Navigating global merger control and regulatory challenges
October 2019 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
October 2019 Issue
A merger or acquisition may be scrutinised and blocked by the relevant competition authorities, whose job it is to protect competitive markets. These authorities have the power to block a merger outright, or to impose remedies which can be onerous and may impair the commercial logic of a deal. Although serious issues tend to be the exception rather than the norm, these issues need to be handled carefully to protect shareholder value. A deeper understanding of merger control risks may widen the range of possible deal options for acquirers, and can improve a company’s negotiating position whether it is a buyer or seller.
2018 saw a record number of merger notifications as global M&A activity continued its record-breaking run, according to an Allen & Overy survey focused primarily on deals in the US, European Union and China. The report noted that more than 29 deals worth at least €46.3bn were influenced by antitrust interventions in 2018. Though only seven deals were formally blocked, 22 were abandoned after antitrust authorities voiced concerns.
“Globally, authorities continue to be active in bringing cases, but also mostly willing to settle if there is a settlement that alleviates the competitive concerns the government has but allows the transaction to proceed, along with the pro-competitive benefits,” suggests Debbie Feinstein, a partner at Arnold & Porter.
Fit for purpose
In light of the volume of recent merger activity and the shifting geopolitical and technological outlook, many competition authorities globally are considering whether their regimes remain fit for purpose, including for merger control. “Much of the focus is on digital mergers, not only about how to assess future market developments and innovation but also concerns that ‘killer acquisitions’ – big tech companies acquiring small, innovative start-ups – often do not meet traditional turnover-based thresholds to trigger a review,” says Ian Giles, a partner at Norton Rose Fulbright LLP. “Germany and Austria have introduced transaction value thresholds for this reason, with similar proposals being considered elsewhere. Another important trend is authorities increasingly relying on parties’ internal documents in their reviews, as well as much heavier sanctions for procedural infringements, such as ‘gun-jumping’ – closing a deal pre-clearance – and incomplete or misleading submissions.”
Other national authorities have started to take action to address merger control issues. For example, Canada’s newly-appointed Commissioner of Competition, Matthew Boswell, has made it a central plank of his enforcement agenda to pursue anti-competitive transactions that are not notifiable. “The commissioner announced the formation of a ‘merger intelligence unit’ to search out unreported mergers that may raise competition issues in Canada, and recently followed through by filing an application with the Canadian Competition Tribunal challenging the acquisition of a Canadian software company that had closed on 13 May 2019,” explains Mark C. Katz, a partner at Davies, Ward, Phillips and Vineberg. “In addition, it is now a matter of public record that the Competition Bureau is also investigating another non-notifiable transaction in the event planning industry.”
Merger control issues have surfaced in a number of prominent cases in recent years. In Canada, the decision of the Supreme Court in Commissioner of Competition v. CCS Corp is by far the most important merger decision in the country in the recent past. “That decision provides important guidance for mergers that prevent, as opposed to lessen, competition and provides a detailed framework for the application of the controversial efficiencies defence,” says Anthony F. Baldanza, a partner at Fasken. “The decision in Thoma Bravo/Aucerna, may also prove to be an important marker of the increased focus on the digital space and non-notifiable mergers.”
Furthermore, the EU prohibition of the Siemens/Alstom deal has generated considerable political debate about the need for merger control reform, according to Mr Giles. “The so-called ‘Franco-German Manifesto’, in response to this decision, argued that mergers should be permitted to allow creation of European champions able to compete globally, especially against Chinese state-owned entities,” he says. “In the Siemens/Alstom case, the European Commission found Chinese competition was currently limited and so not a major factor in its analysis. In the UK, the Sainsbury’s/Asda prohibition was also controversial with many arguing that the Competition and Markets Authority (CMA) had ‘moved the goalposts’ and been inconsistent with previous retail mergers. The CMA’s decision was based on a view that millions of shoppers would be worse off and chimed with proposals by CMA chair, Lord Tyrie, in February that the CMA be given a stronger duty and powers to protect consumers.”
There has also been an increased effort by the Canadian Competition Bureau to discover and take enforcement action with respect to problematic non-notifiable mergers. “A longer-term trend is that the clearance process with respect to mergers presenting substantive concerns is taking increasing amounts of time and resources, with ever-increasing amounts of data and other productions being required and economic assessments becoming increasingly sophisticated,” says Mr Baldanza. “The process in Canada has also become more adversarial over the years.”
A notable case in the US saw the DOJ challenge AT&T’s vertical acquisition of Time Warner. “This was the first vertical challenge to go to trial in decades,” notes Ms Feinstein. “The parties won at both the district court and the appellate court level. Among the key takeaways of these decisions were that the facts are key in an antitrust case. Both courts found that the facts simply did not support the DOJ’s theory. Furthermore, the courts will look at all applicable facts, in this case that the parties had offered to be subject to arbitration if the parties could not reach an agreement on the terms of access to programming.”
Consideration of control issues
For companies pursuing M&A, tighter merger control regimes must be taken into consideration. Acquirers should evaluate whether the deal structure can be improved for competition law purposes while still achieving its objectives. They must also identify relevant merger control regimes and the applicable filing requirements and waiting periods. “Companies must be mindful of merger control regimes other than competition regimes, such as those that are sector-specific, control foreign investment or relate to national security,” says Mr Baldanza. “They must also coordinate filing strategies for the various jurisdictions where filings are required and consider whether steps ought to be taken with respect to any jurisdictions where filings are not required but substantive anti-competitive effects are likely. They must also develop procedures so as not to provide misleading or incomplete information to the applicable authorities and identify relevant theories of harm and develop responses and, where necessary, possible remedies.”
Early consideration of merger control issues is critical. There are over 150 global merger control regimes, which means transactions routinely trigger multiple filing obligations around the world. “Assessing where filings are needed and the substantive competition risks, and trying to align processes to meet deal timelines is complex, and needs careful planning,” says Mr Giles. “Sufficient time should be allowed not only for formal reviews, but for preparation of filings and increasingly lengthy ‘pre-notification discussions’ which can last months in more complex cases. Another key point is being careful in creating documents around a deal. We routinely face extensive document requests from the regulators – into thousands or even millions of documents – and often have to explain unhelpful or exaggerated statements after the event, where it was clear the author had no idea that what they were writing might end up before a regulator. Sophisticated e-discovery tools are making these reviews ever more expansive.”
Companies need to treat merger control issues with the gravity they deserve. This means devoting sufficient resources upfront and conducting a proper merger analysis as early as possible in the process, to understand the risks involved. “This is critical in structuring the deal documents, allocation of risk through ‘hell or high water’ provisions, termination fees and so on, and being prepared to engage the authorities in a serious and timely manner,” says Mr Katz.
Looking ahead, it is imperative that companies are aware of their merger control obligations early in the dealmaking process and ensure that they remain vigilant up until a decision has been rendered and closing completed. They must also identify the issues up-front and be as forthcoming with the agencies as possible,” says Ms Feinstein. “Avoid jamming them on time. Giving them some time up-front before you file can actually speed things up down the road.”
Politicisation of merger control
For M&A, the tides of social and geopolitical change will be tough to ignore, particularly as technology continues to develop and wield considerable influence. “Economic and geopolitical uncertainty have contributed to a growing feeling that ‘big is bad’,” says Mr Katz. “We see this most particularly in the unease now surrounding the ‘giant’ high-tech companies and concerns about their control of data and ability to influence public opinion in negative ways, either through their actions or perhaps more often non-actions. The same unease is contributing to the growing trend to question the pieties of what is now standard antitrust analysis in merger reviews that the focus should be on economic efficiencies and consumer welfare to the exclusion of ‘public interest’ factors, such as impact on employees, the desirability of creating and protecting national champions, and even national security concerns. We see this happening in Europe, where the French and German governments complained about the EC merger review system after the Siemens merger was blocked, but also in the US, where the Federal Trade Commission (FTC) has indicated that impact on labour will be part of any merger analysis.”
Alongside political influence impacting competition reviews, many jurisdictions are introducing or strengthening foreign investment rules, or considering doing so, to be able to scrutinise deals on national security or public interest grounds. “Parties increasingly need to factor such reviews into future deal planning,” says Mr Giles. “There are also lots of proposals for reforms related to digital mergers with several high-profile reports and recommendations published, including in the EU, the UK and the US. These proposals include looking beyond immediate competitive overlaps, to consider complementary technologies, and also allowing more intervention in respect of smaller start-ups, which do not yet have material market presence. All of this gives regulators more flexibility to horizon scan and intervene in deals where there is less obvious immediate harm, and makes the process less predictable for business. Then, of course, there is Brexit. If the UK ever leaves the EU, parties to larger deals will face parallel UK and EU reviews, with the UK considering introducing mandatory filing obligations and trying to align review timelines with the EU and US so that critical decisions can be considered at the same time.”
Completing a deal is a complex process. Increasingly burdensome merger control regulations, combined with greater cooperation and communication between competition authorities, can make it more difficult for businesses to remain compliant. Companies must consider merger control issues as early as possible in the M&A process, and factor them into the dealmaking timetable from the outset.
© Financier Worldwide