10 May 2023
Fiona Garside, a Senior Expertise Lawyer in Ashurst's Antitrust, Foreign Investment and Regulation team, is joined by partners Esther Kelly and Neil Cuninghame.
Regulatory review of deals has become increasingly complex in the last few years and that looks set to continue in 2023.
The trio discuss the interaction between merger control review and foreign direct investment control, increasing flexibility for regulators to review deals that do not meet clear cut thresholds, and the impact of international co-operation and regulatory reform on deals in 2023.
This is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Listeners should take legal advice before applying it to specific issues or transactions.
Hello, and welcome to the first episode in our new mini-series on anticipated trends in competition law and foreign investment in 2023. My name is Fiona Garside, and I'm a Senior Expertise Lawyer in Ashurst's Antitrust, Regulation and Foreign Investment team. I'm delighted to be joined today by Esther Kelly, a partner in our Brussels office, and Neil Cuninghame, a partner in our London team. Thank you both for joining me.
No problem. Hello.
Pleased to be talking with you today, Fiona.
Today we'll be discussing upcoming trends in merger control and foreign direct investment, or FDI, and we're entering 2023 with a number of changes in progress or expected in both spheres. Regulatory review of deals has only become more complex in the last few years, and that trend looks set to continue in 2023. In this episode, we'll talk about the interaction between merger control and FDI control, increasing flexibility for regulators to review deals that don't meet clear cut thresholds and the impact of international cooperation as well as regulatory reforms on deals in 2023.
So starting with merger control. At the end of December last year, the European Commission issued a new Q&A document on the use of Article 22 of the EU Merger Regulation. For those not familiar, that Article allows national authorities to refer deals to the European Commission even if they don't hit local merger control thresholds. So, Esther, how do you see this increased flexibility around merger control thresholds impacting dealmakers in 2023?
Thanks, Fiona. It's an important question. I think there was a lot of attention around the slight reversal on the longstanding informal position of the European Commission of discouraging referrals under Article 22. I think there's a couple of things that are worth bearing in mind. First, the Q&A I think is helpfully seen as a response to the degree of concern that some practitioners had about how the Article could be used and whether it might lead to an influx of deals or an unnecessary, let's say, degree of uncertainty.
To date, I think the merger control stats have shown that the policy change has not had the very widespread impact that some feared. One point that is quite interesting to note if we look at the numbers is that the actual number of referrals that are reviewed in detail is not really still outside of the realm of what we've been used to. There were four real referrals last year: that's quite similar to the number that there were in the beginning of the Kroes commissionership, for example. But it's true that they have been high profile. The famous Illumina/Grail saga, as well as Meta/Kustomer, and Viasat/Inmarsat, as well as Cochlear/Oticon Medical.
What's helpful about the Q&A is that they give a little bit more guidance as to the type of deals that are likely to be reviewed. They note that the referral mechanism is not specifically directed at any particular sector, but they do give a number of examples of cases that they think would be more likely to be investigated. And that is in reality, focused on tech, on pharmaceuticals and on the use of data.
There are several elements, I think, that have come out either of the Q&As or of recent practice that are instructive for dealmakers. I think the first one is that the Q&A suggests that where a deal has already been notified with national authorities that have not requested a referral that would mitigate against the Commission inviting referrals from other countries, which reduces, to some extent, the complexity of the process.
I think more critically it's becoming understood that the Commission is open to informal outreach and ready to give some degree of comfort. That's clearly a timing question. Although many dealmakers will be understandably cautious about making voluntary outreaches of that kind, there are some cases where that might be helpful, particularly those in more sensitive sectors or that meet certain criteria, not least because it may end up with a situation where it's easier to deal primarily with the EC rather than multiple national regulators.
And so the question then becomes what are the relevant flags that one might consider when deciding whether to make such an approach? And I think it's a combination of sector and deal nature.
So on the one hand, I think if we're in the tech or pharma or sustainable innovation sectors, to name a few, that would be one flag we might consider and we would combine with that the relationship between turnover and deal value. I think it's important to note that the recent focus on killer acquisitions when we're talking about Article 22 is potentially not the most helpful term to use. A more likely theory of harm would relate to foreclosure or internalisation of potential competition.
Thanks, Esther. And speaking of below threshold deals, we've also been seeing national competition authorities increasingly call in deals. Have there been any reforms at a national level listeners should be aware of?
Indeed. So in addition to what we've seen in recent years relating to lowering of thresholds, Italy has introduced an ex-post review regime specifically focused on these kind of so-called "killer acquisitions" or similar deals. We would anticipate reforms in several jurisdictions relating to digital markets that will bring additional deals in the scope of merger control reviews. And I think we're hoping to talk about those in a future episode.
Thanks, Esther. If we move on now to FDI, FDI has been in the spotlight for much of 2022. Neil, what are the headline trends that we can expect to see, or continue, into 2023?
Well, indeed, increased regulatory scrutiny over foreign investments looks to continue. So why is that? Why is it a hot topic? Well, even before the COVID-19 pandemic, government control on foreign investment were multiplying. This was driven by a variety of factors. They include, firstly, increased security concerns in the technology sector: for example, related to things like artificial intelligence, quantum computing, and advanced encryption technologies. Secondly, there were concerns that certain State actors were seeking to use investments to increase their influence. And in addition, fears about national crown jewel companies or technologies falling into foreign hands.
The pandemic then raised additional concerns in this space as supply chain disruption and increased recognition of certain businesses important to national safety drew political focus. Greater controls were explicitly encouraged in guidance from the European Commission, and various countries responded to these developments by lowering review thresholds: for example, in Australia, Canada, and France. And there was also expansion of the sectors subject to review in some countries: for example, Germany, Japan, and Italy. And then there was an entirely new regime in the UK from the start of last year requiring hundreds of notifications a year.
So this increased regulatory scrutiny looks set to continue into 2023. And I think probably a few points are worth highlighting. First, many of these regimes are still relatively new and untested.
Secondly, coordination between Member States and the European Commission at EU level will continue to evolve as the coordination system becomes more established. In addition, the ongoing war in Ukraine and concerns over Chinese investments, in particular, continue to raise concerns among politicians about international investments. And finally, concerns about national economies and possible recessions are likely to increase political focus on protecting domestic jobs. Concepts such as public order, public security, and essential interests, which are integral to these regimes may be interpreted flexibly in times of economic hardship.
So against that backdrop, what can dealmakers do to help manage the impact on their deals?
I think for dealmakers, this implies a number of important steps. Firstly, early engagement with advisors, even when an investor does not appear to be problematic or even obviously foreign, is advisable. Although there's now some coordination at EU level, these review regimes are essentially national in nature. Decision-making remains with national governments with varying degrees of experience and procedural restraints.
As to the identity of purchasers, a careful review is still needed. In France, for example, even French nationals who are not tax resident in France might be considered to be foreign investors according to guidance from the government. And in the UK, UK investors can potentially be required to notify if the deal falls within specified sectors. This is because the regime is a national security regime rather than a foreign investment regime as such. That said, guidance accepts that national security concerns are less likely in such cases.
So a careful jurisdictional review is needed of a kind that's familiar to those experienced in merger control. However, that review remains less than straightforward with increased divergence between national regimes as compared to merger control, and complex risk assessments can be required in a world where transparency of likely government concerns is somewhat opaque. It's also important to stay on top of evolving trends. The disruption of the past few years appears set to continue with developing notions of national security and sector subject to scrutiny. So check the filing situation early and be prepared to update it if you have a long deal timeline.
Careful account should also be taken of foreign direct investment regulation in deal documents and deal structuring. Remedies may need to be anticipated and even agreed in advance to reduce deal risk. And in practice, tensions may arise between the remedies needed for different processes. For example, FDI regimes may require remedies which go to maintaining capability in certain countries that would be less relevant in a competition review.
In addition, deal timelines must factor in necessary reviews. Often foreign direct investment review is less structured, more subjective and/or less transparent than is the case for merger control.
For example, decisions are typically not published, at least not in full, and information made available to the parties themselves during the review may be limited. This can lead to increased uncertainty, which needs to be factored in.
And finally, coordination between foreign direct investment, merger control, and soon the foreign subsidies review will be critical. We'll have a separate session on the new EU Foreign Subsidies
Regulation in the near future. But the important point here is that the multiplication of regulatory reviews over deals makes consistent submissions and coordination of timelines more critical than ever.
Thanks, Neil. A lot for dealmakers to be thinking about there. Esther, if we move back to merger control, what other trends do we think we're expecting in global merger control for 2023?
So the EC in particular is in a phase, I think as we've mentioned, of significant legal reform when it comes to competition in general and scrutiny of deals in particular. At the same time, the intensity of review is increasing globally, particularly in the US and the UK. And so merger control isn't going to escape this tide. We can expect a few trends, I think, to continue in 2023 and some new ones to emerge.
I think we can expect continued focus on deals in the technology sector, broadly defined, including acquisitions of smaller companies that have what might look like outsized valuations as well as those that involve the acquisition of significant amounts of data. The pharmaceutical sector is likely to remain an important area of focus as well, particularly after the COVID-19 pandemic. And so we might think about healthcare more broadly as well as the traditional pharma sector.
An increasing trend, particularly post COVID-19, is a focus on consumer welfare and technologies related to the environment. So some of the big deals that we've seen subjected to scrutiny in the last year were in what we might think of as traditional industries, but those that appeared to some extent to be impacted by the global supply chain issues that we've had. So, for example, the supply of building materials, which is important to consumers, but maybe is not within some of the sectors that we've seen focus on in prior years.
Then there continues to be concern, particularly in the US and the UK, regarding vertical cases and also the behavioural remedies that would often be resorted to resolve those cases and so that will continue to have an impact. And likewise, the reinforced robustness, let's say, of US enforcement seems likely to continue despite a number of losses in court, which contrasts to some extent with the relative wins or anticipated wins that the European Commission has experienced in the last couple of years.
Thanks, Esther. And coming back to dealmakers, what are the particular considerations they should be thinking about to manage this process?
I think, first, although coordination between agencies remains very robust, we might anticipate seeing some space opening up between the US, the UK, and the EC. Particularly, as I say, in vertical cases where the EC has a more established framework, and the US and the UK are going through a period of change.
Secondly, the Commission has an ambitious programme of reform to competition rules, as we've mentioned. So they have been engaged in consultations on simplification of the merger regime, review of the market definition notice, reform of the foundational Regulation 1/2003, and the new guidance on Article 22, as we said. And that's without mentioning the entry into force of the DMA and the upcoming FSR regime. So not only are we in a time of market uncertainty, we're also in a time of significant regulatory upheaval also.
So with this multiplication of regimes, we need to consider a number of things which are going to continue to bite for dealmakers. For certain companies, maybe more than originally thought, the Digital Markets Act, the DMA, will start to have an impact. We'll have a separate podcast on this, but as listeners probably know, the DMA introduces new notification requirements to certain companies as and when they are designated. That will start ramping up in earnest this year and so, particularly in long-timeline deals, advisors are going to need to start taking those provisions into account.
The EC has also expanded the application of its whistleblower tool to cover merger control. So although gun jumping cases in the EU remain relatively rare, they are increasing in frequency and the fines are increasing also. And so companies need to be aware that the tool is there and that it could be used by effectively anyone, whether they be employees or competitors or both.
It remains to be seen how these new regimes and reforms will really impact Commission resources and deal timelines, but it seems unlikely that it is going to speed things up. The Commission has publicly stated that they have great confidence in their ability to adapt to these significant reforms and multiplication of regimes. But we need to bear in mind at the same time that pre-notification has not been getting shorter for several years now, and there is a possibility of a stretch on resources. And so when we're thinking about long stop dates and how long deals are technically going to take to get cleared, we will need to continue to be realistic.
Thank you both for that whistle-stop tour through merger control and FDI trends for the next year. In conclusion, we're living in interesting times. None of those challenges are, of course, insurmountable, but they will mean that dealmakers and advisors need to remain coordinated, on their toes, and engage with each other early and often. To keep up to date with competition law developments, watch out for the next episode in this podcast series. And to ensure you don't miss out on any future episodes, do subscribe now on Apple Podcasts, Spotify or your favourite podcast platform. And while you're there, please feel free to keep the conversation going and leave us a rating or a review. Until then, thanks for listening.