Table of Contents
- EU Foreign Subsidies Regulation: 100 Days in and the First Detailed Investigation
- UK CMA Opens First Disparagement Case
- European Commission Updates Market Definition Notice After 27 Years
- UK Court Supports CMA on Director Disqualification Order
EU Foreign Subsidies Regulation: 100 Days in and the First Detailed Investigation
The obligation to notify certain large M&A transactions to the European Commission for clearance under the EU Foreign Subsidies Regulation (FSR) has applied since 12 October 2023. There is a similar notification obligation for certain large public procurements.
In both cases, the jurisdictional test for a notification depends in part on the presence of a certain level of financial contributions having been provided to relevant parties by a foreign government or related body (foreign financial contributions or FFCs). In cases where the Commission has concerns that foreign subsidies granted to the parties to a notified transaction or procurement may distort the EU internal market, it will open an in-depth investigation. FFCs and foreign subsidies are different concepts, with the latter a narrower concept that includes only FFCs that confer a benefit to their recipients and are limited to a particular business.
The first such in-depth investigation, into a public procurement procedure, was launched on 16 February 2024. The investigation follows a notification submitted by CRRC Qingdao Sifang Locomotive Co., Ltd. (CRRC Loco), a subsidiary of Chinese state-owned train manufacturer CRRC Corporation. It concerns a procedure run by Bulgaria’s Ministry of Transport and Communications relating to the provision of several electric “push-pull” trains, as well as related maintenance and staff training services.
The Commission decided in its preliminary review that FFCs to CRRC Loco may constitute a subsidy that directly or indirectly confers a selective benefit to the company and allowed it to submit an unduly advantageous tender. Such an offer could cause other companies participating in the procedure to potentially lose sales opportunities. This will be considered further during the in-depth investigation.
This case is a textbook example of the intent behind the FSR, given that it allows for a comparison of tenders submitted by a foreign (non-EU) bidder against EU bidders. It’s also interesting that the first case concerns a Chinese company. The Commission has stated on several occasions that the FSR does not target Chinese companies investing in the EU and participating in tenders, but nevertheless suspicions remain that this is the case.
Separately, marking 100 days after the start of application of the notification obligation, on 22 February 2024, the Commission published a briefing paper which describes general trends observed in the first notified cases concerning M&A transactions.
In the paper, the Commission identified as a “notable trend” that around one-third of cases involve an investment fund as a notifying party. It also comments that the most common types of FFCs assessed related to the sources of financing of the transactions (capital injections, equity contributions and loans), as well as state guarantees, direct grants for specific projects, and tax benefits for R&D expenses and investment projects.
The paper further emphasizes the important point that for the purpose of determining whether the notification thresholds are met, the presence of FFCs, and not foreign subsidies, is relevant. Therefore, the fact that some or even all of the relevant FFCs have been provided on market terms and thus do not confer a benefit, or that they are generally available and are thus not limited in nature, is irrelevant to determine whether a transaction needs to be notified. For investment funds, this extends to FFCs provided to the relevant investment company (or fund manager) and all the funds it manages, as well as all the portfolio companies controlled by those funds. That wide scope partly explains the number of investment fund transactions that have been caught by the notification obligation in the first 100 days.
UK CMA Opens First Disparagement Case
On 31 January 2024, the UK Competition and Markets Authority (CMA) announced an investigation into alleged disparagement by a pharmaceutical company of a rival’s product. Other competition law regulators have investigated similar conduct under abuse of dominance rules, but this is the first such investigation by the CMA.
The case concerns Vifor Pharma, a global pharmaceutical company, which manufactures Ferinject, a leading IV iron deficiency treatment in the UK. The CMA will investigate whether Vifor has restricted competition in breach of UK competition law by making misleading claims to healthcare professionals about the safety and effectiveness of Monofer, a rival high-dose IV iron deficiency treatment supplied by Pharmacosmos.
The European Commission also has an ongoing investigation into whether uptake of competing IV iron treatments may have been hindered by Vifor’s conduct in the European Economic Area. The two regulators will liaise with each other in relation to their respective investigations.
The case shows once again the very wide scope of activities by a dominant company that can potentially be caught by the competition law rules in the EU, UK and elsewhere, which often ban abuse of dominance. This can be used by competitors and other third parties to their benefit by making complaints or by bringing private claims in court.
European Commission Updates Market Definition Notice After 27 Years
On 8 February 2024, the European Commission adopted a new notice on market definition. This cornerstone document in competition law analysis is the first revision since 1997, a time when dial-up Internet access was still normal and Google had not been founded.
The principles of the 1997 notice still stand: Markets have both a product and a geographic dimension, and market definition is facts-based, case-specific, and is only a first step in the competitive assessment of mergers and other competition law cases where market power needs to be identified.
The new notice includes changes to reflect developments including:
- The need to define markets for digital services without a monetary price.
- Increasingly interconnected and globalised commerce, reflected in products commonly being sold on global markets or imported from outside of the EU.
- Cases where the relevant products are not yet on the market and competition takes place on innovation.
As under the previous notice, the new version defines product/service markets mainly from the customer’s perspective (demand side). It explains how the Commission commonly considers elements other than price, such as a product’s innovativeness or its quality in different aspects. The new notice also sets out the approach to markets for services that are provided for free and monetized in other ways, for example through advertising or through collection of personal data. It also explains the Commission’s view of markets for products built around an operating system or a platform, forming “digital eco-systems.” The notice also includes new guidance on market definition in R&D-intensive markets.
The notice offers more guidance on how the Commission approaches geographic market definition. It explains in detail which factors the Commission considers when assessing whether a market is global, EEA-wide, national or local. As before, when customers in a given area have access to the same suppliers on similar terms regardless of the customers’ location, the relevant geographic market will correspond to that area. However, the Commission accepts that trends like growing cross border trade and the disappearance of barriers have led to broader geographic markets. It is notable in this regard that the proportion of markets defined as worldwide in EU merger investigations has materially increased over the years.
Helpfully, the notice also explains that the Commission considers competitive pressures that come from outside the geographic market, in particular importers that in practice compete for business in the market.
The new notice is an important text which, as with the previous version, will be a well-thumbed document on the desk of anyone advising on competition law.
UK Court Supports CMA on Director Disqualification Order
The UK CMA’s main practical sanction against individuals involved in activity in breach of UK competition law is director disqualification. Under this rule, the CMA has the power 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 they are a director has breached competition law and they have by their conduct shown themselves unfit to hold office. The act also allows the CMA to accept a disqualification undertaking from a director instead of bringing proceedings, which has the same legal effect as a disqualification order.
The CMA has in recent years been very successful in obtaining director disqualification. It has issued 29 director disqualifications since May 2019, prior to which it had only issued nine. This tool is used in preference to prosecuting the criminal “cartel offence,” which applies in a more limited range of situations and is difficult to prove and therefore seems largely to have been abandoned by the CMA.
The most recent director disqualifications have arisen following an investigation into a cartel in the supply of construction services, in which 10 suppliers of demolition and asbestos services were found to have breached competition law by taking part in bid rigging, in the form of cover bidding, and fined for those activities.
In parallel, the CMA secured the disqualification of four directors of firms involved in the unlawful conduct. One of those directors, who was personally involved in two breaches of competition law, gave an undertaking whereby he agreed to a seven-year disqualification as a result of his admitted role in the illegal behaviour.
The activities of this director included instructing staff of the company to collect “compensation payments” with a total value of £700,000 (excluding VAT) paid to the company by two of its competitors. This was done by issuing invoices relating to “fictional services and goods” that were not, in fact, ever supplied by the company. He admitted that, as a shareholder, he stood to benefit personally from these payments, and that he understood at the time that his conduct was wrong.
In July 2023, this individual applied to the UK High Court for permission to continue to act as a director and to be involved in the management of the company on the basis that the companies needed his continued services as a director.
The High Court refused this application, agreeing with the CMA that, in view of the circumstances — including the nature and seriousness of the director’s behaviour — and the importance of director disqualification in the CMA’s enforcement toolkit, granting an exemption from this disqualification would not be appropriate. The court concluded that granting leave in this case “would be an overly great intrusion into the public benefit of this disqualification.”
The CMA welcomed this judgment, commenting that “director disqualifications are a key tool for protecting the public — and making sure those at the top of the chain are held responsible if their companies breach competition law … Personal consequences, such as director disqualification, are a powerful deterrent — something which the Court’s decision clearly recognises.” It can be expected that the CMA will continue to make use of director disqualification as its key sanction against individuals involved in anti-competitive activity in the UK.
Additional EU and UK competition law news coverage can be found in McGuireWoods’ news section.
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