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Full Steam Ahead on Changes for Tech Mergers in the UK and EU

Jenny Patroclou

Full Steam Ahead on Changes for Tech Mergers in the UK and EU
d3sign via Getty Images

2024 brings sweeping changes for tech mergers with the UK’s Digital Markets, Competition and Consumer Bill (“DMCC”), heralding a regime that is expected to come into force in autumn 2024, and the EU’s Digital Markets Act (“DMA”), which entered into full force on 7 March 2024.

Although these two new regimes will most significantly impact large tech companies, particularly those in the US, these changes in the UK and EU signal increased scrutiny for M&A deals. This article outlines the key changes that businesses and their advisors should be aware of.

I. Reporting Requirements under the DMCC

The DMCC signifies a major shift in the UK competition regime – the most significant since the creation of the UK Competition and Markets Authority (“CMA”) in 2014. The DMCC (a) further expands the CMA’s remit and ability to intervene in mergers, particularly as compared to its prominent counterparts in the EU and US and (b) updates and expands the scope of UK merger control.

Royal Assent for the DMCC Bill is expected in April 2024 and the first designation investigations are expected to kick in during autumn of this year.

A. New Reporting Requirements for Digital Transactions

Enforcement of the digital aspects of the DMCC will be led by the Digital Markets Unit (“DMU”), which operates within the CMA.

Although the substantive tests for assessing digital mergers will remain the same as for other sectors, the DMCC regime will impose new merger reporting requirements for firms designated as having Strategic Market Status (“SMS”). Firms will be deemed to have SMS where they have:

  1. substantial and entrenched market power” and “a position of strategic significance” in respect of a digital activity linked to the UK; and
  2. global turnover above £25 billion or UK turnover above £1 billion.

The CMA has announced that it expects to start 3 to 4 SMS investigations within the first year of the new regime. Following designation by the CMA, the DMU will publish tailored rules for the conduct of each SMS firm, for the benefit of start-ups, smaller firms and consumers. It will have the ability to fine SMS firms up to 10% of their global turnover for non-compliance with those rules.

At a minimum, and unlike the ordinary CMA regime which is voluntary, SMS firms will be under an obligation to report mergers to the CMA before completion, where they:

  1. acquire equity or voting shares of more than 15%;
  2. have a value of £25 million or more; and
  3. have a UK nexus, i.e. where the target carries out activities or supplies goods/services in the UK.

For now, once the regime takes effect, the CMA will only require information to help it determine whether a transaction warrants a merger investigation under its normal merger review powers, and therefore the information expected of SMS firms will be much less than that required in a merger notice. Such a report will need to be deemed as “sufficient” by the CMA and merger parties will need to wait for five working days following such confirmation before closing.

B. Updating UK Merger Control Thresholds and Expanding CMA Jurisdiction

Companies should take note that changes under the DMCC for merger control are not limited to digital activities; the changes have wider implications for merging parties active in all sectors. The DMCC will also:

  1. increase the current UK target turnover threshold, in light of inflation, from £70 million to £100 million;
  2. introduce a new small business exception, applicable where the UK turnover of each party to the transaction is less than £10 million in its most recently completed fiscal year; and
  3. expand the CMA’s jurisdiction, capturing deals where the acquirer supplies at least 33% of a good or service in the UK and has above £350 million of UK turnover, while the target business is carried on by a UK business or body, at least part of its activities are in the UK, or it supplies goods or services in the UK. This change is designed to capture so-called “killer acquisitions,” where the target’s value will not necessarily be reflected in its low turnover.

While the CMA’s merger control process is technically voluntary, businesses active in any sector should be vigilant to avoid being caught off guard by regulation enforcement by the CMA, which has proven that it is not shy to intervene in deals it may consider problematic using “evolving theories of harm.

II. Reporting Requirements under the DMA

Similarly to the DMCC, the EU’s DMA also establishes rules which designated “gatekeepers” must comply with. “Gatekeepers” are defined as firms providing “core platform services” (“CPS”) such as online search engines, social networking and operating systems. To be designated as “gatekeepers” by the European Commission (“Commission”), firms must:

  1. (i) achieve an annual turnover in the European Economic Area (“EEA”) equal to or above €7.5 billion in each of the last 3 financial years or (ii) provide a CPS in at least 3 Member States where its average market capitalisation or equivalent fair market value amounted to at least €75 billion in the last financial year;
  2. control an important gateway for business users towards final consumers. This is presumed to be the case if the firm operates a CPS with more than 45 million monthly active end users established or located in the EU and more than 10,000 yearly active business users established in the EU in the last financial year; and
  3. have an entrenched and durable position (which is the case if the firm meets the second criterion in each of the last three financial years).

The Commission has already designated 6 gatekeepers — Alphabet, Amazon, Apple, ByteDance, Meta, and Microsoft. and X may also join the list soon. If the Commission designates such firms’ as gatekeepers, they will have six months to ensure full compliance with the DMA obligations for their respective designated CPS. Some obligations under the DMA will apply from the moment of designation, including the obligation to inform the Commission of all “digital” transactions involving a CPS, any service in the digital sector, or service that enables the collection of data.

The Commission has promised to publish a non-confidential summary of notified transactions “on a rolling basis, not earlier than four months after receipt of the information. It has confirmed that three transactions were notified between September and December 2023, and has already publicised Apple’s purchase of IP and assets from Blueye Limited, a provider of transcription technology, and Microsoft’s acquisition of Activision Blizzard. The Commission’s reporting should provide merging parties with at least some transparency on the types of transactions that the Commission may be interested in reviewing.

Although transactions that are notified may not meet the EU’s merger thresholds (or indeed EU Member State thresholds), it may still choose to review them (even if they are not notified via the DMA), call them in or intervene through the use of its Article 22 powers under the EU Merger Regulation, by asking national competition authorities in the EU to refer the transaction to it, even after a deal has closed (much like the CMA’s power to call-in cases). Recent examples of the Commission’s use of Article 22 include Illumina/Grail, Qualcomm/Autotalks and EEX/Nasdaq.

III. Impact for US firms

DMCC reporting requirements are meant to “increase the visibility of some large transactions, and the same can be said for the DMA to some extent. However, the general view among commentators in the US is that the DMCC and the DMA will dampen competition for US firms. There is less concern around the DMCC compared to its EU equivalent, primarily because of the DMA’s blanket regulation approach, whereas the DMCC’s impact is expected to be more limited considering it is more tailored to each SMS firm. The US’s own efforts to introduce scrutiny of big tech via the proposed “American Innovation and Choice Online Act”, still yet to reach a vote on the floor of the House, are quiet on merger control. Nevertheless, it is clear that dealmakers should keep in mind that it appears that a new status quo has emerged, in particular in the UK and the EU, with new thresholds and reporting requirements that could make or break their transactions.