Global economic growth is back on the agenda and companies are once again looking to position themselves for success by pursuing mergers and acquisitions. But what are the prerequisites for success in an increasingly disrupted world?
Welcome to the second White & Case merger control publication, the first edition of which was warmly received. Earlier this year, it became apparent that an update was required, not so much driven by regulatory change, but rather to take into account policy shifts.
For example, we have seen the US catch up with Europe in relation to vertical mergers, the AT&T/Time Warner review being the most prominent recent example. At the same time, the European Commission has forged ahead again with a focus on conglomerate mergers and innovation markets. Perhaps the Dow/DuPont merger has attracted the most attention, as authorities now get out their telescopes and look far into the horizon to identify anti-competitive harm. There is a sense among the Commission’s hard-liners that in the past too many mergers wriggled through without proper analysis. Our own view is that it may be legitimate to look ahead to try and identify harm (after all, that is what merger control is all about), but this long lens should not be forgotten when it comes to reviewing the synergies that a merger may create. However, Europe has set the tone, and we expect other authorities to follow.
Europe also seems to be taking the lead (and others will follow due to the prospect of publicity-garnering fines) in relation to procedural infringements. The argument for pursuing companies for inaccurate filings, for example, is that such violations call into question the very system of merger control. Be that as it may, due process needs to be followed in such cases, and this may divert valuable resources to past cases as opposed to dealing with the current case load. In other words, pursuing a few flagrant cases may be necessary to set a precedent, but they should not become regular items on the authorities’ agendas (bringing with them attendant increases in filing times, and costs). Our view is that the authorities should confine their focus to statements that would have yielded a very different outcome, not mere technical infringements.
This leads us to the subject of gun-jumping. Again, viewed from afar, this should not be a problem in no-issues filings, and authorities typically have the tools to unwind a completed merger. The maxim ‘no harm, no foul’ ought to be applied to these cases to ensure that valuable resources are not frittered away on them.
In sum, our assessment is that the global system of merger control continues to limp along. However, the costs associated with a system containing myriad controls are increasingly high. Looking ahead, we wonder whether a fundamental overhaul is needed to ensure that transactions that pose no problems are not saddled with the costs imposed by the global system. (Yes, this will mean some authorities will have to relinquish jurisdiction in certain instances, safe in the knowledge that a transaction will be reviewed elsewhere.)
But more importantly, we continue to believe that the system of mandatory pre-merger review is fundamentally flawed and that instead we should shift to a system of voluntary merger control in which only mergers that present genuine issues need to be notified. Ironically, when commentators question whether the UK system of merger control needs to change in light of Brexit, one of the things that we would not change is the voluntary nature of the system.
Axel Schulz and Matteo Giangaspero
The European Commission is increasingly concerned that market consolidation will harm innovation and has changed dramatically the way it examines the impact of mergers on innovation. Merging parties should be prepared for it.
Has the disclosure standard for companies been raised in the EU?
When it comes to mergers within the digital landscape, the greatest challenge for regulation is to strike the right balance as regards enforcement. How are EU authorities taking action and what does this mean for the innovation economy?
Strati Sakellariou-Witt and Jan Jeram
An increase in cases has been seen as a warning that the EU is ramping up its response to potential conglomerate effects. What can merging companies do to prepare for a challenge?
Rebecca Farrington, Noah A. Brumfield, Jérémie Jourdan, Veronica Pinotti, Martino Sforza, and Julio Felipe Pantazis
Regulators in key global markets are increasingly demanding remedial action to allay competitive concerns.
The European Commission is paying greater attention to investors who hold stakes in multiple companies in the same industry and considering how this concentration of influence might have an anti-competitive effect.
Patrick Sarch and Sophie Sahlin
Effective handling of antitrust issues can help businesses bolster their negotiating position—whichever side of the deal they're on.
Pontus Lindfelt and Matteo Giangaspero
The evolution in private equity means that forward-thinking firms are adding early-stage review to their merger strategy.
Dr. Tobias Heinrich, Marc Israel, Farhad Jalinous, Igor Ostapets, Veronica Pinotti, John Tivey, Jun Usami, Z. Alex Zhang, Orion Berg, and Ksenia Tyunik
A clampdown by governments across the world on potential security threats has increased the scrutiny of participants seeking clearance for cross-border mergers and acquisitions.
Whether it is 'hard' or 'soft', a UK exit from the EU will mean a very different dynamic in terms of merger control.
Toshio Dokei, Hideo Nakajima, Seiji Niwa, and Takako Onoki
In the past 18 months, Japan’s regulator has tackled Big Data, introduced greater disclosure and conducted a high-profile, parallel merger review.
Gun-jumping has been in the crosshairs of competition-law enforcers for the past decade, and recent developments show authorities across the world are taking an even tougher line.
Jérémie Jourdan and Martin Möllmann
When European Union Courts overrule European Commission decisions on transactions, finding a solution to the situation can be challenging for parties to the deal.
Partner Mark Powell discusses how the global merger control systems have evolved in the past and what lies ahead.
Partners Axel Schulz and Marc Israel talk about how merger control authorities across the world are taking a greater interest in deals that may potentially raise national security concerns.
Partners Marc Israel, Mark Powell and Axel Schulz discuss how competition regulators investigate issues relating to common ownership.
Partners Axel Schulz and Mark Powell and counsel Sophie Sahlin discuss issues relating to gun-jumping.
Partners Marc Israel and Mark Powell discuss how Brexit may impact the deal approval process, both in the UK and in the EU.
Partner Axel Schulz talks about how competition authorities are increasingly concerned about the impact of consolidation on innovation.
A clampdown by governments across the world on potential security threats has increased the scrutiny of participants seeking clearance for cross-border mergers and acquisitions.
With governments around the world placing foreign direct investment under ever greater scrutiny, an increasing proportion of big cross-border mergers and acquisitions are being subject to national security review procedures. Keeping abreast of new laws and engaging early with national bodies has never been more important when navigating this new landscape.
Australia Infrastructure security spotlighted
The Foreign Investment Review Board has the power to intervene on any transactions that lead to the acquisition of a ‘substantial interest' in an Australian company, land, land-rich entities, agricultural land and agribusiness, or acquisitions by foreign governmental investors. The Treasurer may prohibit or order broad divestments when a transaction appears contrary to the national interest based on its impact on national security, competition, government laws and policies, the economy and community or the investor's character. In January 2017, the Australian government launched the Critical Infrastructure Centre to independently advise the Treasurer on national security risks in respect of access and control of the country's critical assets, such as ports and storage, and energy supply. In March 2018, the Security of Critical Infrastructure Act was passed to give the Minister for Home Affairs a broad power to take action to protect against threats of espionage and foreign interference to critical infrastructure. The legislation established a register of Australia's high-risk critical infrastructure, including information on asset ownership, access and control.
Canada Increased transparency is encouraged
The Canadian government has the power to review transactions that exceed a specific threshold or transactions (including minority investments) where there are ‘reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security'. Although there is no definition for the latter, authorities' examination of the potential effects on national security include the areas of defence, technology, and critical infrastructure and supply. Parties in a transaction raising national security concerns are encouraged to seek clearance at least 45 days before closing. Authorities can block the investment, ask for undertakings and/ or provide terms or conditions. Recent trends show an encouragement of foreign investment, prompting the government to issue guidelines that increase transparency.
China Cybersecurity law adds requirements
In 2011, China's Ministry of Commerce (MOFCOM), the regulatory body that has oversight for reviewing acquisitions, introduced a set of temporary provisions aimed at assessing the overall impact of foreign investments on China's national security, defence, economy and public interest. In 2015, China promulgated its first National Security Law, which provides more detailed rules under which MOFCOM will review, approve or terminate any transaction and to impose sanctions or divestments on acquiring companies. In addition, China's 2017 Cybersecurity Law provides for additional requirements to be placed on companies engaging in critical informational infrastructure or network and data operations.
EU Juncker outlines new measures
In September 2017, European Commission President Jean-Claude Juncker outlined legislative measures on the screening by EU Member States of foreign takeovers and investments following a significant increase of foreign direct investment into European technology assets, particularly from companies in China with links to the Chinese government. The proposed EU Regulation, which can still be amended by the EU legislature (Parliament and Council), and is currently expected to be passed by the end of Q1 2019, stops short of forcing Member States to establish or maintain investment review mechanisms. However, if they do so, frameworks should be in line with EU law. According to the non-exhaustive list of pertinent considerations, critical infrastructure and technology, security of supply of critical inputs, and access to or control of sensitive information are included. The new screening system aims to improve cooperation between Member States in vetting transactions affecting security and public order, although the Commission's views are not binding and an ultimate decision rests with the Member States.
New ‘Pacte' law will extend the foreign investments control mechanism
All foreign investors are required to file a request for prior authorisation over defence, security-related activities and dual-use technology, or activities such as gambling by non-EU investors, so that potential harm to public order, safety or national security can be assessed. The Ministry of Economy may authorise the transaction unconditionally, subject it to mitigating conditions or prohibit it. Prior clearance of the transaction should constitute a condition, whereas buyers should consider including break-up fees or opt-out clauses if conditions imposed are too burdensome. The French Government is contemplating amending the current legal framework in the Loi PACTE (Plan d'Action pour la Croissance et la Transformation des Entreprises – action plan for business growth and transformation) and is debating the law in Parliament. Notably, it will set up a list of sensitive French groups that deserve particular attention. This list will be monitored monthly by a Council of defence and national security comprised of relevant ministers. The French Government will extend the list of sensitive sectors subject to review notably to digital data storage, artificial intelligence, nanotechnologies, financial infrastructures and robotics. Sanctions for infringement to mitigations requirements will also be refined (for example, suspending the voting rights of the foreign investor and introducing fines based on the turnover realised by the target company). It is also expected to help introduce state ‘golden shares' in certain strategic assets and use BPI France state funds to encourage engagement in the event of hostile takeovers of French strategic businesses by foreign investors.
Germany Amendments introduce new criteria
German law provides for a cross-sectoral review of transactions by non-EU/EFTAbased investors in all industries that are likely to pose a serious threat to public order or security. Recent amendments introduced a non-exhaustive list of criteria to determine the threat. The Ministry of Economic Affairs and Energy can also review sector-specific transactions in sensitive industries, such as arms, military equipment, encryption and other key defence technologies. Foreign investors are generally advised to apply for a clearance certificate in early stages of a transaction. Furthermore, there are proposals to reduce the entry level for foreign investment reviews from a 25 per cent threshold down to 10 per cent in equity and/or voting rights.
Italy Shares acquisitions may be subject to scrutiny
In Italy, the acquisition of shareholdings of companies engaged in activities deemed to be of strategic importance may be subject to certain limitations by the Italian Government (so-called Golden Powers). In particular, in case of purchase of shareholdings in strategic businesses operating in the defence and national security sectors, the Italian Government may impose specific conditions in relation to the security of supply, the security of information, technological transfers, and the control of exports. On 16 October 2017, in the context of the Vivendi-TIM transaction, the Italian Government exercised this power for the first time, imposing restrictions on certain strategic assets including a network unit and a software division. Both companies have challenged the decision before the President of the Italian Republic and the case is currently pending.
Japan 2017 sees enhanced enforcement
Japan's Foreign Exchange and Foreign Trade Act authorises the competent ministry to review the acquisition by a foreign investor of shares, loans and bonds of a Japanese company (known as inward direct investment), as well as the acquisition of shares of a non-listed company from other foreign investors (designated acquisition), and to change the content or discontinue the transaction. Designated acquisitions are subject to advance notice where they are relevant to Japan's national security. Advance notice is also required for inward direct investments if they affect national security, public order or safety, the Japanese economy, or involve investors from certain countries. In 2017, amendments were introduced to widen the scope of review and enhance enforcement mechanisms.
Russia Review extended to reach off-shore companies and potentially any transactions posing a threat to the national defence and state security
The Government Commission on Control over Foreign Investments in the Russian Federation is responsible for reviews. It oversees transactions that result in acquisition of control over Russian entities engaged in activities of strategic importance. Currently, the law lists 46 activities that include both those directly related to the state defence and security, and certain other indirectly related activities, such as TV and radio broadcasting over certain territory, extraction of water resources and publishing activities. The criteria for determining control are wide and vary according to the target in question. Foreign investors must also obtain the Government Commission's consent for certain transactions involving acquisition of a strategic entity's property. Foreign public investors are not permitted to obtain control over ‘strategic' entities or acquire more than 25 per cent of their property, and must obtain Commission consent for acquisitions of the reduced stakes in strategic entities. The special, stricter regime established for such investors has recently been extended to ‘off-shore companies' in jurisdictions such as the United Arab Emirates, Jersey, British Virgin Islands and Bermuda. The statutory period for reviewing the application is three months from the date of its acceptance for review. The Commission can extend the review period for an additional three months. In practice, the review depends on the availability of the Commission's members and may take longer. The Commission may approve a transaction with or without certain obligations of the foreign investor or reject it. Amendments to the law introduced in 2017 gave the Commission Chairman the right to decide that approval is required with respect to any transaction by any foreign investor with regard to any Russian company (not necessarily strategic) if this is needed to ensure national defence and state security. As such, the definition of ‘foreign investor' was extended to include Russian nationals holding other citizenships and Russian companies under foreign control.
UK Proposals aim to strengthen powers
While acquisitions in sensitive industries do not require prior approval, the Secretary of State for Business, Energy and Industrial Strategy (SoS) may intervene under the Enterprise Act 2002, based on public interest considerations related to national security, media plurality, quality and standards, and stability of the financial system. If the SoS intervenes, the Competition & Market Authority (and Ofcom in media cases) will investigate and report to the SoS who will then decide whether the transaction should be subject to a Phase II review or accept undertakings. The Government recently reduced the thresholds for intervention in cases involving military or dual-use (i.e., military and civilian) goods, computing hardware and quantum technology. In addition, recent proposals consider introducing a mandatory notification regime for the civil nuclear, defence, energy, telecommunications and transport sectors.
USA New legislation would extend investment oversight
The Committee on Foreign Investment in the United States (CFIUS) has the authority to review any transaction that results in foreign control of a US business. Under the Trump administration, there has been rising sensitivity towards in-bound investment and acquisitions by Chinese companies, as well as investment from traditional allies in certain sectors. Politicians have proposed strengthening the CFIUS process against emerging threats in sensitive technologies and in November 2017, US Senator John Cornyn and Representative Robert Pittenger introduced the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA), which intends to expand the scope of the CFIUS review process. As currently proposed, the legislation would extend the CFIUS review time frames, increase the scope of transactions subject to CFIUS's jurisdiction, make certain notifications mandatory, and establish a process for expedited review of certain transactions.
Partners Axel Schulz and Marc Israel talk about how merger control authorities across the world are taking a greater interest in deals that may potentially raise national security concerns.
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