In a recently published policy paper, the European Commission (EC) assessed whether its jurisdictional merger control thresholds leave an enforcement gap, and whether the administrative burden on merging firms and other market participants is proportionate.
The EC concludes that the bright-line, turnover-based thresholds of the EU Merger Regulation (EUMR) generally suffice to capture transactions that merit EU review. In particular, the EC for the first time officially confirmed its position that these thresholds need not be expanded to capture acquisitions of non-controlling minority shareholdings – though that does not mean minority shareholders are home free under EU competition law.
The EC did express concern that some ‘killer acquisitions’, especially in the digital and pharma sectors, might have flown under the radar in recent years. It intends to solve this perceived gap via a revised referral policy, on which we have previously commented. In this respect, the EC also commented that the German and Austrian competition authorities do not seem to be able to capture killer acquisitions with the transaction value thresholds they implemented a few years ago, which is part of the reason why the EC prefers to try and capture such transactions via a revised referral policy instead of introducing additional thresholds based on a transaction’s value.
The EC also concludes that its latest simplification package was effective in reducing the administrative burden on merging firms and investors, though there remains some scope for improvement. This has led the EC to launch a new public consultation. Until 18 June 2021, stakeholders have the opportunity to comment on whether:
- the categories of simplified cases should be expanded (eg by including asymmetrical vertical transactions); and
- the review of simplified cases can be further streamlined (eg by making part of filling in the Short Form CO a tick-box exercise).
This blog post looks at each of these topics in turn.
Mind the gap – case referrals, killer acquisitions and non-controlling minority shareholdings
The EC finds that its turnover-based thresholds, complemented by referral mechanisms, have generally been effective in capturing transactions that merit EU review.
However, there were some recent cross-border transactions where the turnover of the target was not indicative of its (potential) competitive significance and which the EC would have liked to review. The EC expects that some of these transactions might have amounted to killer acquisitions, possibly warranting intervention. The EC based this conclusion on several observations:
- Using Bloomberg data, it identified 42 digital, 24 pharma and 21 other cross-border deals in the 2015-2019 period whose value exceeded €1bn and which might have merited review due to horizontal overlaps or other commercial links.
- Out of those, 27 stood out to the EC because the deal value exceeded the target’s turnover by a ratio of 10 or more. The EC views such discrepancies between transaction value and target revenue as an indicator of the potential ‘killer’ nature of a deal.
- The EC notes that several major tech companies have made hundreds of acquisitions in recent years but only notified a minority of those transactions to competition regulators. Evidence from the US suggests that the same holds true for many pharma deals.
How should the (perceived) enforcement gap be closed?
The EC assessed several ways to plug this perceived enforcement gap.
It expressed opposition to the introduction of complementary transaction value thresholds, saying that such additional thresholds would risk over-capturing non-problematic deals and increase the administrative burden on merging parties. The EC notes in this regard that the Austrian and German competition authorities (which introduced transaction value thresholds some years ago) have generally not been able to capture the type of digital and pharma transactions that the EC would like to review; nor have the Austrian and German regulators found reasons to intervene in any cases that were captured by the transaction value thresholds.
Instead, the EC decided to update its Article 22 referral policy to encourage and accept referral requests from member states, even where transactions do not meet the national merger control thresholds of the referring member states.
The EC’s new policy puts digital and pharmaceutical firms on notice that any acquisition they make, especially when it involves start-ups or an R&D pipeline, runs the risk of being thoroughly reviewed by the EC via an Article 22 referral even if such deals do not trigger filings in any member states. The policy paper suggests that the EC might use certain ratios of deal value-vs-target turnover as an initial screen to identify transactions meriting referral.
What about minority shareholdings?
The policy paper also closed off an important chapter in the debate on minority shareholdings. In 2014, the EC issued a discussion paper on whether the EUMR should be expanded to capture non-controlling minority shareholdings. This idea faced strong resistance from several stakeholders, who argued that a notification requirement for non-controlling minority shareholdings would significantly increase the administrative burden for both firms and the EC.
The EC has now for the first time officially confirmed its position that it is no longer considering extending the EUMR to capture such shareholdings. The policy paper acknowledges that the burden on investors would not outweigh the perceived benefits of subjecting such transactions to a merger control review process.
This decision can only be welcomed. However, it does not resolve all questions relating to minority shareholdings:
- It is still possible for single transactions to be subject to the dual jurisdiction of the EC and member state authorities whose merger control laws do capture minority shareholdings. More and more undertakings, especially investors, have faced such situations. It has been suggested that Article 3 of the EUMR (specifically, the transaction interdependence principle) be amended to remedy this. However, the EC currently does not seem open to introducing legislative amendments, so this situation will likely persist.
- The divestment of minority shareholdings in competitors, customers, suppliers and/or joint ventures will continue to be a possible remedy in mergers, as they have been in the past.
- The EC will also continue to consider the potential effects of investors taking non-controlling minority stakes in competitors, particularly in oligopolistic industries (the so-called ‘common ownership debate’). Competition authorities around the world, including the EC, are paying increasing attention to common ownership situations. For example, in Dow/DuPont (2017) and Bayer/Monsanto (2018), the EC considered common ownership as an element of context in assessing those firms’ market power. The EC’s joint research centre (an internal think tank) also published a paper at the end of 2020, suggesting that common ownership has increased firms’ market power in some industries, such as the beverage manufacturing industry (see our blog post). There are also a number of examples of national competition authorities in Europe taking issue with common ownership, such as the Greek competition authority's April 2021 finding that common ownership may lead to anticompetitive effects in the construction sector.
Simplification of the merger review process for non-problematic deals
The EUMR’s turnover thresholds capture many transactions that are highly unlikely to raise competition issues. Indeed, nearly three quarters of all deals reviewed between 2014 and 2020 were assessed under the simplified review procedure.
The EC has gradually introduced simplification measures to make such review processes less cumbersome for merging firms, largely by introducing fairly clear-cut market share thresholds. If firms do not exceed certain thresholds, they can follow an accelerated light-touch review process. The EC’s most recent simplification package dates from 2013, when the horizontal threshold was increased to 20 per cent and the vertical threshold to 30 per cent.
In its policy paper, the EC evaluates the effectiveness of its 2013 simplification package and concludes that it has alleviated the administrative burden on firms by increasing the application of the simplified procedure.
Scope for further simplification?
Simplified EU notifications remain fairly burdensome when compared to regimes in other jurisdictions. Many firms and investors will know that a simplified notification with the EC can still hold up a closing by several weeks, or even months if discussions on market definition end up being protracted, which often happens when notifying on the basis of low combined market shares.
The policy paper recognises that certain deals often trigger a full review despite being clearly unproblematic, such as transactions only narrowly exceeding the thresholds for the simplified procedure and transactions in the real estate sector. Sometimes it also transpires during pre-notification that a transaction is clearly unproblematic, but the deal nonetheless needs to be notified and assessed under the full procedure.
The EC helpfully acknowledged that there might be some scope for further simplification in this regard by introducing more flexibility to the criteria for simplified review and has asked interested parties to share their views via a consultation. The EC’s questions cover, among others:
- potential proposals to further increase the horizontal and vertical thresholds for simplified cases;
- whether additional categories of simplified cases should be introduced (such as asymmetrical vertical transactions);
- which factors should influence the EC’s decision to review a case under the full procedure even though it qualifies for the simplified procedure (eg one of the parties is a ‘maverick’ or there is an overlap between a marketed product and a pipeline product – factors that clearly echo the EC’s concerns about killer acquisitions); and
- how to accelerate the pre-notification process and reduce information requirements for simplified cases.
The deadline to respond to the EC’s consultation is 18 June 2021.
Missed opportunity: extra-EEA joint ventures are not subject of consultation
The EC declined in the policy paper to fully exclude the formation of joint ventures with activities entirely outside the EEA from its jurisdiction, citing the need to guarantee an effective merger control regime. This is unfortunate, as stakeholders had previously suggested that the EC should do away with the requirement to notify the formation of extra-EEA joint ventures, describing the process as pointless and cumbersome. Currently, such transactions often need to be notified to the EC due to the joint venture parents’ EU presence and sometimes even trigger additional information requests.
The EC is now considering whether to expand the simplified regime to joint ventures with slightly higher revenue or asset values in the EEA via its consultation. It also noted that even if the EC did accept to remove the notification requirement for such transactions, the benefit of the one-stop-shop regime would be lost and a notification might still be required in some EU member states.
That is of course true, but it does not take account of the fact that a number of member states already exempt extra-EEA joint ventures from their merger control laws. It is regrettable that the EC is not taking the lead to generalise this across the EEA, both via the EUMR and in consultation with national competition authorities, something it has often done before (and is, in fact, doing again with its revamped Article 22 referral policy).
Potential avenues for further simplification suggested by the consultation
As recognised in the EC’s consultation, there are essentially two options available to the EC to further ease the administrative burden on merging parties. These are not mutually exclusive:
- The expansion of the scope of the simplified regime to additional categories of transactions should free up the EC’s resources to focus on the more complex cases, while easing regulatory burden on businesses. The potential treatment under the simplified procedure of a wider array of vertical transactions is particularly noteworthy in this regard.
- Reducing the breadth of information requirements for a simplified notification should be considered. In this regard, the policy paper reveals that several national competition authorities considered that a tick-box type of notification form might be interesting to streamline notification requirements and enquired about the practicalities of such an approach. The consultation is now requesting feedback from stakeholders on how such a tick-box Short Form CO could be structured.
Both items are welcome thinking and we hope that the EC will follow up on the outcome of its consultation with additional simplification, without sacrificing the effectiveness of the EU’s merger control regime.
In the meantime, firms and investors may want to continue to use opportunities to engage with the EC case teams, referring to the policy paper’s conclusions, and discuss whether more flexibility can already be achieved under the current regime.