John Davies is a partner in Freshfields’ antitrust group, where he divides his time between the Brussels and London offices. His practice focuses on competition and regulatory matters at both European and national levels, including the coordination of cases before several different competition authorities in major international transactions and investigations.
His recent experience includes representing Comcast/NBCUniversal in relation to its bid for Sky TV; AB InBev on the global antitrust strategy of the takeover of SABMiller, including the coordination of the global regulatory process across the US, the EU, China, Africa, Australia and Latin America; and Alere on its proposed acquisition by Abbott.
Rafique Bachour is a partner in Freshfields’ antitrust group, based in the Brussels office. His practice focuses on antitrust and regulatory aspects of global M&A transactions, international antitrust investigations and other behavioural and regulatory matters.
His recent experience includes advising BASF on its proposed acquisition of the assets being divested by Bayer in the context of its merger with Monsanto; Holcim on its merger of equals with Lafarge (including an unprecedented Phase I remedies package); Xstrata on its merger with Glencore; ChemChina on the global merger control aspects of its public bid for Pirelli; and clients in recent and ongoing cartel investigations including in the financial services sector, the chemical sectors and the electronics sector.
GTDT: What have been the key developments in the past year or so in merger control in your jurisdiction?
John Davies and Rafique Bachour: The number of mergers notified to the European Commission has continued to increase, rising to 380 cases in 2017 from 362 in 2016. This represents the fourth year of consistent growth in the number of notified mergers. Last year, 93 per cent of cases were cleared unconditionally in Phase I. Of these, almost 80 per cent were approved under the simplified procedure, an even higher proportion compared to 2016 (75 per cent), showing that the Commission is being successful with its objective of increasing use of the simplified procedure.
Despite the increase in merger notifications to the Commission, the number of mergers cleared in Phase I with remedies has remained steady at 18 cases (19 in 2016). The number of cases referred to Phase II has also been consistent (seven cases compared to eight in 2016). However, where last year almost all seven cases that were referred to Phase II were ultimately cleared (with the exception of Hutchison/O2 UK, which was prohibited), by the end of the year only two decisions received the green light for clearance, subject to substantive remedies: Dow/DuPont and ChemChina/Syngenta.
These cases represent two of the three global agrochemical mergers under review in 2017. The third proposed merger, Bayer/Monsanto, was filed last, on 30 June 2017, and was just announced as having obtained conditional clearance from the Commission at the time of this interview. Dow/DuPont is particularly noteworthy for the Commission’s focus and detailed analysis of the impact of the merger on innovation competition. The case is also indicative of the way the Commission (and other regulatory authorities around the world) are increasingly assessing high-profile deals from arguably novel angles, including the effects of common ownership minority investment. Moving forward in 2018, it will therefore be important for parties to think broadly when considering the competition issues that may be raised and what remedies may be required to address them.
In the European courts, the General Court’s judgment in UPS v Commission is particularly significant. On 7 March 2017, the General Court annulled the Commission’s prohibition decision of the proposed UPS/TNT Express acquisition on the grounds that the Commission had infringed UPS’s procedural rights of defence by failing to provide it with the final econometric model in time for UPS to defend itself. The judgment has been further appealed by the Commission to the Court of Justice of the European Union and UPS has brought an action for damages before the General Court, for the loss suffered as a result of the Commission’s prohibition decision.
The past year also saw a marked heightening of concerns around national security and public interest risk arising from mergers involving foreign acquirers, with several EU member states, including France and Germany, actively lobbying for the introduction of a pan-European regime for screening foreign investments in strategic sectors. Against this backdrop, in September 2017 the Commission published a proposal for the introduction of a framework for screening foreign direct investments in the EU. It is likely that this proposal will be developed or adopted in some form in 2018.
GTDT: What lessons can be learned from recent cases to help merger parties manage the review process and allay authority concerns at an early stage?
JD & RB: As mentioned, in 2017 the Commission referred seven cases for an in-depth Phase II review, of which only two cases were conditionally cleared before the end of the year. The Commission prohibited two mergers (Deutsche Börse/London Stock Exchange Group and HeidelbergCement/Schwenk/CemexHungary/CemexCroatia), while three (SOCAR/DESFA, Knorr-Bremse/Haldex and most recently Celanese/Blackstone/JV) were abandoned after the Commission raised substantive concerns that could not be resolved by the parties.
A number of Phase II cases were still under review by the end of 2017, representative of a pattern where many cases are taking longer than expected to obtain EU clearance, despite the Commission’s statutory time limits of up to 35 and 125 working days for a Phase I and Phase II review respectively.
This can, in part, be attributed to pre-notification discussions, which are not time-limited and can take several months in the case of a complex deal or where there are simultaneous developments affecting the relevant market. In Bayer/Monsanto, for instance, the merger was not formally filed in the EU until nine months after the deal was announced.
More significantly, it appears that in-depth reviews are being suspended more frequently, adding greater uncertainty. An extreme example of this is SOCAR/DESFA, which was eventually abandoned by the parties in February 2017 after being suspended for over two years while the parties sought a remedy that would resolve the Commission’s competition concerns.
Other cases that were suspended during the Phase II review include Qualcomm/NXP Semiconductors, which was suspended twice for over four months; and the ongoing review of Bayer/Monsanto, which has been suspended twice. These cases shared a common theme in that they raised concerns about conglomerate effects.
For merging parties to a transaction that is likely to raise competition concerns, this reiterates the need to factor in sufficient time for a detailed merger control process. This should include early engagement with the Commission and any other regulatory agencies that will review the transaction, including on the likely remedies that may be required. The optimal antitrust strategy will also take into account, where relevant, the need for consistency across all jurisdictions where the merger is notified.
GTDT: What do recent cases tell us about the enforcement priorities of the authorities in your jurisdiction?
JD & RB: Recent cases affirm that innovation competition is close to the top of the Commission’s enforcement agenda, and will continue to be subject to close scrutiny in merger reviews, particularly in research and development (R&D) intensive industries. While competition authorities have long recognised that innovation is a relevant component of competition, analyses of the likely effects of a merger on innovation have, until recently, tended to be limited to the overlaps between the merging parties’ marketed and late-stage pipeline products. Recent cases have seen the Commission apply more expansive theories of harm involving innovation.
This is perhaps most evident in the Commission’s analysis in Dow/DuPont, which was conditionally cleared on 27 March 2017. At the time, the merging parties were two of only five global integrated players in the agrochemical industry, competing directly in relation to (existing and pipeline) crop protection products. Notably, however, the Commission scrutinised the potential impact of the merger on innovation not only on the particular relevant markets, but at the overall industry level. The Commission considered that as two of only a few global R&D companies with the capability to innovate in certain innovation spaces, as a result of the merger the parties would find it profitable to reduce their overall R&D investments generally, not only in relation to the development of specific identifiable products. This, according to the Commission, would result in a reduction in the number of new pesticides brought to the market in the future. Accordingly, the remedy required the divestment of major parts of DuPont’s global pesticide business, including its R&D organisation.
Another example of the Commission’s evolving approach to innovation is Johnson & Johnson/Actelion, where the Commission looked beyond an analysis of competition between late-stage pipeline products, to also consider very early-stage pipeline products that have traditionally been considered too speculative to assess. The parties were required to offer a remedy for an overlap between two early-stage insomnia pipeline products.
A series of recent cases also indicate that the Commission is looking at issues around conglomerate effects with renewed interest. In these cases, it has expressed concerns about the relationships that would be created by proposed transactions between merging parties selling complementary products. In particular, the Commission has investigated whether the transactions would increase the merging parties’ ability and incentive to bundle complementary products, thereby marginalising or squeezing out competing products, or to degrade the interoperability between their products and a rival’s competing downstream product.
Where the Commission has found conglomerate effects concerns, behavioural rather than structural commitments have been found suitable to allay those concerns. For example, in Broadcom/Brocade, clearance was conditional on commitments covering non-discrimination measures and firewalls to resolve concerns about technical degradation of interoperability or misuse of confidential information. In Qualcomm/NXP Semiconductors, the Commission considered that the merged entity would have the ability and incentive to exclude rival suppliers of its baseband chipsets and near-field communication and security chips through bundling or tying practices. Qualcomm offered an extensive remedy package to obtain clearance, including offering eight-year licences for some of its technology, guaranteeing the same level of interoperability of its products with those of competitors during that period, and a commitment not to acquire certain standard essential patents of NXP, but to offer them to third parties.
Conglomerate effects issues appear to arise more typically in the technologies industry, but this is not always the case. Essilor/Luxottica, for instance, concerned the merger of the largest supplier of ophthalmic lenses with the largest supplier of eyewear. The Commission raised concerns that the merged entity would be able to distort the market by bundling Luxottica frames together with Essilor lenses. This deal was eventually cleared unconditionally on 1 March 2018, but only after two extensions of the deadline and a suspension, which indicates the depth of the review.
The Commission also renewed its attention on the enforcement of procedural infringements in 2017. It imposed a €110 million fine on Facebook on 18 May 2017 for providing misleading information during the 2014 review of the Facebook/WhatsApp acquisition, and on 6 July 2017 it announced that it had sent statements of objections in relation to alleged procedural infringements in a number of merger cases. General Electric, Merck and Sigma-Aldrich are each alleged to have provided incorrect or misleading information in their merger control notifications, and Canon is alleged to have implemented its acquisition of Toshiba Medical Systems Corporation before notifying the transaction to and obtaining clearance from the Commission. The Commission also sent a statement of objections to Altice for allegedly implementing the acquisition of PT Portugal before notification or approval by the Commission.
It is likely that we will see further fines imposed for merger process infringements during 2018. As such, now more than ever it is essential for merging parties to be clear from the outset on all the rules and their merger control obligations in each jurisdiction, in particular in relation to implementation steps ahead of clearance. It is advisable to keep check of those obligations throughout the process, right through to closing. Parties involved in complex deals must ensure that their document review tools and procedures for preparing and verifying submissions are watertight. Parties should implement strict procedures and processes to help ensure that submissions and evidence submitted are complete and accurate. This can be particularly challenging in the context of agencies demanding ever-increasing volumes of data and internal documents within tight time frames.
GTDT: Have there been any developments in the kinds of evidence that the authorities in your jurisdiction review in assessing mergers?
JD & RB: Recent and ongoing merger investigations show that the Commission continues to rely increasingly at an early stage on forensic discovery of internal documents and emails as evidence. Such materials increasingly influence its view on the company’s competitive strategy. Businesses would do well to work on the basis that all relevant internal documents will be reviewed by the agencies, in particular when discussing the merger. Only legally privileged documents are likely to be out of scope and the Commission is now challenging the limits of privilege protection and when lawyers first became involved in the transaction. It is therefore important that the parties are aware of privilege rules. The cost and time demands of document requests should also be considered by the parties, as they can be very significant. The Commission has stated that it will be publishing best practice guidelines for internal document requests in merger cases over the course of 2018.
GTDT: Talk us through any notable deals that have been prohibited, cleared subject to conditions or referred for in-depth review in the past year.
JD & RB: The Commission prohibited two quite different mergers in 2017, namely the proposed merger between Deutsche Börse and London Stock Exchange Group (LSEG), which would have created Europe’s largest stock exchange and brought together the parties’ clearing houses (Deutsche Börse’s Eurex and LSEG’s LCH Clearnet); and the acquisition by building materials companies HeidelbergCement and Schwenk of Cemex’s assets in Croatia and Hungary, which would have resulted in the acquiring parties’ joint venture company becoming the largest cement manufacturer in Croatia.
The two cases concern entirely different sectors, but both have been taken to highlight the need for remedies offered not only to be capable of addressing the Commission’s competition concerns, but also to be sufficient to create a viable competitive force on a lasting basis.
In Deutsche Börse/LSEG, the Commission expressed concerns that the merger would create a de facto monopoly in the markets for the clearing of fixed-income instruments in Europe. The parties’ proposed substantial remedy to divest LCH Clearnet SA, which would have removed the horizontal overlap in the trading and clearing of single-stock equity derivatives, was not considered adequate by the Commission to remedy its concerns. The Commission said that the market test had shown that the business that would be divested was dependent on LSEG’s fixed-income trading platform, MTS, and therefore the viability of the divested business as an independent competitor in fixed-income clearing could not be assured. The Commission had told the parties that it would consider the divestment of MTS to be an adequate remedy, but LSEG announced publicly that it was not prepared to commit to sell its stake in MTS (in addition to LCH Clearnet SA).
The remedy offered by the acquiring parties in HeidelbergCement/Schwenk/CemexHungary/ CemexCroatia was also deemed insufficient to resolve the Commission’s concerns on a lasting basis. The acquiring parties offered to grant a potential competitor access to a particular cement storage facility. However, the Commission considered that this remedy would leave the merged entity’s market position almost unchanged. Moreover, the Commission also considered the remedy too uncertain, offering a mere business opportunity without any assurance that a new supplier could compete effectively and on a lasting basis with the merged entity. In addition, any new entrant leasing the terminal would face high transport costs to reach customers, making it unlikely that they would be able to grow into viable competitors in the long term. The remedy also appeared insufficient in scale, given the terminal’s capacity was limited. This case appears to reaffirm the practice that a structural remedy, such as the divestiture of a viable business unit, is generally more likely to alleviate competition concerns compared to a behavioural remedy.
Looking ahead to 2018, it will be important to analyse in detail how the Commission has assessed Bayer/Monsanto, following the Dow/DuPont and ChemChina/Syngenta decisions in the agrochemical sector last year. The Commission had at the time of this interview just announced that it had conditionally cleared the deal, and its press release indicates that it has adopted a similar approach in its analysis of the impact on innovation competition as it did in Dow/DuPont, requiring divestments to remove all existing overlaps between the parties in the seed and pesticide markets, as well as some of the parties’ R&D activities and assets, and the licensing of Bayer’s entire global digital agriculture product portfolio and pipeline products.
GTDT: Do you expect enforcement policy or the merger control rules to change in the near future? If so, what do you predict will be the impact on business?
JD & RB: From 7 October 2016 to 13 January 2017, the Commission ran a public consultation on procedural and jurisdictional aspects of the EU merger control regime. In particular, the consultation sought views on whether the current turnover-based thresholds are sufficient to catch all mergers that may potentially have an impact on the internal market, or if an alternative threshold, for instance based on transaction value (as recently introduced in Austria and Germany), may be warranted in order to catch mergers involving a target company that may not (yet) generate significant turnover, but that nonetheless may have significant market impact. The Commission pointed to the digital and pharmaceutical industries in particular where such a merger might occur. The consultation also looked at the treatment of cases eligible for the simplified procedure and the functioning of the case referral system between the Commission and EU member states.
Responses to the consultation have been collected and published, but as this publication was going to print there had been no update on the Commission’s plans in light of the consultation.
It is likely that 2018 will see the introduction of some form of framework for screening foreign direct investments in the EU, following the publication of a Commission proposal for such a framework in September 2017. Based on the proposal, it is likely that any foreign direct investments regime in the EU would differ from the US equivalent (the Committee on Foreign Investment in the United States). Rather than giving the Commission the power to block all deals with serious security issues, the proposal envisages allowing member states to implement mechanisms to review foreign investments on the basis of public order or national security, and provides a framework for doing so. The proposal also envisages empowering the Commission to be able to issue advisory opinions to member states on certain transactions, which must be taken into account.
The Commission has highlighted a particular focus on foreign direct investment flows in strategic sectors (such as energy, space, transport) and assets (key technologies, critical infrastructure, sensitive data) whose control may raise concerns for security, or public order reasons.
It would remain to be seen whether the introduction of a foreign investments framework in the EU would have an impact on the number of acquisitions by foreign companies. At the least, the new framework will add an extra layer of review for acquisitions by non-EU companies, which is likely in some cases to add delay to the regulatory review process.
The Inside Track
What are the most important skills and qualities needed by an adviser in this area?
A complex merger control matter combines a number of factors that need to be balanced and that all form part of the overall strategy. These range from pure competition issues, including the law and the economics; to industry and potential foreign investment issues; to deal-specific matters such as timetable and allocation of risk; and, increasingly, to broader political and media aspects. A successful merger control lawyer needs to be skilled in combining all elements that impact the deal under review. He or she must be capable of sifting through and analysing large amounts of factual and economic data in short periods to understand a client’s business and the markets in which it operates. Proficient crafting of written arguments, in a comprehensible manner, and strong advocacy and communication skills, both at the level of authorities as well as in the boardroom, are also essential.
What are the key things for the parties and their advisers to get right for the review process to go smoothly?
Teamwork and planning are essential: do your homework, anticipate issues and, by doing so, avoid surprises. Anticipating substantive issues and the likelihood of remedies, for instance, is crucial to deal timelines, expectations and successful outcomes. If you and your client are surprised by something, you had better be sure that it falls into the category of ‘genuinely unexpected’. Anything else is not good enough.
What were the most interesting or challenging cases you have dealt with in the past year?
For John it would be Comcast/NBCUniversal’s bid for Sky TV in competition with a prior bid from Fox. It has raised a lot of media attention concerning the implications for the future of broadcasting in the UK and other European countries. For Rafique, it would be advising BASF on its proposed acquisition of the divestment assets that Bayer has agreed to dispose of as a remedy to obtain clearance for its acquisition of Monsanto. This matter has raised a number of substantive and timing challenges that are taking place in the context of the merger control process of the Bayer/Monsanto deal.
John Davies and Rafique Bachour
Freshfields Bruckhaus Deringer