Worldwide: Merger Control And FDI Outlook For 2024

Foreword

Continued geopolitical turbulence and strong macroeconomic headwinds adversely affected global deal-making activity in 2023, while agency scrutiny and intervention both in merger control and foreign direct investment (FDI) intensified.

Merger control authorities continue to expand the scope or interpretation of existing rules to catch a wider range of deals, with established agencies increasingly reviewing transactions which do not meet the traditional notification thresholds, and emerging regimes legislating to enable the review of highprofile global transactions. Deals which may historically have escaped scrutiny are now being pursued more vigorously, with agencies entertaining novel theories of harm outside of the traditional antitrust assessment framework.

In the US in particular, the Federal Trade Commission (FTC) announced proposed changes to premerger filings under the Hart-Scott-Rodino (HSR) Act that, if finalized in similar form, will require parties to provide significantly more information upfront, creating a significant additional burden for both financial sponsors and strategic filers.

The global COVID-19 pandemic, Russia's subsequent invasion of Ukraine, and the conflict in the Middle East exposed the risks that highly concentrated supply chains can pose to various economies. Escalating geopolitical tension, coupled with the rapid development of critical advanced technologies led governments to tighten foreign policy and adopt increasingly protectionist measures. As a result, FDI scrutiny remains a key deal issue typically with protracted and opaque processes, with additional obstacles anticipated in the form of an outbound screening mechanism announced – both in the US and the EU – to protect key technologies and preserve national and economic security.

In 2024, we expect the dealmaking environment to remain challenging in the wake of shifting antitrust, FDI and financial subsidy regulation.

1. Increased Enforcement of Below-Threshold Mergers

Antitrust agencies continue to assert jurisdiction over a broader range of transactions than ever before. In some jurisdictions, agencies are repurposing existing legal tools to expand their reach (e.g., in the EU). In others, legislators have enhanced traditional revenue and/or asset value-based merger control thresholds and introduced alternative transaction value tests (e.g., in Austria, Germany, Mexico, Russia, and South Korea), or introduced call-in powers for transactions which do not satisfy the relevant thresholds (e.g., in Ireland, Italy, Norway, Sweden, China, and Japan, with more to follow).

Following its prohibition of Illumina's completed acquisition of GRAIL in 2021, which ultimately resulted in a gun-jumping fine and an unwinding order, the European Commission (EC) called in two "below-threshold" transactions for review in August 2023 using the Article 22 EU Merger Regulation (EUMR) referral mechanism. While these acquisitions (Qualcomm / Autotalks; EEX / Nasdaq Power) are only the second and third referrals, Article 22 enquiries from the EC are now relatively routine for transactions in the life science and technology sectors, irrespective of their size. This represents a new challenge for dealmakers.

EU Member States are also increasingly relying on existing competition enforcement tools to challenge potentially anticompetitive acquisitions, a development largely endorsed by the Court of Justice of the European Union (CJEU). In its Towercast judgment of March 2023, the CJEU held that an acquisition by a dominant company that does not satisfy the EU or national Member State notification thresholds may nevertheless infringe competition law and be reviewed ex post under the EC's abuse of dominance rules (Article 102 TFEU).

The Belgian Competition Authority (BCA) opened an antitrust investigation into Proximus's acquisition of its telecommunications rival EDPnet, noting an "application of the Towercast case law". Following a finding of prima facie abuse of dominance, the BCA imposed a series of far-reaching interim measures on Proximus to ensure operational autonomy of EDPnet, including supervision by an independent trustee for 15 months. In November 2023, the BCA closed its investigation after Proximus agreed to divest EDPnet Belgium to Citymesh (a fourth telecommunications operator in Belgium). While abuse of dominance investigations are less likely to result in a transaction being unwound given the prevalence of behavioural commitments and the principle of proportionality under Article 102, it provides another avenue for agencies to investigate mergers.

In the UK, the Competition and Markets Authority (CMA) relies on its wide margin of discretion when applying the share of supply test to assert jurisdiction over transactions. In January 2023, for example, the CMA concluded that the completed acquisition of Jus-Rol by Cérélia resulted in a substantial lessening of competition, ordering Cérélia to divest Jus-Rol in its entirety. The CMA asserted jurisdiction based on the parties' combined share in the supply of dough-to-bake products to grocery retailers of 60-70%, notwithstanding the parties' argument (in Phase I) that they did not compete directly and there was no "no increment in the parties' respective shares of supply". The Competition Appeal Tribunal (CAT) upheld the CMA's decision on appeal.

Significant amendments to the UK competition and consumer law regimes announced in April 2023 would further expand the CMA's merger review powers. The proposed new filing threshold, for example, would not require an overlap between the merging parties' activities in the UK. It would capture any acquisition by a company holding a 33%+ share of supply and £350m+ in UK revenue. The change would solidify the CMA's ability to establish jurisdiction over acquisitions by large companies of targets with little or no revenue in the UK, following a series of controversial applications of the current share of supply test.

The reach of competition agencies outside of Europe is also expanding:

• The Chinese State Administration for Market Regulation (SAMR) adopted in April 2023 implementing regulations to accompany the wide-ranging amendments to the PRC Anti-Monopoly Law, including guidance on how SAMR will investigate transactions falling below Chinese merger notification thresholds if there is evidence that the deal may eliminate or restrict competition. In September 2023, the SAMR issued its first conditional approval for a deal that fell below the merger notification thresholds (Simcere Pharmaceutical Group's acquisition of Beijing Tobishi Pharmaceutical).
• The Japan Fair Trade Commission (JFTC) has also conducted several ex officio reviews into deals that do not satisfy the traditional jurisdictional thresholds, with 15 such cases in FY2023 (including Microsoft's acquisition of Activision).
• In March 2023, the Australian Competition and Consumer Commission (ACCC) proposed wholesale reforms to the existing (voluntary) regime, including a new mandatory and suspensory notification regime. If implemented, transacting parties may need to notify the ACCC based on their global or domestic turnover or transaction consideration. Under the proposal, the ACCC would also have the power to 'call in' a transaction falling below the threshold where the transaction raises competition concerns.

Takeaways

Assess the risk of a transaction being reviewed even if the traditional jurisdictional thresholds are not met.

• Do not assume that transactions with little ex-US nexus will avoid ex-US scrutiny – European agencies in particular routinely review unreportable deals or deals with limited local nexus.
• Consider voluntary filings in jurisdictions where the thresholds are not met but potential competition concerns may arise, and consider springing conditions in your purchase agreements.

It is not the size of the target, but the size of the antitrust issue that is most important.

• Expect filings in transactions that may impact competition and where the parties' revenues do not necessarily reflect their competitive potential.
• Significant transaction multiples are likely to attract scrutiny.

Minority (even non-controlling) interest acquisitions, certain joint ventures, collaboration agreements, and IP licensing agreements may trigger notifications under antitrust and/or FDI regimes globally.

Ensure antitrust provisions in transaction documents anticipate the risk of a potentially protracted antitrust review process.

Having a global, well-planned approach to your clearance strategy is more important than ever.

• Coordination with global FDI and EU foreign subsidy reviews is critical.

2. Tougher Reviews of Non-Horizontal Mergers

2023 saw a resurgence of agency appetite to pursue

non-horizontal mergers, examining both vertical and con- glomerate theories of harm in high profile technology and life sciences deals. The US, EU, and UK authorities remain the toughest enforcers, but sometimes reach divergent out- comes. In many cases, however, outright prohibition appears to give way to agreed remedies.

Microsoft's $69bn acquisition of Activision highlights agency divergence. In the UK, the CMA initially prohibited the transaction in April 2023 based on concerns that the deal would affect the future of the fast-growing cloud gaming market, thus reducing innovation and choice for UK gamers. The EC cleared the transaction conditionally in May 2023 (with remedies including a 10-year licensing deal with competitors) and, despite some initial uncertainty, confirmed that Microsoft's restructured deal (to get CMA approval) would not require another approval. The CMA cleared Microsoft's restructured deal (agreeing to divest Activision's cloud gaming rights to Ubisoft) in October 2023. In the US, the FTC filed a lawsuit in administrative court to block the transaction in December 2022, and subsequently sought a preliminary injunction in federal court. The federal trial court refused to grant the preliminary injunction in July 2023, but the FTC appealed that decision, oral argument was held in December 2023, and a decision on the appeal is anticipated in the next several months. Although the FTC briefly withdrew its administrative lawsuit in July 2023, the FTC later returned thematter to adjudication in September 2023, noting concerns that "Microsoft and Activision's new agreement with Ubisoft presents a whole new facet to the merger that will affect American consumers". Nevertheless, Microsoft closed the transaction in October 2023 and the FTC's administrative case is slated to recommence 21 days after the federal appellate decision sometime in the first or second quarter of 2024.

In September 2023, the EC issued its first prohibition decision based solely on "ecosystem" concerns in Booking/eTraveli, departing from its Non-Horizontal Merger Guidelines in pursuit of an arguably novel theory of harm focused on the entrenchment of dominance. The EC found that the acquisi- tion of eTraveli, a flight online travel agency (OTA) services provider (and important customer acquisition channel for accommodation OTAs), would expand Booking's travel ser- vices "ecosystem" by restricting the ability of accommodation OTA competitors to challenge Booking's dominant position in accommodation OTA services, reinforcing indirect network effects and increasing barriers to entry and expansion. The EC's decision contrasts with the unconditional clearances issued in the US, the UK, and Ukraine. Booking subsequently appealed to the General Court.

Other vertical mergers examined by the CMA in 2023 include Broadcom / VMWare and United Health/EMIS, both cleared unconditionally following Phase II reviews. In Broadcom/ VMWare, the CMA decided that the deal would not harm innovation or impact the ability of Broadcom's rivals to compete, whereas the EC required commitments on access and interoperability. In United Health / EMIS, the CMA exam- ined whether the deal would allow United Health to limit its competitors' access to the data held within EMIS's patient record system or to degrade the digital connections to this system, which rivals rely on to provide integrated software. Following a detailed investigation involving the review of thousands of internal documents, the CMA found that it would not be commercially beneficial for the merged entity to restrict access to EMIS's electronic patient record system, and cleared the deal unconditionally in September 2023.

In the US, the FTC's challenge of Amgen's proposed acqui- sition of Horizon Therapeutics, marked the first time in over 40 years that a US antitrust agency challenged a transaction based on conglomerate effects concerns. The FTC alleged that the acquisition would allow Amgen to offer rebates on its blockbuster drugs to pressure insurance companies and pharmacy benefit managers to favour Horizon's products, raising rivals' barriers to entry, and insulating Horizon's products from competition. In September 2023, the parties settled on favorable terms with the FTC pursuant to which Amgen could close the transaction but would be prohibited from (i) bundling any of its products with certain Horizon drugs (Tepezza and Krystexxa), (ii) using any product rebate or contract term to exclude or disadvantage products that would compete with those drugs, and (iii) acquiring without the FTC's consent any competitors of the two Horizon drugs.

Takeaways

Be ready to engage on novel theories of harm in non-horizontal mergers, particularly for mergers in technology and life sciences sectors.

• Expect more thorough (and lengthier) investigations into 'ecosystems', innovation strategy, pipeline, and investment.
• Look beyond horizontal overlaps during initial Anticipate increased scrutiny of potential / pipeline overlaps, vertical relationships, and conglomerate effects concerns for those deals where the target is active in an adjacent or related market to the acquirer (including any of its controlled portfolio).

Educate deal teams on the importance of document hygiene – a bad document can make antitrust reviews much more difficult.

• Assume that antitrust authorities will review any deal-related presentations to management to assess the transaction rationale, valuation, competitive landscape, and the company's forward-looking strategy and projections.
• Develop/document any pro-competitive rationales for the deal valuation, including synergies and customer benefits.
• Avoid unfounded speculation or exaggeration.

Antitrust authorities are not always aligned.

• Merger control (or indeed FDI) clearance in one jurisdiction does not always mean other agencies will follow or accelerate their processes.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.