M&A Outlook 2022: Raising the bar | A more challenging antitrust and national security climate for M&A

2022 is a year when M&A is likely to face increasing regulatory challenges:

• The review process for any M&A is becoming more challenging with approvals becoming harder to obtain and processes becoming more burdensome and risky. 
• Transactions are likely to require more merger control and foreign direct investment (FDI) approvals than before as new regimes are adopted.  
• There is increasing uncertainty for parties over which approvals their deals might require, given recent attempts by authorities to expand the scope of their jurisdictional reach. 

These challenges mean that it will be more important than ever for parties to allow sufficient time in deal timelines to secure and coordinate all required approvals, as well as ensuring transaction documents include conditionality provisions to allocate regulatory risk appropriately (including to provide for potential uncertainties over which authorities might review a deal as it progresses).  The three challenges are examined in further detail below:

An increasingly challenging review process

The general consensus amongst antitrust regulators is that merger control has been overly permissive in recent years.  As a result, the current climate is one in which regulators are looking at mergers with a more sceptical eye.  There is a greater focus on the impact of a deal on innovation and future competition rather than just the current state of competition between merging parties, making substantive assessments and counterfactual analysis (what the market would look like if the transaction under review did not proceed) more complex.  In addition, suspicions about the rationale behind deals are prompting heightened interest by authorities in parties’ internal documents, leading to more extensive document requests and the need to engage forensic data specialists at an early stage to assist with document collection and review.  In terms of the substantive risks, it has never been more important that people within the target and the acquiring businesses avoid inappropriate language in communications that could be misconstrued or need careful explanation before authorities.

Parties who ignore merger control requirements generally face higher risks, with authorities continuing to prioritise enforcement against procedural infringements, such as “gun-jumping” (implementing a deal before required notifications or approvals), incomplete or misleading submissions or failing to comply with commitments/remedies.  More than 50 jurisdictions have sanctioned such infringements since 2014, with considerable penalties now being seen in a larger number of jurisdictions.  Several newer regimes are making a global impression – such as Saudi Arabia where a new low filing threshold requires deals to be notified if parties’ combined global turnover exceeds SAR 100 million (US$ 26.6 million).  The rules have been interpreted broadly to catch transactions even if only one party is active in Saudi and fines have been imposed on several multinational corporates for failing to notify global transactions. Recent gun-jumping fines imposed elsewhere include, for example, Facebook fined €9.6 million in Austria regarding its acquisition of Giphy and a further £50.5 million for breaching a “standstill” order imposed by the UK’s Competition and Markets Authority (CMA).

A broader list of potential concerns for merging parties

There is also a trend towards regulators being tasked with giving greater importance to issues that extend beyond traditional antitrust concerns (such as protecting national security or local “champions” and probing M&A deals “unfairly” subsidised by foreign states).

From January 4, 2022, the UK’s new, much broader, national security regime adds an extra hurdle for many transactions, even deals with a relatively limited nexus to the UK.  Thousands of transactions will be reviewed each year.  The new regime requires mandatory filings for acquisitions of “qualifying entities” (including certain minority shareholdings/interests) active in 17 sensitive sectors – many focusing on technology and innovation (e.g. advanced robotics and quantum technologies) as well as more traditional sectors such as defence, energy and transport.  Other types of transactions (including acquisitions of assets and even IP transfers) raising potential concerns are also subject to voluntary notification and potential review.  See our video, briefing and decision tree to learn more.

Many other jurisdictions are also in the process of introducing new foreign direct investment regimes or strengthening enforcement of existing ones (for an overview of FDI regimes covering a number of jurisdictions, see our guide here).

Authorities looking to expand their jurisdictional reach creates uncertainty

The increasingly hostile climate for M&A review is also being affected by broader geo-political trends.  Post-Brexit, the UK’s CMA is developing a reputation as an increasingly aggressive authority, seeking to establish itself on the global antitrust stage. It has tended to refer more deals for an in-depth Phase 2 review and ultimately prohibited more transactions than the European Commission, including Facebook’s acquisition of Giphy.   In several recent cases there is also a perception that the CMA has “stretched” its jurisdictional reach by finding overlaps in the supply in the UK of a particular product or service to take jurisdiction over global deals with relatively little connection to the UK – including Roche Holdings/Spark Therapeutics, Sabre/Farelogix, Intercontinental Exchange/Trayport and FNZ/GBST.  Proposed reforms to the UK merger control thresholds would allow the CMA to review an even broader range of global transactions (see our video to learn more about the proposed UK reforms).

A general hostility towards perceived power being wielded by large technology companies and a concern that smaller start-up companies might be acquired before they have the opportunity to grow and challenge incumbents (so-called “killer acquisitions”) has led antitrust regulators to seek to expand their jurisdictional reach.  For example, the European Commission has taken the controversial step of encouraging Member States to use a long-forgotten provision of the EU Merger Regulation  to refer cases to it that do not meet thresholds for review in that Member State or at EU level.  This has introduced considerable uncertainty in terms of when transactions will qualify for review by the European Commission, and is currently being tested before the EU Courts in relation to Illumina’s completed US$7.1 billion acquisition of Grail – the first case in which the Commission has applied its new policy (see our video on Illumina/Grail).