Summary: The past year saw a number of hot topics of debate, and significant new proposals, in the context of merger control. Many of these are likely to be discussed further during 2018. In this blog, we discuss what we see as the five key trends to watch in EU merger control over the next year.
The Importance of Compliance – Increased Enforcement of Procedural Rules
In 2017, the European Commission (the “Commission”) and EU national competition agencies cracked down as never before on procedural violations of merger control rules, with a number of investigations being launched and fines being imposed including a €110 million fine on Facebook (read our blogs on key merger control rulings and the importance of complying with procedural rules).
The end of 2017 saw further enforcement action. In November 2017, the UK’s Competition and Markets Authority (“CMA”) fined Hungryhouse £20,000 for failing to adequately respond to an information request during the CMA’s review of its acquisition by Just Eat, and in December 2017 the Portugese Competition Authority fining Vallis €38,500 for failure to notify a merger.
These cases highlight the importance of understanding your merger control obligations early in the deal process, and keeping check of those obligations from the start, through notification and right up until a decision and closing. We anticipate that the Commission and EU Member State agencies will continue this enforcement drive over the next year, likely leading to more investigations launched or fines imposed for merger process infractions across the EU during 2018.
Innovation Markets – A New or Higher Hurdle to Jump?
The Commission’s approach to innovation in its competition assessment of mergers was arguably the hot topic in merger control in 2017. Most notably, in clearing the merger of Dow and DuPont in March 2017, the Commission required the divestment of DuPont’s global research and development organisation. This was on the basis that, rather than in relation to the development of specific identifiable products, the merger had the potential to reduce innovation competition for pesticides more generally.
Many commentators and practitioners have argued that such a theory of harm, where the Commission identifies competition concerns based on innovation generally rather than in relation to specific “pipeline” products, is new. Whether or not this represents a new approach to innovation by the Commission in merger control, which the Commission disputes, we have seen innovation issues being raised in merger reviews throughout 2017 and we expect this trend to continue in 2018. Deals that may receive particular scrutiny under this enhanced innovation theory include acquisitions of R&D-based businesses, mergers that involve markets where innovation is a key parameter of competition and mergers that may result in significant layoffs in R&D staff post-deal. Awareness of this emerging issue in deal planning will be key to ensure that innovation is assessed and addressed early on.
Heightened Profile of National Security Concerns in M&A
Since US President Trump took office in January 2017, the risk of national security posing an obstacle to government approval of mergers in the US, particularly those involving proposed acquisitions by Chinese companies of targets with US operations, has been on the increase. Indeed, a number of deals have either been blocked or faced strong opposition by the Committee on Foreign Investment in the United States (“CFIUS”) over the past 12 months.
Europe is now also moving in this direction and will continue to do so in 2018. In September 2017, the Commission released a proposal for a new framework for the review of foreign direct investment in the EU. Although, if implemented, the new framework will be a step towards a CFIUS-type regime for Europe, it is still a long way off the US position. Rather than giving the Commission the power to block all deals with serious security issues, the proposal simply allows Member States to implement mechanisms to review foreign investments on the basis of public order or national security. If Member States elect to implement such a regime, the proposal provides a framework for doing so, and also allows the Commission to issue an opinion to Member States on certain transactions, which must be taken into account.
At the same time as the EU proposal, the UK Government is considering strengthening the UK’s powers to review transactions from a national security perspective (read our thoughts on the major reform to UK merger control). In the short-term, this is likely to lead to a lowering of the jurisdictional thresholds for deals in the military and dual use sector and deals relating to multi-purpose competing hardware and quantum technology. The longer-term options under consideration include a three month “call-in” power allowing the Government to scrutinise a broader range of transactions for national security concerns as well as mandatory notifications for sectors of the economy deemed “critical” for national security.
We expect to see both the EU and UK proposals developing throughout 2018. Whether the proposals are implemented largely as is, or see significant changes, remains to be seen, but it is clear that national security in the context of mergers will be a new enforcement trend to watch closely over the next 12 months. Tech and Start-Ups – Increased Scrutiny on the Horizon
In 2017, we participated in consultations relating to the revision of merger control thresholds at EU-level and in Germany with respect to the acquisition of “low turnover/high value” targets. In particular, the Commission launched a consultation on whether its current turnover-based thresholds were sufficient to catch all relevant mergers and if a “deal value” based threshold may also be required to catch deals that, although the target does not have significant turnover, the acquisition of the target has a significant market impact. The two industries of focus pointed to were the technology industry (for example, in the case of technology start-ups that are not yet generating significant revenue) and the pharma industry, where companies may carry out research and development of new drugs.
While the consultation closed in January 2017, the Commission has not yet released the outcome of the consultation and it is not yet clear whether the Commission will press ahead with new thresholds. In the meantime, however, similar deal value based thresholds have been introduced and are now in force in Germany (following the controversial acquisition of the German robotics company Kuka by a Chinese company) and in Austria. The new German thresholds are likely the inspiration for the EU’s interest in consulting on the issue at EU-level.
The Brexit Effect on EU Merger Control
As the March 2019 deadline for the UK’s exit from the European Union draws closer, we can expect to gain more clarity as to the future relationship between UK and EU merger control during 2018. Currently, if a merger is notifiable at EU level, then the UK’s CMA does not have primary jurisdiction to review that merger. However, post-Brexit, the UK merger control regime will sit outside the EU regime, and there is the potential that many significant mergers will need to be reviewed by both the Commission and the CMA.
A number of questions remain as to how UK merger control will operate after March 2019. While these may not be fully answered by then, these questions include whether notification will be mandatory or (as currently) voluntary, what the thresholds for the CMA to have jurisdiction over a merger will be and how the CMA will approach and prioritise cases. Until these issues are resolved, we would expect to see a transitional regime in place. There will also be numerous other transition issues that will need to be ironed out particularly on jurisdiction through clarification and guidance from both the Commission and the CMA. We will be working with both agencies on these questions and issues as Brexit draws closer during 2018.