Increasingly complex merger control

For companies engaged in transactions, national and EU merger control regimes have long been familiar territory. However, familiarity should not breed complacency, as the landscape of traditional merger control remains in a state of perpetual evolution, with recent years witnessing a pronounced acceleration of change. These developments have not only heightened the complexity of procedures but have also cast a veil of unpredictability over their outcomes. In the following sections, we delve into some of the pivotal shifts that have reshaped this regulatory terrain.

1. Article 22 EUMR after Illumina/Grail and the EC Guidance Paper

In 2021, the European Commission (EC) initiated a major shift in its approach to referral procedures outlined in Article 22 of the EU Merger Regulation (EUMR). This approach goes back to the Guidance Paper on Article 22 EUMR referrals released by the EC, which actively encourages National Competition Authorities (NCAs) to refer cases to the EC under specific qualitative criteria, and highlights the EC’s intention to assess concentrations based on their substantive impact rather than relying solely on quantitative thresholds. The approach was approved by the European Court of Justice (CJEU) and clearly broadens the EC’s jurisdiction in merger control.

The CJEU’s decision in Illumina/Grail (Case T-227/21) was the first case in which the broad approach to Article 22 EUMR was applied. Article 22 EUMR allows for referrals from the NCAs to the EC for any concentration that does not have a Community dimension within the meaning of Article 1 EUMR but affects trade between EU Member States and threatens to significantly affect competition within the territory of the Member State or States making the request. The CJEU agreed with the EC in two major points regarding the meaning of the constituting elements of Article 22 EUMR:

• Article 22 EUMR referrals can be initiated by a Member State, irrespective of (1) the existence of a national merger control system within the Member State and (2) whether the concentration lies beyond the scope of application of the national merger control regulations. This allows the EC to oversee concentrations that do not meet any EU or national merger control turnover thresholds, as long as the qualitative criteria named above are met. 
• “Made known” within the meaning of Article 22(1) EUMR requires sending sufficient information to the NCA to allow a preliminary assessment. Public announcement of the concentration does not suffice to fulfil this requirement. In cases where sufficient information is not initially supplied to the NCA, the EC retains the authority to conduct merger assessments through the referral procedure, as long as they do not compromise the defensive rights of the involved companies.

While there have been extensive discussions around both Illumina/Grail and the Guidance Paper, the effects of the changed approach have only become apparent in recent months. In 2023, there have been five Article 22 EUMR referrals, the highest in a year since the provision’s introduction, with at least two not meeting any notification threshold (Cases M.11212 – Qualcomm/Autotalks and M.11241 – EEX/Nasdaq Power).

References to Article 22 EUMR can also be found in other pieces of legislation: Article 14(1) of the Digital Markets Act (DMA) obliges gatekeepers to provide the EC with information, “where the merging entities or the target of concentration provide core platform services or any other services in the digital sector or enable the collection of data, irrespective of whether it is notifiable to the [EC] under that Regulation or to a competent national competition authority under national merger rules.” Article 14(5) then states that the NCAs may on the basis of this information “request the [EC] to examine the concentration pursuant to Article 22 [EUMR].”

In conclusion, businesses do encounter a heightened degree of uncertainty in navigating merger control within the EU. The reliance on strict quantitative turnover thresholds is diminishing, which is a significant consideration for both companies involved in concentrations and their legal advisors. This change is particularly crucial when advising companies that do not generate turnover within the EU, as the need for a merger control procedure may not be immediately apparent.

2. Application of Article 102 TFEU after Towercast

In March 2023, the CJEU issued a significant ruling in the Towercast case (Case C-449/21), which has introduced another notable shift in merger control proceedings within the EU. According to this ruling, Article 21(1) EUMR should be interpreted as not barring the NCA of a Member State from regarding a concentration as constituting an abuse of a dominant position prohibited under Article 102 TFEU, where the concentration meets the following criteria:

• The concentration lacks a Community dimension as defined by Article 1 of the EUMR and
• The concentration falls below the thresholds mandating ex ante control set forth in national law and
• The concentration has not been referred to the EC under Article 22 EUMR.

In essence, the Towercast ruling establishes an “NCA equivalent” to the Illumina/Grail case, which empowers NCAs to investigate concentrations that fall below the quantitative thresholds of both EU and national merger control regulations. This paves the way for a more qualitative analysis of such concentrations.

It is still too early to make sweeping generalizations about the widespread use of the Towercast ruling. In fact, it seems more likely that the application will remain more of a last resort to control below-threshold concentrations between direct competitors in very tight, highly concentrated markets. However, there are already instances where NCAs have indeed made use of the Towercast ruling. In June 2023, the Belgian competition authority applied it in Proximus/EDPnet, adopting interim measures after holding that a prima facie abuse of a dominant position had been demonstrated. The case has been closed on 6 November 2023, but only after Proximus divested EDPnet to a competitor.

3. National merger control rules

National merger control is experiencing significant transformation as well, with companies grappling with a rising number of national merger control regimes. This dynamic landscape requires a continually growing multi-jurisdictional evaluation of filing obligations for concentrations. Notably, Luxembourg, as the last Member State in the EU, has just recently introduced a bill for a competition law and in particular a merger control framework.

Furthermore, a trend towards a more qualitative-based merger control is also evident within Member States’ merger control regimes. For example, the recent amendment to the German Act against Restraints of Competition (GWB) introduced a new Section 32f, which provides the German Federal Cartel Office with the authority to examine the competitive implications of almost any transaction following a sector inquiry. This is achieved by significantly lowering the thresholds compared to the now-repealed Section 39a GWB. Other NCAs, such as the Netherlands Authority for Consumers and Markets, recently announced their intention to subject below-threshold concentrations to more scrutiny where possible (see here).

These developments pose complex challenges for businesses. Not only does the need for compliance with an increasing number of diverse national merger control regimes arise, but these regimes are evolving and increasingly emphasizing qualitative criteria, making the assessment more complex than the previously more straightforward quantitative thresholds. It also becomes more likely that regulators take diverging views on the same concentration, as recently illustrated in the Microsoft/Activision Blizzard case.

Foreign investment and subsidy control regimes

Beyond the mounting complexity within the realm of merger control, companies embarking on transactions find themselves increasingly entangled in a web of subsidy and investment control regimes. In an era characterized by escalating global conflicts, heightened fragmentation, and a surge in protectionist sentiments, the prevalence of these rules has grown. This does not only multiply the regulatory factors requiring pre-transaction consideration but also necessitates a fundamental shift in the analytical approach, as these regimes are anchored in geopolitical considerations rather than solely aiming at the maintenance of competitive markets. In the following, we analyse two central instruments: The various national foreign direct investment (FDI) regimes and the (still) new EU Foreign Subsidies Regulation (FSR).

1. FDI regimes

FDI regimes primarily focus on transactions involving foreign entities that may pose risks to a host country’s public order and safety, such as investments in critical infrastructure. Such comprehensive screening regimes have already been introduced in over 50 countries worldwide. The diversity in these regimes is influenced by various factors, including the economic development stage of the country, as well as the cultural and political preferences of the governing authorities.

The wide array of approaches and developmental stages results in varying requirements and a complex regulatory environment. This complexity makes it challenging to determine which transactions fall under FDI regimes in a given country and how they will be evaluated by the relevant institutions. In particular, companies should be aware that not only straightforward acquisitions of shares or assets can be subject to FDI review. They may extent to internal restructurings or carve-outs prior to a deal, further stake-building for already controlling shareholders or other forms of atypical acquisitions of control such as by voting agreements or redemption of shares.

Non-compliance with these FDI regimes in the context of mergers and acquisitions can have severe consequences. Such transactions may be subject to notification obligations, approval requirements, and potential prohibitions. Violations and breaches can lead to significant fines, the reversal of the concentration and even criminal penalties in some jurisdictions. 

2. FSR

Another central piece of legislation is the FSR, which is applicable since 12 July 2023. The FSR is aimed at preventing concentrations that will likely cause distortions of the internal market caused by foreign (non-EU) subsidies.

The FSR operates on a framework more closely aligned with traditional merger control principles, as its objective is to prevent foreign subsidies from having actual or potential adverse effects on competition in the internal market. Unlike FDI regimes, the involvement of a foreign company in the transaction is irrelevant. The key criterion is whether the undertakings participating in the concentration have received foreign subsidies.

The sole authority responsible for enforcing the FSR is the EC. Notification of a concentration – mandatory since 12 October 2023 – and scrutiny will occur, when (1) at least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and generates an aggregate turnover in the EU of EUR 500 million or more; and (2) where the undertakings involved were granted combined aggregate foreign subsidies of more than EUR 50 million in the three years preceding the conclusion of the agreement. Companies should be aware that the EC can also initiate ex officio investigations, even when the specified thresholds are not met.

The FSR has witnessed proactive engagement shortly after its introduction. The EC reported that 17 cases were already undergoing pre-notification before the official notification procedure commenced. Moreover, third parties have initiated the use of the complaint mechanism established under the FSR, even in sectors where it was not necessarily expected originally. In August 2023, for example, the Spanish football league La Liga filed a complaint under the FSR, alleging that French football club PSG violated the FSR by receiving financial support from Qatar.

Given this active involvement with the regulation, it is imperative for companies to familiarize themselves with this new regulatory framework. Non-compliance can lead to severe consequences, ranging from substantial fines to the retrospective reversal of the concentration. For all undertakings involved in a concentration that includes a company established in the EU, careful consideration of any foreign subsidies received by any of the entities is essential.

Conclusions

The shifting tides of regulatory landscapes in mergers and acquisitions have created an environment where companies must navigate uncharted waters with increasing complexity and unpredictability. Traditional merger control, once a predictable path, has evolved into an intricate landscape. The shift towards assessing concentrations based on substantive impact rather than quantitative thresholds emphasizes a qualitative approach, resulting in heightened uncertainty for businesses, both on the national and the EU level. In addition to merger control, companies are also navigating subsidy and investment control regimes, which have grown in complexity and significance.

The above developments place high demands on companies to ensure compliance with the complex standards of modern-day dynamic transaction environment. To circumvent potential setbacks, prohibitions, and financial penalties, companies must maintain a watchful eye on the ever-expanding and ever-changing tapestry of regulatory frameworks. This entails meticulous pre-planning of the transaction timeline and proactive engagement with the respective authorities to avert mistakes and unnecessary delays. Moreover, businesses should ascertain in their contractual documentation the spheres necessitating compliance collaboration, the allocation of responsibilities, and strategies for managing the risks associated with prohibitions, conditional approvals, or unexpected delays.

Authored by Dennis Cukurov and Tobias Kleinschmitt.