Changes to European merger notification and control
June 2014 | TALKINGPOINT | MERGERS & ACQUISITIONS
FW moderates a discussion on European merger notification and control between Catriona Hatton, a partner at Baker Botts L.L.P., Davina Garrod, a partner at Bingham McCutcheon LLP, and Ian Giles, a partner at Norton Rose Fulbright LLP.
FW: Could you provide a brief overview of the new EU merger notification and control provisions? What factors have driven the recent changes?
Hatton: The ‘merger simplification package’ of measures was adopted by the European Commission at the end of last year with the aim of reducing the information burden on companies particularly for notification of non-complex mergers. The measures also aim to streamline the pre-notification process. These changes have been driven by concerns that the EU merger review process is overly burdensome on business – for example, when compared with requirements in countries like Germany and the UK. The system has also fallen in for criticism for unduly delaying approvals of non-complex deals through the Commission’s often extended informal review of draft notifications prior to accepting a filing as complete and triggering the initial statutory review period of 25 working days.
Garrod: On January 1 2014 the EC introduced key reforms to EC merger control rules, including widening the scope of deals qualifying for a ‘simplified review’, reducing the extent of information/data to be submitted in all merger notifications, and streamlining the pre-notification process, so that merging parties spend less time and resources preparing to submit the merger notification. In the wake of the financial crisis and as M&A was beginning to pick up, and prompted by concerns raised by acquisitive companies and their advisers, the EC took the opportunity to streamline the existing merger control rules, which has generally been welcomed. More specifically, in addition to the current list of ‘simplified transactions’, mergers between competitors – so-called ‘horizontal mergers’ – will also qualify for a simplified review where the combined market share of the merging parties does not exceed 20 percent, instead of 15 percent as previously, and vertical mergers where the merging parties do not have more than 30 percent, instead of 25 percent as previously, of the relevant markets. The simplified review requires merging parties to submit far less information to the EC, and no or minimal pre-notification discussions, and takes less than the maximum 25 working days for an EC merger approval. Under the new rules, even horizontal deals where the parties’ combined market share reaches 49.9 percent may qualify for a review where the market will not become materially more concentrated, with a Herfindahl-Hirschman Index delta of less than 150. Separately the EC continues to work on its proposed changes to the overall scope of the EC Merger Regulation, and aims to publish this autumn a white paper setting out the types of minority acquisitions which will also require EC notification. Lowering the ‘control’ threshold for EC notifiable deals is controversial. The EC’s consultation generated many legitimate concerns from financial institutions, corporates and their advisers.
Giles: The package of measures announced recently by the European Commission aim to simplify and streamline the procedures for notifying M&A transactions and certain joint ventures under the EU Merger Regulation. The main elements of the regime remain the same – mandatory notification of any transactions which surpass specified thresholds, and a requirement that transactions be suspended pending clearance. The substantive assessment also remains broadly the same, although the Commission has increased the market share thresholds at which markets are treated as ‘affected markets’, which will mean certain transactions now need to provide less information than previously. Although labelled a ‘comprehensive review’ by the Competition Commissioner, the changes are likely in practice to have a limited impact in reducing the burden on transactions which do not raise substantive competition concerns.
FW: In what ways will the new provisions streamline the EU merger control review process? How will the simplified review work in practice?
Garrod: Streamlining is already occurring in multiple ways. Firstly, more deals are qualifying for a ‘simplified review’, giving rise to some cheaper and quicker clearances. Secondly, the merger notification forms – Form CO and Simplified Form CO – have been truncated so that less data from the merging parties is now needed. Thirdly, waivers of certain information requirements should be more readily available. Fourthly, a ‘super-simplified’ procedure has been introduced for joint ventures active entirely outside the EEA, whereby only a brief explanation of the planned activity of the joint venture suffices to secure a clearance. Fifthly, merging parties now submit less data to the EC in order to convince the EC to review their deal where the deal in question does not meet the EC merger thresholds, instead qualifying for Member State review. The reform should result in the EC’s merger control review being shortened by several weeks for many deals on average.
Giles: The new Simplified Procedures Notice provides greater leeway for transactions which do not raise material concerns. For example, parties can file shorter notification forms where their combined market share is below 50 percent, provided the increment in market share resulting from the transaction is very small, below a measure of market concentration known as an HHI Delta of 150. Deals are also more likely to qualify for the simplified procedure on the basis they do not lead to any ‘affected markets’ as the Commission has increased the market share thresholds for what would constitute ‘affected markets’ by 5 percent. This is welcome given the level of detail required regarding affected markets in an EU Merger Regulation notification. Overall, the changes are expected to increase the percentage of deals reviewed under the Commission’s simplified procedure by around 10 percent to a total of 60-70 percent of transactions notified. This should reduce the administrative burden on businesses and related costs associated with merger notifications.
Hatton: The new provisions are helpful in extending the benefit of the pre-existing simplified procedure to more deals. Deals that qualify for the simplified procedure benefit from a shorter form filing – short Form CO – and the Commission can approve a transaction without consulting competitors, customers or suppliers. The new rules raise the market share thresholds for merging companies to qualify for the simplified procedure to 20 percent where the companies are actual or potential competitors and to 30 percent where companies are not competitors but operate upstream/downstream of each other. Also above these thresholds, where deals result in a combined market share of up to 50 percent but there is only a small increment in the pre-existing large share of one of the parties, the deal may qualify for the simplified procedure. There is a new ‘super-simplified’ procedure for joint ventures which do not affect the EU market. The Commission has made some attempts to reduce the information requirements even in the long Form CO but they also introduce some new requirements for filings so it is uncertain if overall, the changes will achieve the objective of substantially reducing the information burden. Finally, on timing of the review, the statutory review periods do not change but the pre-notification period should be shorter or may even be eliminated particularly where the parties’ activities do not overlap.
FW: To what extent might changes to the standard EU merger filing requirements (Form CO) actually increase the burden on notifying partners rather that reduce it?
Giles: The reforms give parties greater discretion in determining whether to engage in pre-notification contacts with the Commission or in applying for waivers regarding production of certain information. The changes also relax the requirement for submission of relevant internal documents from three to two years prior to a transaction. These developments are encouraging, especially for straightforward and time-critical mergers. However, the underlying complexity of the Form CO process remains and parties will need to see evidence of a cultural change at the Commission in terms of the scope of requests for information. It remains the case that ‘all plausible’ markets can be considered as part of the merger review, meaning that any initiative by parties to expedite the review process by opting out of pre-notification engagement or applying for waivers does not prevent the Commission from raising last-minute market concerns which may add more delay than if such concerns were addressed up-front.
Hatton: Parties now have to identify not only the markets which they believe to be the relevant markets on which to assess the deal but also “all plausible alternative product and geographic market definitions” and provide data on those potential markets. In practice, pre-notification consultations with the Commission are often taken up with discussions on what data is really needed by sub-segment of the market, by country, and so on, and there is often a tension between the Commission who would like to cover off all potential hypotheticals and the business and their advisers who want to limit the data to what they consider is relevant. Amending the filing Form to include all plausible alternatives strengthens the Commission’s hand. Also, there is a new requirement to provide more internal documents with the filings – for example, board and shareholder meeting minutes where the transaction has been discussed need to be provided with the full-length Form CO.
Garrod: Interestingly, the information requirements technically increase under the new rules in two respects. Potentially most significantly, the ‘supporting documentation’ requirement has been expanded to include a broader range of data – for example, reports, surveys, presentations, and ‘any comparable documents’ – from the last two years assessing any of the affected markets, where previously only information concerning the notified transaction was required, and as received by, not only prepared by, any member of the board of management, not only board of directors or supervisory board. Whilst not as wide as the US Hart-Scott-Rodino requirements, the EC now requires greater substantiation of arguments and does not want merging parties to be able to hide any presentations or reports which may undermine their competitive story or deal rationale. Secondly, the EC now requires more detailed information and data on the markets affected by the transaction, including ‘all plausible’ alternative product and geographic market definitions. Now merging parties have to demonstrate the irrelevance or disproportionality of information to be provided under all plausible – but not necessarily credible – market definitions. Whilst the overall amount of information required to notify all mergers, aggregating full form and short form notifications, is diminishing under the new rules, in particular due to more deals qualifying for a simplified review, merging parties will likely need to supply more information upfront in deals giving rise to some or material competition concerns.
FW: What impact do you expect the new provisions will have on M&A activity across the EU? In your opinion, are they likely to generate an increase in cross-border deals?
Hatton: The changes are procedural and are not sweeping enough to impact M&A activity. However, the Commission is looking at broader changes to merger control, in particular by extending the reach of EU merger review to pure minority stakes or so-called ‘structural links’. If this proceeds, there could be a negative impact on minority investments depending on what model of review is ultimately adopted – for example, self-assessment with a voluntary pre-merger filing option versus mandatory filing with suspension of transaction pending approval – and also depending on what level of shareholding will be subject to review.
Garrod: M&A activity is driven by multiple factors, not least by the macroeconomic landscape and access to finance. Whilst the new rules will facilitate dealmaking in Europe, they will not in themselves increase the number of deals. Cross-border investing would be negatively affected if the EC’s proposals on expanding the EC Merger Regulation to include minority acquisitions were to come into effect next year. Just as European equity markets are rising, corporates and financial institutions alike would think twice before taking minority stakes in European companies – particularly if the EC lowers the notification threshold to a 15 percent shareholding. Such a chilling effect on investments and liquidity could be mitigated to an extent by acquirers making a very basic notification to the EC, without a requirement for an EC review or approval unless third parties were to raise concerns, although many acquirers may not want their acquisitions to be a matter of public record in this way. The UK competition regulator, the Competition & Markets Authority, favours a voluntary notification system, whereby acquirers choose whether or not to notify the EC – but some believe that such a system lacks legal certainty.
Giles: The decision on whether a deal goes ahead may be influenced by the substantive competition issues, but rarely by the review timeline in isolation. While it is well-established that in a cross-border transaction EU merger notifications are a relatively drawn-out process, other slower regimes – notably China – and national EU regimes are also not generally materially faster than the EU Merger Regulation review. Nonetheless, the Commission’s new measures are expected to shorten the time needed for pre-notification contacts. According to the Commission, this may affect around 25 per cent of cases notified, so this may have a positive effect. However, despite the broader application of the simplified procedure, the EU Merger Regulation process will remain more complex and costly for simple transactions than, for example, the US Hart-Scott-Rodino process, and the challenge of aligning international review timetables with fundamentally different review periods will remain.
FW: How have business leaders and investors responded to the new regulations? What criticisms have the new rules faced?
Garrod: Given the M&A frenzy in recent months, the new rules are timely and have broadly been welcomed – although some acquisitive companies think that the EC could do more to ease the information burden. Feedback from business leaders and investors indicates that the EC could go a step further and allow for the simplified procedure to be applied in more cases. Corporates and financial institutions largely oppose extending EC merger jurisdiction to minority acquisitions for various reasons, including the lack of competitive harm arising from many minority acquisitions and the questionable economic theories underpinning the EC’s concerns. Practitioners also point to the effectiveness of pre-existing competition laws prohibiting the exchange of competitively sensitive information and other types of collusive behaviour.
Giles: The Commission’s reforms are a response to calls from various stakeholders to lower the costs and perceived difficulties of EU merger filings, and there was a public consultation as part of the process last year. The Commission has heralded the significance of these reforms, but reaction from the business and investor community has been more muted. The key issue will be whether the Commission’s approach changes to allow more flexibility, with individual case teams implementing the changes in a pragmatic way and with an understanding of the business operations of the parties with which they are engaged. The main criticism of the new rules has been that the huge exercise of completing the Form CO will remain unaffected for many transactions, although one example that has received a favourable response has been the measure to make the simplified procedure available for joint ventures that have minimal impact within the EU – that is, where the relevant JV turnover in the EU is below €100m – although critics will say the measures could have gone further given acknowledged likelihood that such transactions will have minimal impact in the EU.
Hatton: In general the initiative is welcome as an attempt to make the procedure more efficient and reduce the information burden. However, there is criticism of certain of the new requirements as they seem to go beyond what is necessary for the proper assessment of the deal. For example, the request to submit documents with regard to alternative acquisition options is too far-reaching and risks compromising confidential business information, particularly when this type of information can be shared with other agencies.
FW: In your opinion, how likely are the changes to achieve the stated objectives of reducing the regulatory burden on parties to transactions?
Giles: The Commission is hopeful that its package will substantially reduce the process burden for some parties, although it is clear that a 10 percent increase in the use of the simplified procedure and 25 percent of cases facing reduced pre-notification discussions will not completely change the burden faced – even if the Commission achieves these goals. These reforms also will not remove the challenges of a frequently protracted and burdensome process that requires significant information on areas which often turn out to be of no concern to market participants. This will only change with a cultural shift to a less formalistic approach, and greater emphasis on the underlying business reality – perhaps prompted by earlier engagement with market participants. The hope is that the Commission’s willingness to accept waiver requests will also make a material difference – but this will depend on case teams’ willingness to depart from the often conservative approach adopted to date.
Hatton: In general the changes should improve the process for deals which are clearly not complex and also for joint ventures which have no impact in the EU. The Commission is looking at taking these types of JVs outside the scope of the EU merger regulation but for now, if companies establish a JV or change control over a JV which operates only outside the EU, you still have to notify the Commission if the parents of the JV meet the EU merger control revenues thresholds. The super-simplified procedure for these JVs will reduce the regulatory burden on companies but the law should be changed to take them outside the scope of EU merger control.
Garrod: The changes are very likely to achieve their stated objectives, in terms of increasing the number of simplified deals. However, in those cases where simplified treatment is at the EC’s discretion, the EC needs to follow the spirit of the reform. The same can be said for the EC’s attitude to granting waivers in respect of certain information requirements. Going on merger reviews undertaken so far this year, EC case teams appear to be following the new rules in practice.
FW: What final advice can you give to acquirers on maintaining compliance with European merger controls?
Hatton: Companies need to consider very early on in a transaction and well before signing whether an EU or any other merger filings will be required. On deals which raise antitrust issues, merger control can obviously impact whether or not the deal can be done and on what terms. However, even on deals which raise few or no antitrust issues, EU and international merger control can significantly impact timing. In the US, Hart-Scott-Rodino filings can be prepared in a very short timeframe as they do not require extensive information. However, even a short-form EU filing can require significantly more time to prepare and pre-notification consultations with the Commission can result in delay in getting the clock running on the 25 working day statutory review period. With over 100 jurisdictions worldwide with merger control laws and increasing international enforcement, early assessment of global filing requirements and risks is essential.
Giles: The EU merger control process, together with other global merger review procedures, are key factors in companies’ strategic planning around acquisitions and joint ventures, and a thorough antitrust analysis should be carried out as part of the due diligence process prior to signing any agreement. Pre-planning not only allows parties to understand the substantive competition law challenges they may face, but also to understand the jurisdictions, including the EU, where these will play out – and the likely timeline impact for their transactions. The Commission’s reforms are welcome, but could have gone much further, and consequently parties need to remain as vigilant as ever in ensuring they factor the merger control aspects of transactions into their broader deal planning. Companies should also be cautious about counting on receiving waivers or expedited treatment from the Commission until it has demonstrated a more flexible approach in practice.
Garrod: Ensuring that your lawyers are conversant with the new rules is essential if you want to take advantage of the streamlining changes. Further, establishing and maintaining a good working relationship with the EC case team will enable your lawyers to take advantage of any applicable waivers and to identify any issues early. Some degree of pre-notification discussions are expected in all but the simplest of cases and it is important to remember that the EC merger regime – unlike the US Hart-Scott-Rodino process – is characterised by front-loading, and so work must be put in early. Maintaining credibility early on with the case is also important. Hold off from submitting data which has not been verified by acquirer/target. In addition, advisers in cross-border deals must coordinate with each other to ensure consistent submissions around the world and adherence to the transaction timetable. Remember that the EC, US and other major competition authorities regularly talk to each other and so a joined up approach to regulators is essential.
Catriona Hatton is the partner in charge of the Baker Botts L.L.P.’s Brussels office. Her practice focuses on European Union (EU) competition law. Ms Hatton has extensive experience advising on EU and national competition law aspects of international mergers, including filings under the EU Merger Regulation and coordinating global merger filings. She advises on compliance with competition rules in a wide range of commercial agreements. Ms Hatton’s compliance work has frequently involved the conduct of antitrust audits and the design and implementation of compliance programs. She can be contacted on +32 (0)2 891 7310 or by email: firstname.lastname@example.org.
Davina Garrod is a partner in Bingham’s Antitrust, Competition and Trade Regulation and Investment Management practice groups. She advises clients on mergers, acquisitions and joint ventures; technology transfer/IP licensing; cartel and behavioural investigations; investigations by government agencies and regulators, including those under the UK Bribery Act; and EC State aid/restructuring. Ms Garrod also litigates before the European and UK courts and provides strategic and regulatory EU/UK law advice in connection with, inter alia, financial services, IP/technology, telecommunications, environmental issues, and the UK’s Treaty obligations and evolving relationship in and with the EU. She can be contacted on +44 (0) 20 7661 5480 or by email: email@example.com.
Ian Giles is a partner in the antitrust and competition group at Norton Rose Fulbright LLP in London. He focuses in advising on all aspects of competition law with a particular focus on cartel investigations and merger control. Ian has been involved in numerous significant mergers in recent years, including in the last year securing EU and other global merger control clearances in Delta/Virgin Atlantic and the $13.6 billion Thermo Fisher/Life Technologies transaction. He can be contacted on +44 (0)20 7444 3930 or by email: firstname.lastname@example.org.
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