Table of Contents
- UK CMA Blocks, EU Approves Microsoft’s Proposed Acquisition of Activision Blizzard
- EU Court Adviser Provides Guidance on Gun-Jumping and Pre-closing Covenants
- EU General Court Rules for First Time on Validity of Request for Information Using Search Terms
- More Director Disqualifications in the UK for Breaches of Competition Law
UK CMA Blocks, EU Approves Microsoft’s Proposed Acquisition of Activision Blizzard
Microsoft’s high-profile proposed acquisition of Activision Blizzard has been undergoing merger control review in numerous jurisdictions around the world. These include the UK (by the Competition and Markets Authority or CMA), EU (European Commission) and the United States (Federal Trade Commission or FTC). Most of the other jurisdictions have already approved the deal, in some cases subject to a licensing remedy.
In one of the most controversial decisions it has ever taken, on 26 April 2023, the CMA became the first and so far only regulator to block the transaction, ruling that Microsoft’s proposed licensing remedy was not adequate to deal with the substantive concerns raised. That decision was followed shortly by the European Commission’s approval of the transaction on the basis of the same remedy. The FTC process continues with its challenge before the internal FTC administrative law judge, scheduled for August 2023.
In its decision, the CMA found that Microsoft accounts for some 60-70% of global cloud gaming services and has other important strengths in cloud gaming. The CMA further took the view that Microsoft would find it commercially beneficial to make Activision’s video games exclusive to its own cloud gaming service, which would strengthen Microsoft in cloud gaming and, as a result, substantially reduce competition in this developing market, to the detriment of current and future cloud gaming users.
To deal with this concern, Microsoft offered a licensing remedy, which set out requirements governing, following closing of the transaction, what games must be offered by Microsoft to what competing platforms and on what conditions over a 10-year period. In parallel, Microsoft had entered into licensing agreements with third-party competitors to similar effect, which would take effect on closing of the deal.
The CMA termed this offer a “behavioural” remedy and, consistent with its guidance and long-standing practice, therefore started from the basis that it was unlikely to be acceptable. This was confirmed, the CMA found, upon analysis of the detail of the remedy. Therefore, the CMA blocked the proposed transaction.
The European Commission found similar substantive concerns. However, facing effectively the same remedy offer from Microsoft, the Commission took the view that the remedy would promote and accelerate the development of the cloud gaming market — it would kick-start it. The remedy was therefore pro-competitive and acceptable, and the transaction was cleared on the basis that the remedy offered to the Commission would be implemented following closing.
The CMA’s decision and dramatic divergence from the Commission’s position — which even drove the CMA to comment publicly and somewhat defensively about the Commission’s decision on the day it was taken — will be tested on appeal in the UK Competition Appeal Tribunal (CAT). The appeal was filed on 24 May 2023. That will be an uphill battle for the parties because the CAT only reviews merger decisions on judicial review grounds. The parties will need to show a clear and unequivocal error on the part of the CMA for the CAT to set aside the CMA’s decision in whole or in part and therefore require the CMA to reconsider it.
The CAT judgment is likely to be handed down toward the end of 2023. That judgment will also be important for parties in other transactions that are considering remedies before the CMA. Meanwhile, the CMA remains an outlier from most other regulators on the issue of the acceptability of behavioural remedies to merger control cases where substantive concerns are identified.
EU Court Adviser Provides Guidance on Gun-Jumping and Pre-closing Covenants
On 27 April 2023, an advocate general (AG) at the EU’s highest court (Court of Justice or ECJ) provided his advice in a case concerning gun-jumping issues in a merger. While not obliged to do so, the ECJ usually follows the advice of the AG on a case.
The case concerned the acquisition of PT Portugal, a telecoms and multimedia operator, by Altice Europe, a cable and telecoms company. The European Commission approved the transaction under the EU merger control rules in April 2015. The Commission subsequently launched an investigation into Altice for implementing the transaction before its approval (gun-jumping) and imposed a fine in April 2018. The gun-jumping arose because clauses in the share purchase agreement (SPA) gave rights to Altice that allowed it to exercise control (“decisive influence”) over PT Portugal prior to closing. Those clauses had been implemented in some cases, and commercially sensitive information concerning PT Portugal had been provided to Altice as from signature of the SPA.
The pre-closing covenants gave Altice a right to veto the appointment of senior management of PT Portugal, its pricing policy and commercial terms agreed with clients, as well as a veto over it entering into, terminating or amending a wide range of contracts. Altice had used these rights prior to Commission approval (and closing) to, for example, give PT Portugal instructions on how to carry out an advertising campaign and provide advice on whether to include a TV channel on dogs in its product offering.
The Commission’s decision was appealed to the EU’s second high court (General Court), which upheld the gun-jumping aspects in September 2021. Altice further appealed to the ECJ.
The AG has advised that the ECJ should uphold the General Court judgment on the gun-jumping aspects. The provisions of an SPA can indeed give rise to gun-jumping, said the AG. The short duration of the operation of the covenants (less than five months following signing and before Commission approval) was not relevant, and the information exchanges (made outside a clean team arrangement) were inherent to the operation of the covenants.
This case is a good reminder that provisions of an SPA should not grant inappropriate rights over decisions of the target following signature and prior to merger clearance and closing. There should also be suitable safeguards for information exchange, such as a clean team on the purchaser side, particularly where the parties are competitors.
EU General Court Rules for First Time on Validity of Request for Information Using Search Terms
On 24 May 2023, the EU General Court held that the European Commission had not exceeded its powers during a competition law investigation when requiring Meta to provide all documents prepared or received by three of its executives within a certain period which contained one or more specific search terms. The court also held that the Commission had acted properly when establishing a virtual data room to review the documents provided before placing them on the investigation file.
This is the first time the EU courts have considered either of these issues, and in particular, the judgment provides useful confirmation of the position concerning search terms.
Meta argued that applying the search terms specified in the Commission’s request for information (RFI) would inevitably lead to the capture of a significant number of documents with no relevance to the investigation, which would be contrary to the general principle of “necessity” that applies in these cases. The court, reviewing only the search terms Meta specifically complained about, held that they were necessary for the investigation as the Commission could reasonably take the view that they were relevant to helping it determine whether a competition law infringement had taken place. The court also held that the RFI itself did not infringe EU privacy rules.
The use of the virtual data room also did not give rise to privacy concerns. That method was put in place to ensure that documents produced by Meta which prima facie were not linked with its business activities and which contained sensitive personal data were analysed separately for relevance (which Meta could challenge). The court considered this a reasonable and proportionate approach. It will likely lead to other companies requesting the same approach where questions from the Commission may lead to documents containing private information.
More Director Disqualifications in the UK for Breaches of Competition Law
The UK CMA has the power under the Company Directors Disqualification Act 1986 (CDDA) to apply to the court to disqualify a director from holding company directorships, or performing certain roles in relation to a company for a specified period, if a company of which he or she is a director has breached competition law. The CDDA also allows the CMA to accept a disqualification undertaking from a director, with the same legal effect as an order, instead of bringing proceedings.
In March 2023, the CMA fined 10 construction firms nearly £60 million for breaking competition law by engaging in a form of collusive tendering known as “cover bidding.” Typically, cover bidding involves companies, when bidding in a competitive tender for a contract, agreeing with each other that one or more of them will place a bid that is deliberately intended to lose the contract, thereby reducing the intensity of competition. In addition, the CMA found that five of the firms, on at least one occasion each, were involved in arrangements by which the “losers” of the contracts were set to be compensated by the winner. Some firms produced false invoices to hide this part of the illegal behaviour.
Following that decision, the CMA secured the disqualification of four directors — two current and two former directors of companies involved in the cartel. The most recent, announced on 25 May 2023, is the disqualification of Nicholas Brown for seven years. Brown admitted being personally involved in two breaches of competition law affecting contracts for demolition services with a total value of over £30 million, including one relating to the Shell Building on London’s Southbank, and the other relating to the Lots Road Power Station in London.
Two competitors made “compensation payments” with an aggregate value of £700,000 (excluding VAT) to his company in return for its participation in the anti-competitive agreements. Brown admitted taking a “central role” in this conduct, including by instructing staff to collect the payments by issuing invoices relating to “fictional services and goods” that were not in fact supplied by the company. Brown further acknowledged that, as a shareholder in the company, he stood to benefit personally from these payments, and that he understood at the time that his conduct was wrong.
In practice, director disqualification is the most commonly used power against individuals who have been involved in cartel behaviour in the UK. The criminal “cartel offence,” which can give rise to imprisonment and/or a fine for an individual, is difficult for the CMA to prove and rarely used. The total number of director disqualifications secured for illegal cartel behaviour since December 2016, when the CMA began actively using this power, is now 29.
This high-profile cartel case and its personal implications for four of the individuals involved shows the importance of an ongoing, suitably targeted, competition compliance programme including training in the UK (as elsewhere).
Additional EU and UK competition law news coverage can be found in McGuireWoods’ news section.