The beginning of 2022 was active in the transactions market, but subsequently the market underwent dramatic changes: the war in Ukraine, global geopolitical tensions, increasing inflation and interest rates as well as the price and availability of energy created a new kind of framework for transactions. After an exceptionally busy period, market activity returned to a more normal level, and this year the transactions market opened to a very different situation. In Europe, the solutions to inflation and the energy crisis are key in determining how the overall economic situation will develop this year and how the M&A activity will turn out.
REGULATORY CONTROL ON TRANSACTIONS IS INCREASING
In addition to changes in the market conditions and the geopolitical operating environment, competition law regulation on transactions saw significant developments last year and in the beginning of this year, which will impact M&A in the future.
At the turn of the year the turnover thresholds for merger control were lowered in Finland due to an amendment to the Competition Act. The amendment extends merger control to more transactions and smaller companies than before. At the same time, the authorities' methods of investigation and theories of harm are also developing.
In many countries, there has already been national legislation in force that allows national authorities under certain conditions to investigate transactions that fall below the national thresholds. It is also worth noting that the European General Court's ruling in the case Illumina/Grail confirmed significant legal guidelines regarding the European Commission's right, under Article 22 of the EU Merger Regulation, to also investigate mergers at the request of a national competition authority even if the thresholds in accordance with the EU's or national competition law are not exceeded. Illumina plans to appeal the ruling. Nevertheless, the case emphasises the need to also assess the competitive effects of transactions and potential merger control in situations where the thresholds are not exceeded and the authorities would not have the power to investigate the transaction without a transfer request to the Commission.
This January, a new EU decree entered into force which aims to address the distortions of competition in the European internal market caused by aid from non-EU countries. The decree will be applied starting from July. It will give the Commission extensive investigative powers and require a prior notification to the Commission for acquisitions that exceed specific turnover thresholds if the parties to the transaction have received significant financial aid from non-EU countries. The decree will impact approval processes particularly in large transactions whose parties are multinational companies.
This being the case, questions concerning merger control will be assessed in more transactions in the future. In many countries, the process takes longer than before and the regulatory control on transactions is becoming stricter. Additionally, the development of authority practice and case law emphasises the need to prepare for the processes of competitive authorities irrespective of the thresholds, particularly in transactions in the technology and pharmaceuticals business.
FOREIGN INVESTMENTS ARE ALSO UNDER INCREASING CONTROL
In addition to competition law, the significance of authority processes concerning the monitoring of foreign direct investments (FDI) has increased markedly both in Finland and globally. This is evident, among other things, in the strong increase in the number of merger notifications and applications made to the Ministry of Economic Affairs and Employment in 2021–2022 as well in the increasingly common authority practice to grant conditional approvals. Conditional approvals were enabled by an amendment that entered into force at the end of 2020.
The same trend is also evident in other European countries where regulation on acquisitions is being implemented or extended. More often, it is necessary to consider in a transaction whether it impacts the national interests of Finland or another country and whether it therefore requires an approval by the authorities in one or more countries. It is also likely that transactions are increasingly assessed in parallel authority processes: in merger control processes as well as in FDI notification processes.
CARRYING OUT TRANSACTIONS REQUIRES CAREFUL PLANNING OF AUTHORITY PROCESSES
To carry out a transaction in the increasingly uncertain and regulated operating environment requires more and more provision for changing circumstances in processes and agreements. Authority processes must also be prepared for carefully.
Particularly cross-border transactions increasingly require more than one authority process. In challenging transactions, approvals for transaction may include conditions that must be reconciled in parallel authority processes – also when the authorities' concerns relate to different markets or different regulatory objects. In such a case, preliminary investigations concerning authority approvals are key to making sure that the parties have a realistic view of the schedule and of how certain the transaction is as well as the ability to account for the associated risks in transaction agreements.
AN EXPERIENCED PARTNER HELPS TO AVOID SURPRISES IN TRANSACTIONS
Despite the weakened visibility and increased cautiousness, the changed operating environment offers new opportunities to many companies and private equity investors. Last year, several significant transactions between listed companies took place in the Finnish market, demonstrating that companies are able to adapt to the new market situation. There is still demand for transactions, and the transactions market tends to recover quickly from crises.
As the regulatory environment becomes stricter, particularly cross-border transactions require more extensive knowledge of the authority processes and careful planning than before. With the right preparation and assistance from experienced partners, companies can avoid surprises in authority processes and carry out the most challenging transactions successfully.
The ability to implement complex transactions effectively may give a significant competitive advantage to private equity investors and companies that are growing their operations through acquisitions. Ensuring a smooth and speedy approval process in the increasingly uncertain operating environment is more and more essential for both parties to the transaction.
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.
