European Union: 8-In-8 Recent Trends In European Law And Policy Alert Series: EU Clearance For M&A Deals: Not So Fast! And Not So Easy!

Obtaining the European Commission's (EC's) approval for a merger or acquisition sometimes can be a time-consuming and costly procedure. This latest issue of WilmerHale's 8-in-8 alert series on European Law and Policy examines the main difficulties that parties can experience when notifying a planned deal to the EC. It reflects on how the EC's scrutiny of deals has evolved and considers whether potential reforms could address some of the issues that are arising.

Background: increased number of transactions and detailed reviews

EC statistics illustrate that more deals were notified to the EC in 2017 than in any year since the start of the financial crisis: 380 in total – more than one a day. While the EC reviewed almost three-quarters of these notifications through its "simplified procedure", the EC still must review even the most straightforward transactions to check if the criteria for the simplified procedure are met, which itself can be time-consuming.

The greater number of filings coincided with more active enforcement activity. The EC "intervened" in 24 investigations in 2017, compared to an average of 20 in the previous seven years).1 The EC defines an "intervention" as (i) prohibiting a deal, (ii) clearing a deal conditionally (remedies are required, such as divestitures of companies, or behavioral commitments), or (iii) the parties abandon a deal.

Contrary to U.S. agency practice, the EC must issue a reasoned decision in all cases, both where interventions occur and where it decides that no intervention is required. This adds to its administrative workload greatly and also increases the parties' burden because they must provide sufficient information to enable the EC to review the transaction and write up a reasoned decision. The simplified procedure aims to alleviate this burden, but only partially achieves that objective.

Increased burden of many reviews

The EC's procedures are also becoming more demanding.

EC merger control is a front-loaded administrative procedure. The parties have to complete a detailed notification form ("Form CO") and annex key documents. It is often hard, detailed work to assemble and draft this notification. Based on the notification, the EC then asks third parties questions to check if the proposed deal will likely reduce competition. In some cases, the EC also carries out econometric modelling and requests large amounts of data from the parties to enable this.

This administrative procedure contrasts with the more back-loaded U.S. process, where notifications typically are easy to assemble but the burden on the parties exponentially increases when the agencies enter the "Second Request" procedure used for deals that the U.S. agency determines – after a preliminary review – may require intervention. The U.S. process is also different in that it is litigation focused: because the U.S. agencies must challenge problematic deals in court – i.e., they cannot clear or block transactions by administrative act – the review process prioritizes direct evidence, such as the parties' or other industry participants' documents or statements from third parties, over written submissions from the parties.

More recently, however, the EC's procedure is morphing into a hybrid administrative/Second Request procedure. For example, in its 2016 review of a transaction creating a joint venture in the Italian mobile telecom market, the EC noted that it reviewed over one million of the parties' internal documents. While the EC does not state how many internal documents it reviewed in its conditional clearance of the Dow/DuPont merger, the decision makes clear that the number was enormous. While these deals may have raised particularly complex issues and may therefore be atypical, they illustrate the potentially burdensome nature of the requirement that parties both produce internal documents (like in a U.S. investigation) and simultaneously complete the very detailed formal notification to the EC.

Parties' internal documents can sometimes provide insights into competition and markets. So, it is hardly surprising that the EC wants to review these documents. The EC has recently stated that it will issue guidance on the types of internal documents that it will request from parties and the procedure that it will follow when requesting documents. In the meantime, however, parties to complex EC merger control proceedings must be aware that they may be required to produce vast volumes of documents on short notice. Given the tight timeframes under which parties to M&A transactions are operating, they may be well advised to search for and assemble documents (key business plans etc.) well before the EC requests them.

The same applies to relevant data sources. It is often more difficult to anticipate exactly what the EC may want (e.g. bidding data to show closeness of competition). However, in any reasonably complex deal, the parties should be assessing what they have and how to search it early on.

Longer review periods

Practitioners agree that it is taking longer and longer to obtain clearance for both relatively straightforward and more complicated deals.

The EC requires that parties submit their Form CO notification in draft before submitting a final version, which then starts the EC's statutory review period for completing its investigation. When multiple draft notifications are required, and the EC sends the parties multiple requests for information, this can lead to very long pre-notification procedures. For example, in complex cases, it is not unusual for the pre-notification phase to take at least 10 to 12 months.

The EC also appears to be making increased use of its "stop-the-clock" procedure. Under this procedure, the EC requests information from the parties after receiving their completed Form CO notification and stops the clock on its investigation until the requested information is received (typically while large data or document requests are met).

While both the pre-notification and stop-the-clock procedures can be useful and enable smooth review of deals, the net result is that investigations are getting longer. The underlying promise of a fast, predictable review procedure, which was a hallmark of EU merger control review, is increasingly broken, leading to longer reviews and greater uncertainty for parties.

Wider range of transactions being scrutinized

Normally, parties to deals need only notify the EC if their revenues exceed certain clearly defined thresholds. However, within the EU, there are mechanisms that allow the EC and national competition authorities to "refer" investigations to each other even if the relevant thresholds are not met.

In principle, this means that almost any deal could come under the EC's review even if the target has little or no revenues. For example, the EC was able to review Facebook's 2014 acquisition of WhatsApp. More recently, the EC has opened a detailed investigation into Apple's proposed acquisition of Shazam, a developer of music recognition applications. In Apple/Shazam, the parties had notified their proposed deal to only one EU merger authority – in Austria. The Austrian authority, however, asked the EC to take over the review of the deal with other authorities supporting this request.

Recently, some EU countries (notably Austria and Germany) have introduced "size of transaction" thresholds under which parties to deals with a value exceeding the threshold must obtain approval, even if traditional "turnover in country/global turnover" thresholds are not met. In 2016, the EC launched a public consultation, which, among other things, sought views on whether the EC should amend its current exclusively revenue-based thresholds for compulsory deal notification and introduce a size of transaction threshold. The EC has indicated that it will publish a follow-up study later in 2018; this could possibly result in even more deals being notified to the EC.

Complex substantive issues and stricter control

When a proposed deal results in overlaps between the parties' activities, high combined market shares and likely price impact, the parties frequently must sell businesses as a condition to obtaining EC clearance. Theories of harm based on high combined market shares and the associated risks are well understood by practitioners and parties to transactions.

Recently, however, the EC has highlighted concerns in "competition in innovation" in several investigations. Most prominently, in the Dow/DuPont merger, the EC investigated alleged reductions of incentives to innovate at an overall industry level, rather than on specific markets. When applied at that level, this theory of harm is controversial. The EC required that the parties sell DuPont's R&D business as a pre-condition to obtaining EC approval. In contrast, the U.S. agencies concluded that innovation competition would not be materially reduced.

The EC has emphasized that the crop protection industry, in which this transaction took place, has special features. These include the importance of rivalry in the industry (competitors continuously try to introduce new products due to the contestable nature of product markets), the existence of strong intellectual property rights and other barriers to entry, previous industry consolidation, and that few companies are active worldwide across all stages of R&D. However, these criteria are not unique to the crop protection industry. They are broad enough to apply in many industries with a few leading players and in which R&D is important. Parties to transactions in such industries will therefore need to analyze and prepare to address concerns about potential reduction in innovation competition early if their transactions are reviewable by the EC.

More broadly, the EC appears more willing to test less traditional theories of harm than its counterparts in the United States and appears to take an increasingly harder look at deals, leading to longer and more complex reviews. Given that – unlike the U.S. agencies – the EC does not operate under the constraint of timely judicial review of merger decisions, it is also easier for the EC to enforce based on less tested theories.

Reforms to EU merger control

Since 2014, the EC has initiated two wide-ranging public consultations on potential changes to its merger control laws. Some of these could result in simplification of EU merger control. For example, they could result in more frequent use of the simplified procedure under which the EC need only publish a two to three-page non-substantive decision regarding its investigation. The EC might also decide to exempt categories of non-problematic transactions from notification (for example where a joint venture is established outside the EU and has no competitive effect there). Both initiatives would be very welcome. However, as noted above, the EU may also broaden the scope of compulsory notification by introducing "size of transaction" thresholds.

However, any sea change in the EU's merger control procedure would require introducing a form of quicker review even where parties have combined market shares exceeding a certain level. It would, for example, be useful if the EC could close investigations quickly with a summary explanation once it becomes clear that proposed deals will not reduce competition, notwithstanding that the parties' activities may overlap. This would eliminate the need to write long reasoned decisions for transactions that are not problematic but – for some reason – do not fall under the EC's current simplified procedure. Although this would reduce transparency, it would have the advantage of reducing the EC's workload and allow it to focus more efficiently on transactions that genuinely require investigation. Parties to M&A deals and competition practitioners would welcome this.

Footnotes

1 https://ec.europa.eu/info/sites/info/files/file_import/comp_aar_2017_final.pdf, page 29.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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