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UK Foreign Direct Investment Control Dramatically Strengthened
On 4 January 2022, the UK National Security and Investment Act 2021 (NSI Act) came fully into effect. The NSI Act introduces a dramatic strengthening of control over foreign direct investment (FDI) affecting the UK.
The NSI Act subjects all acquisitions of shares in targets in 17 specified sectors to mandatory notification and clearance prior to closing, with no thresholds and regardless of the nationality of the purchaser. This will apply in all cases where the target entity/group carries on activities within the UK (including to foreign acquisitions without a UK target company) and includes minority acquisitions of 25 percent and more, as well as debt for equity swaps and internal restructurings.
There is also a general “call in” power for the UK government, which applies where the mandatory notification regime is not triggered. Transactions involving areas outside the 17 sectors or relating to the acquisition of assets rather than shares or a shareholding below 25 percent can all be called in. It is enough that the target is involved in the supply of goods or services into the UK, and again the nationalitiy of the purchaser is not relevant. The call in right applies for a period of five years after completion, although that period is reduced to six months once the Secretary of State is made aware of the transaction (normally through a voluntary notification).
Foreign state affiliation will be an important consideration for reviews, so parties will want to carry out careful due diligence on the controlling structure and ultimate controlling entity of purchasers, including funds. Although the NSI Act is not aimed at China, a company’s general associations with that country (e.g., research and development cooperation with a Chinese entity, memoranda of understanding with the Chinese government, and even the importance of China sales in a company’s revenue stream since China could then influence its activities) will likely be considered closely within the NSI Act reviews. Similarly, if in a market there are particular dependencies on China or another country, again this will likely be looked at very closely to ensure that, if necessary, an independent source remains available.
From being applicable only in rare cases, UK FDI control is now a regime that needs to be considered carefully in a wide range of transactions and acquisitions wherever these may take place.
European Commission Imposes Rare Merger Block
For only the 10th time in the past 10 years, on 13 January 2022, the European Commission announced the prohibition of a proposed merger.
The case concerned the proposed acquisition of Daewoo Shipbuilding & Marine Engineering CO. Ltd by Hyundai Heavy Industries Holdings. The companies are both South Korean shipbuilders and global leaders in the construction of large liquefied natural gas (LNG) carriers, and two of the three largest players in this concentrated market. These highly sophisticated vessels can carry large quantities of LNG —145,000m3 and above — at a temperature of minus 162 degrees Celsius.
The Commission found that the combined entity would have been by far the largest player in the world, with a share of least 60 percent (with both parties’ shares having increased in the past 10 years). In addition, there is only one other large competitor in the market, and it does not have sufficient capacity to act as a credible constraint. The capacity of the remaining competitors would not have covered the projected market demand. Unsurprisingly, given the types of vessels involved, the Commission further found that entering the market and successfully operating in it is very difficult, so significant new entry is not expected.
That list of issues (a consistent, high combined share with, at the same time, capacity limitations for competitors and high barriers to entry) is a recipe for merger control problems. The Commission’s decision is unsurprising when set against those findings. Indeed, absent remedies to change the transaction (which the parties did not offer), it is difficult to see how the parties could have expected the transaction to be approved.
Meta Faces Massive Class Claim in the UK
The list of UK collective actions (class claims) grew longer on 13 January 2022, with the announcement of a claim against Meta (formerly Facebook).
The allegation, brought on behalf of UK Facebook users, is that the company abused its dominant market position in social networks by imposing unfair trading terms and prices on users. Specifically, it claims Facebook only permitted access to its network in exchange for control of its users’ extensive personal data, no monetary compensation was provided, and the price extracted was allegedly unfairly high given the commercial value of the user data collected.
The claim was brought under the UK Consumer Rights Act 2015, so all users of Facebook between at least 2015 and 2019 now living in the UK will automatically become part of the group of claimants unless they explicitly opt out. The total claim is for a minimum of £2.3 billion, plus interest.
The case has interesting parallels to a long-running case in Germany, which started with the German competition authority (Federal Cartel Office or FCO) prohibiting Facebook in 2019 from combining user data from different sources. The FCO held that that activity was an abuse of Facebook’s dominant position in the German market for social networks, but it led to a number of appeals.
European Commission’s Decision Fining Intel Overturned
In the latest stage of a long saga, on 26 January 2022, the EU General Court (the EU’s second-highest court) partly annulled the European Commission’s 2009 decision fining Intel €1.06 billion for abuse of dominance on the worldwide market for x86 processors.
The fine had been imposed for the implementation of a strategy intended to exclude competitors from the market. According to the Commission, that abuse was characterised by two types of commercial conduct Intel engaged in vis-a-vis its trading partners; namely, naked restrictions on using competing products, and rebates and payments conditional on exclusivity of supply by Intel. Those rebates and payments were found to have ensured the loyalty of certain customers and thereby significantly diminished competitors’ ability to compete on the merits of their own x86 processors.
Intel appealed, and in 2014, the General Court dismissed that appeal. On further appeal by Intel, in 2017 the European Court of Justice (the EU’s highest court) set aside that General Court judgment and referred the case back to the General Court for further consideration.
This time around, the General Court was only required to consider the Commission’s analysis of the conditional rebates and payments. The General Court commented that there was no issue concerning the naked restrictions and it had correctly held in its initial judgment (agreeing with the Commission) that those were unlawful.
In relation to the rebates and payments (which were conditional on exclusivity), the General Court commented that, when put in place by a company in a dominant position, these may be characterised as a restriction of competition since they may be assumed to have restrictive effects on competition. However, that is a mere presumption, and if the company challenges this by arguing on the basis of evidence that its conduct was not capable of restricting competition and, in particular, was not capable of producing the foreclosure effects alleged against it, the actual foreclosure capacity of the scheme of rebates must be analysed.
The particular issue was the Commission’s use of an as-efficient-competitor (AEC) test to measure the capability of the rebates to foreclose a competitor that is as efficient as Intel, albeit not dominant. The Court of Justice concluded that the AEC test had played an important role in the Commission’s assessment of whether the scheme at issue was capable of having foreclosure effects on competitors. The General Court in its first judgment had not properly considered Intel’s arguments against the validity of the test.
The General Court concluded this time that the Commission’s analysis using the AEC test had indeed been incomplete and did not support a finding that the rebates at issue were capable of having, or were likely to have, anti-competitive effects. That part of the Commission decision was therefore annulled.
Although the naked restrictions were not at issue, the General Court considered that it was not in a position to identify the amount of the fine that related solely to those restrictions. Accordingly, it also had to annul the fine in its entirety.
This is an important judgment in the area of exclusivity and rebate practices by dominant firms, but it’s notable that exclusivity or quasi-exclusivity requirements used by such companies remain highly problematic and will often be open to challenge.
Additional European competition law news coverage can be found in our news section.
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