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.
When European Union Courts overrule European Commission decisions on transactions, finding a solution to the situation can be challenging for parties to the deal
6 min read
In 2017, the European Union (EU) General Court annulled two merger decisions of the European Commission. In March, the Court overturned the Commission's 2013 decision to block the proposed €5 billion acquisition by United Parcel Services (UPS) of Dutch delivery group TNT Express NV (TNT). The Court annulled this decision on the basis that the Commission had failed to communicate a final version of its econometric analysis—which had been used in support of its objections—to UPS, breaching UPS's rights of defence.
Then in October, the Court annulled a decision by the Commission to clear the €10 billion acquisition of Dutch cable operator Ziggo by Liberty Global of the US. That decision, taken in 2014, was appealed by a competitor and annulled because it did not sufficiently explain why some of the negative vertical effects raised by this competitor during the administrative procedure could be excluded. As a result, the parties had to re-notify the transaction and the Commission to re-examine it under market conditions applicable at the time of re-notification.
Such annulments are rare. EU Courts had previously annulled only eight Commission decisions under the Merger Regulation over a span of 25 years. Annulments of clearances are even rarer, with only four precedents: Kali und Salz/MdK/ Treuhand; RAG/Saarbergwerke/ Preussag; SEB/Moulinex; and Sony/ BMG. Both recent cases, however, illustrate the challenges of judicial review of merger decisions.
Annulment of prohibition decisions
When prohibition decisions are annulled, there is no guarantee that winning the court battle will be sufficient to save the deal, nor does it automatically mean that the Commission was wrong to prohibit a transaction.
The prohibition by the Commission of the 2001 merger between French industrial groups Schneider and Legrand (Schneider/Legrand), in which the Commission was faulted for a breach of the rights of defence, was annulled. But after the annulment, the Commission confirmed its suspicion that the transaction would raise competition issues. As a result, Schneider decided to sell Legrand (which had already been acquired by means of a public exchange offer).
Sometimes, there is actually nothing to be fixed. For example, UPS's recent victory will not allow it to win its prize:
Its main rival, FedEx, acquired TNT in the meantime. What is left is the possibility to seek damages. At the time of writing, UPS had filed an action before the General Court seeking US$2.1 billion in damages. However, such damages are notoriously difficult to obtain and generally of a very limited amount. In Schneider/Legrand, the Court of Justice merely granted damages of €50,000 for expenses incurred by Schneider in relation to the re-examination of the merger.
There are cases that have had a positive outcome for the parties involved. For example, Sweden's Tetra Laval eventually obtained clearance for its €1.6 billion acquisition of French packaging equipment maker Sidel following the annulment of the Commission's initial prohibition. In that case, the Commission decision was annulled by the Court for failure to meet the burden of proof. On its second attempt, the Commission found that the standard set out by the Court for prohibiting a merger because of risks of tacit collusion was not met. It then cleared the merger.
When a clearance decision is successfully appealed by a third party, the acquirer faces a risk of seeing the corporate integration being called into question years after its implementation. The parties must submit a new notification and the Commission has to take a fresh decision in light of current market conditions. This process, known as 're-adoption', can be lengthy and potentially cause the Commission to impose new remedies, or even to prohibit the transaction.
This can give rise to considerable complexity. After the European Commission's decision cleared the proposed merger between Sony and Bertelsmann in 2004, a third party successfully challenged the ruling before the General Court. The Commission then cleared the transaction again. In parallel, the merging parties successfully appealed the General Court's judgment before the Court of Justice. But in the meantime, the same third party who had challenged the first decision also appealed the second clearance decision. Sony eventually acquired sole control of the joint venture, leading to the closing of the pending appeals as they had become devoid of purpose.
It is essential that EU courts decide on Commission merger decisions as quickly as possible. The parties should therefore apply for an expedited procedure when appealing a prohibition decision. This will allow a priority treatment and a shorter written phase, usually with only one round of written submissions, and a shorter deadline for the defendant to file its submission.
In four previous cases of annulments of Commission decisions, the General Court granted the expedited procedure when the parties requested it and ruled within a period of between nine and 19 months. The request was, however, refused in the UPS/TNT case when the General Court's review turned out to be particularly lengthy (four years), which was surprising given that the proceedings ultimately led to a short judgment, annulling the decision on a procedural ground.
In the Liberty Global/Ziggo case, neither the third party appealing the decision nor the Commission requested an expedited procedure. Because of the Court's rules of procedure, the one that really had an interest in such expedited treatment— namely Liberty Global—had no right to request it, even if it had intervened in the case (which it had not). And an intervention by Liberty Global in the case would have likely slowed down proceedings even more. As regards possible mitigating strategies, if the parties to a transaction cleared by the Commission suspect that a third party might appeal that decision, they can try to safeguard their interests by, first, trying to accelerate the publication of the Commission decision. They can do this by submitting confidentiality requests on the decision as soon as possible in order not to delay the publication of the non-confidential version (the clock for third parties to appeal the decision starts ticking when the non-confidential version is published). Likewise, during the court proceedings, they will be asked to submit a confidentiality request, and may accelerate proceedings by not making unduly broad confidentiality requests. Finally, if they believe that there is a material risk of full or partial annulment of the clearance decision, they could take ring-fencing measures in order to facilitate the unscrambling of the eggs, should they eventually have to divest part of the target business.