Tag: EC

“CMA Policy: UK Competition Authority Asserts itself in Anticipation of Brexit” comments by Sarah Long

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Sarah Long was asked to comment on The Capital Forum’s Vol. 7 No. 300 story published on 15 August 2019 entitled “CMA Policy: UK Competition Authority Asserts Itself in Anticipation of Brexit”.In anticipation of the UK’s imminent exit from the EU, the CMA has adopted an aggressive approach in a bid to secure a better outcome for UK consumers. […] The CMA “will now have an element of freedom to look at mergers in a different way,” said Sarah Long, a partner at Euclid Law in London, adding that the CMA could ultimately move away from the European Commission’s approach in some key respects.

To read the full article, click here.

E-commerce, brand equity and managing the Amazon marketplace: a response to the EC’s VBER consultation

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The EC’s consultation on the Vertical Block Exemption Regulation (VBER) and Vertical Guidelines (VGL) closed for comments on 27 May 2019. Euclid Law responded to the consultation, calling for greater clarity around restrictions on online marketplace sales in order to preserve brand equity. To support the response, Euclid Law also submitted an expert report entitled ‘Amazon and the growth in online marketplace sales’ by James Thomson, formally the business head of Amazon services, and now a partner at BuyBox Experts, a managed services agency supporting brands selling online. A full copy of our response is available here and the expert report is available here.

Sarah Long’s short LinkedIn opinion on the consultation is available here.

ARISE EUFIS, SON OF CIFIUS

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Dr. Alan Riley and Oliver Bretz

This article argues that EUFIS, the EU Foreign Investment Screening is modelled on CIFIUS, in that it is a political rather than an administrative process. Merging companies should take it into account if there is a risk of their long-stop date being extended beyond the autumn of 2020. Early engagement with DG Trade, especially in relation to remedies, will be an important step

Compared to CIFIUS on this side of the Atlantic, the adoption of the EU Foreign Investment Screening (EUFIS) has gone almost unnoticed. This may be due to the fact that it is seen as a distant threat, coming into force in late 2020. However, for deals that are currently being negotiated with long-stop dates into 2020 one may need to start looking at this issue quite seriously.

It should also be noted that the European Commission will have no formal decision-making powers. Instead, it will be the coordinating entity between the different foreign investment review systems of the Member States. That co-ordinating role will give it a significant influence over the process. That influence is underpinned by the Commission’s right to publish opinions of its view of the proposed transaction. Given also the Commission’s role as defender of the overall European interest, and its technical capacity it is also likely to become the focal point for the development of acceptable remedies. It is also clear from the experience of CFIUS in Washington that the investment review process will be far less administrative and technical and far more political, with all the uncertainties that this brings.

EUFIS will also for the first time put DG Trade on a par with DG Competition in merger cases, including in relation to remedies. Under the EU Merger Regulation, Member States may take “appropriate measures” to protect public security, the plurality of the media, and prudential rules. Any other public interests must be approved by the European Commission on a case-by-case basis.It will need to be seen how the review period will fit with the timelines of the EU Merger Regulation and national Takeover codes. DG Trade will have to evolve specific procedures for pre-notification and the negotiation of potential remedies.

On 14 February 2019 Trade Commissioner Cecilia Malmström said: “I’m very pleased that the European Parliament has given its backing to this initiative. Foreign investment is essential to the health of the European economy. At the same time, it is clear that we have to address the concerns about the security risk posed by certain investments in critical assets, technologies and infrastructure. Member States and the Commission will have a much better overview of foreign investments in the European Union and, for the first time, will have the possibility to collectively address potential risks to their security and public order.” (emphasis added)

In summary, EUFIS creates a cooperation mechanism where Member States and the Commission will be able to exchange information and raise concerns related to specific investments. The Commission will be able to issue opinions when an investment threatens the security or public order of more than one Member State, or when an investment could undermine an EU project or programme of interest to the whole EU. There are also provisions for cooperation on investment screening, including the sharing experience, best practices and information on issues of common concerns. EUFIS also sets out some minimum requirements for Member States who wish to maintain or adopt a screening mechanism at national level, whilst leaving the ultimate decision to Member States.

The EUFIS process is intended to take around 35 working days and contains the following steps: (i) the Member State where the investment takes place has to provide information on the investment and upon request has to notify cases which undergo national screening (ii) other Member States can then request additional information and provide comments (iii) the European Commission can request additional information and issue opinions (summarising its views and the comments from other Member States).

The Regulation also lists several EU funded projects and programmes which may be relevant for security and public order, and which will deserve a particular attention from the Commission. That list includes for instance Galileo, Horizon 2020, Trans-European Networks and the European Defence Industrial Development Programme. The list will be updated as necessary.

The Regulation sets an indicative list of factors to help Member States and the Commission determine whether an investment is likely to affect security or public order. That list includes the effects of the investment on critical infrastructure, critical technologies, the supply of critical inputs, such as energy or raw materials, access to sensitive information or the ability to control information, the freedom and pluralism of the media.

Member States and the Commission may also consider whether the investor is controlled by the government of a third country, whether the investor has previously been involved in activities affecting security or public order, or whether there are serious risks that the investor could engage in criminal or illegal activities.

The Regulation does not require Member States to introduce investment screening mechanisms. Member States may maintain their existing screening mechanisms, adopt new ones or remain without such national mechanisms.

Only 14 EU Member States currently have national investment screening mechanisms. Several are in the course of reforming existing schemes or of adopting new ones. The precedent from the adoption of the EU Merger Regulation in September 1990, was that almost all Member States rapidly adopted their own national merger regime. As all Member States would want to be able to credibly influence other states investment decisions and the Commission process, it is likely in the run up to the coming into force of EUFIS those states without an investment regime will create one. This in turn could create a further hazard for smaller deals affecting only a national market, where clearance will be required in almost all Member States by the merger and the foreign investment regulator.

The Regulation does provide for some key requirements for national screening mechanisms including transparency of rules and procedures, non-discrimination among foreign investors, confidentiality of information exchanged, the possibility of recourse against screening decisions and measures to identify and prevent circumvention by foreign investors. Member States with current screening procedures include Austria, Denmark, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Spain and the United Kingdom (until such time as it leaves the European Union and becomes a foreign investor under EUFIS).

From the CFIUS experience it can be assumed that Member States will have to evolve sophisticated national review systems that are able to make complicated assessments on very fast-moving technologies in a very short timeframe. That is not an easy endeavour, it can be expected that the Commission will increasingly take some of the burden. That raises the question whether DG Trade is itself equipped to make these assessments and whether it needs additional staff and expertise.

Where EUFIS could make a significant difference is in the area of remedies. Where a merger triggers multiple national reviews, the Commission will almost inevitably become the coordinator on remedies. Experience suggests that the Commission will need to evolve remedies that can deal with these issues through measures such as (i) appropriate black-boxes and information barriers (ii) independent board directors with national security clearance (iii) appropriate national oversight. How these factors will be used is up for grabs in a process that is likely to be intensely political. However, as there is an obligation not to discriminate between investors, a body of precedent is likely to start evolving, perhaps even through the adoption of guidelines and remedies templates – in exactly the same way as has happened under the EU Merger Regulation.

Despite the fact that the decisions will ultimately be taken at national level, the mere existence of EUFIS will give the Commission a degree of oversight and power in the process, which should not be underestimated.

Something is happening in UK merger control … despite Brexit

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One would be forgiven for concluding that the only thing that is happening in the UK is Brexit.  However, there are some interesting ideas being considered, either in the context of Brexit or perhaps more precisely despite Brexit.  The political paralysis that the country has suffered could come to an end quite quickly and the inevitable ministerial reshuffle could re-invigorate the process. 

With the appointment (on 20 June 2018) of Andrew Tyrie as Chairman of the Competition and Markets Authority (CMA), the body is now backed by a political heavyweight and those who followed his work as the Chairman of the Treasury Select Committee know that he means business for consumers.  Tyrie wasted no time in setting out his agenda in a well-publicised letter to the Secretary of State.

The core aspect for merger control is that with the increase in mergers after Brexit, a compulsory notification system with a standstill provision is being mooted. 

The accompanying CMA document explains as follows:

“Brexit could have important implications for merger control UK, in part because the CMA will need to review a larger number of multi-jurisdictional mergers that would previously have been considered by the European Commission. The existing rules, whereby firms notify the CMA of mergers on a voluntary basis, may need amendment, so that the CMA can work effectively with international counterparts. With this in mind, proposals are made to require mandatory notifications of mergers above a certain threshold, accompanied by a “standstill obligation” designed to prevent parties from proceeding with the transaction prior to the CMA’s approval (page 42 in the letter). It is also proposed that higher or full cost recovery from merging parties be reconsidered (the CMA currently recovers around half the cost of its mergers work from fees paid by merging parties, page 43 in the letter).”

The final statement on merger fees is also interesting in that the UK already has the highest merger fees in Europe.  At the moment, the level of fees is based on the turnover of the target, which often has no relationship to the complexity or indeed cost of the review.  Any change could have a chilling effect on smaller mergers in concentrated industries – which may of course be part of the CMA’s objective, even if that is not the most appropriate tool.

In the footnotes to the letter you can also find a suggestion that in digital markets the CMA should have a special power to look at the effect of successive acquisitions by the same company in the round rather than individually – and importantly a special regime whereby certain companies have to report acquisitions to the CMA as a matter of course.  This latter power is clearly aimed at the digital platforms and has to be read in the context of the conclusions of the Furman report, which can be found here.

In that report the Digital Competition Expert Panel made a number of far-reaching recommendations, including:

“Our recommendations also update merger policy to protect consumers and innovation, preserving competition for the market. Central to updating merger policy is ensuring that it can be more forward-looking and take better account of technological developments. This will require updated guidance about how to conduct these assessments based on the latest economic understanding, and updated legislation clarifying the standards for blocking or conditioning a merger. We believe that the correct application of economic analysis would result in more merger enforcement. This would be welcome given that historically there has been little scrutiny and no blocking of an acquisition by the major digital platforms. This suggests that previous practice has not had any ‘false positives’, blocking mergers that should have been allowed, while it may well have had ‘false negatives’, approving mergers that should not have been allowed.”

We may well see legislative change to deal with forward-looking mergers in technology and in particular so-called “killer-acquisitions”, a phrase coined by Cunningham, Ederer and Ma in their paper looking at pipeline pharmaceutical acquisitions – available here.  Although their study was limited to the pharma sector, the principles are now being considered in the context of digital markets and particularly where digital platforms buy up potential competitors before they can potentially become threatening.  This would deal with the 400+ acquisitions that digital platforms have made in recent years.

Change is on its way and this one could make the UK merger regime divert very significantly from its EU counterpart – and ironically place more pressure on reforming the latter. 

What is apparent is that deal or no deal, there will be a parallel merger control system in the UK, which will have its own features, timings and costs – and most larger mergers will be caught by both.  At the moment the UK has a “voluntary” system, but in practice mergers that raise issues in the UK will need to be filed in the UK.  The reason for that is very simple: under UK merger control, the CMA can intervene in a merger within 4 months of closing.  If it does so, it has the ability to impose stringent hold-separate obligations and it has the power to fine the company if those are not respected.  That is a risk that few companies will want to take, especially if there is a prospect of the target being left isolated and rudderless under a hold-separate for extended periods of time.  The Phase II process in the UK is particularly drawn out and painful and this is a risk that few purchasers are willing to accept.  A second ancillary point is that the UK process is very much driven by third party submissions and complaints, which increases the uncertainties in relation to mergers.  Often problems can arise in a very small area (for example in a recent deal that Euclid Law advised on, it was one single bottling line), which can then have significant implications for the rest of the deal.

On balance, it is often better to include a condition precedent in the deal and to notify a merger than to take the risk of a post-closing intervention by the CMA.  If the target is hotly contested, in an auction sale, for example, that may not always be possible, and it is not uncommon for purchasers to take the competition risk in the transaction where that is strictly necessary.  Early strategic advice on the options is clearly crucial in this area, as the CMA is likely to impose hold-separate obligations even where the risk of Phase II is very low.

One important aspect of UK merger control is the CMA’s ability to determine when a merger can be filed by declaring the notification complete.  This is different from the EU process, where the parties can ultimately decide the point of filing and the Commission would have to declare the notification incomplete after filings.  This power gives the CMA the ability to manage its own caseload.  The CMA also has the power to stop the clock if information requests to the parties are not complied with and it has used those powers in the recent past.

It is therefore appropriate to conclude that whatever the outcome of Brexit, the CMA will become a leading player in global merger control, probably on a par with other reputable agencies.  The Commission will have to adapt to dealing with the CMA as an equal rather than as a subordinated NCA under Regulation 1/2003.  This may involve the negotiation of a bilateral agreement, such as the one with Switzerland.  However, unlike Switzerland, the UK is unlikely to wait politely for the Commission to take a merger decision first and follow it.  Whereas the Commission is likely to be more influenced by the ordoliberal thinking in Germany and France, it is likely that the UK will develop an increasingly “dynamic” view of competition, especially in relation to forward-looking merger control.  Divergence is an inevitable consequence of that process. 

The CMA will inevitably need to evolve into a regime that is compatible with merger control regimes in the EU and the US.  Dialogue with Brussels will be key, as many companies operate a single integrated European business across jurisdictions.  This is particularly relevant if the parties need to structure global or EEA-wide remedies. 

The human factor in all of this cannot be underestimated as the future relationship between CMA and EU Commission will be shaped by mutual trust (or perhaps distrust) between the key decision makers.  The European elections and the new Competition Commissioner could have a significant impact on this dynamic.

Regardless of whether the Brexit date is 29 March 2019 or a later date, any large merger will have to be examined in both regimes on a forward-looking basis.  Without a deal, the CMA will become fully competent on Brexit day.  With a deal, that process may be delayed. However, the UK merger regime should not be underestimated and a parallel approach in Brussels and London will become the order of the day.  Chairman Andrew Tyrie is well aware of the opportunity and will use it to set the political tone.  His letter is well worth reading.

Oliver Bretz