Sponsored briefing: The regulatory environment for M&A transactions

The team at Eversheds Sutherland discuss some of the key themes in the regulatory environment and how these are impacting M&A parties

In recent years, there has been a fundamental shift in the regulatory environment for M&A transactions. Deal parties are seeing an increase in the different types of regulation which they are expected to navigate, and yet the ever-growing powers of many of the key competition authorities across the
globe to intervene in mergers is leading to greater uncertainty. In this article, we draw out some of the key themes and how these are impacting M&A parties.

Emergence or expansion of multiple types of regimes regulating M&A and investments

Foreign direct investment (‘FDI’) regulation has become an increasingly relevant consideration for deal parties in the context of M&A transactions and investments more broadly in recent years, with a range of jurisdictions globally having taken steps to strengthen their ability to review and actively intervene in transactions. Many FDI regimes are far-reaching both in terms of the types of deals which are within scope (with the acquisition of minority shareholdings or assets alone being sufficient in some cases), as well as the sectors which are impacted. Whilst the regulation of FDI typically evokes associations with particularly sensitive sectors such as military and defence, in reality many FDI regimes are much broader than this. By way of example, deals involving semiconductors have been a particular focus under the UK’s national security and investment regime to-date, and in China, a transaction involving a regional supermarket chain faced unexpected scrutiny under the national security review regime.¹

Just as deal parties are getting to grips with the additional complexity that the regulation of FDI brings to M&A transactions, the introduction of yet another new regime with mandatory notification requirements is fast-approaching. The Foreign Subsidies Regulation (‘FSR’), which will enter into force on 12 July 2023, is designed to allow the European Commission (the ‘Commission’) to review financial contributions by non-EU governments to businesses to determine whether they are likely to distort markets within the EU. From an M&A perspective, the FSR represents an additional hoop to jump through in addition to existing merger control and FDI regimes, and is likely to have a significant impact on public procurement and many other market situations.

In Asia, where there has traditionally been more screening of FDI into domestic assets, we are seeing a similar expansion in the regulation of M&A, but the focus of this has been on countries implementing merger control regimes for the first time², as well as an increased focus on enforcement in those jurisdictions which already have regimes. The impact of this is most likely to be felt in areas which are becoming increasingly attractive to overseas investors, and investors from other Asian countries are likely to be particularly affected.

Expansion of powers to intervene in mergers

Defined turnover thresholds in merger control regimes are designed to provide legal certainty. Mergers that meet the thresholds in any given jurisdiction must be notified and (usually) cleared by the relevant authority prior to implementation, and where the thresholds are not met, the theory is that a deal can be closed safe in the knowledge that it will not be challenged on merger control grounds. There has, however, been a marked increase in recent times in the powers of competition authorities in a number of key jurisdictions to intervene in below-threshold M&A deals, which means that merger control thresholds cannot always be relied upon in this way.

Article 22

Article 22 of the EU Merger Regulation (‘EUMR’) allows Member States to request that the Commission examine transactions which fall below the standard EU financial thresholds for review where certain criteria are met. It was originally conceived as a corrective mechanism where Member States did not have their own regime, meaning that its relevance gradually diminished over time and the Commission developed a practice of discouraging referral requests from Member States. In recent years, however, an increased concern around so-called ‘killer acquisitions’ where a target’s turnover is deemed not to be reflective of its actual or future competitive potential has led to the Commission reversing its policy of discouraging article 22 referrals where national turnover thresholds are not met, an approach which was endorsed by the General Court in the Illumina/Grail case³.

Whilst the numbers to-date suggest that the Commission appears to be exercising its powers under article 22 with an element of restraint⁴, its change in approach has been controversial as it provides a mechanism for it to investigate transactions which are not required to be notified under the EUMR or to individual Member States. This means that what was once a relatively straightforward question of whether a mandatory filing to the Commission or one or more EU Member States is required has become somewhat more complicated. There has been a concern that this adds to deal uncertainty for M&A transactions and reflects the broader trend towards more regulation of M&A, with more details potentially being subject to merger control scrutiny.

Abuse of dominance as another tool in the arsenal of competition regulators?

The European Court of Justice’s (the ‘ECJ’) recent judgment in the Towercast case⁵ clarifies that acquisitions by already dominant companies which do not meet the EUMR thresholds (or those in individual Member States) can still be reviewed by national competition authorities post-completion under the rules prohibiting abuse of dominance. This provides national competition authorities with yet another means of exercising jurisdiction over non-notifiable deals, as well as providing third party complainants with a basis for challenging deals post-completion, and adds a layer of complexity for dominant companies in particular who will need to consider the potential impact of contemplated transactions on market structure.

Whilst it remains to be seen how and with what frequency abuse of dominance rules are applied in this context, it is notable that since the ECJ’s Towercast judgment the Belgian competition authority has already launched an abuse of dominance investigation into a below-threshold acquisition by a company in the telecommunications sector.

Not just an EU issue

These recent developments mean that the EU is becoming increasingly aligned with other major jurisdictions where there is an ability for competition authorities to intervene in below-threshold M&A deals.

In the US, it has long been the case that both the FTC and the DOJ have jurisdiction to review transactions that either fall below the notification thresholds or that are otherwise non-reportable because of an exemption, and both agencies are active in their use of these powers in a variety of industries.

In his July 2021 Executive Order, President Biden directed the FTC and DOJ to make use of this jurisdiction in order to challenge deals which might otherwise have escaped scrutiny under the HSR which has brought these powers into renewed focus for transaction parties.

In China, recent amendments to the Anti-Monopoly Law have given SAMR the power to ‘call in’ deals and require notification (including post-completion) where there is evidence that a transaction may eliminate or restrict competition, even if it does not meet the thresholds for mandatory notification. Whilst there is limited guidance as to the circumstances in which these powers will be exercised, the focus is again likely to be on ‘killer acquisitions’ involving targets where turnover is not reflective of actual or future competitive potential.

Whilst the UK regime is voluntary, the CMA has a broad discretion to ‘call in’ transactions over which it has jurisdiction, and we have seen the CMA becoming more actively involved in considering a wide range of global deals post-Brexit. In particular, there has been a clear trend of the CMA investigating deals between parties with a limited nexus to the UK⁶.

Competition authorities identifying a broader range of concerns when investigating mergers

Whilst transactions between direct competitors that could lead to higher prices remain a clear priority for competition authorities, there has been a recent and increased focus on novel and complex competition issues during the course of merger investigations, with a number of key regulators setting out their stall in this regard.

At a conference speech given in February 2023, the Chief Executive of the CMA made clear that whilst there has been no material shift in the CMA’s approach to typical horizontal mergers, the UK regulator is consciously scrutinising a greater number of deals with other concerns, such as those with
threats to dynamic or potential competition and innovation, relatively more complex theories of harm across supply chains, or an accumulation of market powers across vertical or adjacent markets.

Similarly, in relation to EU mergers, DG COMP’s Director for Policy and Strategy commented in a recent interview that the Commission is ‘pushing analysis beyond traditional horizontal issues and looking more attentively at non-horizontal conglomerate aspects’.

In the US, the FTC and the DOJ are undertaking a joint review of both the horizontal and vertical merger guidelines, and the expectation is that the new guidance will set forth a revised analytical framework for the assessment of mergers including a focus on acquisitions that target nascent competitors, the non-price effects of mergers, and the consideration of the impact of vertical mergers.

Closing remarks

The regulatory landscape for M&A deals is becoming increasingly complex to navigate, and it is more important than ever for deal parties to be alive to these issues from the very outset of the transaction process. Undertaking an in-depth analysis of the application of merger control, FDI and other regulations is an essential part of any due diligence process, and will no doubt continue to play an important role in shaping the M&A strategy of many acquirers and investors.

1. Zhongbai Holdings/Yonghui Superstores, intervened by the NDRC in 2020.
2. By way of example, both Malaysia and Cambodia are in the process of taking steps towards implementing fully-fledged merger control regimes.
3. Case T-227/21, EU:T:2022:447
4. We understand that as of December 2022, the Commission had considered around 30 deals which were not notifiable either under the EUMR or in any Member State since it published its 2021 guidance, and that of these cases, only one has been pursued (Illumina/Grail). The Commission has also opened investigations into three deals which were originally notified by the parties
   to a Member State, but which were subsequently referred to the Commission by the Member State in question (and a number of other Member States) under Article 22 (Meta/Kustomer,Inmarsat/Viasat, and Oticom Medical/Cochlear).
5. Case C-449/21, EU:C:2023:207
6. Examples of this include Sabre/Farelogix (target had no UK turnover and no direct UK customers), Facebook/Giphy (no UK target sales), Cargotec/Konecranes (both parties non-UK companies and even though the Commission had conditionally approved the transaction, the CMA prohibited the deal and it was subsequently abandoned by the parties), and Roche/Spark (no UK turnover and jurisdiction established on the basis of R&D activities in the UK alone).

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