Q&A: Merger control and regulatory compliance in 2017
June 2017 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2017 Issue
FW moderates a discussion on merger control and regulatory compliance in 2017 between Peter Alexiadis at Gibson Dunn, Ulrich Soltész at Gleiss Lutz, Jay Modrall at Norton Rose Fulbright LLP, and Matthew P. Hendrickson at Skadden, Arps, Slate, Meagher & Flom LLP.
FW: Reflecting on the last 12-18 months, how would you characterise key trends in the area of merger control?
Hendrickson: Over the last several years, a growing trend in the area of merger control has been agencies’ willingness to litigate challenges to proposed mergers. In 2016, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) brought seven new litigations and resolved five that were pending at the beginning of the year, for a total of 12 challenges of mergers in the court, up from eight in 2015. The readiness of the DOJ and the FTC to turn to the courts reflects both a growing comfort, borne of their recent success, and an increased unwillingness to accept remedies that are perceived as inadequate to fully address the agency’s competition concerns. In 2016 alone, the agencies obtained five court victories and forced four transactions to be abandoned because of litigation or the threat of litigation. Many of the agencies’ challenges – and victories – were in the healthcare sector, including those involving Aetna/Humana, Advocate/NorthShore and Hershey/PinnacleHealth. Their success in that area has continued into 2017, with a major DOJ victory in the DC Circuit, which upheld the agency’s challenge to the $54bn merger of Anthem Inc. and Cigna Corp. But while merger enforcement was a priority throughout the Obama presidency, whether the agencies will continue to be as litigious under the Trump administration remains to be seen.
Modrall: From a European perspective, over the past couple of years acquisitions involving financial buyers have continued to account for a significant proportion of notifications, but there have been a large number of strategic mergers, including a number of mega-mergers, that have attracted close scrutiny from the European Commission (EC), as well as other regulators. Though each case is different, we have seen a number of mobile telecoms transactions raising traditional horizontal overlap issues; more complementary technology sector deals raising vertical issues and mergers in traditional industrial sectors, ranging from heavy industry to agriculture. Especially in some large industrial mega-mergers, the EC has looked not only at traditional theories of harm, but also more novel issues, such as effects on innovation competition.
Alexiadis: Globally, we have seen a proliferation of merger control regimes, many of which have been set at unreasonably low threshold revenue levels, and with little regard to the competitive effects they would have on the relevant markets. We have also seen a greater appetite for active enforcement around the world, with a pronounced rise in actions taken against firms engaged in gun-jumping practices or those failing to notify. Within the European Union (EU), four key trends are at various stages of development. First, the substantive test of review – the Significant Impediment to Effective Competition (SIEC) test – is being developed in concentrated markets in ways which are qualitatively different from the previous substantive test of whether the merger led to the creation or strengthening of a dominant position, particularly in recent “four-to-three” mobile communications sector mergers. The second trend relates to the increasing role played by a theory of harm, which emphasises the negative impact of a merger on ‘innovation’. This issue is particularly playing out in a series of high profile agrochemical sector mergers. The third trend relates to the acknowledgment that merger-specific efficiencies might be of such magnitude that they can lead to the clearance of notified mergers, at least as a matter of principle. The final trend is the appropriate use and limits of econometric analyses based on the Gross Upward Pricing Pressure Index (GUPPI) and Illustrative Price Increases (IPR) calculations to measure potential anti-competitive price effects post-merger.
Soltész: Since the new competition commissioner took office, the EC has taken a tough line when it came to the enforcement of the merger control rules. Competition commissioner Margrethe Vestager has not only recently blocked a number of mergers, but she has also opened some investigations based on alleged infringements of procedural rules, including alleged incomplete or inaccurate filings, among other things. One recent example is the ongoing investigation into whether Facebook provided ‘misleading information’ when seeking clearance for its acquisition of WhatsApp. This approach is different from her predecessors, Joaquín Almunia and Neelie Kroes, who adopted a more lenient approach and were not overly aggressive when it came to the enforcement of the merger rules.
FW: Have any recent merger control cases caught your attention? What can we learn from their outcome?
Modrall: There have been quite a few significant cases. For example, the Microsoft/LinkedIn and Facebook/WhatsApp mergers have demonstrated that the EC will look closely at the competitive effects of mergers combining Big Data assets, even though the EC has not found any problems so far and the theory of harm that might emerge in future cases is not completely clear. Two cases involving Baker Hughes were instructive. Halliburton’s attempt to acquire Baker Hughes foundered on antitrust grounds. Interestingly, however, Baker Hughes was ultimately acquired, not by another oilfield services company, but by GE, which stressed the potential it sees to bring Big Data techniques to the oil & gas industry. This story illustrates both the complexity of finding acceptable antitrust remedies where the merging parties’ businesses overlap in a large number of closely interrelated markets and also the fact that Big Data techniques will drive M&A activity in a wide range of sectors, not only technology transactions. Finally, in Dow/DuPont, the EC focused not only on the competitive effects of head-to-head overlaps, but also on much more general ideas of innovation competition. The EC also required an up-front buyer divestiture remedy, which is unusual in EU practice.
Alexiadis: There have been a number of interesting decisions. The recent clearance of the WIND/H3G joint venture in Italy was important, especially given the EC’s veto in the Hutchison/Telefónica UK deal – and the pending appeal to overturn the Commission decision in Telefónica/E-Plus. Those decisions confirmed the EC’s more traditional view that a merger in a highly concentrated industry is likely to require a structural remedy and, in the case of mobile sector mergers, will require the introduction of a full network operator, post-merger, in order to restore the conditions of sustainable competition that can offset the inevitable price rises that would result from increased consolidation. Set against a range of other precedents in the mobile sector, the WIND/H3G case confirms what must be considered to be the prevailing EC view. By the same token, the EC seems to have been genuinely willing at least to consider the value of investment efficiencies as a counterweight to potential price rises post-merger, even if the parties were unable to convince the EC on the facts that such efficiencies would have resulted from the merger. From a political perspective, the abandoned Deutsche Börse/LSE deal provided us with the first merger ‘victim’ of Brexit, as the LSE’s reluctance to provide one particular element of the proposed remedies package is difficult to explain as a strictly business-driven outcome.
Soltész: While the EC has adopted a relatively aggressive approach in recent months, resulting in some negative decisions, it should not become too self-confident. It suffered a major defeat before the European courts in the UPS v. Commission case; the courts found some serious flaws and made it clear that they will scrutinise any negative decision very closely. Most practitioners would probably agree that UPS v. Commission was a setback for the EC. In general, I think it is fair to say that the intensity of judicial review has increased in recent years – something which we have not only seen in the field of mergers but also in other areas of competition law, such as antitrust and state aid law. As a result, a number of parties have challenged negative EC decisions before the courts in Luxembourg.
Hendrickson: There have been several notable merger control cases in the last few years, because they all teach the same important lesson – where factually supportable, the antitrust authorities’ litigation strategy is to define markets narrowly, based on a limited group of customers who have specific needs, and courts are agreeing that those are appropriate markets in which to evaluate the effect of the challenged transactions. For example, in the FTC’s successful bid to block Sysco Corp.’s proposed acquisition of US Foods in 2015, the court focused on what it called the “broadline food service” market for customers with national footprints, which excluded from the competitive mix distributors capable of serving regional, but not national, customers. Similarly, in the FTC’s challenge to Staples’ acquisition of Office Depot, the agency defined the relevant market to include only the “business-to-business” segment, a market that includes only large customers who buy consumable office supplies in large quantities and under long-term contracts, which the FTC argued is distinct from the retail consumer market. The court accepted the FTC’s definition, finding that Staples and Office Depot currently operate as a duopoly in the relevant market, with a combined 79 percent market share, facing little competition from regional competitors, such as W.B. Mason. Similarly, though the parties abandoned the merger before a court weighed in on the relevant market, the DOJ’s challenge to the proposed GE/Electrolux merger similarly involved a narrow set of customers, specifically “contract channel” buyers of home appliances who would pass price increases on to end consumers.
FW: Could you outline any recent legal and regulatory developments affecting merger control? How will companies need to respond to these developments when planning complex cross-border transactions to meet their compliance requirements?
Alexiadis: A key legal development arises from the successful appeal in UPS v. Commission before the General Court, where the EC merger prohibition decision was overturned because, late in the review process, the EC had failed to respect the parties’ rights of defence by not notifying them that the economic model relied upon by the EC to support its theory of harm had been altered in certain respects, nor by providing them with an opportunity to adduce evidence to address the questions raised by the EC’s revised economic model. Given the increasing importance of economic evidence as the foundation of the EC’s decisions to block complex mergers, this judgment may have significant effects on the conduct of merger review proceedings. A key potential legislative development might be found in the potential revision of the EU Merger Regulation to bring within its scope those mergers which satisfy transactional value criteria, even where the target’s revenues are relatively small. In this way, argues the EC, highly lucrative deals in the IT and pharma sectors, which might otherwise not be captured by the current revenue-based threshold tests, can be subject to scrutiny for their competitive effects.
Soltész: Some national merger control laws, for example in Germany and Austria, have been changed by introducing a revenue band threshold in order to cover acquisitions of such smaller companies. The new rules are targeted at M&A deals concerning the acquisition of businesses which do not achieve very high sales, and therefore do not trigger the ‘traditional thresholds’ based on turnover, but which have significant resources in terms of IP rights, data and so on. These new rules are mainly targeted at startups in the digital economy. Even though these relatively small players do not generate huge profits now, such deals might raise serious problems in terms of market power. Under the new rules, some transactions have to be notified if the purchase price exceeds a certain threshold. Such a criterion is relatively new in European jurisdictions. Like any new rule, these new thresholds will create some legal uncertainty. Buyers should therefore watch out when assessing the filing requirements.
Hendrickson: Companies planning cross-border transactions must be aware of both the emergence of more active competition regimes in some countries, and the potential for agencies to consider non-traditional issues and theories as part of the competition analysis. For example, coming off the heels of successful competition policy reform in Brazil, lawmakers in Argentina and Chile recently announced plans to implement major changes to their merger review processes, suggesting that companies may need to be prepared for a more activist approach to merger control in these countries. New competition authorities may have different ideas about how to properly analyse certain products or assets in an antitrust context than do US or EU enforcers, especially in new or developing industries that lack enforcement precedent. For example, one industry that has received scrutiny in recent years is Big Data, with different enforcement agencies disagreeing on the extent to which antitrust law should be used to resolve privacy and data protection issues in these markets. These developments demonstrate that companies must look beyond the traditional scope of antitrust law to prepare for challenges to cross-border transactions.
Modrall: The prevalence of high-value transactions where the target has very little revenue is leading authorities to consider revisions to their notification thresholds, because they fear that potentially significant transactions may escape merger review because they do not trigger turnover-based thresholds. Germany and Austria are taking the lead in this area, but the EC is also considering introducing a transaction-value-based threshold. These changes will likely lead to more transactions being notifiable in Europe, including US and Asian transactions where the target has little or no turnover in Europe, so long as it has some other local nexus, such as a significant number of users of a software offering.
FW: What merger control developments do you expect to see this year in key jurisdictions such as the US, the EU and China?
Modrall: The European changes to merger review thresholds may well trigger imitations in other jurisdictions. Another key development for merger control will be Brexit, which will lead to many transactions being notified in Brussels and London. Though many transactions trigger multiple filings and the addition of one more might not seem too serious, duplicative reviews in Brussels and London are likely to impose a disproportionate burden on businesses, among other things because the markets and potential remedies will often overlap or be the same. The Competition and Markets Authority (CMA) has signalled a desire to cooperate closely with the EC, and hopefully the EC will respond in kind.
Hendrickson: In March 2016, the Standard Merger and Acquisition Reviews Through Equal Rules Act of 2015 (SMARTER Act) passed the US House of Representatives, but stalled in the Senate and was opposed by the Obama administration. The SMARTER Act may resurface now that there is Republican control of Congress and the White House. In effect, the SMARTER Act would eliminate the differences in the procedures the FTC and DOJ follow when challenging M&A transactions by changing the current FTC standard for obtaining a preliminary injunction, which many believe is biased in the FTC’s favour. The EC recently sought public feedback on a proposal to amend the EU reporting thresholds to capture acquisitions with high transaction values but that fell below the EU merger control turnover or revenue thresholds, perceived by some as a gap in the current system. This initiative was sparked by a number of transactions between valuable tech companies with low sales and few assets that escaped EC review or, in the case of Facebook’s acquisition of WhatsApp, could be assessed by the EU only after a referral from EU member states. The acquisition of WhatsApp has also been a catalyst for merger control reforms within certain EU member states, namely Germany and Austria. It is too early to tell whether the EC will follow suit and change its rules to accommodate the growing number of these acquisitions in the digital economy, but if it does, the EU’s Merger Regulation could wind up casting a much larger net. In China, the State Council is revising the Anti-Unfair Competition Law and may finalise any amendments in 2017. One of the proposed amendments would prohibit companies from taking advantage of a “comparatively advantageous” position, a term the draft amendment defines broadly. This proposal is a topic of hot debate and, if incorporated into the law, would inject additional uncertainty into MOFCOM’s antitrust reviews, already one of the less predictable regimes in terms of outcome and timing, because the standard for determining what constitutes a comparatively advantageous position is not clear.
Soltész: The EC has certainly put a very much stronger emphasis on economic analysis, and this trend is likely to continue. Parties are required to provide a lot of economic data and it often proves useful to retain an economic consultant at an early stage in order to refine the line of arguments. In addition, the EC increasingly makes use of very broad requests for information which resemble US-style discovery requests. Such questionnaires often include ‘catch-all’ questions on internal documents relating to the transaction during a certain time frame. This can lead to the production of a very high number of documents, such as internal presentations, emails, minutes and so on. This practice also raises difficult questions concerning the scope of legal professional privilege (LPP).
Alexiadis: A question mark lies over whether the merger enforcement strategy of the DOJ and the FTC under a Trump administration is likely to change materially, and whether or not populism results in employment obligations being linked to merger clearances – which a jurisdiction such as South Africa has implemented formally for a number of years. In the EU, a key development will turn on whether the parallel introduction of transaction-based jurisdictional thresholds for merger enforcement, at both EU and at national level, will result in the Balkanisation of merger enforcement in the EU in high tech and pharma industry mergers. In addition, the completion of the Brexit process will raise the possibility of a very broad range of procedural and substantive changes occurring in current merger practice.
FW: With a number of jurisdictions adopting new merger control regulations and stepping up enforcement, what effect might this have on M&A activity in the months ahead?
Hendrickson: The level of M&A activity is not likely to change due to new merger control regulations and increased antitrust enforcement in many jurisdictions, but the length of the merger review process is likely to increase as a result. Increased antitrust scrutiny is not likely to affect the overall levels of M&A activity, in part because the vast majority of M&A activity does not involve combinations of key competitors in concentrated markets. Parties contemplating strategic deals will be conscious of the new merger regulations in their deal planning and negotiations, but ultimately are not likely to be deterred from pursuing M&A to further their business goals. And antitrust risk in strategic deals can be mitigated through contractual provisions that increase the likelihood of closure, even if remedies are required. Indeed, with the change in administration in the US, parties may see an opportunity to try more difficult transactions, even with more scrutiny by non-US antitrust enforcers and greater potential for a lengthy review process.
Soltész: We do not expect the changes to European national merger controls to create a significant obstacle to mergers, or slow down M&A activity too much. The changes will, however, lead to a greater administrative burden for companies, particularly if other jurisdictions follow this example. The number of notifiable transactions will probably increase and the new rules will almost certainly lead to more legal uncertainty when it comes to the assessment of filing requirements. Like many reforms in the field of merger control, the new rules will create more work for competition lawyers, as well as for the regulators.
Alexiadis: The rise in the number of jurisdictions which now have merger review powers has grown extraordinarily over the past decade. The increased appetite of merger review bodies to pursue merging parties for their ‘gun-jumping’ practices pays testimony to the fact that those jurisdictions previously considered ‘outliers’ will become more actively involved in merger enforcement. The growth in various forms of regional cooperation will only add to this trend. One can expect that relatively new merger regimes in Asia and the Middle East will soon start to ‘bite’, as will the pan-African merger review institutions such as the Common Market for Eastern and Southern Africa (COMESA). In addition, the recent enthusiasm of the European Commission to re-open merger investigations because of allegedly inaccurate submissions by the notifying parties raises a new range of challenges, especially if such a policy is also adopted by other merger review authorities. This will inevitably mean that the process of merger review becomes more complex and more expensive, with closing schedules having to be extended significantly by the merging parties.
Modrall: Merger approval is an important part of the M&A process. The need to identify and obtain required approvals is an unfortunate fact of life and cost of doing business, but this burden can be mitigated by good planning.
FW: What overall advice can you offer to parties on planning for merger control regimes, facilitating a smoother review and obtaining clearance with the least possible disruption?
Soltész: You should start as early as possible with the assessment of the filing-requirements on a worldwide basis. If you have identified the key jurisdictions you should kick-off the drafting process very quickly. Given that many authorities, in particular the EC, require lengthy pre-notification contacts and given that all regulators tend to request more and more data, you can basically never start early enough. If you expect problems in terms of substance, in particular a strong position in some markets, you have to prepare yourself for the discussions about possible remedies. The development of a suitable remedy package takes time. If you only start to reflect about remedies after filing, it will probably be too late.
Alexiadis: A number of strategic concerns come to mind, largely driven by recent developments across a number of jurisdictions. There will be an increasing need to front-load the merger filing timetable with the completion of Indian and Chinese filings, given the time constraints posed by these jurisdictions in terms of commencing the notification process and closing it out. One must also be prepared to define relevant products in the context of a Chinese filing, irrespective of whether they are of little relevance in most other jurisdictions. Also, if divestitures are likely, be realistic about identifying viable purchasers in the event that merger regulators insist upon a ‘fix it first’ remedy. Where markets have both global and local characteristics, be prepared for a cocktail of remedies that might need to satisfy both sets of market concerns simultaneously. One should also not be surprised to find that relatively new merger regimes will become more active, especially the pan-African COMESA and Authorities in the Middle East and Asia. Finally, there are also signs that merger authorities might also become more interventionist in private equity deals in certain industrial sectors, unless it is clear that they are passive minority shareholders.
Modrall: Planning ahead is essential to avoiding disruption in M&A transactions. Transaction parties need to determine where filings will be required, identify the information that will be needed to complete these filings and understand the timing implications of different merger review procedures. In those relatively rare transactions that may raise substantive antitrust issues, it is particularly important to plan for an extended review and possibly even remedies. Incorporating these workstreams early in the transaction planning process will reduce costs and potential delays.
FW: Looking ahead, what impact do you believe the economic and geopolitical uncertainty across the globe might have on M&A in general and merger control specifically?
Alexiadis: Recourse to unilateral enforcement policies and the effects of protectionism do not augur well for the future of international merger control in the short term. The voices of protectionism, coupled with current political turmoil, raise a range of concerns for dealmakers, both in terms of enforcement risks and risks arising in terms of the sustainable value of deals. Coupled with the contraction of the BRIC economies in the recent past, the prospects for higher levels of merger activity do not seem high in the very short term. Material changes to the current atmosphere of uncertainty in Europe seem to be marked by two political watersheds, namely, the aftermath of the French and British elections on the one hand, and the relative stability of the international political stance of the US under its current president. The value of dealmaking will also be influenced by the continued strengths of the US dollar and the euro respectively.
Modrall: Brexit will have a clear impact in Brussels. More broadly, the increasing trend toward economic nationalism may lead some authorities to look more closely at the effects of transactions on a broader range of national interests, not limited to traditional economic effects. A number of authorities have had statutory authority to do this for years, but the vagueness of such standards leaves them open to manipulation, and uneconomic demands for remedies can chill pro-competitive transactions.
Soltész: It is very difficult to predict. Some people believe that Brexit and the Trump administration might lead to a slowdown of M&A activity, but there are also factors associated with these events, such as low value of British pound, which seem to encourage investors. In terms of regulation, Brexit will probably make transactions more complicated, given that the very convenient ‘one-stop-shop’ in Brussels will cease to exist. As a result, parties will probably have to notify bigger deals in Brussels and London in the future. This will lead to multiple filings; it will create higher costs and will necessitate complex coordination efforts between these jurisdictions. Unfortunately this will be a backwards step and things may become messy.
Peter Alexiadis is the partner-in-charge of the Brussels office of Gibson, Dunn & Crutcher and is a visiting professor at King’s College, London. He has practised community law in Brussels since 1989, where his practice is split between competition law and communications policy, specialising in merger control and abusive practices before the European Commission and National Authorities. He is the holder of postgraduate legal qualifications from the Universities of London, Sydney and Thessaloniki. He can be contacted on +32 2 554 72 00 or by email: firstname.lastname@example.org.
Ulrich Soltész is a partner in the Brussels office of Gleiss Lutz. He advises clients on European and German competition law. Over the last 20 years he has represented companies before the European Commission and national competition authorities, and has litigated more than 40 cases before the EU Courts. He has published many articles on competition and state aid issues. He can be contacted on +32 2 551 1743 or by email: email@example.com.
James R. Modrall is a partner in the antitrust and competition practice of Norton Rose Fulbright LLP in Brussels. He joined the firm in September 2013 as partner, having been a resident partner in a major US law firm since 1995. A US-qualified lawyer by background, he is a member of the Bar in New York, Washington, DC and Brussels, Belgium. He can be contacted on +32 2 237 61 47 or by email: firstname.lastname@example.org.
Matthew Hendrickson is a partner in Skadden’s Antitrust and Competition Group and is resident in the firm’s New York office. Mr Hendrickson represents parties involved in mergers and acquisitions in proceedings before the Federal Trade Commission and the Antitrust Division of the US Department of Justice. Part of the teams representing a number of clients with respect to major transactions, he also handles antitrust litigation and provides counselling on US competition laws and the Hart-Scott-Rodino Act. He can be contacted on +1 (212) 735 2066 or by email: email@example.com.
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