Antitrust in focus - May 2022

He has selected:

General

• UK CMA’s record of tough intervention in M&A looks set to continue
• Revised EU and UK antitrust rules on vertical agreements reflect changed market landscape
• Setbacks for U.S. DOJ’s first labour market prosecutions as antitrust scrutiny of wage-fixing/no-poach agreements increases across the globe
• European Commission proposes changes to streamline merger review process
• UK enacts subsidy control legislation
• Morocco imposes its first gun-jumping fine, on a foreign-to-foreign transaction
  

Consumer & Retail

• French Competition Authority accepts failing firm defence for the first time
  

Digital & TMT

• UK Government plans for a pro-competition digital markets regime face delay

 

General

UK CMA’s record of tough intervention in M&A looks set to continue

The Competition and Markets Authority (CMA)’s record for intervening in M&A has been the subject of much discussion in recent years.

In 2020 we saw the number of deals frustrated in the UK reach record levels, with nine transactions frustrated (four prohibited and five abandoned) and 12 deals that were only cleared subject to remedies. Last year the figures were not quite so high – six frustrated deals and four remedies cases in total. But as discussed in our latest Global trends in merger control enforcement report, the data is still significant.

It seems that 2022 will be no different. In the past month alone we have seen several developments:

1. An auction services deal was abandoned after the CMA opened an in-depth investigation. The acquirer announced that it did not believe that there was any realistic prospect of getting merger control approval given the CMA’s significant concerns.
2. The CMA announced provisional phase 2 findings in Dye & Durham/TM Group, a completed transaction in the property search services sector. The CMA’s initial view was that the sale of the whole of the target is the only effective way to address its concerns. If the CMA confirms this position in its final decision, due in August, it will add another frustrated deal to its tally. The case is also a warning of the dangers of not notifying problematic transactions to the CMA. Here, despite the parties choosing not to notify, the authority identified potential concerns as part of its monitoring function and called the deal in.
3. In another provisional phase 2 decision, the CMA has identified antitrust concerns in relation to Veolia’s acquisition of Suez. In particular, it has provisionally concluded that the merger would lead to a loss of competition in the supply of various waste and water management services in the UK. To address its waste management concerns, the CMA is minded to require a full divestment of either Veolia’s or Suez’s UK waste business. For the water management concerns, it is yet to form a view, but will be considering whether remedies accepted by the European Commission (EC) in its December 2021 conditional clearance of the deal might also address the issues in the UK. It will be interesting to see how all of this plays out in the final report.

These decisions follow closely on the heels of other frustrated deals in 2022.

Cargotec/Konecranes was blocked last month by the CMA in a decision that controversially marked its first major post-Brexit merger control divergence from the EC, which conditionally cleared the deal (see April’s edition of Antitrust in focus). Nvidia/ARM, which was subject to an in-depth CMA review on competition and national security grounds, was abandoned in February due to concerns in the UK, EU and U.S.

There have also been some developments in remedies cases. In a phase 1 investigation into a completed merger between veterinary groups, for example, the CMA is currently consulting on whether to accept undertakings from the parties to sell off the whole of the target. This would effectively amount to a prohibition of the deal. Such cases are unusual, but not unheard of – we saw two similar outcomes in 2020.

Whether 2022 CMA intervention levels surpass those of the previous year remains to be seen. But it’s looking very likely that they will. In the meantime, merging parties should ensure that the UK remains a key jurisdiction to be considered as part of their merger control assessment and strategy.

Revised EU and UK antitrust rules on vertical agreements reflect changed market landscape

New antitrust regimes for vertical arrangements ‒ agreements between businesses at different levels of the supply chain ‒ take effect on 1 June 2022 in both the EU and the UK. Significant and not entirely aligned changes have been made to both rulebooks.

In the EU, a revised Vertical Block Exemption Regulation (VBER) will continue to exempt certain categories of vertical arrangement from the prohibition on anti-competitive agreements. Together with updated accompanying guidelines, the VBER will assist businesses self-assess whether their vertical arrangements comply with EU antitrust law. Our alert sets out the key changes in the EU’s approach, including in relation to dual distribution, agency, parity obligations and dual pricing.

In the UK, the rules are now set out in a Vertical Agreements Block Exemption Order. The Competition and Markets Authority (CMA) is expected to finalise associated guidance shortly. Our alert on the CMA’s draft guidance sets out the main changes in the UK’s approach.

The updates to the rules in both jurisdictions in large part reflect new market developments and in particular the growth in e-commerce. Other amendments serve to clarify or update existing rules. Helpfully, businesses have 12 month transition periods to make any necessary amendments to ensure that vertical agreements that are block exempted under the old rules continue to benefit from the new block exemptions.

Crucially, however, while the EU and UK take a consistent position in many areas, they diverge in a few key aspects. Our alert therefore also comments on the extent to which the revised EU and UK approaches differ from each other. Businesses with operations in both jurisdictions must carefully take these differences into account.

Setbacks for U.S. DOJ’s first labour market prosecutions as antitrust scrutiny of wage-fixing/no-poach agreements increases across the globe 

In recent months, the U.S. Department of Justice’s Antitrust Division (DOJ) has embarked on an aggressive campaign to enforce U.S. antitrust rules against anti-competitive conduct in labour markets. In particular, it is targeting wage-fixing agreements (ie agreements between employers to set or fix employees’ wages), as well as “no-poach” agreements (where employers agree not to hire each other’s employees).

However, the DOJ has been met with some setbacks at trial. First, a Texas federal jury acquitted the former owner and former clinical director of a healthcare staffing company of all substantive antitrust charges in the DOJ’s first ever criminal wage-fixing prosecution. Just a day later, a federal jury in Colorado acquitted a national healthcare provider and its former CEO of illegal market allocation through no-poach agreements.

DOJ Antitrust Division head Jonathan Kanter has nevertheless claimed that the cases are important. He says they establish that such conduct is per se unlawful under the U.S. antitrust rules.

More labour market cases are yet to go to trial, including in the healthcare sector and aerospace engineering services industry where indictments were filed in 2021. Our alert comments on lessons learned from the prosecutions so far, and in particular the evolution in the concept of intent which may hamper the DOJ’s ability to secure convictions in future trials.

Outside the U.S., wage-fixing and no-poach agreements have similarly attracted antitrust scrutiny in the past few weeks. We expect more jurisdictions will join this list in the coming months.

In Portugal, the antitrust authority fined 31 football clubs a total of around EUR11.3m for entering into a no-poach agreement that prevented the recruitment by clubs in the First and Second Leagues of players who had unilaterally terminated their contracts due to issues caused by the Covid-19 pandemic. This is the first time the authority has sanctioned an anti-competitive practice relating to labour markets.

No-poach agreements are also in the spotlight in Turkey, where the antitrust authority has opened an investigation into a number of software companies suspected of entering into “gentlemen’s agreements” in labour markets.

Finally, in Canada, the Government has proposed a number of amendments to the antitrust rules, including the introduction of a new criminal conspiracy offence for wage-fixing and no-poach agreements. This would be punishable by up to 14 years in prison and/or a criminal fine with no maximum limit.

European Commission proposes changes to streamline merger review process

The European Commission (EC) has been considering procedural amendments to the EU merger control rules since August 2016. It wants to simplify the review process for deals that are unlikely to raise antitrust concerns and to focus on the most complex and relevant cases.

The EC has issued various consultations, evaluations and impact assessments over the years. Now, it has set out the direction it wishes to take, publishing for consultation draft revised versions of a number of materials, including the Notice on Simplified Procedure and the Merger Implementing Regulation (which contains the Form CO and Short Form CO merger notification forms).

The proposed changes are targeted at four areas.

1. Expanding and clarifying mergers that qualify for the simplified procedure

This is a procedure for certain categories of non-problematic transactions. The EC does not conduct a comprehensive market investigation, the proceedings are faster and the parties are not required to provide as much information.

Under the revised rules, new categories of vertical merger would fall within the simplified procedure.

At the parties’ request, the EC would also be able to use the simplified procedure (under so-called “flexibility clauses”) for transactions which do not fall under any of the simplified treatment categories. This includes mergers with horizontal overlaps where the combined market share of the parties is 20-25% and with vertical relationships where the individual or combined upstream and downstream market shares of the parties are 30-35%.

2. Streamlining the review process for simplified cases

The EC plans to introduce “super-simplified” treatment for joint ventures with activities entirely outside the EEA and all cases where there are no horizontal overlaps or non-horizontal relationships between the merging parties’ activities. The parties would be able to notify the transactions directly, without pre-notification discussions with the EC, and would not have to complete all of the sections of the Short Form CO.

In addition, for all simplified cases, the changes would introduce a “tick-the-box” format for the Short Form CO, including mainly multiple choice questions and tables instead of open text questions.

3. Streamlining the review of non-simplified cases

The draft revised rules also propose modifications to the information requirements in relation to non-simplified cases. These include:

• Adding clear instructions on how to request waivers from the requirement to provide certain information and identifying sections of the Form CO which are suitable for such requests.
• Removing the requirement to provide certain categories of information (eg on trade between Member States and imports from outside the EEA) but adding requests for new types of information, including information on horizontal overlaps and vertical relationships involving pipeline products.
• Adding a clearer and more detailed list of the circumstances under which a transaction that technically qualifies for simplified treatment must be investigated as a non-simplified case, eg where there is difficulty in defining the relevant markets or defining the market shares of the parties.

4. Introducing electronic notifications

The EC proposes to permanently establish a system for electronic transmission of documents, including notification forms. This has been temporarily allowed during the Covid-19 pandemic.

Any revisions to merger control rules that are designed to streamline the review process and reduce the burden on merging parties are welcome. However, it is not clear that all of the EC’s proposals will do this. Instead, some may trigger additional information requests and raise further issues for the EC to consider. The consultation is open until early June 2022 and the EC is aiming to have the new rules in place in 2023. It will be interesting to see, following respondents’ comments, which proposals the EC ultimately takes forward.

UK enacts subsidy control legislation 

This month the new Subsidy Control Act 2022 gained royal assent. The Act is intended to serve as the post-Brexit framework for the review of subsidies in the UK. It replaces the EU state aid system that, post-Brexit, no longer applies in most of the UK, and it implements many of the UK’s obligations on subsidy control in the EU-UK Trade and Cooperation Agreement (TCA).

The new UK regime retains many of the key concepts from EU state aid law, often slightly rebranded – “aid” becomes “subsidy”, “undertaking” becomes “enterprise”, “selective” becomes “specific”, and so on. Many of the underlying principles will look suspiciously similar to anybody who has dealt with issues in EU state aid law.

But there are a number of differences.

1. First, an expansion – prior to Brexit, EU state aid law only applied to subsidies liable to affect trade between the UK and other EU member states, and the TCA subsidy control obligations now only apply to subsidies liable to affect trade between the UK and EU. But the Subsidy Control Act will also apply to subsidies with purely domestic effect within the UK. The EU rules were (and are) widely interpreted, so this may not make much difference in substance. But, rather than being purely a post-Brexit ‘bonfire of regulations’, it reflects a wider intention by central government to place greater limits on local authority use of funds.
2. Secondly, a contraction – the Subsidy Control Act does not restrict subsidies in legislation by the UK Parliament itself: only some procedural rules apply. This differs from EU law, where it was common for primary legislation by national legislators to need European Commission approval, or to be struck down as unlawful aid. Controversially, however, the new UK regime does apply (in a slightly adjusted form) to legislation by the devolved legislatures in Scotland, Wales and Northern Ireland. And UK Parliament legislation that interferes with UK-EU trade is still subject to challenge under the TCA, but as a matter of international law.
3. Finally, and most significantly, the procedural structure of the UK regime is very different to that under the EU regime. In a bid to create “a more agile and flexible system”, the Government has dispensed with the EU-style requirements for most aid measures to be notified and pre-approved. The new regime is, instead, more similar to the ‘judicial review’ regime in English law. Public authorities (including devolved administrations and local authorities) will be expected to self-assess most subsidies they intend to grant against statutory principles. Aggrieved parties can then, if they act quickly enough, challenge the reasoning behind these decisions (in the Competition Appeal Tribunal) and potentially get them overturned, and require recovery of an unlawfully granted subsidy. But these challenges need to succeed on traditional judicial review grounds, for example, that a decision was unreasonable or that a required principle was not applied.

That said, some categories of subsidy are given special treatment:

• So-called “subsidies or schemes of interest” (SSoI) may be voluntarily notified to the Subsidy Advice Unit, a new division of the Competition and Markets Authority. The Unit will provide the authority with non-binding advice on whether the subsidy complies with subsidy control principles, giving some up-front clarity.
• So-called “subsidies or schemes of particular interest” (SSoPI) must be notified to the Subsidy Advice Unit for a non-binding view, before they are implemented.
• At one extreme, certain types of subsidy are also prohibited outright, such as unlimited guarantees or subsidies granted to “ailing or insolvent” enterprises where there is no credible restructuring plan. Other subsidies are only allowed if specified conditions are met.
• At the other extreme, some subsidies will be exempt from the regime altogether, including measures falling below certain value thresholds and temporary subsidies given in response to national or global economic emergencies.

The new regime is expected to come into force this autumn. Preparations are well underway. The Government has consulted on its intended approach to setting criteria for categorisation of SSoI and SSoPI, and is developing related and broader guidance for consultation. We will keep you posted.

Morocco imposes its first gun-jumping fine, on a foreign-to-foreign transaction 

The Moroccan Competition Council (MCC) has fined Swiss company Sika MAD11.6 million (approx. EUR1m) for completing its acquisition of exclusive control over French rival Financière Dry Mix Solutions in 2019 without MCC approval. Sika had failed to file the deal to, and wait for clearance from, the MCC despite meeting the country’s notification thresholds.

Morocco’s merger control law, which is suspensory, requires merging companies to notify the MCC if any of the following thresholds are met:

• the parties’ combined market share in Morocco, or a substantial part of Morocco, exceeds 40% ‒ this threshold can be met by only one party (ie there does not need to be an increase); or
• the parties’ combined worldwide turnover is at least MAD750m (approx. EUR70.5m); or
• at least two parties’ individual turnover in Morocco is at least MAD250m (approx. EUR23.5m).

These thresholds are low, and many international transactions could be subject to Moroccan merger control rules even if at first sight they have no (or a minor) impact on Moroccan markets. However, there is a limited local effects exemption, which means that mergers involving companies with no presence or turnover in Morocco do not need to be filed.

For legal entities responsible for filing, failing to file or closing before clearance can lead to penalties of up to 5% of Moroccan pre-tax turnover during the most recently completed financial year (increased, where applicable, by the target’s turnover in Morocco). For natural persons with a personal notification obligation, the MCC can impose a penalty of up to MAD5m (approx. EUR450,000). In addition, the MCC may compel the parties to notify or unwind the deal, subject to a daily penalty payment.

Sika reportedly agreed to submit a post-merger filing and to pay a fine amounting to 2.5% of its turnover in Morocco, representing half of the maximum possible penalty for gun-jumping.

The MCC’s decision marks the first time that the MCC has issued a fine for breach of the Moroccan merger control regime’s standstill provision. Given the MCC is likely to sanction such conduct going forward, parties to transactions should conduct a robust Moroccan jurisdictional assessment and, where relevant, factor MCC approval into deal timetables.

Consumer & Retail

French Competition Authority accepts failing firm defence for the first time 

At the end of April, the French Competition Authority (FCA) unconditionally approved Mobilux’s purchase of rival Conforama after applying the failing firm defence for the first time.

Mobilux (through its subsidiary the But Group) and Conforama are active in the retail distribution of furniture, household electrical appliances, homeware and general merchandise. They both operate in France and French overseas territories.

Following a successful referral request to the European Commission, the deal was notified to the FCA in July 2020. Shortly after, the FCA granted Mobilux a derogation from the standstill obligation due to Conforama’s serious financial difficulties. This meant that the parties could close the deal before waiting for the FCA’s approval.

Following an in-depth review, the FCA concluded that the transaction gave rise to various antitrust concerns, including a potential harm to competition in various markets for the retail distribution of furniture products. Mobilux was unable to demonstrate that these negative effects could be offset by efficiency gains.

However, Mobilux argued that the failing firm defence should apply in relation to Conforama. The FCA agreed. It found that the three-limbed test set out by the French Administrative Supreme Court (competent to hear appeals against the FCA’s merger control decisions) was met:

1. the difficulties of the company would lead to its rapid exit in the absence of the transaction;
2. there is no alternative transaction that is less damaging to competition (including a transaction relating a substantial part, but not all, of the company); and
3. the exit of the company in difficulty would be no less harmful to consumers than the planned transaction.

This is the first time that the FCA has accepted the failing firm defence since it gained merger control powers in 2009.

Elsewhere in Europe, successful application of the defence is also rare. We had expected to see more failing firm cases during the Covid-19 crisis. However, there have been no recent failing firm decisions at EU level and only one in the UK.

The reason for this is not entirely clear. It may be that companies have received sufficient support in the form of state aid or other funding which has helped them to survive in the current economic climate without the need to invoke the defence during M&A processes. It could also be a result of the strict criteria that need to be met. Merging parties wishing to argue that the failing firm defence should apply to their transactions should be prepared to back up their submissions with robust evidence.

Digital & TMT

UK Government plans for a pro-competition digital markets regime face delay 

The UK Government has this month set out a framework for an entirely new “pro-competition regime” for digital markets.

The Digital Markets Unit (DMU), which was launched in shadow form within the Competition and Markets Authority (CMA) in April 2021, will be responsible for designating firms with “Strategic Market Status” (SMS) and developing tailored, binding conduct requirements for each of those SMS firms. The DMU will also be able to undertake “pro-competitive interventions”, with a broad discretion to implement a wide range of remedies including ownership separation. And its functions will be backed up with tough enforcement powers.

Merger control is the only area where the Government has substantially drawn back from its original proposals. It has settled for a narrower reporting mechanism rather than a bespoke, potentially mandatory merger control regime for SMS firms. Our alert on the Government’s proposals provides more information on all aspects of the new framework.

What is unclear at this stage, is exactly when the new regime will come into force. Draft legislation is expected to be drawn up in the coming year, but it appears that Parliamentary scrutiny and therefore enactment of the rules will take longer. In the meantime, the CMA is likely to continue to turn to its antitrust enforcement tools to investigate concerns in digital markets.

In doing so, the CMA is likely to take account of antitrust enforcement and regulatory initiatives in other jurisdictions.

These initiatives are following their own paths. In Australia, the Australian Competition & Consumer Commission is now half-way through a government-directed inquiry into markets for the supply of digital platform services. In February, it published a discussion paper on options for a possible new framework for digital platforms that could include obligations and prohibitions contained in legislation, codes of conduct, and/or rule-making powers, as well as tailored merger rules for digital platforms.

Proposed EU rules for “gatekeeper” digital platforms are more advanced. The final text was published this month. The regime may become applicable in early 2023. We have also seen developments at Member State level. In Germany, for example, the Federal Cartel Office has already proceeded to designate companies with “paramount significance for competition across markets” under a new legal provision that allows it to subject these so-far Big Tech companies to stricter obligations.

A&O Antitrust team in publication

Recent publications by members of our global team include:

• Noah Brumfield (partner, Washington, D.C. and Silicon Valley) and Nicholas Putz (associate, Washington, D.C.): Antitrust considerations for ESG initiatives, 12 May 2022, Informa Connect

Spotlight on Tom

A typical working day in London… No such thing as a typical working day in London, which is why I still get a buzz coming into the office every morning. (Although too much coffee is a common theme…)

If I hadn’t become an antitrust lawyer, I would… I almost joined the Navy as a teenager!

The best career advice I’ve been given is… Be kind.

The most interesting matter I’ve worked on… Advising 21st Century Fox on the long-running saga of its bid for Sky and subsequent sale to Disney are amongst the many highlights of my career to date.

For me, being a good lawyer/advisor means… Making the complex simple.

Something I’d like to do but haven’t yet done is… I would love to relocate to another continent for an extended period of time and really immerse myself in the local culture.

My ideal weekend in one sentence… Long walks with my dogs, slowly cooking Sunday lunch, watching my fantasy football team succeed.

My typical weekend in one sentence… Feeling guilty about not walking my dogs enough, takeaway food, watching my fantasy football team fail…

Something that might surprise you about me is… I walked across Spain in my 20s.

My top tip for visitors to London is… Get out of the City! London is surrounded by some glorious countryside.