2021 - Tougher merger control is on the horizon

In this context, this article aims to gather the latest developments in the EU and other countries regarding merger control rules. In addition, it analyses some of the major challenges to be faced in the merger control enforcement, such as the treatment of “killer acquisitions” as well as greater clarity on “gun jumping” practices and the new situations created by the Covid-19 crisis or Brexit.

Latest developments

Currently, the European Commission is carrying out public consultations and reviewing several competition rules.

In relation to merger control, a public consultation on the Market Definition Notice has recently been held in response to calls for the Commission's application of competition law to take better account of global competition and the impact of digitisation. This consultation was completed this year in October and the results of the assessment are expected to be published throughout 2021 and legislative changes adopted in 2022.

In addition, the Commission’s long-awaited report of the results of the consultation on the procedural and jurisdictional aspects of EU merger control that took place in 2016 is expected to be published by the end of the year. The Commission's objective was to increase the jurisdictional scope of the Merger Regulation to cover high value transactions not exceeding the turnover thresholds. For now, some Member States (e.g., Germany and Austria) have introduced size of transaction tests, whether the Commission follows this approach remains to be seen. Moreover, several Member States have already implemented rules to simplify their merger filing and review procedures, to readjust their thresholds with the aim of exempting operations that do not present a risk for competition from the merger control analysis or to reinforce the work of the national competition authorities (“NCAs”). Among others, the following changes applied in 2019 can be highlighted:

• France has simplified the notification procedure before the French Competition Authority and increased the notification threshold in vertical markets from 25% to 30%.
• Belgium has provided additional time for the Belgian Competition Authority to analyse mergers and for the parties to submit remedies within the investigation phase and to modify the structure of the transaction until the end of the oral hearing.
• Finland has shortened the merger review deadlines during the investigation. Phase 1 has been reduced from 1 month to 23 working days and Phase 2 from 3 months to 69 working days, but it may be extended by the Finnish Market Court for a maximum of 46 working days. 

Other EU countries have not yet adopted any changes in this matter, but they are preparing to do so in the near future:

• Italy, in July 2019, published guidelines on the treatment of big data aiming to control killer acquisitions more closely. The Italian Competition Authority ("AGCM") proposes to amend the competition rules to review these transactions with the “significant impediment to effective competition" test ("SIEC"), which would make it possible to prohibit a merger if it is deemed to cause anticompetitive harm. 
• Ireland, in October 2019, published draft guidelines to simplify the procedure for notifying mergers.
• Spain plans to introduce some amendments to its thresholds and merger procedure when transposing the ECN+ Directive.

And it is not only in Europe where changes are being implemented to adapt to new market situations. For instance, in the United States, the Federal Trade Commission ("FTC") annually reviews notification thresholds based on changes in the Gross National Product; and in Japan, the Merger Guidelines and Merger Policies have been revised to improve the application of competition law in digital markets.

Retrospective control review and potential reforms

In addition to the public consultations launched by the European Commission regarding merger control policy, other studies have been carried out in recent years on how competition rules should be updated to better reach the digital age.

In particular, it is noteworthy the report requested by the CMA to the consulting firm Lear for the evaluation of several merger decisions in the digital sector (e.g. Facebook/Instagram, Google/Waze, Priceline/Kayak and Amazon/The Book Depository. These consisted of transactions that did not meet the turnover threshold of the EU Merger Regulation but did meet the alternative share of supply test threshold provided in the Enterprise Act 2002.

The report’s final conclusions were that the CMA should take into account the business model and monetization strategies of companies in the digital sector when analysing transactions. Although this report is addressed to the CMA, the implications and recommendations contained therein may be applied by other NCAs in the increasingly common digital mergers.

In addition, the UK’s digital taskforce has proposed a new strengthened merger control regime governing firms designated as having “strategic market status”, this would include mandatory reporting of all transactions as well as mandatory pre-merger notifications of transactions which satisfy the relevant thresholds which would include a new size of transaction threshold.

Also, concerning the convenience of merger control rules in the digital era, special mention should be made regarding Furman and Crémer reports. The former points out that the assessment of digital mergers needs to be reset and calls on the CMA to take stronger and more frequent action against mergers that are potentially harmful to consumers by reducing future levels of innovation and competition. The Crémer report, while acknowledging that the EUMR does not require an update, defends that the functioning of the referral system between the European Commission and the NCAs should be monitored more closely, as well as the new size of transaction tests implemented in Germany and Austria. It also recommends the adoption of a new theory of damage to capture potential adverse effects on digital mergers.

Killer acquisitions 

The control of the so-called “killer acquisitions” is a concern for Governments and regulators across the globe. Facebook’s acquisitions of Instagram and WhatsApp are frequently cited as defining transactions and the US FTC and 48 states led by New York have just filed suits against Facebook which will test this. It remains to be seen whether the US courts will allow these cases to be re-opened and intervention could have a chilling effect on innovation and investment – what is certain is that this will likely take years to play out and Facebook will rigorously defend its position. Whilst the calls for break-up of big tech continue, rather than re-opening cleared transactions, it will be important for regulators to ensure they review future transactions with appropriate rigour and the Google/Fitbit decision expected in January promises to provide some clarity.  

This practice consists of a company acquiring a nascent competitor with the aim of curbing its innovation projects and, in this way, preventing the appearance of future competitors. This may happen in any sector, but they are more common where start-ups with great potential emerge, such as in the pharmaceutical, biotechnological, chemical, or technological sectors.

These new companies usually have a low turnover in their first stages of evolution, since their business models, e.g. in the digital sector begin by creating a large user base, collecting and analysing large amounts of data or in the pharmaceutical/biotechnological sector by conducting research before starting to make a profit from the trading of their products or services. For this reason, in many occasions the acquisition of this type of companies does not exceed the turnover thresholds and escapes the control of the competition authorities and hence the increasing call for size of transaction thresholds.

There are studies that estimate that in the pharmaceutical sector about 6% of the merger operations related to drug projects in development are killer acquisitions. Regarding the most innovative sectors, the large technology companies (i.e. Google, Microsoft, Apple, Amazon and Facebook) have made nearly 400 acquisitions worldwide in the last 10 years, without the vast majority being reviewed by the European Commission or the NCAs.

However, the potential anticompetitive effect of these practices has led some competition authorities to take a strict position regarding this matter. For instance, the transaction between Illumina and Pacific Biosciences, active in the biotechnology sector, caused both the FTC and the Competition Market Authority ("CMA") to oppose the proposed merger because it would considerably reduce competition in the next-generation sequencing (“NGS”) market. Illumina had approx. 80% of the NSG market share worldwide (90% in the UK), whereas Pacific Biosciences had 2-3%. The CMA concluded that companies saw each other as a potential threat and that competition would increase in the future due to the advances and growth of Pacific Biosciences.

The referral system

Transactions such as Facebook/WhatsApp were only analysed by the European Commission due to the referral system of Article 4(5) of the Mergers Regulation, as it was referred to the Commission by three Member States. WhatsApp, at the time of the transaction, already had between 50 and 150 million users in the EEA, but only a small turnover. The same happened with the merger Apple/Shazam, which was analysed by the European Commission after being referred by several Member States.

Despite the debate on adapting the EU thresholds to cover these situations, it has also been argued that the referral system provides a high degree of flexibility that would make it unnecessary to change the current thresholds.

However, Brexit makes this statement more questionable since the UK was frequently one of the jurisdictions capable of capturing transactions that could raise concerns irrespective of the turnovers involved (given the application of the UK’s share of supply test).

Gun jumping

Gun jumping practices present another growing problem in merger control enforcement. If a company carries out an activity that contributes to the change of control of another company without waiting for clearance, this will result in gun jumping.

The European Commission has not yet imposed many sanctions as a consequence of this practice: In 2019, Canon was fined with €28 million for implementing its acquisition of Toshiba Medical Systems Corporation prior to the notification and approval by the Commission. In 2018, the Dutch telecommunications company Altice in the acquisition of PT Portugal was sanctioned with a €125 million fine, and in 2014, the Norwegian Marine Harvest ASA in the acquisition of its rival Morpol ASA was fined with €20 million, both for carrying out the transactions without having received prior authorisation. 

On the other hand, in some Member States this practice has been sanctioned on numerous occasions. In Spain, for example, 9 sanctions have been imposed for gun jumping in the last 8 years and an investigation is currently ongoing regarding a merger in the funeral services sector. Furthermore, other NCAs have recently imposed fines for gun jumping in the energy sector: Last September the AGCM has fined three companies active in this market with over €150,000, whereas the following month the Polish Competition Authority (“UOKiK”) sanctioned Gazprom with the biggest fine ever imposed by a NCA for gun jumping which amounted to approx. €6.5 billion (other five energy companies were also sanctioned with a total of €65.4 million). 

In addition, the Portuguese Competition Authority (“ADC”) seems to monitor this practice closely and last September issued a statement of objection against two real estate investment companies for failure to notify a merger. 

Merger control and Covid-19

The health crisis created by Covid-19 has undoubtedly brough new challenges for merger control enforcement.

During the first months since the start of the pandemic, the Commission requested to notify transactions only for “very compelling reasons”, as it was very difficult to obtain relevant information due to the global situation. Gradually, more complex notifications were accepted, such as the merger between Fiat-Chrysler and Peugeot, which has led to an in-depth investigation which is expected to be completed by the end of the year.

In addition, Covid-19 has wreaked havoc on the economy, causing many companies to face financial problems and even bankruptcy. In this regard, concerning the possible application of the Commission's guidelines on the assessment of horizontal mergers, the European Commissioner for Competition, Margrethe Vestager, stated that the Covid-19 crisis should not be a shield allowing mergers that harm consumers and slow down the recovery.

Many Governments have also strengthened their foreign direct investment clearance processes as a result of the pandemic allowing for greater scrutiny of transactions for national security reasons. These measures together with the application of the EU’s FDI screening regulation from October 2020 will result in increased scrutiny of transactions. The UK has also introduced a new national security bill which will introduce mandatory review of transactions for certain transactions for the first time later in 2021. 

Brexit

The UK's withdrawal from the EU will also result in increased merger control scrutiny with the EUMR one-stop shop no longer being applicable and the potential for parallel merger control reviews (where transactions meets national thresholds). This might lead to divergences between the authorities. 

In conclusion, there are significant challenges that merger control rules will have to face in the coming years. As we look to 2021, we can expect to see greater clarity on the approach to killer acquisitions and potential reforms to merger control as well as tougher enforcement.

For more information please contact Patricia Liñán and Candela Sotés