Killer acquisitions: Driving uncertainty
An increasing challenge for M&A parties is identifying where their deals will be reviewed in a context where merger control authorities are finding new ways to take jurisdiction over transactions falling below traditional (usually turnover-based) notification thresholds. This complicates both the analysis of where reviews will be needed, as well as drafting of appropriate conditions in deal documents. Early merger control analysis is therefore vital.
This trend is driven by concerns about “killer acquisitions” (large incumbents acquiring innovative start-ups to discontinue their innovative projects – pre-empting future competition) and “reverse killer acquisitions” (where the acquirer absorbs a start-up’s skills to replace its own) – and given start-ups tend to have little turnover so fall below turnover thresholds.
New thresholds, new approaches, Article 22…
To make it easier to conduct a review, some jurisdictions have revised their notification thresholds, while others have changed how they apply existing thresholds. Germany, Austria and South Korea notably introduced transaction value thresholds in recent years, while Italy amended its thresholds in 2022 to enable a review if these are only partially met but there are potential concerns considering possible detrimental effects on small, innovative enterprises (see our briefing on the Italian changes here).
The European Commission has a controversial new approach to Article 22 of the EU Merger Regulation (EUMR), under which it can review concentrations below the EUMR turnover thresholds if the deal can be said to affect trade between Member States and threaten to significantly affect competition in a referring Member State (with no requirement that the national merger control thresholds be met). This is particularly relevant if innovation is important to competition, including deals impacting on the digital economy, pharma, and competitively valuable assets (e.g. raw materials, IPRs, data and infrastructure).
Previously the Commission discouraged Article 22 referrals from Member States if the deal did not qualify for review under their national regime, but is now encouraging such referrals. Illumina/GRAIL is the first test of this new approach, a deal the Commission prohibited in September 2022 after the EU General Court confirmed the Commission’s jurisdiction under Article 22 despite no Member State having jurisdiction under their national regime. Illumina is appealing. To learn more about Illumina/GRAIL and the Commission’s new approach to Article 22, read our briefings here and here, and watch our video here.
Separately, the EU Foreign Subsidies Regulation (FSR) introduces new tools in 2023 for the European Commission to combat distortions of competition on the EU internal market caused by foreign subsidies. Addressing a perceived gap between merger control and FDI regimes, this includes new mandatory notifications for concentrations meeting thresholds based on parties’ EU turnover and financial contributions from non-EU states, as well as enabling the Commission to review below threshold deals. You can read more about the new FSR regime in our briefing here.
What is happening in the UK?
Also controversial is the approach of the UK Competition and Markets Authority (CMA), accused of stretching its “share of supply” test to review several deals with little connection to the UK. Proposed UK reforms include a new jurisdictional threshold targeted at deals raising killer acquisition or vertical concerns, which will make it even easier for CMA to assert jurisdiction.
Uncertainty around CMA jurisdiction is helping to drive a huge increase in use of the UK briefing paper process – whereby parties submit a short paper explaining why their deal does not raise concerns with the aim the CMA will confirm no notification is needed (UK notifications are voluntary, but unnotified transactions can be called-in). We understand the CMA received more than 170 briefing papers in 2021/22, compared to around 80 in 2020/21 and less than 40 in 2017/18.
And North America?
The US position is slightly different to those above – the Department of Justice (DOJ) and Federal Trade Commission (FTC) have always been able to review below threshold deals, even if historic and already cleared under the Hart-Scott-Rodino (HSR) Act, and no limitation period applies. Notably, the FTC is now seeking to unwind Facebook’s acquisitions of Instagram in 2012 and WhatsApp in 2014, despite both deals clearing HSR waiting periods without challenge.
In Canada, an ongoing consultation regarding competition policy and enforcement is anticipated to result in potentially significant changes. The consultation echoes themes similar to other jurisdictions – in particular, broadening application of the merger notification rules, a focus on mergers in the digital economy, considering effects of mergers on labor markets, as well as changes to Canada’s efficiencies defense. To learn more about the reforms in Canada, see our briefing here.
New approaches across Asia
In addition to South Korea’s transaction size test, several other countries in Asia have broadened their regimes in recent years – e.g. Japan introduced a voluntary mechanism for high value transactions with small targets, and has conducted several ex officio reviews into such deals, including imposing remedies in some cases. Meanwhile, changes to China’s merger control regime in 2022 make it easier to require Chinese clearance for transactions that would not otherwise need to be notified due to parties’ low sales, but which may restrict or eliminate competition.
In this context, merger reviews are at high levels in Japan, Korea and Taiwan, while China conducted around 800 reviews in each of the past two years (up 40 per cent on the previous two-year period). In response, China has decentralised merger review (provincial authorities now deal with a third of cases) and plans to increase its thresholds (see our briefing here to learn more), while South Korea is expanding its simplified process.