New Challenges to Finality in Merger Review

On January 28, 2022, the Mergers and Acquisitions Committee and the International Comments and Policy Committee co-hosted a panel titled “New Challenges to Finality in Merger Review.”  Kavita Pillai (Covington) moderated the panel with the following panelists: Michele Davis (Freshfields), David Emanuelson (Intel), and Christina Ma (Wachtell).  The panelists discussed recent developments in the U.S. and Europe that are creating new questions around whether particular transactions are subject to EU review and whether the expiration of the Hart-Scott-Rodino waiting period means the merging parties are free to close.

Key takeaways:

• Merging parties should not assume that because there is no or low turnover in Europe a transaction will not be reviewed by European regulators.
  • Under Article 22, the European Commission (EC) can obtain jurisdiction to review transactions that do not meet the EU turnover thresholds through referrals by national competition authorities in Europe. This referral mechanism has been used to catch deals not otherwise subject to review in dynamic industries, such as biotech, pharma, and tech, where innovation is a crucial parameter of competition.  This process can impact the overall deal timeline as illustrated in the Illumina/Grail deal, in which the EC took five months before asserting jurisdiction.
• Risk factors for deals not meeting the turnover thresholds but may nonetheless be investigated.
  • Turnover is not reflecting the competitive potential of the business.  For example, the target company has no revenue, but there is intense competition to buy that company or certain bidders are willing to pay billions of dollars to buy the target company.
  • High-profile acquirers with alleged market power in certain markets.
  • High transaction values.
  • Global deals other jurisdictions are investigating.
• To address the risk that a deal may be called in, one option is to engage proactively with the EC or national competition authorities, such as submitting a briefing paper explaining why the deal does not raise competitive concerns. This can eliminate uncertainties and start the clock for national competition authorities to decide whether to make referral requests to the EC. Whether parties should engage proactively requires a case-specific assessment.
• Strategies for transactions that may trigger investigations in the UK
  • Under the share of supply test, the Competition and Market Authority (CMA) of the UK can assert jurisdiction in cases where a merger creates or enhances a 25% share of supply or purchases of any goods or services in the UK. The CMA has wide discretion in defining the relevant market.
  • The UK government is proposing to change the test that would permit the CMA to assert jurisdiction over a merger where any party has at least 25% share of supply even if there is no overlap.  In the interim, if the parties are in sectors such as tech or pharma where the CMA may have some interest in investigating, submitting a briefing paper explaining the lack of jurisdiction or competitive effects would be an efficient way to deal with this risk.
• The FTC and the DOJ are largely aligned in merger enforcement
  • Following Assistant Attorney General Kanter’s appointment as the head of the DOJ’s Antitrust Division, the DOJ and the FTC have made efforts to show they are unified in terms of pursuing more aggressive enforcement. While Kanter’s background suggests he may focus on big tech, his recent statements suggest he is willing to pursue cases in other industries and is open to consider non-competition areas of harm.
  • One difference between the two agencies’ enforcement strategies is that the FTC may pursue administrative cases while the DOJ must seek injunctions in federal court.
• Foreign direct investment (FDI) filings can have consequences to deal timeline
  • FDI can be the long pole in getting deals closed.  In Europe, the number of countries that have implemented or are legislating FDI laws has increased from 11 in 2017 to 24 in 2021.
  • There is no one-stop shop in terms of FDI filing. The filing thresholds need to be analyzed separately for each jurisdiction. 
  • Even if a transaction is not caught by a mandatory regime, authorities in certain jurisdictions may have retrospective power to call in transactions. Under the UK FDI regime, the government has a five-year retrospective power to call in transactions that may raise national security concerns.
• Recent trends in merger agreements
  • During a time of transition, there may be more disagreements between parties about the best way to execute a strategy. There is an increasing need to specify the timeline and strategies for HSR and ex-U.S. merger clearance and FDI clearance in merger agreements. 
  • Specific limitations on prior approvals and limitations on the types of remedies (including labor regulations) may become more common.
  • Regarding closing conditions, there is an increased focus on pending or threatened litigation (e.g., whether parties can close a transaction when the FTC issues a warning letter) and the change of law provision in light of the recent changes of law in FDI.
  • It is also increasingly common to include provisions regarding the CMA or other jurisdictions that may call in deals.
  • As new theories of harm are emerging, parties also appear to be increasingly using reverse break fees to handle the uncertainty.