M&A supervision has always been predictable. If turnover thresholds were exceeded, companies had to notify a transaction (see Article 29 of the Mededingingswet (Competition Act) and Article 1 of the EC Merger Regulation). The competition authority then reviewed the transaction. This made it easy to anticipate the regulatory obligations.
Although, broadly speaking, merger control still functions this manner, the predictability has been decreasing of late. A trend can be identified whereby competition authorities are getting involved in non-notifiable transactions. What is known as ‘killer acquisitions’, for instance, may also be reviewed by the European Commission (the Commission). And transactions may potentially qualify as abuse of a dominant position by the acquirer (see this blog).
Authorities are also scrutinising transactions more closely on the grounds of political and strategic considerations. This year, for instance, the Dutch Wet Vifo (Investments, Mergers and Acquisitions (Security Screening) Act — the Vifo Act) and the European Foreign Subsidies Regulation (FSR) entered into force, whereby transactions are assessed not for their effects on market operations, but rather for their effects on the strategic interests of the Netherlands and the European Union (EU) (see this blog).
These developments may affect the timing and deal certainty of M&A transactions. In this blog these developments are addressed in more detail and tips are provided on how to manage transactions.
Assessment of transactions under competition law
Article 22 of the EC Merger Regulation
Article 22 of the EC Merger Regulation allows the Commission to assess transactions that do not exceed (turnover) thresholds. Although Article 22 of the EC Merger Regulation is not a new instrument, companies have only had to seriously consider it since 2021 (see this blog). The article was intended for Member States that had no merger control, but is now being applied to transactions in innovative sectors, where competitors are being taken off the market – known as ‘killer acquisitions’. To name a few examples: acquisitions of pharmaceutical companies with promising pipeline products, software developers, or the 2022 ban on the acquisition by Illumina of biotechnology company GRAIL.
An indication of a killer acquisition may be the high transaction value compared to the target company’s relatively low turnover. The reason for this is that the turnover does not reflect the target company’s (potential) market power. The fact that authorities are also considering the turnover and transaction value is apparent from the recent Article 22 proceedings regarding Adobe’s acquisition of Figma. National competition authorities, including the Netherlands Authority for Consumers and Markets (ACM), got wind of the acquisition because Adobe offered USD 20 billion for Figma; a record sum. Never before has a company paid a multiple of 50 of a target company’s annual recurring revenue.
Transactions in innovative sectors have the special and ongoing attention of competition authorities, as apparent from the announced Article 22 investigation into Qualcomm’s acquisition in the semiconductor industry of Autotalks, and the investigation into EEX’s acquisition in the energy sector of Nasdaq Power.
It is therefore advisable to check beforehand whether the target company’s turnover reflects its potential – all the more so if the target company operates in an innovative sector. If a killer acquisition is suspected, parties may informally contact the competition authorities to address any competition concerns in a timely manner.
Gun jumping
Completing a transaction that requires notification to a competition authority, such as ACM or the European Commission, before being given approval to do so, also known as ‘gun jumping’, is prohibited.
The Illumina/GRAIL transaction is a case in point. The Commission fined Illumina €432 million (and GRAIL €1,000) for completing the transaction before being given approval. This is the highest fine ever imposed for gun jumping (see this blog). The Commission is currently still investigating Vivendi for possibly having partially implemented its acquisition of Lagardère before being given approval.
To avoid fines, parties should not take any action that effectively amounts to the implementation of a transaction before they obtain approval. It is advisable to make agreements to this effect in the transaction documentation and to observe the relevant regulatory deadlines.
Transaction as abuse of a dominant position
A company that has a dominant market position should also be aware that a concentration that is not subject to notification may still be investigated as abuse of a dominant position by the buyer. The ECJ recently confirmed this in the Towercast case, citing the old Continental Can judgment (see this blog).
This gives national competition authorities an additional review tool. A direct result of this is the Belgian competition authority’s investigation into an acquisition by Proximus. Market parties (such as customers) may also try to reverse a transaction or claim damages in court.
Moreover, the Competition Act provides that a concentration cannot be regarded as abuse of a dominant position (Article 24(2)). This differs from European competition rules, which is precisely not the intention of the Dutch legislature. This clearly calls for a change in the law.
For this reason, it is advisable for parties with a strong market position to make a careful assessment and contractual agreements before a transaction takes place, to avoid proceedings at a later stage.
Strategic and political review of transactions — Vifo Act and FSR
Vifo Act
M&A transactions and investments may be assessed by the authorities also outside competition law. The Vifo Act entered into force on 1 June 2023. Under this Act, companies are required to notify certain acquisition activities in certain sectors. The notification must be made to the Bureau Toetsing Investeringen (Investment Screening Agency – the BTI).
The purpose of the Act is to protect Dutch national security by regulating investments in vital providers, companies active in sensitive technology, and managers of corporate campuses.
The legislature may designate new categories of sensitive technologies. Photonics and semiconductor technology, for instance, have also already been brought under the scope of the Act through the Sensitive Technology Decree.
In principle, the BTI has eight weeks to assess a notification. This period may be extended to a maximum of six months. Notifiable transactions may not be implemented before approval is given, under penalty of a fine of up to 10% of the buyer’s annual turnover.
In light of the long assessment period, parties should seek timely advice on the applicability of the Vifo Act. The BTI may also be contacted informally at an early stage (see this blog).
Foreign Subsidies Regulation
Investments are reviewed from a strategic perspective also at a European level. The FSR recently came into force (see this blog). This review tool focuses on companies operating within the EU that have received a subsidy from a state outside the EU (third country). The Commission assesses whether the subsidy distorts the internal market.
Because European state aid rules do not apply to subsidies from third countries, an unfair difference may arise between companies that receive subsidies from EU Member States and companies that receive subsidies from third countries, for instance when a recipient company wishes to make an acquisition or bids for public tenders. If the subsidies received exceed a certain value, the transaction will also be reviewed under the FSR (€50 million in the three years preceding the transaction).
The first application of the FSR was quick to arrive. Spanish football league La Liga, for instance, is aiming to create a level playing field by means of a complaint that it filed on 12 August 2023 against French football club PSG. La Liga is alleging that PSG receives subsidies from its Qatari owners that distort market forces within the EU. La Liga is presumably referring to PSG’s record purchase of player Neymar, who was snapped up from F.C. Barcelona.
It will be interesting to follow in which other industries the FSR will be applied in the coming period. Grants received from non-EU countries will have to become part of the orientation on and preparation for proposed transactions.
Tips
It follows from the developments described above that authorities are increasingly looking for ways to control transactions. The following tips serve to ensure that the deal certainty and timing of M&A transactions are not jeopardised:
- Regardless of the size of a transaction, it is advisable to check in any transaction in innovative sectors whether it may be classified as a killer acquisition.
- Prevent premature implementation of a transaction. Make sound arrangements to that end in the transaction documentation, taking the processing time at the regulator into account.
- When preparing for a transaction, also consider the concerns that market parties or authorities may have with regard to the transaction and how those concerns can be addressed. One way of doing so is, for instance, by making contractual arrangements. This applies in particular to companies with a dominant market position.
- Bear in mind that certain transactions may also be reviewed from a political and strategic perspective. It is advisable to seek timely advice on this point.
Information on dawn raids by ACM and the European Commission can be found at invalacm.nl
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