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Antitrust in focus - November 2023

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News: 28 February 2024

Antitrust authorities continue intense scrutiny in M&A markets

Publications: 28 February 2024

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Publications: 29 January 2024

Antitrust in focus - January 2024

This newsletter is a summary of the antitrust developments we think are most interesting to your business. Börries Ahrens, partner based in Hamburg, is our editor this month. He has selected:

Significant reforms to German antitrust law come into effect with more on the horizon

In early November, the 11th amendment to the German Act Against Restraints of Competition (Act) came into effect. It introduced three significant changes to German antitrust law.

Sector inquiries: new tool and changes to procedural framework

Following a sector inquiry, the Federal Cartel Office (FCO) may now impose remedies, including (as a last resort) divestitures, to address “significant and continuous disruptions of competition”. This tool will be available irrespective of the addressee’s compliance with antitrust law. The change adds a new “fourth pillar” to German antitrust law, to stand alongside traditional rules on cartels, abuse of market power and merger control. It seeks to fill a perceived enforcement gap in situations where harm to competition is not attributable to anti-competitive conduct but to imperfect market structures (in particular narrow oligopolies).

In addition, the threshold for the FCO to be able to require individual undertakings to notify future mergers following a sector inquiry has been substantially lowered. If the FCO’s inquiry finds that future concentrations may significantly impede effective competition in Germany in the relevant sector(s), it may order acquirers with a domestic turnover of more than EUR50 million to notify the FCO of any acquisitions of targets with a domestic turnover of more than EUR1m for the next three years. This threshold change has the potential to bring more M&A in small and regional markets under the FCO’s scrutiny.

In terms of the procedural framework, the new law reduces the standard duration of a sector inquiry to 18 months. Previously, the FCO was under no time limit to complete a sector inquiry.

Digital Markets Act enforcement

The amendment empowers the FCO to conduct investigations into possible non-compliance by European Commission (EC)-designated gatekeepers with the obligations imposed by the Digital Markets Act (DMA), and to support the EC’s own enforcement of the DMA. The reform also establishes the procedural and substantive rules for private enforcement of the DMA in Germany.

Profit-skimming

The FCO’s ability to seek public disgorgement of illegal profits is improved through a new rebuttable presumption that anti-competitive profits amount to 1% of an undertaking’s domestic sales of goods or services affected by the infringement.

Our alert (in English and in German)  takes you through each of the reforms in more detail, including the limitations on the FCO’s ability to impose behavioural and structural remedies, and discusses how they could impact public and/or private enforcement. 

Further changes are in the pipeline. The German Federal Ministry of Economics has already launched a consultation regarding a 12th amendment to the Act that aims to strengthen the competition framework and consumer protection. The Ministry is seeking views on a number of issues. In particular they are considering: (i) a potential revision of antitrust damages procedural rules to reduce costs and improve efficiency; (ii) whether the current merger control rules are efficient (if they cover all relevant transactions without subjecting too many mergers to notification requirements); and (iii) potential changes to promote sustainability cooperation. The consultation is open until 4 December 2023.

ECJ’s gun jumping ruling reminds merging parties of the importance of EU merger control compliance

The European Court of Justice (ECJ) has largely confirmed the European Commission (EC)’s decision to fine Altice for implementing its acquisition of PT Portugal in breach of procedural rules under the EU merger control regime.

In 2018, the EC fined Altice EUR124.5m for “jumping the gun”, concluding that the company infringed both the obligation to notify the transaction and the “standstill” obligation, ie the requirement not to implement the deal before the EC has approved it.

According to the authority, certain veto rights granted in the SPA gave Altice the possibility to exercise “decisive influence” (ie control) over PT Portugal. The EC also found that, in some instances, Altice actually exercised decisive influence by intervening in the day-to-day business decisions of PT Portugal. Finally, it said that its conclusions were supported by the exchange of competitively sensitive information between the parties.

The General Court upheld the EC’s decision on appeal (subject to a small fine reduction for the failure to notify infringement). Now, the ECJ has done the same, adding a further small fine reduction. The final level of fine stands at EUR115.2m.

Our alert takes you through the key elements of the ECJ’s ruling, including the confirmation that, when there is unlawful gun jumping conduct during the period prior to formal notification of the merger, the EC is entitled to impose two separate fines for failure to notify and breach of the standstill obligation (although it must provide full reasons for its calculations).

We also highlight what the case means for merging parties, giving best practice guidance for ensuring that M&A does not fall foul of procedural rules under the EU merger control system.

Review of UK investment screening regime could see some rules relaxed but certain sensitive areas expanded

In response to geopolitical uncertainty and technology threats, the UK government has issued a Call for Evidence on potential updates to its investment screening regime.

Nearly two years after the National Security and Investment Act (NSIA) came into force, the government has considered over 1,000 notifications. Of the notifications made in the financial year 2022-23, 93% were cleared without an in-depth review, ie within 30 working days. In total, 17 notifications have resulted in final orders that imposed conditions on or blocked or unwound specific deals. See our key takeaways from the second annual report for further information on the functioning of the regime.

The government is now keen to find ways to reduce the compliance burden for companies and investors and provide greater certainty, while still safeguarding national security. Deputy Prime Minister Oliver Dowden describes this as a “small garden, high fence” approach.

Exemptions from mandatory notification

Significantly, the government is considering the introduction of targeted exemptions from mandatory notification, specifically: some internal reorganisations; the appointment of liquidators, official receivers, and special administrators; Scots law share pledges; and additional public bodies. This is a welcome development.

In contrast, the government is not currently planning to exempt transfers of control under automatic enforcement provisions in secured lending agreements or certain types of acquirers considered lower risk (eg UK-based acquirers or acquirers that have previously had acquisitions investigated and cleared under the regime).

Sensitive areas

The government is also seeking feedback on the regulation setting out which activities in the 17 sensitive areas of the UK’s economy are within the scope of the mandatory notification requirements.

We can expect some clarification and simplification, eg in relation to advanced materials, defence and synthetic biology.

But the government also anticipates expanding some areas, such as artificial intelligence, communications and data infrastructure, and updating others, such as energy.

Semiconductors and critical minerals could be carved out into standalone sensitive sectors to reflect their increasing importance.

Operation of the regime

Finally, the government is open to views on how the operation of the regime could be improved, including how the Investment Security Unit communicates with parties.

Notably, the government is considering extending all the notification forms by including additional, unspecified information requests. The government hopes that this would reduce the number of subsequent information and attendance notices issued and speed up acceptance of notifications.

The government’s consultation closes on 15 January 2024.

Planned changes to UK phase 2 merger processes should improve engagement and result in earlier focus on issues and remedies discussions

Over the past few months, the UK Competition and Markets Authority (CMA) has sought views on ways to improve its phase 2 merger control processes. An increase in the number of complex multi-jurisdictional cases being reviewed post-Brexit, developments in investigatory practices as well as the CMA’s experience in cases such as Microsoft/Activision Blizzard (see our commentary) have prompted this “stocktake”.

The results are now in, and the authority is consulting on a suite of proposed amendments. Chief Executive Sarah Cardell describes them as a “real step-change in aspects of the way the UK merger regime operates”.

The proposals fall into three categories:

  1. Improved engagement between CMA and merging parties, including an additional opportunity at the beginning of phase 2 for parties to present their case to the decision-makers and more informal update calls throughout.
  2. Earlier focus on the key issues, with a new interim report setting out the decision-makers’ initial assessment earlier in the process and a revamped oral hearing giving parties the chance to respond.
  3. Encouraging earlier (‘without prejudice’) remedies discussions, eg through a new phase 2 remedies form and various meetings/calls throughout the review to discuss the parties’ proposals.

The planned changes are good news for merging parties facing an in-depth merger control investigation in the UK. They reflect many of the points we made to the CMA in our response to its call for information and our participation in direct discussions with the authority. 

Separately, the CMA is consulting on reforms to other aspects of merger control processes. These include tweaks to the merger notification form, as well as changes to make it easier for the CMA to apply the “de minimis exception” (under which it can decide not to refer a transaction for a phase 2 review if it believes that the markets involved are not sufficiently important to justify the reference).

The consultations run until early 2024. We expect the authority to finalise and publish the changes to its guidance in the first few months of the year.

Australian merger control faces major shake-up after government sets out reform options

The Australian government has launched a consultation on potential amendments to the country’s voluntary merger control regime.

In a paper it sets out various options for a new-look merger control regime, covering both process and the substantive test.

On merger control process, the government seeks views on three alternative systems:

  1. A voluntary suspensory clearance regime. Transactions notified to the ACCC could not close during the review. There would be no obligation to notify but the ACCC would have call-in powers for transactions raising competition concerns. ACCC clearance would give immunity from enforcement.
  2. A mandatory suspensory regime. Compulsory notification to the ACCC if thresholds are met with no closing during the review period. The ACCC would need to take legal action in court to prevent an anti-competitive deal from proceeding.
  3. A mandatory formal clearance regime. Compulsory notification to the ACCC if thresholds are met with no closing during the review period. The ACCC would have call-in powers for transactions falling below the thresholds. ACCC clearance would give immunity from court action.

In terms of the substantive test, three options are proposed (which could be implemented alone, together or alongside the process reforms):

  1. Modernising the factors that decision makers must consider when determining if a merger substantially lessens competition, including adding factors such as creeping acquisitions, loss of potential competition access to or control of data and interlocking directorships.
  2. Prohibiting mergers that entrench, materially increase or extend market power.
  3. Allowing consideration of related agreements between parties, eg non-compete agreements or agreements concerning the supply of goods or services post-merger.

Adoption of any of the reform proposals may increase the number of notifiable transactions, impose greater information burdens on merger parties and result in more deals being opposed. There could also be some potential benefits for businesses, including more certainty on when clearance is needed, more transparency of issues arising in the clearance process, and specified timelines for decisions.

Watch out for our upcoming alert which will give you more detail on the options and their potential impact.

The consultation process runs until 19 January 2024, after which the government will settle on its preferred approach. It will then consult further. We will keep you posted.

New Saudi Arabian merger control thresholds take effect

A merger filing is now required to the General Authority for Competition of Saudi Arabia (GAC) if each of the following thresholds are met:

  1. combined annual worldwide turnover of the parties to the transaction is at least SAR200m (approx. USD52m/EUR50.3m);
  2. annual worldwide turnover of the target is at least SAR40m (approx. USD10.4m/EUR10.1m); and
  3. combined annual turnover of all parties to the transaction in Saudi Arabia is at least SAR40m (approx. USD10.4m/EUR10.1m).

These new thresholds mark a significant change from the previous thresholds, which required only that the combined annual worldwide turnover of all parties exceeded SAR200m.

Importantly, it appears that the domestic turnover threshold can be met by any party to the transaction, eg the acquirer or joint venture parents.

This is not the first change to the Saudi merger control rules this year. At the end of March 2023, the worldwide turnover of the parties’ threshold was increased from SAR100m to SAR200m. The authority also decreased the filing fee cap to SAR250,000 (approx. USD66,700/EUR62,700) from SAR400,000. This series of amendments indicates the GAC’s continued willingness to hone the Saudi merger control regime as its gains more experience of enforcing the rules.

In practice, the GAC continues to strengthen its merger control enforcement. In 2021, the authority prohibited its first transaction – Delivery Hero’s planned acquisition of rival food delivery app The Chefz – on procedural grounds (see our alert for more details). A few months later, it blocked the proposed acquisition by National Gas and Industrialization Company of a 55% stake in Best Gas Carrier Company on the basis of substantive vertical competition concerns. In August this year, the GAC conditionally cleared outdoor advertising company Arabian Contracting Services’ acquisition of competitor Faden Media Agency, marking the authority's third-ever clearance with commitments.

It remains to be seen how the new thresholds will influence the number of transactions reviewed by the authority.

Antitrust scrutiny of artificial intelligence climbs up authorities’ priority lists

Antitrust authorities continue to make statements on how they expect to apply antitrust rules to the artificial intelligence sector. This month we have seen a number of developments. The overall theme is “vigilance”, with authorities committing to monitor the development of the AI sector and use existing and new toolkits to tackle potential breaches of the antitrust rules and ensure markets are competitive.

No German requirement to notify Microsoft/OpenAI deals to date but FCO is monitoring the AI sector

The German Federal Cartel Office (FCO) observed that Microsoft’s involvement in and its cooperation with OpenAI to date is not subject to German merger control review. The FCO noted that the links between Microsoft and OpenAI likely fell within the scope of Germany’s merger control rules as they gave Microsoft “material competitive influence” over OpenAI. But the authority went on to say that the cooperation to date did not satisfy the notification thresholds and therefore did not need to be filed for approval. 

The announcement was important, however, for highlighting the FCO’s continued monitoring of the AI sector. President Andreas Mundt promised to keep “a very close eye on how the market develops and, in particular, on the extent to which the major players get involved in young, up-and-coming companies”.

G7 nations set out possible AI concerns

Antitrust authorities and policymakers from the G7 nations met in Japan to discuss digital competition. They followed this with a “communiqué” focusing on possible antitrust issues in the AI sector, and in particular generative AI.

Their concerns include the potential for anti-competitive conduct by incumbent tech firms controlling key AI inputs (data, skilled workforce, cloud computing services and computing power) in the form of tying, bundling, exclusive dealing and self-preferencing. They also highlight the possibility for incumbents to use acquisitions or partnerships to facilitate such conduct or to create or strengthen positions of market power. All of this could, they say, limit the ability of startups and new entrants to compete, as well as create a risk of collusion and/or unfairly high prices.

The G7 authorities and policymakers underlined the need for cooperation, both between authorities regulating antitrust and other areas (eg consumer protection, data privacy and cybersecurity) and amongst antitrust authorities internationally. They plan to share updates on their approaches and experiences in this area.

EC in watching mode

Remarks by European Commission (EC) Director General Olivier Guersent were in a similar vein. Guersent noted that the EC is monitoring the development of the AI sector and stands ready to address antitrust concerns through its antitrust and merger control regimes as well as the Digital Markets Act (DMA). He observed that the scope of the DMA could be expanded to cover new services like AI systems, if warranted. 

CMA taking a proactive approach to AI foundation models

In the UK, Competition and Markets Authority (CMA) Chair Marcus Bokkerink highlighted the possibility for AI to “supercharge the harms to consumers and competition in digital markets”. But he was clear that being on the alert for breaches of existing antitrust laws is not enough. The CMA also aims to prevent entrenched market power and anti-competitive practices from developing in the first place.

Bokkerink spoke about the CMA’s initial review into AI foundation models and the principles it has proposed to guide developments in these markets (see our commentary for more details). The CMA has since published an update on the review, noting that it has begun a further programme of engagement with stakeholders. It intends to publish a further update in March 2024. Interestingly, the CMA expects this to consider the role of AI semiconductor chips in the foundation model supply chain.

FTC scrutinising bottlenecks

Across the Atlantic, U.S. Federal Trade Commission (FTC) Chair Lina Khan explained that the agency is “taking a close look across the AI stack to understand the extent of competition across the various layers and sub-layers”.

A new Office of Technology will help examine whether dominant firms with control over key inputs may be able to exploit bottlenecks by, for example, charging excessive prices or imposing coercive terms. The agency aims to ensure that claims of innovation are not used as a cover for lawbreaking.

Australian regulators focus in on large language models

In Australia, the Digital Platform Regulators Forum (comprised of competition, media, eSafety and data protection regulators) has published working papers on algorithms and large language models (LLMs) used in generative AI. The latter outlines that LLMs have features that make them tend towards concentration, including economies of scale and access to large volumes of data and computing power. It notes that new entrants could find it difficult to compete with digital platform services that use LLMs.

The Australian Competition and Consumer Commission (ACCC)’s latest report in the Digital Platform Services Inquiry discusses the role of digital platforms in developing emerging technologies such as generative AI. The ACCC considers that the expansion of digital platforms into these emerging technologies and related markets via interconnected products and services is exacerbating risks of harm to competition and consumers. The ACCC argues this is further evidence that Australian antitrust rules need to be “fit-for-purpose to respond to the potential challenges posed by these technological and market developments”.

What next?

Antitrust scrutiny of the AI sector is only expected to increase in the coming months/years. Enforcement action will no doubt follow. The Italian Antitrust Authority, for example, has announced an investigation into pricing algorithms built on AI and user profiling in the domestic airline tickets market.

It is clear, however, that authorities such as the CMA are also taking steps to try and prevent antitrust issues from arising at all. Digital markets regulation such as the EU DMA will likely play an important role. Businesses in the AI sector should therefore expect a two-pronged approach: forward-looking monitoring, guidance and regulation complemented by the enforcement of antitrust rules in the event of a suspected breach.   

UK introduces new merger control regime for energy networks

The newly enacted Energy Act 2023 – described by government (possibly with more than a bit of hyperbole) as “the biggest piece of energy legislation in the UK’s history” – includes provisions that introduce a special merger control regime for energy networks.

The legislation largely replicates the merger control rules that have applied for many years to mergers of regulated water companies in England and Wales but applies them to mergers of electricity and gas networks in England, Wales and Scotland.

The aim is to maintain the ability of the regulator Ofgem to set effectively the price controls of energy network enterprises operating in Great Britain through “comparative benchmarking”. When network ownership is consolidated through M&A activity, the number of wholly independent network enterprises that Ofgem can use to compare the performance of each network operator is reduced. The UK government argues that this could harm Ofgem’s ability to regulate effectively the amount that energy network enterprises charge, resulting in costs for consumers.

The new regime came into force immediately on enactment, in late October, and applies to M&A transactions involving “energy network enterprises” that hold a gas transporter licence, an electricity distribution licence or an electricity transmission licence.

As has happened in the water sector, the CMA may refer a merger for a phase 2 review under both the standard merger control provisions (considering whether there is a substantial lessening of competition) and the special energy network provisions (considering whether there is a substantial prejudice to Ofgem’s ability to benchmark).

Merging parties wishing to avoid a phase 2 reference could seek to agree undertakings, such as price guarantees or ring-fencing.

Although a lot of the details are still to be ironed out in guidance and in the first transactions, we expect that in practice the regime will operate very similarly to the long-standing special water merger regime, of which A&O has a lot of prior experience.

UK CMA acts to reduce competition law fears for suppliers cooperating on ‘combination therapies’

The UK Competition and Markets Authority (CMA) has issued a statement that it will not prioritise competition enforcement against specific forms of collaboration between competing medicine manufacturers which are carried out in good faith and aimed at making a combination therapy available to NHS patients in the UK. The CMA is clear that certain market features would have to be present and a set of five conditions must be met, based around a negotiation framework developed by the Association of the British Pharmaceutical Industry.

Our blog post explains how suppliers’ competition law fears prevent NHS patients from receiving these therapies and sets out the CMA’s conditions for supplier negotiations and cooperation.

A&O Antitrust team in publication

Recent publications/initiatives by members of our global team include:

About your editor

Börries advises on all aspects of European and German antitrust law. He regularly represents clients in merger control proceedings and cartel investigations before the German Federal Cartel Office, the European Commission, and the courts.

He has extensive experience of advising companies in the retail, automotive, food, chemicals, waste management and financial services sectors.

Spotlight on Börries

A typical working day in Hamburg involves… cycling to the office and a chat with our Viennese concierge. Always a charming start to the day.

If I hadn’t become an antitrust lawyer, I would be… probably still a poor, deal-chasing M&A lawyer is the very honest answer (which is what I did for the first years of my career, until luck came my way).

The best career advice I’ve been given is… My Dad used to say: “Think Big!”. Not a bad piece of advice for all young people.

The most interesting matter I’ve worked on is… That’s very hard to select. Obtaining a permit for the takeover of a couple of small, underperforming supermarkets from the German Minister of Economics on reasons of “public interest” (thereby overruling the FCO’s merger prohibition) was probably one of the most unusual.

For me, being a good lawyer/adviser means… being inquisitive most of all. Practicing antitrust law is for inquisitive people.

My ideal weekend… involves being outdoors, most of the time.

My typical weekend… comes, well, relatively close to the ideal.

Something that might surprise you about me is… that I once saved eleven ducklings from our office rooftop. A slapstick scene starring three desperate A&O lawyers frantically trying to steer them (and the disoriented mother duck) away from the abyss.

Something I’d like to do but haven’t yet done is… climb one really tall mountain.

My top tip for visitors to Hamburg is… buy only a one-way-ticket.