
1. Selected recent trends and old problems
Below threshold interventions
While the US has had the option of reviewing below-threshold deals for a long time, the EC had long discouraged referrals of transactions pursuant to Article 22 EUMR if they did not meet any national filing thresholds. With its new policy announced in March 2021 (Communication from the Commission, (2021/C 113/01)), it is now encouraging (or actually lobbying for) such referrals in cases that it deems appropriate. At the time of writing, there have been three such referrals for cases that did not require any national filings in the EU: the "procedural rollercoaster" Illumina/Grail (M.10483, M.10188, M.10493 and M.10939) - in which the EC recently imposed a gun jumping fine of around EUR 432million; Qualcomm/Autotalks (M.11212; EC daily news); and EEX/NASDAQ (M.11241; EC daily news).
With the ECJ's Towercast judgment (C-449/21), national competition authorities ("NCAs") also obtained a new tool for an ex-post review of below-threshold transactions. The Court clarified that transactions that fall below EU and national merger control thresholds, and at the same time have not been referred to the EC pursuant to Article 22, may be subject to ex-post intervention based on Article 102 TFEU. At the same time, the Court specified that strengthening a dominant position in itself is not sufficient to establish an abuse under Article 102 TFEU. It rather "must be established that the degree of dominance reached through the acquisition would substantially impede competition", implying that the merger leads to a material difference in the competitive landscape not only quantitatively with a market share increment but also qualitatively. Applying this threshold is far from straightforward, the standard is not well developed. Not even a week after the judgement, the Belgian Competition Authority ("BCA") announced the review of Proximus/EDPnet, expressly with reference to the Towercast judgment (the only known "Towercast procedure" so far). In June 2023, after finding the takeover constituted a prima facie abuse of dominance by Proximus, the BCA imposed interim measures to ensure the operational autonomy of EDPnet including the supervision of an independent trustee for a duration of 15 months (BCA press release).
Despite a voluntary filing regime, the UK CMA can call in mergers on its own initiative. It takes an increasingly aggressive approach to merger review post-Brexit by generously exercising this power and applying a low standard to assert jurisdiction (c.f. the share of purchase test which is not a market share test and allows for wide discretion in describing goods or services; we are seeing arguments like "the downstream products may become important for UK customers", and the like).
International divergence and new alliances
There is also an increasing number of deals that some of the global lead authorities clear (subject to remedies), while others block them or require commitments to be offered - something that would have been more or less unthinkable not long ago.
Specifically, the parties called off the Cargotec/Konecranes merger after the EC cleared but the CMA blocked the deal despite the exact same remedy offer. The Microsoft/Activision Blizzard deal took even more surprising turns. With the EC clearing the deal, accepting long-term licensing commitments as a remedy, and the CMA blocking it, not being convinced by the same remedies that convinced the EC, the closing of the deal appeared improbable at first. Microsoft then appealed the CMA's decision in May 2023. In the course of the proceedings, the CMA agreed on a suspension and entered into negotiations with the parties to find a competitively viable solution for the deal, allegedly focusing on structural remedies (as opposed to the EC's behavioral remedies). Microsoft re-filed a substantially different deal with the CMA, proposing a fix-it-first divestiture remedy by opting to divest the cloud streaming rights to all current and future Activision games released over the next 15 years outside the EEA to Ubisoft (instead of acquiring those) (GCR article), which the CMA is now market testing with some positive communication around it (GCR Article). Moreover, the FTC withdrew its lawsuit against the merger in the US and the parties postponed their closing deadline up until October. By contrast, the CMA cleared Meta/Kustomer, while the EC required commitments, which seems to indicate that the way the agencies take a particularly subjective view on the counterfactual in digital markets. Booking/eTraveli (M. 10615) seems to be the next example, with the FTC and the CMA clearing the deal while the EC just blocked it.
At the same time that the agencies are becoming confident to reach diverging views, new alliances are forming. One recent example is EEX/NASDAQ, where the Nordic competition authorities of Denmark, Finland, Sweden and Norway rallied to convince the EC to review the deal and had their referral requests accepted in late August 2023 (c.f GCR article for reference). Separately, there were rumblings about the US and the Commonwealth agencies coordinating the Cargotec/Konecranes merger block despite the EC's openness to the deal. Even more spectacularly, in Illumina/Grail, the FTC withdrew its application for preliminary injunction on May 20, 2021 - just shortly after the EC asserted jurisdiction over the deal on April 19. This timeline alone raises doubts if the FTC really acted independently and guided by objective and impartial motives or if they withdrew their application comfortably, knowing that the EC would apply its standstill provision, extensively review and probably block the deal or at least require some form of remedy.
This new mix of international divergences and ad hoc alliances creates additional uncertainty about how to navigate global deals.
Novel "offenses" - "make or buy" decisions under fire, and increasing focus on vertical and conglomerate "ecosystem" theories of harm
Mergers like Meta/Within, Adobe/Figma and Amazon/Deliveroo are examples for growing regulator skepticism towards so-called make-or-buy decisions (i.e., one party decides to buy (parts of) a business with a certain technology or a product rather than trying to develop it itself). Without success, the FTC sued to block Meta/Within, essentially alleging the deal killed the acquirer's own innovation efforts/incentives, which purportedly harmed competition (see paras. 102 et seq. of the FTC's lawsuit).
This approach is remarkable. Large corporate acquirers typically have ample activities and ongoing research and development (R&D) projects, and they typically try to leverage existing resources and technologies to make improved or new products. They are necessarily not as nimble as smaller companies that may focus on one or only a few selected projects but have a large and costly R&D organization where there is competition for several projects in parallel, especially for publicly listed companies with clear investor profitability expectations. They simply cannot pursue every single project to enter a segment themselves. Conversely, start-ups require venture capital (VC) funding to get started, and for VC investors, the option to sell their stakes later on profitably to a strategic acquirer is the key incentive to provide initial funding in the first place. (This is why characterising incumbents buying start-ups as "killer acquisitions" is often inappropriate, especially in digital industries, because the deal rationale is not to "kill" the target, but to keep it alive - I have accordingly dubbed these cases "zombie acquisitions". The regulator concern is more about the acquiror's own innovation efforts (see above), a somewhat more vague strengthening of its ecosystem, a broader issue about start-ups only innovating "around" and "in the vicinity" of the incumbents' business models in order to bought out at some point, a prevention of future competition from a business model that is complementary and not directly competitive today, and/or more classical tying or bundling concerns.) Even more puzzling are the increasing regulator concerns about the potentially "chilling impact" of an M&A deal on innovation efforts and incentives of third parties - something hardly empirically proven or measurable in a predictive art like merger control.
There is also an increasing focus on vertical and conglomerate "ecosystem" theories of harm (non-price effects in general - c.f. Haucap and Stibale) and growing skepticism towards behavioral remedies in case of non-horizontal concerns, as these are gauged as insufficient more frequently. With Illumina/Grail, the EC for the first time blocked a purely vertical merger and rejected the proposed behavioral remedies. Moreover, in the EC blocked Booking/eTraveli (M.10615) on September 25, 2023, based on an "ecosystem" theory of harm according to which the deal would strengthen Booking.com's existing dominant position on the hotel online travel agencies market by acquiring a major customer acquisition channel, which would have allowed Booking.com to expand its travel services ecosystem. Increasing traffic and sales by Booking.com's platforms would have, according to the EC, increased barriers to entry and expansion, and led to higher costs for hotels and possibly consumers. The proposed behavioral remedies did not persuade the EC (EC press release). The jury is still out as to whether "strengthening" of an ecosystem is just a new label, as the EC seems to be arguing in Booking.com/eTraveli (it is speaking of reverse conglomerate effects or leveraging from the weaker to the stronger position and thereby strengthening pre-existing dominance), or whether it is a new tool (see e.g, the Federal Cartel Office's remark on Meta/Kustomer effectively saying that it wished it could look at ecosystem strengthening as a theory of harm, but it could not under the current state of the law) and what the limiting principles and approach to evidence are.
Recent court endorsements strengthen the EC
One balancing factor ought to be the courts. While judicial reviews of merger vetos are basically unheard of in China, the US agencies seem to be losing frequently before the courts.
In the EU, recent court endorsements will, however, likely further invigorate the EC. First, the General Court ("GC") explicitly confirmed the EC's new Article 22 policy in in Illumina/Grail (press release and T-227/21) and found the referral request to still be in time (within 15 working days), although the deal was announced in September 2020 and the referral request by the French competition authority was only sent in March 2021. While remarkable at first sight, this results from the GC's interpretation of a transaction having been "made known" to a Member State within the meaning of Article 22 as requiring the active transmission of information to the Member State concerned that enables the Member state to assess whether the criteria of Article 22 are met, which was in this case in the GC's view only the EC's invitation letter in February 2021 since the parties did not otherwise notify any Member State of the deal. Still, the GC found - inconsequentially, however - that the EC sent its invitation letter "within an unreasonable period of time", violating the objectives of effectiveness and speed pursued by the EU merger control system but did, however, not annul the EC's acceptance decision since the parties failed to establish that this infringed their rights of defence. Second, the ECJ provided the EC with tailwinds in applying the SIEC test below the dominance threshold (so-called "gap cases") in its CK telecoms judgment (C-376/20 P), only requiring a "more likely than not" standard for a merger to result in a significant impediment to effective competition (SIEC) rather than the "strong probability" that the GC had suggested earlier (T-399/16) (for criticism, see Kuhn). The ECJ also disagreed with the GC's criticism that the EC had applied a too low standard for considering the parties close competitors and important competitive forces and rejected a standard efficiencies assumption for horizontal mergers - a major set-back for merging parties given that in practice, the burden of proof that the EC applies for efficiencies offsetting the assumed price increase is insurmountable and entirely assymetrical to the standard the EC applies to find that competitive harm is more likely than not to occur. Third, the GC recognized a broad margin of discretion in the EC's evaluation of effects and remedies in two rulings in 2022, upholding two prohibition decisions - Wieland/ ARP/ Schwermetall (T-251/19) and ThyssenKrupp/ Tata Steel (T-584/19). In those cases, the GC discussed fundamental issues like the required standard of proof and the assessment of evidence and remedies, also bolstering the EC's approach.
Procedural points - especially review timing, equality of arms, and the approach to evidence
Key procedural issues I have discussed in some detail at other occasions have not been addressed. First, despite repeated revisions of the EUMR Implementing Regulation (Commission Implementing Regulation (EU) 2023/914 of 20 April 2023 implementing Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings), a new Form CO, and the expansion of the simplified procedure, cases that obviously do not raise issues are still taking too long and the review process subjects the parties to undue burdens.
Even for the simplest transactions, we are still seeing extensive data requests for all plausible markets and lengthy pre-notification. Also in complex cases, too much time is spent on non-core issues. But in my experience, every case, even the most complex ones, effectively turns on a few key issues. The agencies would seem better advised to focus more on getting the core issues right, e.g., by seeking witness statements, independent experts, etc., and try to fully appreciate the balance of evidence.
But unfortunately, the GC has recently broadly endorsed the EC's use and probative value of internal documents in the cases mentioned above, but in my view, using them as key evidence without hearing witnesses such as the authors or recipients of the documents seems to be suboptimal to get to the truth. Moreover, a key challenge for the parties remains that whatever the parties say is treated as advocacy, what complainants say is evidence ("market test"), and the parties have no way of countering this with witnesses of their own, as they would in the US process. And this is despite the parties being subject to the sanctions for incorrect or misleading information pursuant to Article 14 EUMR. Frankly, it is difficult to understand why that is not even possible in appeals in front of the Luxembourg courts, while in the US, executive testimony has long been treated as key evidence- and rightly so.
This imbalance and lacking equality of arms can be particularly cruel under the new Article 22 EUMR policy. As recent cases indicate, the EC is frequently alerted to transactions by complainants. While it does occasionally send early RFIs to parties (insisting Articles 11 and 14 EUMR already apply at that stage), its "invitation letters" to member states pursuant to Article 22(5) EUMR can be based largely on the perceived fact pattern as described by the complainants without properly taking into account the parties' evidence and observations. The NCAs then repeat this fact pattern in their referral letters without having done much of an impartial own investigation. The EC then takes jurisdiction on this basis, with the NCAs issuing press releases perpetuating the same fact base that started the process. With "information gathering" of the specialized press, this establishes a somewhat collusive public narrative that creates a genuinely anti-transaction environment.
Again, there is hardly anything that the parties can do here, given the case-law that these referral decisions and the EC taking jurisdiction basically cannot be appealed but for a failure to meet the 15 working day deadline. However, that is not of much help either, because based on the GC's Illumina/Grail judgment, the only way to safely trigger this deadline is to make "mini-notifications" to each member state (in fact, we have seen cases in which the NCAs have stated that even the EC invitation letter and 15 working days were not enough time for them to form a view of whether the criteria of Article 22 EUMR are met in the case at issue).
Share purchase agreements (SPAS) often provide for long-stop dates at which one or both parties can walk away, break-up fees if a deal is not closed by a specific point in time, etc. All of the abovementioned procedural issues extend the real review timetable, add deal uncertainty, and allow the agencies to let the clock run out on the parties, thereby effectively blocking deals without having to issue a reasoned decision that could be appealed. This is apparently what triggered Illumina to close the Grail deal despite the EC's pending review, it recently happened with a view to the SAMR review of the Intel/Tower Semiconductor deal, and under the German FDI regime in Global Wafers/Siltronic. The parties are left essentially defenceless in the face of such administrative power tools.
Add to this that effectively the EC is still prosecutor and judge in one person, and a final court verdict on an M&A transaction will still take more than four years (so that parties are pressed to accept extensive remedies, which creates a body of case-law precedent unchecked by independent courts), one may wonder who really thinks this is a fair system that likely leads to the right results.
The described developments have created a regulatory enforcement environment in which it is increasingly difficult even to consider doing non-trivial international deals. New tools and theories create massive uncertainty, and reviews take longer and longer. The general sense that most mergers are good because they create efficiencies, or at least neutral, from a competition perspective seems to vanish among regulators.
It seems like the new regionalism or nationalism has led to an unspoken consensus among governments and agencies that state investment trumps private investment, and vast subsidies to strengthen regional or domestic industries and resilience seem preferable to transactions involving large international corporates.
So we live in an age in which regulatory authorities are increasingly skeptical towards M&A deals, and at the same time they have an unprecedented and expanding degree of power. But this expansion of power should come with a special responsibility, and there need to be limits, especially where timely judicial review is not possible. In particular, where the agencies enter uncharted territory, they should be particularly impartial and convincing on both the theory and the evidence, and predictability and legal certainty are key for companies considering a transaction. The agencies should hold themselves to a very high standard of impartiality, openness and persuasiveness.
To my mind, the root of the problem is the system's architecture and especially the lack of effective and timely judicial protection in merger control outside the US (and that it is basically inexistent in FDI). Therefore, as I have argued elsewhere, a US-style system that requires the agencies to sue in court to block a deal seems like the only conceivable way to get there. It would require a streamlined application for an injunction, focusing on the key evidence and arguments. It should also involve the ability to hear and cross-examine witnesses, especially where the EC relies extensively on the parties' post-merger incentives and its own interpretation of the parties' internal documents.
Until that happens, we will need to play the cards we were dealt and accept that times have changed quite a bit. This means that major M&A transactions will require even longer and more complex advance planning, framing, and a different combination of advisory skills. But the increased complexity and uncertainty makes addressing these fundamental imbalances ever more important. Stakeholders who share the above concerns should collaborate to build a new consensus, fix the parts of the system that are broken, and help rebuild an environment in which investment and innovation can flourish without relying mainly on state subsidies.
Tilman Kuhn is an antitrust and FDI partner at a global law firm in Dusseldorf and Brussels, and also heads the firm's the Global Consumer & Retail Industry Group. He has around two decades of experience in handling international merger control cases, including landmark deals such as Dow's $ 130 billion merger of equals with DuPont, Metso's merger with Outotec, GlobalWafers' attempt to take over its rival Siltronic, and many others. His views expressed here are strictly personal and should not be attributed to his law firm, its affiliates or clients.
This article was first published in EU Law Live and the Symposium.
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