On 20 April 2021, the UK’s Competition and Markets Authority (CMA), the German Bundeskartellamt (BKartA) and the Australian Competition and Consumer Commission (ACCC) issued a joint statement¹ and held a joint online event pushing for more rigorous merger control enforcement. Our global competition team in these jurisdictions unpacks the joint statement and provides the following insights.
The main takeaway for businesses is to be prepared for more intervention in deals, especially deals involving dynamic and fast-paced markets, such as digital markets and life sciences. In particular, businesses should expect closer scrutiny – and skepticism – of statements about the benefits of a deal, with the consequent need to rebut with hard evidence a “quasi presumption” of competition concerns. This in turn means allowing ample time to prepare for notification of reportable deals raising prima facie substantive concerns. The harder stance displayed by the three agencies also serves as a warning that businesses may have to anticipate a prohibition in some countries, despite the deal having been cleared elsewhere, with the consequent need to explore carve outs, if possible, to allow the deal to proceed where clearance has already been obtained. Businesses should also assume structural remedies will be required if competition concerns arise in all but exceptional cases. We also expect the authorities to keep up the pressure on courts to maintain a firm line. However, ultimately the courts will decide if the authorities have discharged their burden of proof and this joint statement should not alter the standard of proof the authorities are held to by the courts.
Purpose of the joint statement
The joint statement provides “a common understanding across competition agencies on the need for rigorous and effective merger enforcement”. This “common understanding” may have two meanings.
One is explicit, loud and clear. It is a warning signal to the boardrooms of companies in markets that are highly concentrated (e.g. with four or fewer players) or markets prone to tipping due to network effects (e.g. digital markets) or to expensive R&D and exclusivity through patents (e.g. life sciences). Any attempt of further consolidation in these markets will face scrutiny in the three jurisdictions.
However, the BKartA will not have jurisdiction on merger affecting the German market where the parties are large enough, globally and in the EEA, to trigger a one-stop shop filing to the European Commission under the EU Merger Regulation and the German portion of the deal is not referred back to the BKartA for review.
Last year, out of the 12 cases that ended up in a Phase 2 in-depth review in the UK, the CMA blocked four deals, cleared two only subject to divestiture remedies, and the merging parties abandoned the remaining five on the face of a probable prohibition, leaving just one unconditional clearance. Indeed, one of the CMA’s senior directors of mergers, Joel Bamford, recently stated at a conference in February 2021 “You have to wonder about the decisions being made in the boardroom or advice being given on the likelihood of clearance…” and said that the stigma attached to a failed transaction, despite the potential cost for a company, “is not necessarily what it once was”. So this joint statement reinforces the impression of a group of agencies which appear increasingly suspicious of mergers and looking to deter (via this statement) boardroom decision makers from even attempting mergers that may be blocked.
Across the Channel, the BKartA has maintained its record number of merger control notifications within Europe and has further widened its jurisdiction to review mergers based on the value of the transaction.
Further afield, the ACCC is planning to propose reforms to its current merger control regime: currently, the ACCC – similar to the US – cannot block a deal without seeking a court injunction. Though the ACCC has generally succeeded in persuading merging parties to abandon deals to which the ACCC has taken a critical view (or offer court-enforceable undertakings addressing the ACCC’s concerns), the ACCC’s few attempts to block a deal through the judiciary have all been unsuccessful.
The second meaning of the opening joint statement is perhaps more subtle. Post-Brexit, the CMA aspires to become an influencing leader in global competition law enforcement. In addition to the joint statement, it signed cooperation agreements with the competition agencies of Canada, US, Australia and New Zealand. It also joined a multilateral working group with the US Federal Trade Commission and the European Commission to reassess their approach to the analysis of the impact of mergers in the pharmaceutical industry. The joint statement seeks renewed attention for the CMA at the centre stage of international cooperation with other competition agencies, in line with its post-Brexit aspirations. The ACCC’s conspicuous inclusion may perhaps be a reaction to Google/Fitbit, where Google and Fitbit proceeded to complete the deal even though the ACCC rejected the behavioural undertaking offered by Google, and before it had made a final decision.
Purpose of merger control and the impact of the Coronavirus (Covid-19) pandemic
The joint statement goes on to provide a manifesto on merger control that on its face is unquestionable: “The purpose of merger control is to ensure that relevant transactions are assessed, and anticompetitive mergers are prevented so that consumers benefit from the lower prices, higher quality products and services, greater choice and innovation that effective competition brings. Competition increases consumer trust in markets and drives the functioning of market economies and economic prosperity.”
However, there is more to this than meets the eye. The joint statement echoes Keynesian economics theories on mergers and monopoly powers. Keynesian theory warns that “the concentration of capital is biased toward merger rather than toward growth.” The CMA’s CEO, Andrea Coscelli, supported by the CEOs of the BKartA and ACCC, echoes the concept: “merger control is pivotal for fuelling growth after the pandemic and it is important that countries emerge from the crisis with competitive markets.” He warned against relaxing competition rules as a result of Covid-19, especially as government support falls away and struggling companies become ripe for acquisition bids. “That means, potentially: bankruptcies, acquisitions of firms and assets by competitors, and we think it’s very important to be clear that what we need here is to emerge from the pandemic with competitive markets. That’s what delivers growth in our economies,” Coscelli said. “We desperately need growth. Growth is the only way to pay off the debts over time and to earn the tax revenues to pay these debts. So we think merger control needs to be an important component of that,” he added.
Even if there were economic arguments to support a bias against concentrations as a stimulus for growth, there would be economic counter arguments that mergers are generally pro-competitive. In any event, the key question is not economic, but it is rather whether such a bias against concentrations would be consistent with the applicable legal frameworks for merger control enforcement.
Challenges for merger control
The joint statement’s central piece is on the challenges facing a more aggressive merger control enforcement. Behind each of these stated challenges, an expert antitrust eye can easily recognise the CMA’s own experience and how it aligns with similar trends in Germany and Australia. They can be summarised as follows:
- Failing firm: “while it is conceivable that the pandemic could lead to an increase in valid failing firm claims, the pandemic is not a reason to lower the standard for accepting such claims.” The ACCC has a long-standing scepticism of the failing firm argument. In Amazon/Deliveroo, the CMA had provisionally cleared the deal based on a presumed failing firm defence during the early stages of the pandemic. However, the CMA subsequently changed its mind when it came to realise that Deliveroo had bounced back in the later stages of the pandemic due to the increase in take-away deliveries orders, which in turn led to a successful IPO. The deal was in any event cleared unconditionally on the merits.
- Standard of proof: “the forward-looking nature of merger control review will always mean competition agencies face some uncertainty when making such decisions. However, uncertainty as to the future should not necessarily mean that potentially anticompetitive mergers are cleared because of that uncertainty.” While this is not a controversial statement, rather a simple reflection of the current legal test for intervention, the suggestion in the joint statement that what is being proposed represents a new approach to intervention seems based on a “straw man” misdescription of the status quo, for instance the joint statement says “it is important that competition agencies are willing to challenge the presumption often promoted by merging firms and their advisers that mergers…should only be restrained where there is certainty that serious detriment will result”.
- Rebuttable presumptions: the joint statement suggests that certain mergers may be presumed to cause “harm to consumers” – e.g. in digital markets (due to network effects), life sciences markets (due to the loss of R&D competition), and in any other cases “where incumbents seek to protect their market position by acquiring potential competitors in the form of smaller firms or potential entrants in adjacent markets.” In recent times, the CMA has moved away from relying on traditional merger assessment screening tools (such as market shares and econometrics) and focused more on qualitative evidence, such as internal documents and loss of competition between closer actual or potential competitors. The same pattern may be recognised in Germany and Australia, although the ACCC recently lost its court case trying to block a four to three telecom merger (Vodafone/TPG) based on economic witness experts supporting the competitive nature of a market with only three players. The ACCC’s CEO, Rod Sims, lamented that the court should have focused more on the loss of competition resulting from the merger rather than the forward-looking assessment of the market.
- Efficiencies: “given the long-term structural change and clear loss of rivalry that can result from a merger, protecting competition may require the prevention of problematic mergers rather than the acceptance of submissions relating to purportedly procompetitive benefits that are difficult to verify and predict.” The CMA’s practice to date, also reflected in the updates to its Merger Assessment Guidelines on countervailing factors, emphasises a sceptical approach to efficiencies and competitor reactions. Such scepticism might be justified when balancing a certain and immediate prospect of an SLC against medium term and uncertain countervailing forces. But the logic of that sceptical approach is harder to reconcile with a situation where the SLC itself has been identified only in the future and is itself surrounded by material uncertainty. This is well illustrated by the EU General Court’s judgment in CK Telecoms UK Investments v Commission, where the Court found that the Commission’s reliance on a simple Upward Pricing Pressure (“UPP”) analysis lacked probative value. Indeed, any four-to-three merger would result in positive price increases based on an UPP analysis. However, four-to-three mergers may also result in long-term efficiencies potentially offsetting short-term price increases. The Commission’s quantitative analysis failed to consider such efficiencies. The problem is that this precedent is not binding on the CMA, BKartA and ACCC.
- Advocacy: “Companies are often advised and represented by law firms and economists that strongly advocate for their views of the market. […] competition agencies, courts and tribunals need to be aware of the risk of accepting the merger firm’s views over those of competitors, customers and consumers simply because the merger firms are more engaged in the merger review process.” The subtext here is that any advocacy piece must be supported by cogent evidence and the agencies will not thank the merging parties for making unsubstantiated pro merger claims. No surprises here. In our experience, merger control enforcement has always focused on reviewing and testing that advocacy to examine the evidence, particularly documents and data, and decide whether the merging parties’ claims are robust and supported by the body of available evidence. Preparation is key in this respect to ensure that documents are read and assessed in the right factual context.
- Remedies: finally, the joint statement confirms the agencies’ bias towards structural remedies. Behavioural remedies may be acceptably only in limited circumstances, e.g. where the market is already subject to sector specific regulation, such as access remedies in the telecom sector. In all other cases, “structural remedies – whether prohibition or divestment of a standalone business – are more likely to preserve competition and lead to an optimal solution for stakeholders and are therefore in the best interests of consumers. Importantly, the threshold of proof required to prohibit a merger is not higher when no divestment would be effective in restoring the lost competition; indeed, protecting competition and consumer welfare can sometimes only be achieved by blocking a merger outright.” A recent CMA Study on Remedies found that “complex behavioural remedies that create continuing economic links and dependencies are unlikely to recreate the pre-merger competitive intensity of the market, can raise significant circumvention risks, and can quickly become outdated as market conditions change. In some circumstances they can also distort the natural development of the market. Behavioural remedies also place a burden on competition agencies and businesses by necessitating extensive post-merger monitoring of companies and their conduct.” BKartA and ACCC agree with the findings of the study.
This joint statement obviously cannot change the legal test for merger control intervention and the burden of proof borne by the CMA, ACCC and BKartA. However, to the extent this statement is intended to flag that the three agencies are embarking on a mission to more aggressively apply the existing legal tests with a view to intervening in more mergers, by relaxing the evidential standards they have been applying up till now and irrespective of third party evidence (if the authority feels third parties are not fully engaged or may be holding back), that is worrying. Taking the UK for example, given the relatively limited access to file accorded the merging parties during a Phase 2 review, the very wide discretion accorded to the CMA by the courts as regards how it conducts its investigations, and given the very high cost and lengthy duration of a CMA review and any subsequent judicial review proceedings (and any subsequent remittal review), what this statement says about the CMA’s, BKartA’s and ACCC’s commitment to evidence-based decision-making is sobering.
The joint statement confirms that merger control enforcement is becoming more complex not just in the UK, Germany and Australia, but across multiple jurisdictions. Deal making is further complicated by the concurrent application of new foreign investment control regimes, such as the new National Security & Investment Act 2021 which received Royal Assent in the UK on 29 April 2021 (and which is expected to come into force later this year) and the recent reforms to Australia’s Foreign Investment Review Board rules, in sectors raising public interest concerns, increasing exponentially the number of necessary or desirable pre-merger authorisations. A coordinated approach and plenty of planning ahead of filing across multiple jurisdictions is more than ever the key to try to disentangle the positive effects from the negative effects of a merger and to get the deal through merger control enforcement.