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From Relative Clarity to Fog: EU Merger Control Now Less Certain
Determining necessary merger control filings in the EU (and EEA) has until now been relatively easy in most cases. Large deals go to Brussels for review by the European Commission under the EU Merger Regulation (EUMR), while smaller deals may need to be cleared in one or more of the individual EU member states.
A recent policy change by the European Commission has made the analysis much less certain. Any acquisition, however small and even if it does not meet any of the jurisdictional thresholds at EU member state level, can now be the subject of a “referral up” to the Commission for review and approval under the EUMR. This includes cases where the target has little or no turnover at the moment of the transaction.
The change, explained in a 26 March 2021 Commission communication, applies to acquisitions where, “based on a preliminary analysis, there is a real risk that the transaction may have a significant adverse impact on competition [in the EU].” This formulation potentially has a very wide scope, but as explained in that document, is of particular relevance in the digital economy and in pharmaceuticals and other sectors where innovation is an important parameter of competition.
A range of situations can be caught, including transactions which impact competitively valuable assets or where the target provides products or services that are key inputs or components for other industries. An apparent overpayment is also a red flag; the Commission comments that it “may also take into account whether the value of the consideration received by the seller is particularly high compared to the current turnover of the target.”
This issue is not theoretical. In a hotly contested decision, on 20 April 2021, the Commission accepted requests from Belgium, France, Greece, Iceland, the Netherlands and Norway to assess Illumina’s proposed acquisition of GRAIL under the EUMR. GRAIL is a healthcare company that develops cancer detection tests relying on next-generation sequencing systems. The proposed acquisition did not reach the notification thresholds set out in the EUMR and was not notified in any EU member state for merger control approval. In accepting the requests, the Commission commented that a referral was appropriate because “GRAIL's competitive significance is not reflected in its turnover, as notably evidenced by the USD 7.1 billion dollar deal value.”
Dealmakers need to consider the risk of a referral to the Commission at an early stage and, as relevant, factor it into the timeline and transaction documents. Even completion does not remove the risk; the Commission confirms in its communication that a member state can still request a referral where a transaction has already closed.
UK Adopts New Investment Screening Powers
On 29 April 2021, the UK’s sweeping new investment screening legislation, the National Security and Investment Act 2021, became law. The new law, which will operate in parallel to the UK merger control rules, dramatically increases the scope of the government’s investment review powers and, in many cases, will increase deal risk and uncertainty where there is a UK element.
The new law — which applies to all purchasers, including those based in the UK, and does not include materiality thresholds — provides for compulsory notification and clearance of a wide range of corporate acquisition transactions in designated sensitive sectors. Amongst others, these sectors include defense, transport and energy, quantum computing, robotics, artificial intelligence, and space and satellite technologies. In addition, the government will have the power to “call in” acquisitions that were not notified but which may raise national security concerns. Purchasers can voluntarily notify transactions for clearance in order to gain certainty if they think national security concerns may arise.
A wide range of asset acquisitions can be reviewed, including of land, tangible moveable property (such as plant and machinery) and intellectual property such as trade secrets, databases, source code, algorithms, formulae, designs, plans, drawings, specifications and software.
The law is not yet fully in effect, since secondary legislation is needed to set out the specifics of elements of the regime, including the exact scope of the mandatory notification requirement. The government has been targeting 1 October 2021 for it to be fully operational, but in practice, this date is likely to slip.
Nevertheless, parties to deals which may raise national security concerns can take steps now. In particular, if the government is made aware of a transaction, the period during which it can call it in for review (once the regime is fully in effect) is reduced to six months from five years.
In addition, a suitable condition precedent may be needed in deal documents. This is both for transactions which are likely to be subject to the mandatory notification regime and those which, although outside the mandatory notification regime, could raise issues justifying a national security review (either before or after completion). There are various possible outcomes and routes, so these provisions need to be drafted with a particular transaction in mind.
Procedure Matters: Commission Imposes Large Fine for Misleading Information
The European Commission, like other competition law regulators, takes procedure and, in particular, the provision of accurate information very seriously. Companies need to ensure that adequate effort is put into ensuring that all responses to regulatory questions are full and complete.
On 3 May 2021, the Commission provided an example of what can go wrong, when it fined Sigma-Aldrich €7.5 million for providing incorrect or misleading information during the Commission's investigation under the EU Merger Regulation of Merck's acquisition of Sigma-Aldrich.
On 15 June 2015, the Commission approved the proposed acquisition subject to the divestiture of certain Sigma-Aldrich assets, which would address the competition concerns identified in markets for specific laboratory chemicals. In the context of the divestment process, the Commission was made aware that an innovation project, called iCap, was closely linked to the divested business and specifically developed for products included in the divestment business. However, the project had not been disclosed to the Commission.
Not only was the project not disclosed and discussed in remedy submissions, but information about it was also withheld in replies to specific requests for information. Moreover, the Commission found indications that Sigma-Adrich's supply of incorrect or misleading information was intended to avoid the transfer of the relevant project to the purchaser of the divestment business.
The Comission therefore concluded that statements provided to it were incorrect or misleading and had prevented it from undertaking an informed assessment of the intended scope of the commitments. This was done deliberately or at least negligently and justified a fine.
The 3 May case is the third time the Commission has adopted a decision imposing fines on a company for provision of incorrect or misleading information since the entry into force of the 2004 Merger Regulation. These types of issues are easily avoidable if due care and attention are put to ensuring the accuracy and completneess of any information submitted to a regulator.
European Commission Attacks Apple’s Walled Garden
On 30 April 2021, the European Commission sent a statement of objections (SO) (preliminary statement of case) to Apple alleging that it abused its dominant position for the distribution of music streaming apps through its App Store. This is the latest Commission case against “Big Tech” under EU competition law and follows the UK Competition and Markets Authority’s (CMA) recent decision to open an investigation under UK competition law into alleged anti-competitive behaviour by Apple, which also concerns the App Store.
The UK and EU cases are very similar. In the EU case, the Commission claims in its preliminary finding that Apple has a dominant position in the market for the distribution of music streaming apps through its App Store. This is on the basis that, for app developers, the App Store is the sole gateway to consumers using Apple's smart mobile devices running on Apple's smart mobile operating system iOS.
The Commission then objects to two rules Apple allegedly imposes in its agreements with music-streaming app developers. The first is the mandatory use of Apple's proprietary in-app purchase system for the distribution of paid digital content. Apple charges app developers a 30 percent commission fee on all subscriptions bought through the mandatory IAP. In addition, the Commission says “anti-steering provisions” limit the ability of app developers to inform users of alternative purchasing possibilities outside of apps.
The Commission and the CMA will both consider whether Apple has a dominant position as initially claimed and, if so, whether the rules in question are unfair or anti-competitive. As part of this analysis, the regulators will have to consider the overall benefits to customers from any alleged practices engaged in by Apple, not least the protection of privacy and security for individuals and their devices. Many customers are likely to take the view that a safe and secure App Store is preferable to a situation in which their data, identity, money and device are at risk from unknown and unmonitored developers and apps. Often users prefer Apple’s “walled garden” for good reason.
Additional European competition law news coverage can be found in our news section.
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