The Android choice screen

Has google “ducked” the EU remedy?

a CLI article by Oliver Bretz and Marie Leppard

In 2018, the European Commission found that Google abused its dominant position by imposing various restrictions on the Android operating system in order to entrench and promote its own search engine. In short, Google’s practices had denied rival search engines the possibility to compete on merits. The tying practices ensured the pre-installation of Google’s search engine and browser on practically all Google Android devices, and the exclusivity payments strongly reduced the incentive to pre-install competing search engines. Google had also obstructed the development of Android forks, which could have provided a platform for rival search engines to gain traffic.

To read the rest of this article please follow the link to CLI (Competition Law Insights)

ARISE EUFIS, SON OF CIFIUS

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

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

Leaving the Problem Behind – a possible alternative to Remedies in UK Merger Control

In 2004 I was involved in Convatec/Acordis, an anticipated UK merger, which was referred to a Phase II investigation by the then Competition Commission.  The transaction gave rise to a very limited overlap in alginate fibres, but was otherwise without concern.

https://assets.publishing.service.gov.uk/media/555de45ded915d7ae200012d/convatec.pdf

Instead of continuing with the Phase II reference, the parties  modified the transaction.  The original agreements were amended so that the alginate fibre business was retained by the Seller.  The remainder of the business remained subject to the acquisition.

https://assets.publishing.service.gov.uk/media/55194c2de5274a142e00037d/14-04.pdf

Faced with these facts, the Competition Commission concluded that it was under an obligation to cancel the reference, which it duly did.  This was obviously an attractive alternative for the parties, compared to the cost, delay and uncertainties involved in a potential reference.

Since then a lot of changes have been made to UK merger control regime and this article looks again at whether leaving the problem business behind is a suitable alternative to (i) an uncertain Phase I remedies process; and (ii) a potential Phase II reference.

THE LEGAL FRAMEWORK

For the purpose of this section, we have to assume that the CMA has taken a provisional decision under Section 34 ZA(1)b of the Enterprise Act (as amended).  Such a Decision is usually worded as follows:

“On the date of the SLC Decision, the CMA gave notice pursuant to section 34ZA(1)(b) of the Act to the Parties of the SLC Decision. However, the CMA did not refer the Merger for a phase 2 investigation pursuant to section 33(3)(b) on the date of the SLC Decision in order to allow the Parties the opportunity to offer undertakings to the CMA in lieu of such reference for the purposes of section 73(2) of the Act.”

Section 33 provides as follows:

Duty to make references in relation to anticipated mergers

  1. (1)  The OFT shall, subject to subsections (2) and (3), make a reference to the Commission if the OFT believes that it is or may be the case that
    1. (a)  arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation; and
    2. (b)  the creation of that situation may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

The important point here is that at the point of the decision under Section 34ZA(1)(b), the reference pursuant to Section 33(3)(b) has not yet been made – but the parties have received notice so that they can propose remedies.  Could they modify the transaction instead?  What would be the impact of such a modification on the duty to refer under Section 33?

The CMA Guidance CMA 2 on jurisdiction and procedure provides as follows:

15.2 If an anticipated merger is abandoned during the course of the CMA’s Phase 1 investigation, the CMA can issue a decision finding that its duty to refer does not arise because there is no relevant merger situation. If an anticipated merger is abandoned following a reference to Phase 2, the CMA can cancel the reference and stop the inquiry. The CMA has no power to cancel an investigation of a completed merger.

15.3 Section 37(1) of the Act requires the CMA to cancel a Phase 2 reference if it considers that the proposal to make arrangements of the kind mentioned in the reference has been abandonedWhere it is claimed that the arrangements have been abandoned and new arrangements are proposed or contemplated, the CMA must be satisfied that the arrangements that are described in the terms of reference have, in fact, been abandoned and that the new arrangements are not merely an amended form of the arrangements that were referred. (emphasis added)

 15.4 In order to be satisfied that the parties have abandoned the merger (at either Phase 1 or Phase 2), the CMA will require written assurance from the parties to the transaction to that effect. […] ”

As a result of the change to the merger it becomes more difficult for the CMA to prove the second condition of Section 33, because its theory of harm (usually price rises due to horizontal unilateral effects) no longer exists. Indeed, the non-merging of the overlapping business broadly reflects the CMA’s counterfactual (i.e. that business being run separately as a competitor).

In order to deal with that issue, the CMA would have to find that “the Merger” could be expected to lead to a SLC in the retained business.  That is an interesting question.  Every time a business is acquired from a Group, other parts of that Group are being left behind.  Merger control is typically focussed on unilateral, coordinated or sometimes portfolio effects of merging the businesses, but not ordinarily on whether what is left behind will be a less effective competitor.  In theory, it is possible that the act of splitting a previously integrated business would weaken the business left behind to such an extent that another player would be able unilaterally, or the other players in the market would be able in coordination, to raise prices. (Interestingly, such a theory of harm may not even require that the buyer would have the ability to raise prices as a result: it could be a third party competitor unconnected to the transaction.) For this to be the case, however, there would have to be strong evidence that the carve-out or “leaving behind” would undermine the competitiveness of the retained business to a sufficient extent (e.g. because of the consequent destruction of economies of scale or scope, or the starving of future investment that it requires), and there would also have to be something special about the retained business that its weakening as a rival would weaken the structure of competition in the market as a whole (e.g. there are very few other credible competitors or if it is a maverick).

Legally, the fact that the SLC arises not directly from the merging of businesses, but instead from the “leaving behind” of a business is unlikely to be a barrier to finding of an SLC under sections 33 (or 35) of the Enterprise Act. After all, even if it is the business “left behind” that is weakened as a competitor (rather than the target or acquiring business) by the merger, it is arguably still “the creation of the relevant merger situation” which “results” in the SLC.

That said, such a “carve out” theory of harm would be an unprecedented step, not just for the CMA. In Case M.4005 Ineos/Innovene, the European Commission allowed BP to retain a carved-out business whose subsequent sale to the same buyer Ineos under put and call options was referred to Phase 2 (although ultimately cleared unconditionally), without questioning whether the carve-out itself weakened the retained business as a competitive force. It would also raise some interesting issues about whether the UK Merger Notice adequately explores such “carve out” effects.  It would take a very bold CMA to refer a merger on that basis.

PRE-EMPTIVE ACTION

One other option would be for the CMA to make an interim order to preclude pre-emptive action.  The Guidance on interim orders can be found here:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/642070/guidance-initial-enforcement-orders-and-derogations-merger-investigations.pdf

  • The Guidance provides as follows:

“2.3 As explained in paragraphs C.5 to C.10 of CMA2, the CMA will only exceptionally impose an IEO in relation to a merger which has not yet completed. This is because the circumstances in which the CMA might consider that an IEO is necessary in relation to an anticipated merger (examples of which are provided in paragraph C.9 of CMA2) are, in practice, relatively rare.

2.4 Where the CMA does impose an IEO in relation to an anticipated merger, this will typically not prevent completion of the transaction from taking place (unless there are unusual circumstances which could mean that the act of completion itself would constitute pre-emptive action).5 In other words, during (and in advance of) the CMA’s phase 1 investigation, the CMA is typically concerned with limiting integration (maintaining pre-merger competitive conditions and ensuring that the CMA is able to implement an effective remedy if necessary) rather than preventing completion itself.”

It is plain from the text of the Guidance that an order preventing the closing of the transaction is (a) very rare and exceptional and (b) only intended for circumstances where limiting integration is the concern.

This is also in accordance with the actual text of Section 72 EA:

(8) In this section “pre-emptive action” means action which might prejudice the reference concerned or impede the taking of any action under this Part which may be justified by the CMA’s decisions on the reference.”

In the light of the CMA’s own guidelines it would not be a proper exercise of discretion to adopt an IEO at prohibiting the retention of a business. That would run counter to the CMA’s own counterfactual, and the main rationale of an IEO is to prohibit further integration. Rather, any IEO would have to be directed at prohibiting the merger of the merging business (highly unlikely), or at ensuring that staff or assets etc remain with the seller, sufficient to support the business (highly unlikely).

CONCLUSION

It has been 14 years since the abandonment decision in Convatec/Acordis.  This article concludes that it is still possible to leave behind a business or activity that gives rise to the substantial lessening of competition after the CMA has taken a Decision under Section 34 ZA(1)b.

In such circumstances the CMA would have to show a new SLC arising out of the “carve out”, which would be a difficult step to take within the current merger control framework.

For those who are wondering why all this is still relevant, I will conclude this article with a quote from Patrick Stanley, the CFO of Acordis at the time:

http://www.maguspartners.com/templates/Press%20Releases/Dealmaker%20Disposals%20May%2004%20copy1.pdf

“Another high point for me was solving the problem that arose when the OFT referred the deal to the Competition Commission. The deal was referred over what was actually a pretty insignificant part of the business – most of the value was in a different part of the operation. Whatever people say, the amount of information required during an investigation by these types of authorities is horrendous.”

 Oliver Bretz 

The Transactionalization of EU Competition Law

Damien recently held a presentation on the “transactionalization of EU Competition law”, i.e. the abundant use of commitments and settlement decisions by the Commission, at the Chillin’Competition conference in Brussels. The presentation builds on a paper Damien and Evi recently published on this topic, discussing the decisional practice of the Commission and the consequences of the lack of appeal.

For further details, please click on this link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040306