Digital mergers remain a key area of focus for competition authorities and in 2022 we expect them to continue to tighten the screws on merger control regimes. In addition, regulators are taking diverging paths on the review of digital mergers and regimes are becoming more difficult to predict, which will have an obvious impact on deal certainty and execution risk.
Expanding jurisdictional reach
In order to review digital mergers, which often involve nascent companies that generate little or no turnover, regulators are stretching the boundaries of the current jurisdictional rules and seeking new thresholds to bring more deals within their remit.
While the UK has a voluntary merger control regime, the CMA’s jurisdictional tests, including its ‘share of supply’ threshold, are uniquely elastic, giving the CMA the power to review deals that other regulators often could or did not. The CMA has taken an expansive interpretation of the various elements of the current jurisdictional tests, which has been validated by the appellate tribunal.
The UK Government is proposing to stretch the boundaries of UK merger jurisdiction even further, including removing the requirement to have an increment to the share of supply (i.e. no overlap would be required), which would enable it to capture more vertical and conglomerate deals, common in tech markets. In relation to digital mergers involving firms with ‘strategic market status’ (or SMS), the government proposes to introduce (i) an in-advance reporting obligation for all transactions; (ii) a transaction value threshold; and (iii) mandatory review for a subset of the largest SMS transactions.
Meanwhile, in the EU, the European Commission announced plans to use the existing referral mechanism under Article 22 of the EU Merger Regulation to address a perceived enforcement gap with regard to acquisitions by incumbents of nascent competitors, particularly in the tech and pharma industries. Under this new approach, the Commission will actively cooperate with national competition authorities to identify candidate cases with no or limited turnover in the EU for review by the Commission where competition concerns could arise due to the elimination of potential competition.
The Commission has already used the referral mechanism to review US gene-sequencing company Illumina’s acquisition of cancer-testing company Grail, which has been referred to an in-depth Phase 2 investigation and is subject to interim measures ordering Illumina to hold the companies separate after it closed the deal while the Commission’s review was ongoing. We expect the Commission to use its new approach towards Article 22 to increase scrutiny of digital mergers in 2022.
While the US already has broad jurisdictional rules, the US competition authorities have also been reassessing whether existing rules for mandatory filings need to be expanded. Following a study of non-reportable transactions in the sector, for example, the Federal Trade Commission has taken steps to overturn some prior informal interpretations that have commonly allowed parties to exempt start-up acquisitions in digital markets.
Meanwhile, China has granted its merger review authority residual jurisdiction to investigate transactions which are below the notification thresholds but may have anti-competitive effect since the Anti-Monopoly Law took effect in 2008.
In 2021, China’s antitrust guidelines on platform economy specifically note that the merger review authority is highly attentive to transactions involving start-ups or newly emerged platforms, or undertakings with low turnover due to free / low price business models, but which may have anti-competitive effects, and will rely on its residual jurisdiction to investigate such deals.
Dynamic markets and the standard of proof
It goes without saying that digital markets are dynamic and subject to rapid change: identifying the unicorns of tomorrow and predicting how markets will move is inherently uncertain for experts in the sector, let alone competition agencies. And those agencies have become increasingly preoccupied with Type II errors (i.e. erroneously approving problematic deals) in recent years, citing Facebook/Instagram (CMA) and Google/DoubleClick (European Commission) as examples of perceived underenforcement.
But how do regulators meet the required standard of proof in dynamic markets? There have been calls for changes to the applicable standard of proof by, for example, reversing the burden of proof or employing a ‘balance of harms’ test. The UK government looks set to lower the standard of proof at Phase 2 from ‘more likely than not’ to a ‘realistic prospect’ of a substantial lessening of competition for deals involving SMS firms.
While the new UK rules would only apply to a subset of the largest tech firms and their potential targets, the ramifications will be felt more broadly in what are often global markets – if the UK lowers the standard of proof, then the CMA is more likely to block deals that other regulators clear.
In the US Congress, the burden of proof to challenge killer acquisitions in court is seen as a significant barrier to enforcement in the sector relative to jurisdictions like the UK. As a result, legislative initiatives have been tabled in both houses of Congress to create presumptions of competitive harm for certain types of transactions and/or shift burdens of proof to the parties to show that the transaction will not harm competition.
Finding solutions to perceived problems
Next, what happens if regulators find competition concerns – can those concerns be ‘remedied’ by offering undertakings or commitments, and how will regulators approach such remedies?
While the European Commission has been willing to accept complex behavioural remedies in tech sector deals, including Google/Fitbit, the CMA’s position is that the behavioural remedies accepted by the Commission to clear Google’s acquisition of Fitbit would likely have been rejected in the UK were the CMA to have jurisdiction (as they were in Australia). The CMA has released a joint statement with the German and Australian competition regulators arguing that the “increasing complexity of dynamic markets and the need to undertake forward-looking assessments require competition agencies to favour structural over behavioural remedies.”
Thus, the difference in substantive assessment coupled with the difference in approach to remedies will result in increasing tension. And even where different regulators identify similar concerns, there is still a risk that alignment on remedies will not be possible. Deals currently subject to parallel review, including NVIDIA/Arm (under review in UK, EU, China, US) and Facebook/Kustomer (cleared by the CMA; referred to Phase 2 by the European Commission) will provide interesting learnings for future deal strategy.
For more on tech trends see our Tech Legal Outlook 2022